<PAGE>
As filed with the Securities and Exchange Commission on September 8, 2000
Registration No. 333- .
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BROKAT Aktiengesellschaft
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of Registrant's Name into English)
Federal Republic of 7379 Not Applicable
Germany (Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization)
Copies to:
BROKAT Steve Aufderhar
Aktiengesellschaft Brokat Infosystems Inc.
Industriestrasse 3 6625 The Corners Parkway
D-70565 Stuttgart Suite 500
Federal Republic of Norcross, GA 30092
Germany (678) 533-4777
+ 49 711 788-44-0 (Name, address and
(Address and telephone telephone number of
number of registrant's agent for service)
principal executive
offices)
Mark S. Bergman, Esq. Hans-Peter Berger, Esq. Dr. Gerhard Wegen
Paul, Weiss, Rifkind, General Legal Counsel Gleiss Lutz Hootz Hirsch
Wharton & Garrison BROKAT Maybachstrasse 6, D-
1285 Avenue of the Aktiengesellschaft 70469
Americas Industriestrasse 3 Stuttgart
New York, N.Y. 10019 D-70565 Stuttgart Federal Republic of
Federal Republic of Germany
Germany
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
----------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
----------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed maximum
Title of each class of Amount maximum aggregate Amount of
securities to be to be offering Price offering registration
registered(1) registered(2) per share(3) Price(3) fee
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary shares, no par
value................... 5,424,000 $98.40 $533,748,666 $140,910
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1) American Depositary Receipts evidencing American Depositary Shares issuable
upon deposit of the Brokat ordinary shares registered hereby are being
registered under a separate Registration Statement on Form F-6 (File
No.333- ). Each ADS represents 0.50 Brokat ordinary shares.
(2) Based on the ordinary shares underlying Brokat ADSs to be issued with
regard to outstanding shares of common stock of Blaze and warrants and
options of Blaze, at a ratio of 0.1826 ordinary shares per share of Blaze
common stock.
(3) Pursuant to Rule 457(c) and (f)(1) under the Securities Act and solely for
the purpose of calculating the registration fee, the proposed maximum
aggregate offering price is based upon $17.97, the average of the high and
low sales prices of Blaze common stock on the Nasdaq National Market on
August 30, 2000.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement/prospectus is not complete and may be +
+changed. Brokat may not issue its ordinary shares in the form of American +
+Depositary Shares or ordinary shares in the merger until the registration +
+containing this proxy statement/prospectus is declared effective by the +
+Securities and Exchange Commission. This proxy statement/prospectus is not an +
+offer to sell these securities and it is not a solicitation of an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 2000
Prospectus
[LOGO OF BROKAT]
BROKAT Aktiengesellschaft
Ordinary Shares, No Par Value,
The Portion of the Share Capital Attributable to each Share is Euro 1.00.
[LOGO OF BLAZE SOFTWARE]
Proxy Statement
Blaze Software, Inc.
This proxy statement/prospectus is being furnished to holders of shares of
common stock, par value $0.0001 per share, of Blaze Software, Inc. This proxy
statement/prospectus relates to the solicitation by the Blaze board of
directors of proxies for use at a special meeting of Blaze's stockholders.
At the special meeting you will be asked to approve and adopt a merger
agreement providing for a merger in which Blaze will become a wholly owned
subsidiary of BROKAT Aktiengesellschaft, a stock corporation organized and
existing under the laws of the Federal Republic of Germany.
If the merger is completed, you will receive 0.3652 American Depositary
Shares of Brokat for each share of Blaze common stock that you own. Each Brokat
ADS will represent 0.50 ordinary shares of Brokat. The Brokat ADSs are expected
to be quoted on the Nasdaq National Market under the symbol "BRKA."
Please pay particular attention to the "Risk Factors" section beginning on
page 17, which describes some of the risks that you should consider in deciding
whether to vote in favor of the merger agreement and the merger.
Neither the U.S. SEC nor any state securities regulator has approved the
Brokat ADSs or the Brokat ordinary shares to be issued in connection with the
merger or determined that this proxy statement/prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus and the accompanying forms of proxy are first
being mailed to Blaze stockholders on or about the date set forth below.
Proxy Statement/Prospectus dated September 8, 2000
<PAGE>
[LOGO OF BLAZE SOFTWARE]
September 8, 2000
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders of
Blaze Software, Inc., which will be held on September 29, 2000 at 8:00 a.m.,
local time, at 150 Almaden Boulevard, 9th Floor, San Jose, California, 95113 or
any adjournment or postponement of the meeting. At the special meeting you will
be asked to approve and adopt a merger agreement providing for a merger in
which Blaze will become a wholly owned subsidiary of BROKAT Aktiengesellschaft,
a corporation organized and existing under the laws of the Federal Republic of
Germany. If the merger is completed, you will receive 0.3652 American
Depositary Shares of Brokat for each share of Blaze common stock that you own.
Each Brokat ADS will represent 0.50 ordinary shares of Brokat. Each such
ordinary share has no par value. The portion of the share capital attributable
to each share is euro 1.00. The Brokat ADSs are expected to be quoted on the
Nasdaq National Market under the symbol "BRKA".
Our board of directors has unanimously approved the merger agreement,
determined that the merger is advisable and in the best interests of Blaze and
its stockholders and recommends that the holders of Blaze common stock vote for
the approval and adoption of the merger agreement and the merger.
The accompanying proxy statement/prospectus gives you detailed information
about the proposed merger. We encourage you to read this entire document
carefully. In addition, you may obtain other information about Blaze or Brokat
from documents filed with the SEC.
Please pay particular attention to the "Risk Factors" section beginning on
page 17, which describes some of the risks that you should consider in deciding
whether to vote in favor of the merger agreement and the merger.
Your vote is important. Whether or not you plan to attend the special
meeting, please take the time to complete, sign and date the enclosed proxy
card and return it in the enclosed, prepaid envelope marked "Proxy," or vote by
telephone or through the Internet as described in the proxy
statement/prospectus. If you sign, date and mail your proxy card without
indicating how you wish to vote, your proxy will be counted as a vote in favor
of the merger agreement. If you attend the special meeting, you may vote in
person even if you have previously returned your proxy.
On behalf of the board of directors of Blaze, I urge you to vote in favor of
the merger agreement and the merger.
/s/ Thomas J. Kelley
Thomas F. Kelly
President, Chief Executive Officer
and Chairman of the Board of
Directors
<PAGE>
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, California 95113
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 29, 2000
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Blaze
Software, Inc., a Delaware corporation, will be held at 150 Almaden Boulevard,
9th Floor, San Jose, California 95113, on September 29, 2000, at 8:00 a.m.,
local time, for the following purposes:
(1) To consider and vote upon a proposal to adopt a merger agreement that
provides for:
. a merger in which Blaze will become a wholly owned subsidiary of
BROKAT Aktiengesellschaft; and
. the conversion of each share of Blaze common stock into 0.3652 ADSs
of Brokat. A copy of the merger agreement is attached as Annex A to
the accompanying proxy statement/prospectus.
(2) To transact such other matters as may properly come before the meeting or
any adjournment or postponement thereof.
Only holders of Blaze common stock at the close of business on August 14,
2000 are entitled to notice of, and to vote at, the meeting and any
adjournments or postponements thereof.
Adoption of the merger agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Blaze common stock entitled
to vote at the meeting. Stockholders who in the aggregate held approximately
38.3% of the outstanding shares of Blaze common stock as of the record date
have agreed to vote to adopt the merger agreement.
Information regarding the merger, the merger agreement, Blaze, Brokat and
related matters is contained in the accompanying proxy statement/prospectus and
the annexes. Such information is incorporated by reference in and forms a part
of this notice.
/s/ Robert S. Michitarian
Robert S. Michitarian
Secretary
September 8, 2000
San Jose, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary................................................................... 1
Brokat and Blaze........................................................ 1
GemStone Systems Acquisition............................................ 2
The Merger and the Merger Agreement..................................... 2
Accounting Treatment.................................................... 6
Listing of Brokat ADSs and Brokat ordinary shares....................... 6
The Blaze Special Meeting............................................... 7
Summary Financial Data.................................................... 9
Summary Financial Data of Brokat........................................ 9
Summary Financial Data of Blaze......................................... 11
Summary Pro Forma Condensed Consolidated Financial Information............ 13
Comparative Per Share Information......................................... 14
Comparative Market Price and Dividend Information......................... 15
Dividend Policy......................................................... 16
Risk Factors.............................................................. 17
Risks Relating to the Merger............................................ 17
Risks Relating to Brokat's Business..................................... 19
Risks Related to Brokat's Indebtedness.................................. 27
Risks Related to Holding Brokat Ordinary Shares and Brokat ADSs......... 28
Special Note Regarding Forward-Looking Statements......................... 31
Currency and Financial Statement Presentation............................. 32
Exchange Rate Information................................................. 33
The Special Meeting....................................................... 34
General................................................................. 34
Matters to be Considered at the Special Meeting......................... 34
No Dissenters' Rights to Appraisal ..................................... 34
Record Date; Quorum; Required Vote; Shares Outstanding and Entitled to
Vote................................................................... 34
Security Ownership of Management........................................ 34
Voting Agreements....................................................... 35
Voting of Proxies....................................................... 35
Voting by Mail.......................................................... 35
Voting by Internet or Telephone......................................... 35
Revocation of Proxies................................................... 36
Solicitation of Proxies................................................. 36
Background and Reasons for the Merger..................................... 37
Background of the Merger................................................ 37
Blaze's Reasons for the Merger; Recommendation of the Blaze Board of
Directors.............................................................. 39
Recommendation of Blaze's Board of Directors............................ 41
Fairness Opinion of Financial Advisor to the Blaze Board of Directors... 41
Certain Relationships; Terms of Engagement.............................. 45
Interests of Certain Persons in the Merger.............................. 46
Brokat's Reasons for the Merger; Recommendation of the Brokat
Supervisory and Management Boards...................................... 47
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Merger and the Merger Agreement....................................... 49
Structure of the Merger................................................. 49
Blaze Trust............................................................. 49
Effective Time and Effects of the Merger................................ 49
Merger Consideration.................................................... 49
The Exchange Agent Will Not Issue Fractional Brokat ADSs or Brokat
Ordinary Shares........................................................ 49
Exchange of Share Certificates.......................................... 49
Treatment of Blaze Common Stock Options................................. 50
Treatment of Blaze Warrants............................................. 50
Representations and Warranties.......................................... 50
Certain Covenants....................................................... 51
Stockholders Meetings................................................... 52
Conditions to the Merger................................................ 53
Amendment and Waiver.................................................... 54
No Solicitation by Blaze................................................ 55
Termination of the Merger Agreement..................................... 55
Expenses and Termination Fees........................................... 56
Indemnification for Prior Acts.......................................... 57
Blaze Employees......................................................... 57
Voting Arrangements..................................................... 57
Regulatory Matters...................................................... 57
Restriction on Resales of Brokat ADSs................................... 58
Accounting Treatment.................................................... 58
Tax Treatment........................................................... 58
Unaudited Pro Forma Financial Information................................. 59
Selected Historical Consolidated Financial Data of Brokat................. 69
Recent Acquisitions and Other Strategic Initiatives....................... 71
Recent Strategic Initiatives............................................ 71
MeTechnology Acquisition................................................ 71
TST Acquisition......................................................... 71
Description of Brokat..................................................... 72
General................................................................. 72
Market Overview......................................................... 73
Brokat's Strengths...................................................... 73
Strategy................................................................ 74
Products................................................................ 76
Services................................................................ 79
Marketing............................................................... 80
Distribution and Sales.................................................. 81
Research and Development................................................ 81
Intellectual Property................................................... 82
Competition............................................................. 84
Employees............................................................... 85
Real Property........................................................... 85
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Legal Proceedings........................................................ 85
Description of the Merger Subsidiary....................................... 85
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Brokat...................................................... 86
Overview................................................................. 86
Results of Operations.................................................... 88
Liquidity and Capital Resources.......................................... 96
Quantitative and Qualitative Disclosures About Market Risk............... 98
Accounting for Income Taxes.............................................. 98
Recent Accounting Pronouncements......................................... 99
Management ................................................................ 100
Management Board......................................................... 100
Supervisory Board........................................................ 102
Management and employee incentive arrangements........................... 103
Material Relationships and Related Transactions of Brokat.................. 105
License agreement with Fernbach Software S. A............................ 105
Transaction Software Technologies, Inc................................... 105
MeTechnology Europe GmbH................................................. 105
Haver & Mailaender....................................................... 105
Tax advisory firm RWT Reutlinger Wirtschaftstreuhand GmbH and the related
law firm Rechtsanwaltsgesellschaft RWT Anwaltskanzlei GmbH.............. 105
Security Ownership of Certain Beneficial Owners and Management of Brokat... 107
Security Ownership of Certain Beneficial Owners and Management of Blaze.... 108
Selected Historical Consolidated Financial Data of Blaze................... 110
Description of Blaze....................................................... 112
Overview................................................................. 112
Blaze Products........................................................... 112
Blaze's Professional Services............................................ 113
Blaze's Strategy......................................................... 113
Research and Development................................................. 114
Sales and Marketing...................................................... 114
Customers................................................................ 115
Competition.............................................................. 115
Intellectual Property and Other Proprietary Rights....................... 116
Employees................................................................ 117
Description of Properties................................................ 117
Legal Proceedings........................................................ 117
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Blaze....................................................... 118
Overview................................................................. 118
Results of Operations.................................................... 120
Year 2000 Compliance .................................................... 127
Quantitative and Qualitative Disclosures about Market Risk............... 127
Material Tax Consequences.................................................. 128
General.................................................................. 128
German Taxation.......................................................... 128
Dividends.............................................................. 128
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Business Tax Reform................................................... 130
U.S. Federal Income Tax Considerations.................................. 131
United States Federal Income Tax Consequences of the Merger........... 132
United States Federal Income Tax Consequences of Ownership of Brokat
Ordinary Shares and Brokat ADSs...................................... 132
U.S. Federal Income Tax Backup Withholding............................ 134
Corporate Structure of Brokat............................................. 135
General Corporate Information........................................... 135
The Brokat Group of Companies........................................... 135
Description of Capital Stock of Brokat.................................... 136
General................................................................. 136
Development of Share Capital............................................ 137
Dividend Rights......................................................... 138
Liquidation Rights...................................................... 138
Preemptive Rights....................................................... 138
Shareholders' Meetings and Voting Rights................................ 139
Disclosure Requirements................................................. 139
Repurchase of Brokat's Own Shares....................................... 140
Limitations Affecting Security Holders.................................... 140
Comparison of Rights of Blaze Stockholders and Brokat Shareholders........ 141
Duties of Directors..................................................... 141
Size and Classification of the Board of Directors....................... 143
Removal of Directors; Filling Vacancies on the Board of Directors....... 143
Information Available to Shareholders................................... 144
Shareholder Meetings.................................................... 144
Shareholders' Proposals................................................. 145
Required Vote for Authorization of Certain Actions...................... 145
Amendment of Corporate Charter and Bylaws............................... 146
Appraisal Rights........................................................ 146
Preemptive Rights....................................................... 147
Limitation on Directors' Liability...................................... 147
Indemnification of Officers and Directors............................... 147
Conflict-of-Interest Transactions....................................... 148
Dividends............................................................... 149
Loans to Directors...................................................... 149
Shareholder Suits....................................................... 149
Rights of Inspection.................................................... 150
Stock Repurchases....................................................... 150
Anti-Takeover Statutes.................................................. 151
Disclosure of Interests................................................. 151
Description of the Brokat American Depositary Shares...................... 152
American Depositary Shares.............................................. 152
Description of American Depositary Shares............................... 152
Share Dividends and Other Distributions................................. 153
Deposit, Withdrawal and Cancellation.................................... 154
Voting Rights........................................................... 154
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fees and Expenses....................................................... 155
Payment of Taxes........................................................ 155
Reclassifications, Recapitalizations and Mergers........................ 155
Amendment and Termination............................................... 156
Limitations on Obligations and Liability to ADS Holders................. 156
Pre-Release of ADSs..................................................... 157
Shares Eligible for Future Sale........................................... 158
Lock-up Agreements...................................................... 158
Regulation S............................................................ 159
Rule 701................................................................ 159
Stock Options........................................................... 159
Enforceability of Civil Liabilities....................................... 159
Stockholder Proposals..................................................... 159
Legal Matters............................................................. 160
Experts .................................................................. 160
Where You Can Find More Information....................................... 161
Trademarks and Service Marks of Brokat.................................... 161
Trademarks and Service Marks of Blaze..................................... 161
Index to Financial Statements............................................. F-1
Annex A--Agreement and Plan of Merger dated June 19, 2000 by and between
Blaze Software, Inc. and Brokat Aktiengesellschaft....................... A-1
Annex B--Opinion of Chase H&Q............................................. B-1
</TABLE>
v
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q.What is the proposed transaction on which I am being asked to vote?
A. It is the merger of Blaze and Brokat. In the merger, a company formed on
behalf of and at the direction of Brokat for the sole purpose of consummating
this transaction will merge with and into Blaze, with Blaze surviving the
merger. As a result, Blaze will become a wholly owned subsidiary of Brokat.
Q.Why are Blaze and Brokat proposing to merge?
A. The merger of Blaze and Brokat will strengthen the product portfolios of
the two companies and give them access to new markets. Blaze and Brokat believe
the combined company will be a more competitive global provider of Internet-
based and electronic business software and services than either Blaze or Brokat
would be on its own. Blaze and Brokat believe this combination will generate
significant opportunities to enhance stockholder value.
Q.What effect will the merger have on my Blaze shares?
A. Each share of your Blaze common stock will be exchanged for 0.3652 Brokat
ADSs, representing 0.1826 Brokat ordinary shares. The Bank of New York will not
distribute fractional ADSs. If you are entitled to any fraction of a Brokat
ADS, you will be given cash only for that fraction.
Q.What is a Brokat ADS?
A. A Brokat ADS is an American Depositary Share, evidenced by an American
Depositary Receipt, or ADR, that represents 0.50 Brokat ordinary shares. The
Brokat ADSs have been created to allow U.S. stockholders more easily to hold
and trade interests in Brokat on U.S. markets after the merger. The Bank of New
York will be the depositary that will issue the Brokat ADSs and hold the Brokat
ordinary shares represented by the ADSs. A holder of Brokat ADSs will have the
right to surrender them and withdraw Brokat ordinary shares upon payment of
fees, taxes and other governmental charges. For a discussion of the differences
between owning Brokat ADSs and Brokat ordinary shares, see "Description of
Brokat American Depositary Shares--General."
Q.Will the Brokat ADSs and the Brokat ordinary shares be publicly traded?
A. We expect that the Brokat ADSs will be quoted on the Nasdaq National
Market. Brokat ordinary shares are listed on the Neuer Markt of the Frankfurt
Stock Exchange. There is no plan to list the Brokat ordinary shares on any U.S.
securities exchange.
Q.What percentage of Brokat's outstanding ordinary shares will be held by
former Blaze stockholders after the merger?
A. When the merger is complete, the Blaze stockholders will hold, directly
or through ADSs, approximately 15.3% of Brokat's outstanding ordinary shares on
a fully diluted basis.
Q.Is the merger taxable?
A. The merger has been structured to qualify as a tax-free reorganization
under the U.S. Internal Revenue Code. We believe that you will not recognize
any taxable gain or loss for U.S. federal income tax purposes on the exchange
of your Blaze common stock for Brokat ADSs in the merger, except for the cash
amounts received for the fractional ADSs. The tax consequences of the
transaction may be very complicated and will depend on the facts of your own
situation. If you reside outside the United States, the tax consequences of the
merger under the tax laws of the jurisdictions that apply to you are not
described in this proxy statement/prospectus. We urge all Blaze stockholders to
consult their own tax advisor for a full understanding of the tax consequences
of the merger to them.
<PAGE>
Q. Am I entitled to appraisal rights?
A. No. Under Delaware law, which governs Blaze and the rights of Blaze
stockholders in the merger, you are not entitled to appraisal rights.
Q. When and where is the special meeting?
A. The Blaze special meeting is scheduled to take place on September 29,
2000 at 8:00 a.m., local time, at 150 Almaden Boulevard, 9th Floor, San Jose,
California 95113.
Q. When do you expect the merger to be completed?
A. We expect to complete the merger promptly after receiving the Blaze
stockholder approval at the Blaze special meeting and after all necessary
regulatory approvals are received. We believe that the merger will occur during
the third calendar quarter of 2000. Because the merger is subject to
governmental approvals and various contingencies, we cannot predict the exact
timing.
Q. How do I vote?
A. After you have carefully read this proxy statement/prospectus, mail your
signed proxy card in the enclosed postage-paid envelope as soon as possible so
that your shares may be represented and voted at the Blaze special meeting.
Additionally, you may submit your proxy by telephone or by using the Internet.
You may also vote in person at the Blaze special meeting. If your shares are
held in "street name" through a broker, bank or other financial institution,
you must either direct the record holder as to how to vote your shares or
obtain a proxy from the record holder to vote at the special meeting.
Q. May I change my vote?
A. Yes. You may withdraw your proxy or change your vote by delivering a
later-dated, signed written notice of revocation or proxy card or by voting
again by telephone or through the Internet before the Blaze special meeting or
by voting in person at the Blaze special meeting.
Q. Should I send in my stock certificates now?
A. No. After the merger is completed, Brokat will send you instructions that
will explain how to exchange your Blaze stock certificates for Brokat ADSs and
cash for any fractional Brokat ADS you would otherwise receive.
Q. What vote is required for approval?
A. The merger agreement must be adopted by holders of a majority of the
outstanding shares of Blaze common stock entitled to vote at the meeting.
Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me without my instructions?
A. No. You should instruct your broker to vote your shares, following the
directions provided by your broker. Your failure to instruct your broker to
vote your shares in favor of the merger will be the equivalent of voting
against the merger.
Q. What if I plan to attend the meeting in person?
A. We recommend that you cast your vote in advance in any event by sending
in your voting form or by voting by telephone or through the Internet.
<PAGE>
Q. Can I call anyone if I have further questions?
A. If you have more questions about the merger, you should contact one of
the following:
In the United States:
Morrow & Co. Blaze Software, Inc.
Donna Corso Scott Schroeder
445 Park Avenue, 5th Floor Director of Investor
New York, NY 10022 Relations
Stockholders, 150 Almaden Blvd.
please call: 1-800-566-9061 San Jose, CA 95113
Brokers and Banks, Tel:1-877-472-5293
please call: 1-212-754-8000
In Europe:
BROKAT Aktiengesellschaft
Silke Simon
Head of Investor Relations
Industriestr. 3
70565 Stuttgart, Germany
Tel: +49-711-78844-298
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It may not contain all of the information that is
important to you. For a more complete description of Brokat, Blaze and the
merger, you should read this entire document and the other documents to which
we refer in this document, including the materials attached as annexes. We have
included page references in this summary to direct you to more complete
descriptions of the topics we have summarized.
Brokat and Blaze (pages 72 and 112)
BROKAT Aktiengesellschaft
Industriestrasse 3,
70565, Stuttgart
Germany
Tel: + (49) 711-788-440
Brokat designs, develops, markets and supports e-business software. Brokat
is a leading provider of software for the rapidly expanding e-banking market
and the leading provider of e-banking software to European banks. Brokat's 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. Twister 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.
Brokat also offers 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, in combination with the Twister
platform, provide a business with both customer relationship management and
back office integration functions. In addition, Brokat provides a range of
professional services such as consulting, customization, installation,
training, and maintenance and support in connection with the sales of its
products.
Brokat is a stock corporation organized under the laws of Germany. In
September 1998, Brokat completed an initial public offering of its shares in
Germany. Brokat's ordinary shares are listed on the Neuer Markt of the
Frankfurt Stock Exchange.
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, California 95113
Tel: + (408) 275-6900
Blaze designs, develops, markets and supports software that enables
companies to provide their customers, employees, partners and suppliers with
adaptable and personalized interactions that are consistent across all company
communication channels, including the Internet, automated telephone response
systems, manned customer service centers, automated self-service electronic
kiosks and others. Blaze software enables companies to translate business rules
into a format that can be used by business applications. Blaze software also
enables companies to communicate their unique way of doing business through
these interactions, thereby differentiating themselves from their competitors
and providing incentives for customers to use their products and services and
allows business persons to modify the business rules included in Blaze software
quickly and easily, enabling companies to respond quickly to changes in market
conditions, business practices and user
1
<PAGE>
preferences. Blaze also provides consulting and professional services to help
customers plan, develop and implement personalization solutions using Blaze
software.
Blaze is incorporated under the laws of the State of Delaware. In March
2000, Blaze completed an initial public offering of its common stock in the
United States. Blaze's shares are quoted on the Nasdaq National Market.
GemStone Systems Acquisition
On June 19, 2000, Brokat entered into a definitive merger agreement pursuant
to which GemStone Systems, Inc. became a wholly owned subsidiary of Brokat in
August 2000 and all of the GemStone stockholders became holders of Brokat
ordinary shares. The addition of GemStone to Brokat is expected to strengthen
the product portfolio of the combined company and enhance Brokat's technology.
In connection with the GemStone merger, Brokat issued approximately 2.6
million of its ordinary shares. When the GemStone merger was completed, the
GemStone stockholders and a trust for the benefit of GemStone employees held
approximately 8.8% of Brokat's outstanding ordinary shares on a fully diluted
basis. The acquisition of GemStone is valued at 296.9 million euros or U.S.
$283.0 million. The GemStone acquisition was subject to a fairness hearing
under Oregon law for purposes of a U.S. federal securities law exemption.
The GemStone acquisition was not conditioned upon the Blaze acquisition and
the Blaze acquisition is not conditioned upon the GemStone acquisition. The
GemStone acquisition was accounted for under U.S. GAAP as a purchase and
qualified as a reorganization under the U.S. Internal Revenue Code.
See "Unaudited Pro Forma Financial Information" and the historical financial
statements of GemStone included in this proxy statement/prospectus.
The Merger and the Merger Agreement
Summary of the merger (page 49).
In the proposed merger, Blaze will become a wholly owned subsidiary of
Brokat, and all of the Blaze stockholders will become holders of Brokat ADSs.
The merger agreement is attached as Annex A. You should read the merger
agreement as it is the legal document that governs the Blaze merger.
What you will receive in the merger (page 49).
You will receive 0.3652 Brokat American Depositary Shares, called Brokat
ADSs, for each share of Blaze common stock that you own. Each Brokat ADS will
represent 0.50 Brokat ordinary shares.
If you are entitled to receive a fraction of a Brokat ADS as a result of the
merger, you will instead receive cash equal to your proportionate interest in
the net proceeds from the sale of the aggregate fractional Brokat ADSs that
would otherwise have been issued. The sale of fractional ADSs will be conducted
by the exchange agent, acting on behalf of all holders of a right to receive
Brokat ADSs. Any cash payment for a fractional Brokat ADS will be paid in U.S.
dollars.
2
<PAGE>
Blaze board of directors recommendation (page 41)
The board of directors of Blaze has unanimously approved the merger. The
Blaze board of directors believes that the merger and the merger agreement are
advisable, fair to and in the best interests of Blaze and its stockholders and
recommends that Blaze's stockholders vote for the approval of the merger
agreement.
Blaze's reasons for the merger (page 39)
In reaching its determination, the Blaze board consulted with Blaze's
management, as well as its financial adviser and legal counsel, and gave
significant consideration to a number of factors bearing on its decision.
The Blaze board believes that the proposed merger would afford Blaze the
following advantages:
. The merger would allow the integration of Blaze's personalization
technology with the Internet-based e-business products and technology of
Brokat and its industry-specific systems integration packages, while
providing strong synergies between the parties professional services
offerings, all of which would create a range of product and service
offerings far broader than Blaze's current offerings.
. The board of directors considered Blaze's prospects, and the effect on
Blaze's stockholders, of developing products, services and technology
similar to Brokat's as a stand-alone company, as compared to the effect
of combining with Brokat, and the board of directors determined that the
merger would give the combined enterprise a greater competitive advantage
and technological lead than Blaze could achieve on its own.
. The relatively greater financial, sales and technical resources of Brokat
and the likelihood that these resources would allow Blaze to accelerate
the introduction of new products with a greater technical base and to
compete more effectively in its targeted markets.
. The merger would potentially create increased sales of Blaze's products
and services by exposing Blaze to Brokat's international customer base,
as well as creating additional cross-selling opportunities with Blaze's
existing customers.
. The merger would allow Blaze to more rapidly establish indirect
distribution channels by leveraging Brokat's existing relationships.
Fairness opinion of Blaze's financial advisor (page 41)
In deciding to approve the merger and the merger agreement, the Blaze board
of directors also considered the opinion of its financial advisor, Chase H&Q, a
division of Chase Securities Inc. Blaze received an opinion from Chase H&Q
dated June 19, 2000 on the fairness, from a financial point of view, of the
exchange ratio pursuant to the merger agreement to the holders of the
outstanding shares of Blaze common stock. This opinion is attached as Annex B.
We encourage you to read this opinion in its entirety.
Brokat supervisory board and management board approval (page 47)
Brokat's supervisory board and management board unanimously approved the
merger agreement and the merger.
Brokat's reasons for the merger (page 47)
Brokat's management board and supervisory board determined that the merger
would be in the best long-term interests of the shareholders and employees of
Brokat. In particular, the merger with Blaze fits with Brokat's publicly stated
strategy of expanding its North American presence. In reaching their decisions,
Brokat's management board and supervisory board considered a number of factors
including:
3
<PAGE>
. the merger with Blaze would enable Brokat to gain market share in
software products in the United States;
. the software developed by Brokat and Blaze are complementary;
. Blaze and Brokat have complementary distribution strategies;
. the geographic coverage of Brokat and Blaze is complementary, with Blaze
having particular strength in the United States, where Brokat is under
represented;
. the combined research and development resources of Brokat and Blaze could
be used more efficiently; and
. Brokat believes that its international approach will appeal to Blaze
employees.
Interests of certain persons in the merger may be different from yours (page
46)
Blaze's directors and officers have interests in the merger that are
different from, or in addition to, yours. The interests are described under the
caption "Background and Reasons for the Merger--Interests of Certain Persons in
the Merger." Blaze's board of directors was aware of these interests and
considered them in approving and recommending the merger. You should be aware
of these interests when considering the board of directors's recommendation
that you vote in favor of the merger and the merger agreement.
Required vote by Blaze stockholders (pages 34, 35 and 57)
Stockholders of Blaze owning a majority of its outstanding common stock
represented and entitled to vote at the meeting will have to vote in favor of
the merger agreement for it to be adopted. Funds affiliated with TL Ventures,
funds affiliated with Morgan Stanley Dean Witter Venture Partners, Blaze's
president and chief executive officer Thomas Kelly, Blaze's chief financial
officer Gary Shroyer, Blaze's chief technology officer Eric Kintzer, and Blaze
directors Charles Boesenberg, George Klaus and Ken Goldman, who together owned
about 38.3% of the outstanding Blaze common stock on the record date for the
special meeting, have agreed to vote their shares in favor of the merger unless
the merger agreement is terminated without the special meeting taking place.
No dissenters' rights to appraisal (page 34)
Under Delaware law, you do not have dissenters' rights of appraisal with
respect to the merger.
Conditions to the merger (page 53)
Blaze's and Brokat's obligations to complete the merger are subject to
satisfaction or waiver of a number of conditions, including:
. the Blaze stockholders must approve the merger agreement and the
consummation of the merger;
. Brokat's ADSs issuable to Blaze's stockholders must have been authorized
for quotation on the Nasdaq National Market upon official notice of
issuance;
. Brokat and Blaze must obtain all required approvals from governmental
entities to permit the consummation of the merger and the capital
increase and no law or regulation, judgment, injunction, order or decree
of a court of competent jurisdiction may prohibit or enjoin such
transactions;
. the representations and warranties made in the merger agreement must be
true and correct subject to customary exceptions; and
. Blaze and Brokat must have fulfilled in all material respects all of
their obligations under the merger agreement.
4
<PAGE>
For a more complete description of the conditions to the completion of the
merger, see "The Merger and the Merger Agreement--Conditions to the Merger."
Termination of the merger agreement (page 55)
Blaze and Brokat can agree in writing at any time to terminate the merger
agreement. In addition, the merger agreement may be terminated by either Blaze
or Brokat if any of the following occurs:
. the representations and warranties made in the merger agreement by the
other party were not complete and accurate when they were made, or the
conditions to that party's obligation to perform under the merger
agreement are not satisfied or waived, except to the extent that these
inaccuracies or non-satisfactions do not have, in the aggregate, a
material adverse effect on the merger;
. Blaze's stockholders fail to approve the merger at the special meeting;
or
. the merger is not completed by December 31, 2000.
Brokat may terminate the merger agreement if Blaze's board withdraws or
modifies its approval or recommendation to vote in favor of the merger
agreement and of the consummation of the merger.
Blaze may terminate the merger agreement if its board of directors concludes
in good faith that failure to do so would be inconsistent with its fiduciary
duties in light of a pending superior acquisition proposal by another person
(subject to certain conditions).
No solicitation of competing transactions (page 55)
Blaze has agreed not to:
. solicit, initiate or knowingly encourage discussions with any third party
regarding an acquisition or business combination involving Blaze or any
subsidiary of Blaze; or
. participate in negotiations with, or furnish information to, a third
party seeking to engage in such a transaction unless the Blaze board of
directors determines in good faith that an unsolicited proposal would be
more favorable to the Blaze stockholders than the Brokat merger.
Blaze must inform Brokat of any acquisition proposal from a third party and
promptly furnish to Brokat copies of any written communications or documents
received with respect to the acquisition proposal. Blaze must also notify
Brokat within two business days if the Blaze board decides that Blaze should
give nonpublic information to a potential acquiror.
Payments of termination fee and expenses (page 56)
Blaze will be required to pay Brokat a termination fee of $20 million if:
. the Blaze board of directors withdraws its recommendation that the
stockholders approve the merger, recommends to Blaze's stockholders a
different acquisition proposal or terminates the merger agreement to
pursue what it determines to be a superior acquisition proposal; or
. the Blaze stockholders fail to approve the merger agreement while there
is outstanding another acquisition proposal and, within twelve months of
the termination of the merger agreement, Blaze enters into an agreement
to be acquired by a third party or an acquisition of Blaze by a third
party is completed.
5
<PAGE>
Each of Blaze and Brokat will bear all expenses it incurs in connection with
the merger, except that, if the Blaze board of directors terminates the merger
agreement or the Blaze stockholders do not approve the merger, Blaze will
reimburse Brokat for all actual and documented expenses it incurred in
connection with the merger, subject to a maximum reimbursement amount of $2
million under some circumstances.
Tax consequences (page 128)
The merger is structured to qualify as a tax-free "reorganization" for U.S.
federal income tax purposes with respect to your receipt of Brokat ADSs.
Tax consequences of the merger and of owning Brokat ADSs are complicated and
the resulting tax consequences will depend on the facts of your particular
circumstances. If you pay taxes in a country other than the United States, the
tax consequences to you may be different from those described in this proxy
statement/prospectus. We strongly urge you to consult your own tax advisor
regarding the tax consequences of the merger and of owning Brokat ADSs given
your particular circumstances.
Accounting treatment
Brokat will account for the merger under the purchase method of accounting
under U.S. GAAP.
Listing of Brokat ADSs and Brokat ordinary shares
The Brokat ADSs you receive in the merger are expected to be quoted on the
Nasdaq National Market. The Brokat ordinary shares are listed on the Neuer
Markt of the Frankfurt stock exchange. The Brokat ordinary shares represented
by ADSs are expected to be listed on the Neuer Markt of the Frankfurt stock
exchange.
Restrictions on the ability to sell Brokat ADSs and Brokat ordinary shares
(page 158)
All Brokat ADSs received by you in connection with the merger will be freely
transferable unless you are considered an "affiliate" of either Blaze or Brokat
for purposes of the U.S. Securities Act. Brokat ADSs or Brokat ordinary shares
held by these affiliates may only be sold in the United States pursuant to a
registration statement or exemption under the U.S. Securities Act.
Some members of Blaze's management, the funds affiliated with TL Ventures
and the funds affiliated with Morgan Stanley Dean Witter Venture Partners that
own Blaze stock have entered into a stockholders agreement with Brokat. Under
that stockholders agreement, the Blaze management stockholders have agreed not
to transfer the Brokat ADSs they receive in connection with the merger for the
first six months after the closing of the merger.
Under the stockholders agreement, each of the funds affiliated with TL
Ventures and each of the funds affiliated with Morgan Stanley Dean Witter
Venture Partners have agreed:
. not to transfer the Brokat ADSs it receives in connection with the merger
for the first 60 days after the closing of the merger;
. not to transfer its shares for an additional 45-day period if Brokat
files a registration statement with the U.S. SEC for a primary offering
of capital stock for cash before the end of the 60-day period;
. after the two periods mentioned above, to limit its transfers to
. its own security holders; or
6
<PAGE>
. in any 90-day period, up to (1) the average weekly trading volume in
Brokat ADSs reported through Nasdaq during the preceding four calendar
weeks if that shareholder is transferring Brokat ADSs, or (2) the
greater of 1% of the total number of outstanding shares of Brokat and
the average weekly trading volume in Brokat ordinary shares reported
through the Neuer Markt during the preceding four calendar weeks if
that shareholder is transferring Brokat ordinary shares
In addition, the Blaze stockholders subject to the stockholders agreement
have agreed not to transfer their shares during the 14-day period before, and
the 90-day period after, a public offering by Brokat in the United States.
The Blaze Special Meeting
General (page 34)
The special meeting will be held at 8:00 a.m., local time, on September 29,
2000, at 150 Almaden Boulevard, 9th Floor, San Jose, California, 95113.
Purpose of the special meeting (page 34)
The purpose of the special meeting will be to vote upon a proposal to
approve and adopt the merger agreement and the merger.
Record date; quorum; required vote; shares outstanding and entitled to vote
(page 34)
Only holders of record of Blaze common stock at the close of business on
August 14, 2000, the record date for the special meeting, will be entitled to
notice of and to vote at the special meeting. The presence, in person or by
proxy, of the holders of a majority of the voting power of the stock issued,
outstanding and entitled to vote at the special meeting is necessary to
constitute a quorum. Each holder of record of shares of Blaze common stock on
the Blaze record date is entitled to cast one vote per share on the merger
proposal and on any other matter properly submitted for the vote of the Blaze
stockholders at the special meeting. The affirmative vote of a majority of the
outstanding shares of Blaze common stock entitled to vote is required to
approve the merger proposal. As of the record date, there were 23,229,854
shares of Blaze common stock outstanding and entitled to vote at the special
meeting.
Failure to vote in favor of the merger proposal has the same effect as a vote
against it.
All beneficial owners of Blaze common stock are urged to return the enclosed
proxy card marked to indicate their votes or to instruct the broker or other
person in whose name the shares are held to vote the shares in favor of the
merger. The actions proposed in this proxy statement/prospectus are not matters
that can be voted on by brokers holding shares for beneficial owners without
the owners' specific instructions.
Voting of proxies; revocation of proxies (pages 35 and 36)
Properly executed proxies will be voted in accordance with the instructions
indicated in the proxies. Also, the persons named in the proxy will have
discretionary power to vote on any matters other than the merger proposal that
are properly presented at the special meeting. Proxies may be submitted by
mail, by telephone or using the Internet. A stockholder may revoke a proxy
before the special meeting by complying with any of the procedures described in
this proxy statement/prospectus under "The Special Meeting--Voting of Proxies;
Revocation of Proxies."
7
<PAGE>
Security ownership of Blaze's management (page 108)
As of the record date, certain of the directors and executive officers of
Blaze and their affiliates beneficially owned an aggregate of approximately
9,126,850 shares of Blaze common stock (approximately 39.3% of the Blaze common
stock then outstanding).
8
<PAGE>
SUMMARY FINANCIAL DATA
Summary Financial Data of Brokat
The following table presents some of Brokat's summary historical
consolidated financial data derived from Brokat's historical consolidated
financial statements for the periods indicated.
The summary historical financial data for the years ended June 30, 1996,
1997, 1998 and 1999 and the six months ended December 31, 1999, were derived
from the audited consolidated financial statements of Brokat for those periods.
The consolidated financial statements for the years ended June 30, 1997, 1998
and 1999 and the six months ended December 31, 1999, are included elsewhere in
this proxy statement/prospectus. The consolidated financial statements for the
year ended June 30, 1996, are not included in this prospectus.
The summary historical financial data as of and for the year ended June 30,
1995 were derived from the unaudited consolidated financial statements of
Brokat for that period, which were prepared under German GAAP. These
consolidated financial statements are not included in this proxy
statement/prospectus.
The summary 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 Brokat's unaudited financial statements and, in Brokat's opinion,
reflect all adjustments necessary to present fairly the financial position and
results of operations for the periods presented.
Brokat's consolidated financial statements have been prepared in accordance
with U.S. GAAP since (but not including) the fiscal year ended June 30, 1995.
Since Brokat's inception through the fiscal year ended June 30, 1999,
Brokat's fiscal year ended on June 30. Brokat changed its fiscal year in 1999
to end on December 31. Brokat's results of operations for the six months ended
December 31, 1999 and for the six months ended June 30, 1999 and 2000 are not
necessarily indicative of results that may be expected for the full year. For
information relating to the currency exchange rates used in the following
table, you should read "Currency and Financial Statement Presentation."
You should carefully review Brokat's consolidated financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "Unaudited Pro Forma Consolidated Financial Information," "Selected
Historical Consolidated Financial Data of Brokat" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Brokat."
9
<PAGE>
Summary Financial Data of Brokat
(Deutsche marks and dollars in thousands)
<TABLE>
<CAPTION>
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 $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
(1)
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 absorption of
convertible debt of
silent partners........
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................ (1,714) (11,845) (44,038) (21,490) (12,509) (51,477) (25,122) (25,394) (76,686) (37,426)
====== ======= ======= ======= ======= ======= ======= ======= ======== =======
Other Financial Data:
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
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31, As of June 30,
----------------------------- ---------------------- ---------------
1997 1998 1999 1999 1998 1999 1999 2000 2000
----- ------ ------- ------- ------ ------- ------- ------- -------
DM DM DM $ DM DM $ DM $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Total assets............ 7,222 19,680 275,070 134,239 94,246 248,685 121,363 496,167 242,151
Total long-term debt.... 2,730 10,308 24,356 11,886 6,000 3,850 1,879 248,596 121,326
Total liabilities....... 8,208 19,219 56,731 27,686 18,354 78,313 38,218 301,750 147,267
Total shareholders'
equity................. (986) 461 217,939 106,358 75,892 169,946 82,937 194,091 94,725
</TABLE>
--------
(1) Brokat's financial statements contained in this proxy statement/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 differ from the balance sheet data at that date
included in Brokat's published accounts.
10
<PAGE>
Summary Financial Data of Blaze
The following table presents Blaze's summary historical consolidated
financial data derived from Blaze's historical consolidated financial
statements for the periods indicated.
The summary historical financial data as of March 31, 1999 and 2000, and for
the years ended March 31, 1998, 1999 and 2000 were derived from the audited
consolidated financial statements of Blaze for those periods. These
consolidated financial statements are included elsewhere in this proxy
statement/prospectus.
The summary historical financial data as of March 31, 1996, 1997 and 1998,
and for the years ended March 31, 1996 and 1997 were derived from the audited
consolidated financial statements of Blaze for those periods. These
consolidated financial statements are not included in this proxy
statement/prospectus.
The summary historical financial data for the three months ended June 30,
1999 and 2000 were derived from Blaze's unaudited financial statements and, in
Blaze's opinion, reflect all adjustments necessary to present fairly the
results of operations for the periods presented.
Blaze's consolidated financial statements have been prepared in accordance
with U.S. GAAP.
You should carefully review Blaze's consolidated financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "Unaudited Pro Forma Consolidated Financial Information," "Selected
Historical Consolidated Financial Data of Blaze" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Blaze."
11
<PAGE>
Summary Financial Data of Blaze
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Years Ended March 31, Ended June 30,
-------------------------------------------- ----------------
1996 1997 1998 1999 2000 1999 2000
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data
Net revenues:
Product licenses....... $ -- $ 3,296 $ 3,559 $ 3,722 $ 8,486 $ 1,394 $ 3,320
Services and
maintenance........... -- 327 803 5,332 9,710 1,926 3,914
------- ------- ------- ------- -------- ------- -------
Total revenues......... -- 3,623 4,362 9,054 18,196 3,320 7,324
------- ------- ------- ------- -------- ------- -------
Cost of revenues:
Product licenses....... -- 180 74 40 67 10 10
Services and
maintenance........... -- 463 512 2,892 6,808 1,187 3,194
------- ------- ------- ------- -------- ------- -------
Total cost of
revenues.............. -- 643 586 2,932 6,875 1,197 3,204
------- ------- ------- ------- -------- ------- -------
Gross profit............ -- 2,980 3,776 6,122 11,321 2,123 4,030
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Research and
development........... 1,138 1,370 1,938 3,843 5,079 1,260 1,902
Sales and marketing.... 2,512 2,342 3,702 5,586 12,226 1,894 5,959
General and
administrative........ 1,026 957 1,106 2,205 3,785 638 1,838
Stock-based
compensation.......... -- -- -- -- 16,400 -- 4,330
------- ------- ------- ------- -------- ------- -------
Total operating
expenses.............. 4,676 4,669 6,746 11,634 37,490 3,792 14,029
------- ------- ------- ------- -------- ------- -------
Operating loss.......... (4,676) (1,689) (2,970) (5,512) (26,169) (1,669) (9,999)
------- ------- ------- ------- -------- ------- -------
Net loss from continuing
operations............. $(5,748) $(2,723) $(3,631) $(5,848) $(26,424) $(1,783) $(8,983)
======= ======= ======= ======= ======== ======= =======
Basic and diluted loss
per share from
continuing operations.. $ (2.56) $ (3.56) $(37.37) $(19.15) $ (6.68) $ (0.71) $ (0.42)
======= ======= ======= ======= ======== ======= =======
Number of shares used in
calculation of basic
and diluted loss per
share.................. 2,246 920 125 371 5,781 2,211 21,864
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
----------------------------------------------- As of June 30,
1996 1997 1998 1999 2000 2000
------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 1,117 $ 2,258 $ 6,591 $ 2,129 $ 69,293 $ 67,920
Working capital
(deficit).............. (1,519) (3,324) 628 (4,316) 63,018 65,504
Total assets............ 12,642 10,615 13,854 7,765 78,359 79,645
Capital lease
obligations, net of
current portion........ 646 236 91 19 256 211
Accumulated deficit..... (3,044) (11,800) (17,051) (22,651) (58,157) (67,262)
Mandatory redeemable
preferred stock........ 3,275 9,684 19,624 20,882 -- --
Total stockholders'
equity (deficit)....... (2,583) (10,795) (17,563) (24,203) 65,769 69,567
</TABLE>
The Company has never paid any cash dividends on its capital stock.
12
<PAGE>
Summary Pro Forma Condensed Consolidated Financial Information
The following summary unaudited pro forma condensed consolidated financial
information, prepared in accordance with U.S. GAAP, is intended to provide
Blaze stockholders with an idea of what the results of operations and financial
position of the combined businesses of Brokat and Blaze might have looked like
had the merger occurred on an earlier date. For more detailed information, you
should read "Unaudited Pro Forma Financial Information."
The unaudited pro forma condensed consolidated financial information is
provided for illustrative purposes only and does not show what the results of
operations and financial position of Brokat would have been if the merger had
actually occurred on the dates assumed. This information also does not indicate
what Brokat's future operating results or consolidated financial position will
be.
The following summary unaudited pro forma statement of operations data give
effect to the acquisitions of MeTechnology AG and Transaction Software
Technologies, Inc., the offering of Brokat's 11 1/2% senior notes due 2010 and
the application of the net proceeds of the offering, and the acquisitions of
Blaze and GemStone, as if they had occurred on July 1, 1998.
The summary unaudited pro forma balance sheet data as of June 30, 2000 give
effect to the offering of Brokat's senior notes and the application of the net
proceeds of such offering as well as to the acquisitions of Blaze and GemStone,
as if they had occurred on June 30, 2000.
<TABLE>
<CAPTION>
Adjusted Pro Forma for Senior
Pro Forma for the Senior Notes Pro Forma for the Senior Notes Notes Offering and TST, ME,
Offering and Acquisitions of Offering and TST, ME and Blaze and GemStone
TST and MeTechnology GemStone Acquisitions Acquisitions
------------------------------- ------------------------------- -------------------------------
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
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations
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) (167,850) (419,095) (253,067) (291,436)
Operating loss from
continuing
operations......... (90,819) (52,813) (70,505) (182,033) (99,017) (123,462) (341,734) (200,756) (281,831)
-------- ------- -------- -------- -------- -------- -------- -------- --------
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 absorption of
convertible debt of
silent partners....
Loss before income
taxes and
extraordinary
items.............. (116,741) (65,124) (90,232) (208,496) (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
-------- ------- -------- -------- -------- -------- -------- -------- --------
Loss before
extraordinary
item............... (116,861) (65,254) (90,463) (208,498) (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)
======== ======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------------------------------------
Pro Forma for Pro Forma for the
the Acquisition of Gemstone Acquisitions of Blaze and GemStone
--------------------------- ----------------------------------
DM DM
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Total assets............ 1,033,969 2,068,799
Total long-term debt.... 248,733 249,235
Total liabilities....... 331,043 356,693
Total shareholders'
equity................. 702,600 1,711,780
</TABLE>
13
<PAGE>
Comparative Per Share Information
The following tables set forth unaudited historical per share data of Brokat
and Blaze and the combined per share information on an unaudited pro forma
basis after giving effect to the transactions described below. Book value per
share is computed by dividing shareholders' equity by the number of shares
outstanding at the end of each period. Pro forma information reflects the
earnings per share and book value per share that each share would have been
entitled to if the offering of Brokat's 11 1/2% senior notes due 2010 and the
acquisitions of Transaction Software Technologies, MeTechnology, GemStone and
Blaze occurred on July 1, 1998. Pro forma equivalent data was calculated by
multiplying the pro forma data including Blaze by an exchange ratio of 0.3652
Brokat ADSs for each share of Blaze common stock. You should read this
information together with Brokat's and Blaze's consolidated financial
statements and the unaudited pro forma condensed consolidated financial
information included in this proxy statement/prospectus. The pro forma combined
per share information is not necessarily indicative of the operating results or
financial position that would have been achieved if the merger had been
consummated as of the beginning of the period presented, nor is it necessarily
indicative of the future operating results or financial position of Brokat or
Blaze.
<TABLE>
<CAPTION>
Historical Brokat Historical Blaze
--------------------------- ---------------------------
Fiscal Six Fiscal Six
Year Months Year Months
Ended Six Months Ended Ended Six Months Ended
June Ended June June Ended June
30, December 31, 30, 30, December 31, 30,
1999 1999 2000 1999 1999 2000
------ ------------ ------ ------ ------------ ------
DM DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic and diluted loss
per share:
Loss before
extraordinary items... (2.23) (1.92) (2.84) (12.57) (4.26) (1.22)
Extraordinary Loss..... -- -- -- -- -- --
----- ----- ----- ------ ----- -----
Net loss from
continuing
operations............ (2.24) (1.92) (2.84) (12.57) (4.26) (1.22)
===== ===== ===== ====== ===== =====
Book value per share: 13.97 9.26 16.52 (0.02) 3.04 6.26
===== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Pro Forma for the Pro Forma for the Pro Forma Equivalent
Senior Note Offering, Senior Note Offering, for the Senior Note Offering,
and TST, ME and and TST, ME, Gemstone and TST, ME, Gemstone
Gemstone Acquisitions and Blaze Acquisitions and Blaze Acquisitions
--------------------------- --------------------------- ------------------------------
Fiscal Six Fiscal Six
Year Months Year Months Fiscal Six
Ended Six Months Ended Ended Six Months Ended Year Six Months Months
June Ended June June Ended June Ended Ended Ended
30, December 31, 30, 30, December 31, 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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic and diluted loss
per share:
Loss before
extraordinary items... (9.51) (3.85) (4.94) (13.99) (6.38) (7.06) (5.11) (2.33) (2.58)
Extraordinary loss..... (0.00) -- -- (0.00) -- -- (0.00) -- --
----- ----- ----- ------ ----- ----- ----- ----- -----
Net loss from continuing
operations............. (0.52) (3.85) (4.94) (13.99) (6.38) (7.06) (5.11) (2.33) (2.58)
===== ===== ===== ====== ===== ===== ===== ===== =====
Book value per share: 12.22 8.32 14.40 10.15 7.85 16.71 4.46 3.04 5.26
===== ===== ===== ====== ===== ===== ===== ===== =====
</TABLE>
14
<PAGE>
Comparative Market Price and Dividend Information
Brokat's share capital consists of one class of ordinary shares. The
principal trading market for the Brokat ordinary shares is the Neuer Markt of
the Frankfurt Stock Exchange, where the ordinary shares are listed under the
symbol "BRJ." Brokat has applied for the Brokat ADSs to be quoted on the Nasdaq
National Market under the symbol "BRKA" effective at the date of the merger.
The table below shows, for the calendar quarters indicated, the high and low
closing prices per Brokat ordinary share and the average daily trading price of
the Brokat ordinary shares, all as reported on the Neuer Markt of the Frankfurt
Stock Exchange. Translation of euro into dollars has been made at the rate of
euro 1.00 = $0.9545, the noon buying rate in the City of New York for cable
transfers in foreign currencies certified by the Federal Reserve Bank of New
York for customs purposes on June 30, 2000. This translation is provided solely
for your convenience. All the prices of Brokat ordinary shares set forth in the
following table have been adjusted to reflect the 3:1 stock split effective on
February 7, 2000.
<TABLE>
<CAPTION>
Average Daily
Year High Low Trading
---- ------------- ------------ -------------
(Euro) ($) (Euro) ($) (Euro) ($)
<S> <C> <C> <C> <C> <C> <C>
1998
Third quarter........................ 16.36 15.62 10.91 10.41 14.07 13.43
Fourth quarter....................... 44.31 42.29 11.50 10.98 22.53 21.50
1999
First quarter........................ 60.67 57.91 37.33 35.63 50.93 48.61
Second quarter....................... 51.67 49.32 31.33 29.90 40.98 39.11
Third quarter........................ 45.67 43.59 31.73 30.29 37.18 35.48
Fourth quarter....................... 72 68.72 34 32.45 49.50 47.25
2000
First quarter........................ 210 200.44 56 53.45 118.87 113.46
Second quarter....................... 155 147.94 76.50 73.02 121.23 115.71
Third quarter (through September 7,
2000)............................... 124.00 118.35 85.99 82.08 102.99 98.30
</TABLE>
As of June 19, 2000, Brokat had 27,311,184 ordinary shares outstanding.
Blaze's outstanding share capital consists only of common stock, par value
$0.0001 per share. Blaze is authorized to issue preferred stock, but none is
outstanding. The principal trading market for the shares of Blaze common stock
is the Nasdaq National Market where the Blaze common stock is quoted under the
symbol "BLZE."
The table below shows, for the calendar quarters indicated, the high and low
closing prices per share of Blaze common stock, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Year High Low
---- ----- -----
($) ($)
<S> <C> <C>
2000
First quarter (starting March 23, 2000).......................... 31.13 24.25
Second quarter................................................... 25.44 8.00
Third quarter (through September 7, 2000)........................ 18.81 13.75
</TABLE>
As of June 19, 2000, Blaze had 22,662,571 shares of common stock outstanding.
There were 589 holders of record of Blaze common stock on June 19, 2000.
15
<PAGE>
The following table shows:
. the last reported sale price of one share of Blaze common stock, as
reported on the Nasdaq National Market;
. the last reported sale price of one Brokat ordinary share, as reported in
euros on the Neuer Markt of the Frankfurt Stock Exchange in euros and
converted into dollars; and
. the implied equivalent per share value for one share of Blaze common
stock determined as if the merger had been completed;
in each case, on June 19, 2000, the last full trading day prior to the public
announcement of the merger and, on August 30, 2000, the most recent practicable
trading day prior to the date of this proxy statement/prospectus. The implied
equivalent per share values have been determined based upon the prices for
Brokat ordinary shares on such dates and the exchange ratio of 0.1826 Brokat
ordinary shares for each share of Blaze common stock.
<TABLE>
<CAPTION>
Equivalent price
Blaze Brokat per share of
Date common stock ordinary shares Blaze common stock
---- ------------ --------------- ------------------
($) ($) ($)
<S> <C> <C> <C>
June 19, 2000................... 15.50 118 20.68
August 30, 2000................. 18.69 124 22.64
</TABLE>
The translation of Brokat ordinary shares into dollars was made using 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
1.00 = $0.9622 on June 19, 2000 and euro 1.00 = $0.8924 on August 30, 2000.
We urge Blaze stockholders to obtain current market quotations for Brokat
ordinary shares and shares of Blaze common stock before making a decision with
respect to the merger.
Dividend Policy
Neither Brokat nor Blaze has ever declared or paid any cash dividends on its
capital stock. Each of Brokat and Blaze expects to retain its future earnings,
if any, for use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future. Covenants in
the indenture governing Brokat's outstanding senior notes restrict the payment
of cash dividends.
16
<PAGE>
RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in Brokat
ADSs. An investment in these securities involves a high degree of risk. In
addition to the other information contained in this proxy
statement/prospectus, in deciding how to vote you should consider carefully
the risks associated with owning Brokat ADSs following the merger. Some of
these risks are described below.
Risks Relating to the Merger
Brokat and Blaze may not successfully integrate their operations, which could
result in a failure of the combined company to realize the potential benefits
of the merger.
In order for the merger to be successful, we must integrate the operations
and technologies of the two companies and manage geographically dispersed
operations. Among the challenges involved in this integration is demonstrating
to our customers that the merger will not result in an adverse change in
customer service standards or business focus and persuading our personnel that
our business cultures are compatible. The integration process will be
expensive and time consuming and may strain our management and other
resources. The integration of our operations will require, among other things:
. educating the employees of each company about the technologies and
products of the other company;
. coordinating or combining our research and development efforts and sales
and marketing organizations; and
. aligning the strategic plans of two previously independent management
teams.
The difficulties of this integration may be increased by the geographical
separation of our two companies and our employees. Brokat's research and
development operations are located in Germany. Blaze's research and
development operations are located mainly in the United States. Integration
will require the dedication of management resources that may distract
management's attention from the day-to-day business of the combined company.
If we fail to integrate the companies quickly and efficiently, we will not
realize the benefits we expect from the merger and the combined company's
business and results of operations could be impaired.
If Brokat and Blaze do not integrate their technology quickly and
effectively, many of the potential benefits of the merger may not be
realized.
Brokat intends to integrate Blaze's technology into its own software
solutions as well as offer Blaze's solutions separately. Brokat and Blaze
cannot assure you that they will be able to integrate their technology quickly
and effectively. In order to obtain the benefits of the merger, Brokat must
make Blaze's technology, products and services operate together with Brokat's
technology, products and services. Brokat may be required to spend additional
time or money on integration that would otherwise be spent on developing its
business and services or other matters. If Brokat does not integrate the
technology effectively or if management spends too much time on integration
issues, it could harm the combined companies' business, financial condition
and results of operations.
The merger may result in a loss of Blaze or Brokat employees, which could
adversely affect the operating results of the combined company.
Despite Brokat's efforts to hire and retain quality employees, Brokat might
lose some of Blaze's or its own key employees following the merger.
Competition for qualified management, engineering and technical employees in
the software industry is intense. Brokat and Blaze have different corporate
cultures, and Blaze employees may not want to work for a larger, non-U.S.
based company instead of a smaller, start-up company. In addition, competitors
may recruit employees prior to the merger and during integration, as is common
in high technology mergers. As a result, employees of Blaze or the combined
company could leave with little or
17
<PAGE>
no prior notice. Brokat and Blaze cannot assure you that the combined company
will be able to attract, retain and integrate employees following the merger.
The combined company's failure to attract, retain and integrate employees
following the merger may adversely affect the operating results of the
company.
The merger may result in a loss of Blaze customers or strategic alliances and
have a negative impact on its business.
As a result of the merger, some customers, potential customers or strategic
partners may not continue to do business with Blaze. Customers who do not
believe that the transaction will be favorable to their relationship with
Blaze in terms of the future quality of the products and services Blaze
provides to them or otherwise may decide to terminate or diminish in some way
their relationship with Blaze. Potential customers or strategic partners of
Blaze may delay entering into, or decide not to enter into, a business
relationship with Blaze because of the merger. Any of the factors discussed
above may result in a material adverse effect on Blaze's business and results
of operations. In such case, Blaze may lose significant revenue that it might
have otherwise received had the merger not occurred.
Merger related accounting charges may delay and reduce Brokat's
profitability.
The Blaze acquisition by Brokat is being accounted for by Brokat under the
"purchase" method of accounting. Under the purchase method, the purchase price
of Blaze will be allocated to the assets and liabilities acquired from Blaze.
The excess of the purchase price over Blaze's net assets will result in
certain intangible assets for Brokat that will have to be amortized. As a
result, Brokat will incur accounting charges from the merger that will delay
and reduce Brokat's profitability.
The number of Brokat ordinary shares or Brokat ADSs you will receive will not
change to reflect changes in the market price of Brokat shares between the
signing of the merger agreement and the merger.
Under the merger agreement, the exchange ratio used to determine the number
of Brokat's ordinary shares that Blaze stockholders will receive is unaffected
by the share price of Brokat's ordinary shares. Increases in the value of
Brokat's ordinary shares will result in a higher price being paid by Brokat
for Blaze and more value received by Blaze stockholders in the merger.
Decreases in the value of Brokat's ordinary shares will result in a lower
price being paid by Brokat for Blaze and less value received by Blaze
stockholders in the merger. It is likely that you will not know the value of
Brokat's ordinary shares to be issued in the merger at the time of the Blaze
special meeting of stockholders. Under the merger agreement, neither Brokat
nor Blaze will have the right to terminate or renegotiate the merger agreement
or resolicit proxies as a result of any increase or decrease in the value of
Brokat's ordinary shares. The market price of Brokat's ordinary shares has
been and may continue to be volatile. For example, since Brokat's initial
public offering in September 1998 through June 30, 2000, the closing price of
the Brokat ordinary shares ranged from a high of euro 210 per share to a low
of euro 10.91 per share. Converting into dollars using the exchange rate of
euro 1= $0.9545 on June 30, 2000, these high and low prices would be $200.44
and $10.41. Recently, the stock market in general and the shares of technology
and information services companies in particular have experienced significant
price fluctuations. The market price of Brokat shares may continue to
fluctuate significantly in response to various factors, including:
. quarterly variations in operating results or growth rates;
. the announcement of technological innovations;
. the introduction of new products by Brokat and its competitors;
. changes in estimates by securities analysts;
. market conditions in the industry;
. announcements and actions by competitors;
18
<PAGE>
. regulatory and judicial actions; and
. general economic conditions.
Brokat's results could be affected by the merger, which could cause the
market price of the Brokat ADSs and Brokat ordinary shares to decline.
If Brokat is not successful in integrating Brokat's and Blaze's operations,
Brokat's business and results of operations could be adversely affected. In
addition, Brokat will be required to amortize significant amounts of goodwill
and other intangible assets in connection with the merger, which could
adversely affect Brokat's results of operations and the market price of the
Brokat ADSs and the Brokat ordinary shares.
The failure to complete the merger may be detrimental to Blaze's business.
If the merger is not consummated on schedule or at all, for any reason,
including reasons that would result in Blaze making substantial payments to
Brokat or other parties, Blaze's business, financial condition and results of
operations would be materially adverse affected.
Risks Relating to Brokat's Business
Brokat has a history of losses, Brokat expects future losses and may never
achieve sufficient profitability or positive cash flow to meet its
obligations.
Brokat 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. Its accumulated deficit through June 30,
2000 was approximately DM 185.7 million. Brokat has 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, Brokat 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, respectively.
The development of new versions and adaptations of its Twister platform,
the entry into new e-business sectors, the increased penetration of the e-
finance sector and the geographic expansion of its business through internal
growth or acquisitions will require a significant amount of cash resources.
From October 1998 through June 2000 Brokat has invested approximately DM
163.8 million in its expansion. Brokat used about 80% of this investment to
finance its internal growth and 20% for the external growth through an
acquisition for cash. Brokat expects that it will continue to invest in its
business in similar amounts and proportions, but since Brokat, like other
companies operating in its market, requires high degree of flexibility, these
amounts and proportions may change.
Brokat expects to continue to operate at a net loss and experience negative
cash flow as Brokat continues its development program and expands its
business. Continuing net losses and future cash shortfalls will require
additional debt or equity financing, which may not be available to it on a
timely basis, at acceptable terms, or at all. If Brokat cannot obtain the
financing on acceptable terms, Brokat may not be able to continue its
development programs or expand its business.
The market for Brokat's products and services is in its early stage of
development and, if a viable market for them does not develop, Brokat's
business may not succeed.
Brokat develops and markets software which serves as an interface between
businesses' traditional information processing systems and electronic
distribution channels for the sale of products and services. The
19
<PAGE>
market for Brokat's products and services is in its early stages of
development and is rapidly evolving. A viable market for Brokat's 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 Brokat, 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 Brokat 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. Brokat's
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 its 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
Brokat's products and services may inhibit the growth of e-business generally
and the market's acceptance of its products and services in particular.
If the Internet and the related electronic communication channels fail to
gain acceptance as widely used media for banking transactions and other
commerce, Brokat's business will be adversely affected.
Sales of most of Brokat's 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 Brokat anticipates, Brokat may not be able to grow
its 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, Brokat's business, financial condition and results of
operations will be materially and adversely affected.
Brokat increasingly relies on third party consultants, distributors and
customizers for sales of its products, and, if these relationships fail,
Brokat's business could be adversely affected.
For most of its history, Brokat engaged primarily in the direct sales of
its products to banks and other business customers and provided services to
these customers to adapt and customize its products to their existing
informational systems and their specific requirements. Brokat is increasingly
emphasizing indirect sales through third parties, including joint ventures to
which Brokat may license its software, as part of its business strategy to
increase sales and market penetration of its products and to enter into new e-
commerce sectors and geographic regions. If these relationships fail, Brokat
will have to devote substantially more resources to the
20
<PAGE>
distribution, sales and marketing, implementation and support of its products
than Brokat would otherwise, and its efforts may not be as effective as those
of its partners.
For these indirect sales, Brokat relies 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 Brokat's increasing emphasis on indirect
sales, the proportion of its 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 its revenue
derived from the provision of services has decreased from 56% to 38% of revenue
for the same periods. Brokat has relationships with only a limited number of
third party distribution partners, and Brokat intends to further increase its
reliance on these partners in the future.
The continued success of this strategy will depend on its ability to enter
into and expand profitable relationships with third parties, including joint
ventures to which Brokat may license its software, who are willing and able to
distribute its products under license and perform or contract for the necessary
services to install and customize its products. Its agreements with these third
parties may not restrict them from distributing products that compete with its
products.
If Brokat is unable to compete successfully in the highly competitive markets
for e-business software, its business will not become profitable and Brokat
will not be able to preserve its market position.
The e-business software industry and the markets for Brokat's products are
generally highly competitive. Brokat may not be able to compete successfully
with current or future competitors. Brokat expects that competition in the
market for e-business software will increase from both existing suppliers and
new suppliers entering the 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 its products, Brokat competes 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 Brokat's competitors have longer operating histories, and
significantly greater financial, technical, marketing, and other resources than
Brokat 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 its 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 Brokat can. Some of its current and potential competitors may
also bundle their products in a manner that may discourage users from
purchasing products offered by Brokat. 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 its 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 Brokat is unable to timely respond to rapid technological advances and
emerging industry standards and practices, it will not be able to maintain or
expand its 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. Its future success will depend, in part, on its ability to
develop leading technologies, enhance its existing products and services,
develop new products and services that address the increasingly sophisticated
and varied needs of its prospective customers, and respond to technological
advances
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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.
Brokat may not be successful in effectively using new technologies,
adapting its products to emerging industry standards, developing, introducing,
and marketing product and service enhancements, or new products and services.
Brokat may also experience difficulties that could delay or prevent the
successful development, introduction, or marketing of these products and
services. Its new product and service enhancements may not adequately meet the
requirements of the marketplace and achieve market acceptance.
If Brokat is 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, its business, financial condition
and results of operations will be materially and adversely affected.
Brokat may be unable to successfully manage any future growth, which could
harm its ability to serve its customers, disrupt its operations and delay its
ability to pursue its business strategy.
The rapid growth of its business and sales has created significant demands
on its personnel and on its administrative and financial resources. If Brokat
is unable to manage this growth successfully, its ability to take advantage of
and grow its business could be severely impeded. Brokat's ability to manage
growth will depend in part on its administrative, financial and operational
controls and its continued ability to create the infrastructure necessary to
exploit market opportunities for its products and services. Brokat's senior
management has generally had limited experience in managing large and rapidly
growing business organizations. Brokat's ability to compete effectively and to
grow its business profitably will require it to continually improve its
financial and management controls, reporting systems and procedures on a
timely basis, implement new systems as necessary, and expand, train and manage
its workforce. The failure of Brokat's management to respond effectively to
these challenges and to changes in business conditions could significantly
affect its business, results of operations and financial condition.
During 1999, Brokat implemented a new integrated operational system for
accounting and control functions related to its German operations. Brokat has
no integrated system for operations outside of Germany. If Brokat is unable to
implement an integrated system for its worldwide operations on a timely basis,
its ability to manage its business effectively on a global basis could be
materially and adversely affected.
If Brokat is unable to obtain additional capital as needed in the future,
Brokat may not be able to develop and expand its business.
As Brokat continues to develop and expand its business, Brokat may require
significant additional capital to fund its capital expenditures, research and
development and working capital needs, as well as its debt service
requirements and anticipated cash flow deficits. The actual amounts and timing
of its future capital requirements may vary significantly from its estimates.
Brokat continually reevaluates its business plan in its rapidly changing
industry. Brokat's business plan may change in material respects. The change
could result in unforeseen needs for additional financing. Brokat's revenues
and costs are dependent on factors that are largely beyond its 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, Brokat's actual revenues and costs
may vary significantly from its forecasts. The significant variation will
affect Brokat's future capital requirements.
If Brokat fails to make successful acquisitions and integrate acquired
businesses, its growth and the future viability of its business could be
adversely affected.
In the last twelve months, Brokat made several strategic acquisitions, it
has entered into definitive agreements to acquire Blaze and GemStone and it
will continue to explore acquisitions of related businesses as
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an important element of its growth strategy as a means of enhancing its
existing products and expanding the geographic and industry scope of its
business.
Brokat's ability to implement this strategy will depend on its 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 its recent acquisitions and the proposed acquisitions of Blaze and
GemStone. Brokat's ability to make acquisitions will be limited by its
financial resources, including available cash and borrowing capacity and the
market value and liquidity of its shares. Acquisitions could also divert
management attention from its other operations. Brokat could also lose key
employees of acquired businesses. If Brokat uses available cash resources or
borrow money to finance an acquisition, its ability to make payments on the
notes may be further reduced. Brokat could also incur substantial expenses
following an acquisition, including expenses of integrating an acquired
business.
Brokat expects that competition for appropriate acquisition targets may be
significant. Brokat may compete with other software companies with similar
acquisition strategies, many of which may be larger and have greater financial
and other resources than Brokat has. Brokat believes that competition for
acquisition targets in its 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. Brokat cannot assure you that it will be able to
identify and acquire suitable companies on acceptable terms.
If Twister fails to gain continued and growing market acceptance or Brokat
fails to adapt Twister and related products to meet changes in technology and
customer needs, Brokat's business could fail.
All of Brokat's revenue is derived from the sale of products and services
derived from its core product platform, Twister. Brokat's success depends on
the continued and growing acceptance of products based on Twister and its
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 not continue to grow, or pricing or demand is otherwise adversely
affected by competition or technological change, Brokat's business could fail.
If Brokat fails to retain and attract the services its management, key
employees and qualified personnel, its business could be adversely affected.
Brokat's success depends to a large extent on the efforts and ability of its
management and other key employees. Brokat's ability to retain and attract
qualified management, technical and sales personnel is critical to the success
of its business. The loss of management or key employees, in particular in the
area of research and development, or its inability to hire additional qualified
personnel as required, could have a detrimental effect on its business,
financial condition and results of operations. There is intense employment
competition among companies in its industry because of a shortage of qualified
personnel. Because of this shortage, Brokat could suffer losses of key
personnel whom Brokat may not be able to replace.
Defects in Brokat's products could diminish demand for its products and result
in large remedial expenditures or claims against it.
Brokat's software products could contain latent defects. Any latent defects
could
. adversely affect the performance of Brokat's software and significantly
reduce the demand for Brokat's products,
. generate negative publicity,
. result in the loss of existing orders or a delay in the receipt of new
orders,
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. delay the introduction of new products or new versions of Brokat's
existing products,
. divert development resources and
. result in additional warranty and service costs and product liability
claims.
Since Brokat's products are critical to the functioning of electronic
distribution and sales channels, any failure of its products could result in
substantial financial losses for businesses using Brokat's products. It is
possible that contractual conditions limiting its liability will not be valid
in all cases and under all legal systems, and that sufficient insurance
coverage will not be available to Brokat on reasonable terms. Brokat is
subject to the risk that product claims may be made against it in the future.
Brokat has taken the year 2000 date recognition problem of certain computer
software and hardware into account in designing its software products. Brokat
warrants the year 2000 compatibility of its software to its customers. Brokat
cannot exclude the possibility that claims for year 2000 non-compliance may
arise in the future.
Brokat's failure to protect its intellectual property rights could reduce its
revenues or result in costly litigation.
To maintain the benefits of its technology, Brokat needs to protect its
intellectual property rights, and Brokat also needs to invest in research and
development. Brokat's success as an enterprise depends to a large extent on
the protection of intellectual property rights for the software Brokat
develops. Brokat generally does not rely on patents to protect its
intellectual property interests. Brokat seeks to protect its intellectual
property rights through confidentiality covenants with management, employees
and third parties as well as through copyright and trademark protection.
However, Brokat cannot guarantee that Brokat 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. Brokat
also cannot assure you that Brokat can sustain the level of capital
expenditure necessary to protect its technological position.
Others may make claims that Brokat infringes their intellectual property and
these claims could be costly to defend and result in the loss of significant
rights.
Brokat is subject to the risks of claims alleging infringement of third
party intellectual property rights. These claims could require Brokat to:
. spend significant sums in litigation;
. pay damages;
. divert significant management resources;
. cause delays in the marketing and sale of Brokat's products;
. enter into royalty or licensing arrangements;
. cause Brokat 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 Brokat's business, financial condition and results of
operations.
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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 Brokat's
products or increase Brokat's 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 Brokat's 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 its 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 Brokat. 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. Brokat has 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.
Germany, the European Union, the United States or other jurisdictions may
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 a detrimental effect on the marketing of the X.PRESSO
Security Package application and on Brokat's business as a whole. Also, if
existing export license requirements in the United States were rescinded,
Brokat could be exposed to additional competition.
New developments may compromise or breach encryption technology used by
Brokat to protect customer transaction data and reduce demand for its
products.
A significant barrier to online commerce and communication is the secure
exchange of value and confidential information over public networks. Brokat
relies 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. Brokat 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
Brokat to protect customer transaction data. If a compromise of Brokat's
security were to occur, it could significantly reduce demand for its products.
Brokat's results of operations are subject to strong volatility that could
affect its ability to meet its obligations under its indenture agreement.
Brokat's results are and will continue to be subject to strong volatility
which could affect its ability to make payments on the notes as due. A wide
range of factors may precipitate variations in results which could hurt its
ability to make payments on the notes Brokat issued under its indenture
agreement. These factors include the introduction by Brokat, or its
competitors, of new or improved products, the market acceptance of Brokat's
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.
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Brokat' s geographic market expansion involves significant risks and Brokat
may not be successful in increasing and meeting demand for its products
outside of Europe.
In recent years, Brokat has sought to expand the geographic scope of its
markets outside Germany and Europe, particularly in Asia and the United
States. Brokat has made, and expects to continue to make, significant
expenditures to expand its geographic presence, including the acquisition of
related businesses in other geographic regions. Its 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 its products. For example, Brokat does not expect that
electronic retail banking applications on which Brokat has based its growth in
parts of Europe will play a significant role in its expansion efforts in the
United States. Brokat's success in the United States and some markets outside
of Europe will depend on the development and marketing of new applications for
its 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 Brokat's euro revenues and cash flows which may reduce Brokat's
ability to satisfy its euro denominated obligations, including its senior
notes.
During the six months ended June 30, 2000, approximately 30% of Brokat's
revenues came from sources outside the euro currency zone, and Brokat expects
that the percentage of its revenues derived from these countries may increase
in the future. Changes in foreign currency exchange rates can affect Brokat's
ability to sell its products at satisfactory prices, can reduce the value of
its assets and revenues and increase its liabilities and costs and may reduce
its ability to satisfy its obligations denominated in euros, including its
obligations under its indenture agreement. Even if foreign currency expenses
substantially offset revenues in the same currency, Brokat's profits may be
diminished when reported in Deutsche marks or euro. Brokat has not sought to
reduce its exposure to exchange rate risks through hedging transactions.
Brokat may suffer losses solely because of exchange rate fluctuations.
Brokat's management board, which owns a substantial portion of its
outstanding shares, is likely to have a controlling influence over all
business decisions and may be difficult to remove.
As of August 30, 2000 (following the GemStone merger), the members of
Brokat's management board as a group beneficially owned approximately 29.3% of
its outstanding ordinary shares. They are likely to continue to have a
controlling influence over all material decisions concerning its 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 Brokat's management board.
Brokat relies on the financial services sector for a significant proportion
of its revenues, and a decline in the demand for its products by banks could
significantly impair its business.
Brokat has relied on the sale of its products and services to European
banks for most of its revenue. During the six months ended June 30, 2000, the
six months ended December 31, 1999 and the fiscal year ended June 30, 1999,
revenues related to its European e-banking products and services accounted for
66% of Brokat's revenues. Although Brokat is seeking to expand into other e-
business sectors, there can be no assurance that Brokat will be able to
duplicate its success with e-banking products in these other sectors. If
Brokat was unable to expand successfully into other sectors, Brokat would be
adversely affected by a decline in demand for its e-banking products and
services or greater competition in providing these products and services.
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Brokat's results depend on a small number of large orders and Brokat's revenue
could decline significantly during a period by its failure to complete one or
more sales.
Brokat derives a significant portion of its 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. Brokat's
operating results for a particular period could be materially and adversely
affected if Brokat is unable to complete one or more substantial license sales
or implementations planned for that period.
Risks Related to Brokat's Indebtedness
Brokat may not be able to meet its payment obligations under the terms of the
indenture governing its 11 1/2% senior notes due 2010 if it cannot implement
its strategy successfully and grow its business.
Brokat's ability to repay its indebtedness will depend on the future
performance of its business and whether Brokat can successfully implement its
business strategy. Brokat's future performance will be subject to the further
development of the market for its products and services, competition, general
economic conditions and legal, regulatory and technological factors. Brokat may
not generate sufficient cash flow to enable it to repay its indebtedness or be
able to fund its other cash requirements. If Brokat is unable to generate
sufficient cash flow to meet these requirements, it will have to explore other
alternatives such as delaying or reducing capital expenditures, including
research and development, refinancing its debt, or the sale of additional
equity. Brokat's ability to obtain additional financing or equity capital will
depend on its financial condition, our prospects and market conditions at that
time. Brokat 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 it to repay its indebtedness.
Brokat's substantial amount of indebtedness and repayment obligations could
impair Brokat's financial health and adversely affect its operations and the
value of your investment.
Although the terms of Brokat's indenture governing its 11 1/2% senior notes
due 2010 permits it to incur substantial additional indebtedness, which Brokat
may incur as it pursues its expansion strategy, Brokat's large amount of debt
and its heavy repayment obligations, could have negative consequences for its
shareholders, including that:
. it may limit Brokat's ability to pursue business opportunities, to borrow
more money, to compete effectively and to implement its business
strategy;
. Brokat may have more debt than its competitors, which could put it at a
competitive disadvantage;
. it may reduce Brokat's flexibility in responding to changing economic and
industry conditions; and
. it may make Brokat more vulnerable to general economic and industry
specific downturns.
The terms of Brokat's indenture governing its 11 1/2% senior notes due 2010
and its credit agreements restrict Brokat's ability to operate its business,
which could impede Brokat's growth.
The terms of Brokat's indenture governing its 11 1/2% senior notes due 2010
and those of its existing and future credit agreements limit Brokat's
flexibility in operating its business which could impede its growth. In
particular, these agreements limit Brokat's ability and the ability of its
subsidiaries to:
. borrow more money;
. pay dividends;
. make investments or buy assets;
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. use assets as security for a loan or other transaction;
. enter into transactions with affiliates;
. sell assets;
. merge or consolidate with other companies; and
. engage in joint ventures.
Also, one of Brokat's strategies is to consider and take advantage of
selected opportunities to grow by acquiring other businesses whose operations
or product lines fit well with Brokat's existing business or whose geographic
location or market position enables it to expand into new markets. Brokat's
ability to implement this expansion strategy may depend on its ability to
finance an expansion within the constraints of its various debt covenants, as
well as on the availability of suitable businesses at suitable valuations.
Risks Related to Holding Brokat Ordinary Shares and Brokat ADSs
The lack of an existing and established trading market for Brokat ADSs could
make it difficult for you to liquidate your investment.
There is no existing trading market for Brokat ADSs and there can be no
assurance that an active trading market will be established. Brokat has
applied for approval for quotation of its Brokat ADSs on the Nasdaq National
Market and expects to receive approval for quotation on the Nasdaq National
Market at the time of the completion of the merger. Brokat ADSs may experience
volatility until trading values become established. As a result, it could be
difficult to make sales of Brokat ADSs in the market at any particular time.
Because Brokat's share price has been volatile, the market value of the
Brokat ADSs you will receive in the merger may fluctuate significantly.
The stock market in general, and the market for stocks of technology
related companies in particular, has experienced extreme price and volume
fluctuations. The market price for Brokat's ordinary shares has been volatile.
During 1999, Brokat's share price ranged from euro 31.33 to euro 72 (or $29.90
to $68.72 based on the noon buying rate on June 30, 2000 of euro 1.00=$0.9545)
and between January 1 and August 30, 2000 Brokat's share price ranged from
euro 56 to euro 210 (or $53.45 to $200.44 based on the noon buying rate on
June 30, 2000 of euro 1.00=$0.9545). These broad market and industry
fluctuations may adversely affect the market price of the Brokat ADSs and the
Brokat ordinary shares, irrespective of Brokat's actual operating performance.
Factors that could significantly impact the market price of Brokat ADSs or
Brokat ordinary shares in the future include:
. announcements concerning new customer engagements and software products
or other product developments by Brokat or its competitors;
. the successful integration of any future acquisitions or investments by
Brokat;
. the development of new technologies; and
. general market conditions.
You will be subject to exchange rate risks and the market price of the Brokat
ADSs may decline if the value of the euro falls against the dollar.
Individuals and entities located in the United States who hold Brokat ADSs
and Brokat ordinary shares will bear exchange rate risk. A decrease in the
value of the euro relative to the dollar will cause a decrease in the dollar
value of the Brokat ordinary shares which will also affect the market price of
the Brokat ADSs on U.S. securities markets. Since its introduction in January
1999, the value of the euro to the dollar has fallen significantly. Recent
fluctuations in the dollar/euro exchange rate have been significant, and
fluctuations may be
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significant in the future. You may receive a reduced dollar value upon the
sale of your Brokat ADSs or Brokat ordinary shares as the result of the
dollar/euro exchange rate in effect at that time which may have no relation to
the operations or prospects of Brokat.
You may have less access to information about Brokat and less opportunity to
exercise your rights as a shareholder if you hold Brokat ordinary shares
through Brokat ADSs.
There are risks associated with holding Brokat ordinary shares through
Brokat ADSs, as Brokat is a stock corporation organized under the laws of
Germany. Brokat is subject to German laws and regulations, and to its charter
documents, which are known in Germany as its articles of association (Satzung)
and the management board rules of procedures. Your rights as a holder of
Brokat ADSs will differ in various ways from a shareholder's rights, and you
may be affected in other ways, including:
. you may not be able to participate in rights offerings or dividend
alternatives;
. you may not receive copies of reports and may have to go to the office of
the depositary to inspect any reports issued;
. the deposit agreement may be amended by Brokat and the depositary, or may
be terminated by Brokat or the depositary, without your consent in a
manner that could prejudice your rights; and
. the deposit agreement limits Brokat's obligations and liabilities and
those of the depositary.
German law requires less corporate disclosure than the laws of the United
States, which means that publicly available information about Brokat is less
extensive and available later than publicly available information about
Blaze.
There is less publicly available information about Brokat, as a foreign
issuer of securities publicly traded in the United States, than is regularly
published by or about domestic issuers of publicly traded securities.
Therefore, Brokat shareholders receive less information about the performance
of Brokat than Blaze stockholders receive about Blaze.
Although Brokat is subject to the disclosure requirements mandated by the
German Stock Exchange, German law generally imposes limited disclosure
requirements. Under German law, Brokat is required to make available year-end
financials to its shareholders and file them with the Stuttgart company
registrar within eight months after the close of each fiscal year. The rules
of the German stock exchange also require Brokat to prepare quarterly
financial accounts within two months after the close of each quarter.
Subsequently, the German stock exchange makes such report publicly available.
As a foreign private issuer under the U.S. Exchange Act, Brokat would not be
required to file an annual report on Form 20-F with the U.S. SEC until six
months after the close of each fiscal year, would not generally be required to
file quarterly or current reports with the U.S. SEC and would not be required
to furnish an annual proxy statement or information statement to stockholders
under the U.S. Exchange Act. However, under the terms of the indenture
governing Brokat's 11 1/2% senior notes issued in March 2000, Brokat is
required to file annual, quarterly and current reports at similar times and
containing information similar to those filed by a U.S. reporting company.
Once such notes are no longer outstanding, information you may require to make
an informed investment decision with respect to Brokat may be less extensive
and available later than the information made available to you regarding Blaze
prior to the merger.
Under German law, the shareholders of Brokat have fewer and less well-defined
shareholders' rights than they would have if Brokat were a Delaware
corporation.
Brokat's corporate affairs are governed by the Brokat charter and German
law while Blaze's corporate affairs are governed by the Blaze charter and the
laws of Delaware. German law is generally less specific in terms of governance
of corporate operations than is the General Corporation Law of the State of
Delaware.
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Accordingly, under German law, the shareholders of Brokat may have fewer or
less well-defined rights than they might otherwise have as stockholders of
Blaze. For example, a stockholder of a Delaware corporation may institute
lawsuits on behalf of the corporation and class actions. In contrast, a
shareholder of a German corporation lacks the right to institute lawsuits to
assert rights on behalf of a corporation and is not entitled to bring a class
action. As a result, a shareholder in a German corporation may not be able to
protect his or her interest in the shares as well as a stockholder of a
Delaware corporation could. For a description of what your rights will be as an
Brokat shareholder, see "Description of Capital Stock of Brokat" and
"Comparison of Rights of Blaze Stockholders and Brokat Shareholders."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The U.S. SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. This proxy statement/prospectus contains such
"forward-looking statements." These include statements regarding the period
following completion of the merger.
Words such as "anticipate," "estimate," "expects," "projects," "intends,"
"plans," "believes" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the
merger, identify forward-looking statements. All forward-looking statements are
based on Blaze's or Brokat's management's present expectations of future events
and are subject to a number of factors and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. In addition to the risks related to the businesses of Blaze and
Brokat and the factors relating to the merger discussed under "Risk Factors,"
factors which could cause actual results to differ materially from those
described in the forward-looking statements include: the inability of Brokat
and Blaze to integrate their operations, fluctuations in the value of Brokat
and Blaze shares and the effect of the merger on Brokat's business.
Stockholders are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this proxy statement/prospectus.
Neither Blaze nor Brokat is under any obligation, and each expressly disclaims
any obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
For additional information that could cause actual results to differ
materially from those described in the forward-looking statements, please see
the final prospectus filed by Blaze with the U.S. SEC on March 23, 2000,
pursuant to Rule 424(b)(4) of the Securities Act of 1933, Blaze's annual report
on Form 10-K filed on June 29, 2000, its related amendment filed on Form 10-K/A
on July 27, 2000 and its quarterly report on Form 10-Q filed on August 10,
2000.
All forward-looking statements attributable to Blaze or Brokat or any person
acting on behalf of either or both of them are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
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CURRENCY AND FINANCIAL STATEMENT PRESENTATION
Brokat prepares its consolidated financial statements in Deutsche marks. In
this proxy statement/prospectus, unless otherwise specified or unless the
context otherwise requires, all references to "Deutsche marks," "DM" and
"pfennigs" are to the denominative currency used in the Federal Republic of
Germany, all references to "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.
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 ("EMU Council"). Solely for
your convenience (except where 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 construe these translations as a representation that such
translated amounts actually represent such Deutsche mark, euro or U.S. dollar
amounts from which they were translated or that they could be converted into
such Deutsche mark, euro or U.S. dollar amounts at the rates indicated or any
other rates. On August 30, 2000, the exchange rate was euro 1.1206 = $1.00,
based on the noon buying rate. You should read "Exchange Rate Information" for
information regarding 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 proxy statement/prospectus has been prepared
in accordance with U.S. GAAP, except for financial information of ESD
Vermoegensverwaltungsgesellschaft mbH and MeTechnology AG for the fiscal years
ended December 31, 1997 and 1998, which was prepared in accordance with 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 set forth, for the periods indicated, certain
information concerning the exchange rates based on the noon buying rates for
Deutsche marks and euro, expressed in Deutsche marks and euro, respectively,
per dollar. We have provided such rates solely for your convenience and you
should not construe these translations as a representation that Deutsche marks
or euro amounts actually represent such dollar amounts or that such Deutsche
marks or euro amounts could have been, or could be, converted into dollars at
that rate or at any other rate. Brokat did not use such rates in the
preparation of its combined financial statements included elsewhere in this
proxy statement/prospectus.
The columns entitled "Average Rate" represent the exchange rates based on
the average noon buying rates for Deutsche marks and euro, in each case on the
last business day of each month during the relevant period. As of January 1,
1999, the exchange rate between the Deutsche mark and the euro was 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......................................... 1.1009 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 30........................................ 1.1206
</TABLE>
33
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THE SPECIAL MEETING
General
This proxy statement/prospectus is being furnished in connection with the
solicitation by the board of directors of Blaze of proxies from the holders of
Blaze common stock for use at the Blaze special meeting. At the special
meeting, the holders of Blaze common stock will be asked to approve and adopt a
merger agreement providing for a merger in which Blaze will become a wholly
owned subsidiary of Brokat. The special meeting will be held on September 29,
2000, at 150 Almaden Boulevard, 9th Floor, San Jose, California 95113,
commencing at 8:00 a.m., local time.
Matters to be Considered at the Special Meeting
The purpose of the special meeting is to consider and vote upon the approval
and adoption of a plan and agreement of merger, dated June 19, 2000, among
Blaze, Brokat and the merger subsidiary and a merger in which Blaze will become
a wholly owned subsidiary of Brokat. In addition, we will transact any other
business that is properly brought before the special meeting.
No Dissenters' Rights to Appraisal
Under Delaware law, you will not have dissenters' rights to appraisal in
connection with the merger.
Record Date; Quorum; Required Vote; Shares Outstanding and Entitled to Vote
The board of directors of Blaze has fixed August 14, 2000 as the record date
for the special meeting. Accordingly, only holders of shares of Blaze common
stock at the close of business on August 14, 2000 are entitled to notice of and
to vote at the special meeting. Each holder of Blaze common stock on the record
date is entitled to cast one vote per share, in person or by a properly
executed proxy, at the special meeting. As of the record date, there were
23,229,854 shares of Blaze common stock outstanding. They were held by
approximately 280 holders of record.
Under the Blaze bylaws, the holders of a majority in voting power of Blaze
common stock issued and outstanding, present in person or represented by proxy
will constitute a quorum. The affirmative vote of the holders of a majority of
the outstanding shares of Blaze common stock entitled to vote at the special
meeting is required to adopt the merger agreement.
Shares of Blaze common stock held of record by a broker that are present in
person or represented by proxy will be counted for purposes of determining a
quorum. If, however, under rules applicable to brokers, a broker does not have
discretionary voting authority to vote on any matter at the special meeting in
the absence of instructions from the beneficial owners, then such shares will
be considered "broker non-votes" and will not be entitled to vote on such
matters. Broker non-votes and abstaining votes will not be counted in favor of
adopting the merger agreement. Since adoption of the merger requires the
affirmative vote of a majority of the outstanding shares of Blaze common stock
entitled to vote at the special meeting, abstentions and broker non-votes will
have the same effect as votes against the adoption of the merger agreement.
Security Ownership of Management
As of the record date, the directors and executive officers of Blaze and
their affiliates beneficially owned approximately 9,126,850 of the outstanding
shares of Blaze common stock. Accordingly, Blaze directors, executive officers
and their affiliates hold shares representing approximately 39.3% of the total
number of shares of Blaze common stock required for the approval of the merger
agreement and the merger.
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<PAGE>
Voting Agreements
Thomas Kelly, Gary Shroyer, Eric Kintzer, Charles Boesenberg, George Klaus,
Ken Goldman, funds affiliated with TL Ventures and funds affiliated with Morgan
Stanley Dean Witter Venture Partners, who beneficially held in the aggregate as
of the record date approximately 8,900,350 shares of Blaze common stock, have
each entered into voting agreements with Brokat in which they agreed, among
other things, to vote all of their shares of Blaze common stock in favor of the
adoption and approval of the merger agreement and the merger. Shares held by
these persons and subject to the voting agreements represent approximately
38.3% of the shares entitled to vote at the special meeting.
Voting of Proxies
Properly executed proxies that have not been revoked will be voted at the
meeting in accordance with the instructions indicated in the proxies. If no
instructions are indicated, such proxies will be voted FOR adoption of the
merger agreement.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to us in time to vote, one of the individuals named as
your proxy will vote your shares as you have directed.
If any other matters are properly presented at the special meeting,
including consideration of a motion to adjourn the meeting to another time or
place for the purpose of soliciting additional proxies, the persons named in
the enclosed form of proxy will have discretion to vote on those matters in
accordance with their best judgment. Blaze is not aware of any matters that
will be presented at the special meeting other than adoption and approval of
the merger agreement and the merger.
Voting by Mail
To vote a proxy by mail, you must sign, date and mail your proxy card and
return it in the enclosed, prepaid envelope marked "Proxy" to Blaze Software,
Inc. c/o Shareowner Services, P.O. Box 64873, Saint Paul, Minnesota 55164-0873,
prior to the special meeting.
Voting by Internet or Telephone
Because Delaware, the state in which Blaze is incorporated, permits
electronic submission of proxies by telephone or through the Internet, instead
of submitting proxies by mail on the enclosed proxy card or voting instruction
all stockholders will have the option to submit their proxies or voting
instructions electronically by telephone or through the Internet. Please note
that there are separate arrangements for using a telephone and the Internet
depending on whether your shares are registered in Blaze stock records in your
name or in the name of a brokerage firm or bank. Stockholders should check
their proxy card or voting instructions forwarded by their broker, bank or
other holder of record to see which options are available.
The telephone and Internet procedures described below for submitting your
proxy or voting instructions are designed to authenticate stockholders'
identities, to allow stockholders to have their shares voted and to confirm
that their instructions have been properly recorded. We have been advised by
counsel that the procedures that have been put in place are consistent with the
requirements of Delaware law. Stockholders submitting proxies or voting
instructions via telephone or the Internet should understand that there may be
costs associated with electronic access, such as usage charges from Internet
access providers and telephone companies, that would be borne by the
stockholder.
Blaze holders of record may submit their proxies:
. through the Internet by visiting a website established for that purpose
at http://www.eproxy.com/blze/ and following the instructions; or
. by telephone by calling (800) 240-6326.
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<PAGE>
Revocation of Proxies
Any proxy may be revoked by the person giving it at any time before it is
voted.
Proxies may be revoked by:
. filing with the secretary of Blaze (including by facsimile) a written
notice of revocation bearing a later date than the date of the proxy or
giving notice of revocation at the special meeting;
. submitting a later-dated proxy relating to the same shares, including a
proxy given by telephone or Internet; or
. attending the special meeting and voting in person.
In order to vote in person at the special meeting, Blaze stockholders must
attend the meeting and cast their votes in accordance with the voting
procedures established for the meeting. Attendance at the special meeting
without voting in accordance with the voting procedures will not in and of
itself revoke a proxy. Any written notice of revocation either must be
delivered at the special meeting or must be sent, in time to be received before
the day of the special meeting, to:
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, California 95113
Facsimile: (408) 535-1776
Attention: Robert S. Michitarian
Secretary
Solicitation of Proxies
Blaze will bear the cost of the solicitation of proxies from its
stockholders and will share the cost of printing and mailing this proxy
statement/prospectus. In addition to the solicitation by mail, Blaze's
directors, officers and employees may solicit proxies from its stockholders in
person or by telephone, telegram or electronically. Those directors, officers
and employees will not be additionally compensated for that solicitation but
may be reimbursed for out-of-pocket expenses in connection therewith. Blaze has
also retained a proxy solicitation firm, Morrow & Co., to aid it in the
solicitation process. Blaze will pay that firm a fee that is not expected to
exceed $6,000, plus reasonable expenses. Arrangements will also be made with
brokerage houses and other custodians, nominees and fiduciaries for the
solicitation of votes from beneficial owners of shares held of record by such
persons. Blaze will pay those custodians, nominees and fiduciaries a customary
fee based upon the number of shares of Blaze common stock held by such person
and reimburse them for their reasonable out-of-pocket expenses in connection
therewith.
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BACKGROUND AND REASONS FOR THE MERGER
Background of the Merger
Throughout 1999 and 2000, Brokat was regularly involved in the review of
private and public companies with which it might form strategic partnerships or
engage in business combinations.
Market research had identified Blaze as the leader in a technology that
Brokat needed to achieve the position it had targeted in client relationship
management. Brokat initiated a discussion with Blaze about forming a possible
joint marketing partnership in early 1999 during the German computer and
software fair CEBIT. However, at that time, the discussions did not proceed.
Brokat decided nonetheless to pursue its negotiations with Blaze's management.
On March 28, 2000, Boris Anderer, chairman of Brokat's management board,
introduced Brokat and himself to Thomas Kelly, president and chief executive
officer of Blaze, via email. The email outlined Brokat's business model and
history and suggested that a strong relationship between the companies could
benefit both. Mr. Anderer suggested a meeting.
On April 11, 2000, Mr. Anderer and Mr. Kelly met in San Jose to discuss a
possible closer relationship between the two companies and the potential mutual
benefits that Brokat and Blaze could derive from combining their businesses.
Mr. Kelly indicated that he would call Mr. Anderer to further discuss the
matter.
After the meeting, Mr. Anderer consulted with Brokat's financial advisor,
Robertson Stephens, in order to prepare a presentation on Blaze and the
potential of a business combination between the two companies.
On April 14, 2000, Mr. Anderer summarized his meeting with Mr. Kelly before
Brokat's management board in Stuttgart. The board decided that it would be in
Brokat's interest to continue the discussion between Brokat and Blaze.
On April 18, 2000, Stefan Roever, chief executive officer and spokesman of
Brokat's management board, met with representatives of Robertson Stephens to
discuss the business and competitive situation of Brokat, as well as the
advisability of pursuing strategic business combinations.
On April 26 and 27, 2000, Brokat's product managers met in San Jose with
Blaze's product managers in order to familiarize themselves with the respective
product offerings and to evaluate their compatibility.
On May 4, Mr. Kelly met with Mr. Anderer and a representative from Robertson
Stephens to discuss Blaze's strategy, products, customers and a potential
business combination.
On May 10, Mr. Kelly and Gary Shroyer, Blaze's Chief Financial Officer, met
with a representative of Chase H&Q to discuss a potential business combination.
On May 15, 2000, Blaze's board of directors and Blaze's management met with
its financial advisor, Chase H&Q, and Wilson Sonsini Goodrich & Rosati, Blaze's
outside legal advisor, and discussed the preliminary talks involving senior
executives of Blaze and Brokat concerning a possible business combination.
In May 2000, Brokat engaged Paul, Weiss, Rifkind, Wharton & Garrison, New
York, as its U.S. legal counsel and Gleiss, Lutz, Hootz, Hirsch, Stuttgart as
its German legal counsel.
Working with Robertson Stephens and Paul, Weiss, Rifkind, Wharton & Garrison
on May 12, Brokat delivered its initial proposal of terms to Blaze regarding a
proposed acquisition of Blaze by Brokat as well as a confidentiality agreement.
Shortly thereafter, Blaze and Brokat exchanged revisions and comments.
On May 17, 2000, Blaze's board of directors met and discussed with its legal
counsel and financial advisor as to the status of the discussions with Brokat,
the terms of the proposed transaction, the board's obligations
37
<PAGE>
and duties in connection with the transaction, and comparable transaction
structures and valuations. The board instructed its management and its advisors
to proceed with the discussions with Brokat.
On May 17, 2000, Blaze and Brokat entered into a confidentiality agreement
granting an exclusive negotiation period to Brokat.
Beginning May 17, 2000 and continuing through June 19, 2000, Blaze and
Brokat conducted mutual legal, financial, accounting and business due
diligence, including a review of each other's business plans, budgets and
capital requirements. The parties began negotiation of a merger agreement on
May 26, 2000 and continued their negotiations until shortly before the merger
agreement was signed on June 19, 2000.
From May through June, the parties, including Robertson Stephens on behalf
of Brokat and Chase H&Q on behalf of Blaze, held a series of discussions
concerning a mutually acceptable exchange ratio.
On May 18, 2000, Mr. Kelly and Mr. Roever met in San Jose to discuss their
views on the transaction and the mutual benefits to the companies. They agreed
to continue the negotiations, and discussed the structure of the transaction
and other organizational matters.
On May 25 and 26, 2000, Mr. Kelly, Mr. Shroyer, and Mr. Kintzer, Blaze's
chief technology officer, came to Brokat's headquarters in Stuttgart to meet
Mr. Roever, Mr. Jansen, Brokat's chief financial officer, Mr. Maestrini,
Brokat's chief operating officer, and Mr. Schlumpberger, Brokat's chief
technology officer. Chase H&Q and Robertson Stephens were also present. The
parties discussed their respective business models, product offerings, product
strategy and sales strategy, as well as how the two companies might be
integrated.
On May 26, 2000, after further negotiations, the senior executives of the
two companies preliminarily agreed, subject to the approval of the parties'
respective boards of directors, due diligence reviews and negotiation of
mutually acceptable agreements, that the exchange ratio would be set based on a
valuation of Blaze shares and the market price of the Brokat shares at the time
of signing.
On May 30, 2000, Brokat's management board in Stuttgart met to discuss the
status of the negotiations with Blaze, to address structural and organizational
issues and to review valuation analyses.
On June 5, 2000, Brokat's management board met to discuss the merger and
voted unanimously in favor of the transaction.
On June 8, 2000, Blaze's board of directors met with their legal counsel and
financial advisor, discussed the revised terms of the proposed agreement and
reviewed, with the assistance of its legal counsel, drafts of the merger
agreement and ancillary agreements. Senior executives of Blaze were also
present at the meeting. The board of directors, with the assistance of the
senior executives, then reviewed and discussed the possible costs and benefits
of the transaction.
On June 10 and 11, 2000, Blaze's legal counsel and Brokat's legal counsel
met at Paul, Weiss, Rifkind, Wharton & Garrison's New York offices to negotiate
the merger agreements and related agreements.
On June 15, 2000, Brokat's supervisory board unanimously approved the
transaction.
On June 19, 2000, Brokat's management board met in Stuttgart to discuss the
merger agreement, transaction valuation and future organizational structure.
Representatives from Robertson Stephens presented a financial summary of both
the GemStone and Blaze transactions to the Brokat management board. The
management board again unanimously approved the merger agreement.
On June 19, 2000, Blaze's board of directors met with its legal and
financial advisors to review the terms of the transaction. Senior executives of
Blaze were also present at the meeting. Blaze's legal counsel reviewed the
proposed definitive merger agreement and stockholders agreement.
Representatives from Chase H&Q
38
<PAGE>
reviewed the financial terms of the transaction and the related financial
analyses. The board discussed the strategic value of the transaction and the
expected synergies. The board further discussed the status of Blaze's
relationships with potential investors and its prospects as a stand-along
company. Chase H&Q then rendered its opinion that, as of June 19, 2000, the
consideration to be received in the proposed merger was fair, from a financial
point of view, to the stockholders of Blaze. After additional discussion, the
Blaze board of directors unanimously approved the merger agreement and the
stockholders agreement and unanimously resolved to recommend to the Blaze
stockholders to approve and adopt the merger agreement. On the evening of June
19, 2000, the definitive merger agreement and the stockholders agreement were
executed by all parties.
In the early morning of June 20, 2000, Brokat and Blaze issued a joint press
release announcing the signing of the merger agreement. On the same day, staff
meetings were held in all locations of the companies to announce the
transaction to the employees and to give them more background information.
Blaze's Reasons for the Merger; Recommendation of the Blaze Board of Directors
The board of directors of Blaze has unanimously approved the merger. In
reaching its determination, the Blaze board consulted with Blaze's management,
as well as its financial adviser and legal counsel, and gave significant
consideration to a number of factors bearing on its decision.
The Blaze board believes that the proposed merger would afford Blaze the
following advantages:
. The merger would allow the integration of Blaze's personalization
technology with the Internet-based e-business products and technology of
Brokat and its industry-specific systems integration packages, while
providing strong synergies between the parties, professional services
offerings, all of which would create a range of product and service
offerings far broader than Blaze's current offerings.
. The board of directors considered Blaze's prospects, and the effect on
Blaze's stockholders, of developing products, services and technology
similar to Brokat's as a stand-alone company, as compared to the effect
of combining with Brokat, and the board of directors determined that the
merger would give the combined enterprise a greater competitive
advantage and technological lead than Blaze could achieve on its own.
. The relatively greater financial, sales and technical resources of
Brokat and the likelihood that these resources would allow Blaze to
accelerate the introduction of new products with a greater technical
base and to compete more effectively in its targeted markets.
. The merger would potentially create increased sales of Blaze's products
and services by exposing Blaze to Brokat's international customer base,
as well a creating additional cross-selling opportunities with Blaze's
existing customers.
. The merger would allow Blaze to more rapidly establish indirect
distribution channels by leveraging Brokat's existing relationships.
In the course of its deliberations, the Blaze board also considered a number
of additional factors relevant to the merger. These factors included:
. historical information concerning the businesses operations, positions
and results of operations, technology and management style, competitive
position, industry trends and prospects of Blaze and Brokat;
. current and historical market prices, volatility and trading data for
the two companies on their respective markets;
39
<PAGE>
. information and advice based on due diligence investigations by members
of Blaze's board of directors and management and Blaze's legal,
financial and accounting advisors concerning the business, technology,
services, operations, properties, assets, financial condition, operating
results and prospects of Brokat, trends in Brokat's business and
financial results and capabilities of Brokat's management team;
. the written opinion of Chase H&Q that as of June 19, 2000, and based
upon and subject to various qualifications and assumptions described in
their opinion, the consideration to be received in the merger was fair,
from a financial point of view, to the Blaze stockholders;
. the exchange ratio and other terms of the merger agreement;
. the compatibility of the respective management teams and employees of
Blaze and Brokat;
. levels of interest in and potential valuations of Blaze as reflected by
discussions with other potential investors or acquirors;
. the results of financial and operational due diligence on Brokat;
. the expectation that the merger will qualify as a tax-free
reorganization; and
. the fact that the merger will be accounted for as a purchase.
The Blaze board of directors also considered the following potentially
negative factors in its deliberations concerning the transaction:
. the limited trading history of Brokat shares on the Neuer Markt of the
Frankfurt Stock Exchange;
. that the Brokat ADSs to be issued in exchange for the outstanding Blaze
capital stock had not yet been, and might never be, qualified for
listing on the Nasdaq National Market;
. the potential disruption of existing and prospective relationships with
Blaze's partners and customers that could result from the announcement
or consummation of the merger;
. the loss of control over future operations of Blaze following the
merger;
. the potential disruption and loss of Blaze's management team and key
employees that could result from the announcement or consummation of the
merger; and
. the risk that the anticipated benefits of the merger might not be
realized; and
. the risks described in "Risk Factors."
As a result of the foregoing considerations, Blaze's board of directors
determined that the potential advantages of the merger outweighed the benefits
of remaining a separate company. Blaze's board of directors believes that the
combined company will have a far greater opportunity than Blaze alone to
compete in its industry.
In view of the variety of factors considered in connection with its
evaluation of the merger, Blaze's board of directors did not find it
practicable to quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination and did not do so. In
addition, many of the factors contained elements that may affect the fairness
of the merger in both a positive and negative way. Except as described above,
Blaze's board of directors, as a whole, did not attempt to analyze each
individual factor separately to determine how it impacted the fairness of the
merger. Consequently, individual members of Blaze's board of directors may have
given different weights to different factors and may have viewed different
factors as affecting the determination of fairness differently.
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Recommendation of Blaze's Board of Directors
After careful consideration, Blaze's board of directors unanimously
determined the merger to be fair to you and in your best interest and declared
the transaction advisable. Blaze's board of directors unanimously approved the
merger agreement and recommends your adoption of merger agreement.
In considering the recommendation of Blaze's board of directors with
respect to the merger agreement, you should be aware that some directors and
officers of Blaze have interests in the merger that are different from, or are
in addition to, the interests of Blaze stockholders generally. For a
discussion of these interests, please see the disclosure under "--Interests of
Certain Persons in the Merger" in this proxy statement/prospectus.
Fairness Opinion of Financial Advisor to the Blaze Board of Directors
Blaze engaged Chase H&Q, a division of Chase Securities Inc., to act as a
financial advisor to Blaze in connection with the proposed merger. The Blaze
board of directors selected Chase H&Q to act as a financial advisor based on
Chase H&Q's qualifications, expertise and reputation, as well as Chase H&Q's
historical investment banking relationship and familiarity with Blaze. Chase
H&Q delivered its written opinion on June 19, 2000 to the Blaze board of
directors that, as of such date, based upon and subject to the assumptions
made, matters considered and limits of the review undertaken by Chase H&Q, the
exchange ratio in the proposed merger was fair, from a financial point of
view, to the stockholders of Blaze.
The full text of the opinion delivered by Chase H&Q to the Blaze board of
directors, dated June 19, 2000, which sets forth the assumptions made, general
procedures followed, matters considered and limitations on the scope of review
undertaken by Chase H&Q in rendering its opinion, is attached as Annex B to
this prospectus/proxy statement and is incorporated herein by reference. The
Chase H&Q opinion does not constitute a recommendation to any Blaze
stockholder as to how such stockholder should vote with respect to the merger
agreement and the merger. The summary of the Chase H&Q opinion set forth below
is qualified in its entirety by reference to the full text of such opinion
attached as Annex B. Blaze stockholders are urged to read the opinion
carefully in its entirety.
In reviewing the proposed transactions, and in arriving at its opinion,
Chase H&Q, among other things:
. reviewed the publicly available consolidated financial statements of
Brokat for recent years and interim periods to date and certain other
relevant financial and operating data of Brokat made available to Chase
H&Q from published sources;
. discussed the business, financial condition and prospects of Brokat with
certain members of Blaze's senior management;
. reviewed the publicly available consolidated financial statements of
Blaze for recent years and interim periods to date and certain other
relevant financial and operating data of Blaze made available to Blaze
from published sources;
. discussed the business, financial condition and prospects of Blaze with
certain members of Blaze's senior management;
. reviewed the publicly available consolidated financial statements of
GemStone Systems, Inc. for recent years and interim periods to date and
certain other relevant financial and operating data of GemStone made
available to Blaze from published sources;
. discussed the business, financial condition and prospects of GemStone
with certain members of senior management;
. reviewed the summary information regarding the financial terms of the
proposed acquisition of GemStone provided to Blaze by representatives of
Brokat;
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. reviewed the recent reported prices and trading activity for the
ordinary shares of Brokat and common stock of Blaze and compared such
information and certain financial information for Brokat and Blaze with
similar information for certain other companies engaged in businesses
Chase H&Q considers comparable;
. reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
. reviewed the merger agreement dated June 19, 2000; and
. performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and
financial, economic and market data as Chase H&Q deemed relevant.
Chase H&Q did not assume responsibility for independent verification of, and
did not independently verify, any of the information concerning Blaze or Brokat
considered in connection with its review of the proposed transactions,
including without limitation any financial information, forecasts or
projections, considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, Chase H&Q assumed and relied upon the
accuracy and completeness of all such information. In connection with its
opinion, Chase H&Q did not prepare or obtain any independent valuation or
appraisal of any of the assets or liabilities of Blaze or Brokat, and it did
not conduct a physical inspection of the properties and facilities of Blaze or
Brokat. With respect to the financial forecasts and projections relating to
Blaze, prepared by Blaze management, and relating to Brokat, prepared by Brokat
management and reviewed by Blaze management, and used in its analysis, Chase
H&Q assumed that they reflected the best currently available estimates and
judgments of the expected future financial performance of Blaze and Brokat, and
Chase H&Q expressed no view as to the reasonableness of such forecasts and
projections or the assumptions on which such forecasts or projections were
based. Other than the acquisition of GemStone by Brokat, the proposed merger
and transactions in the ordinary course of conducting their respective
businesses for the purposes of its opinion, Chase H&Q also assumed that neither
Blaze nor Brokat was a party to any pending transactions, including without
limitation external recapitalizations or material merger or acquisition
discussions. Blaze advised Chase H&Q, and for purposes of its opinion Chase H&Q
assumed, that the proposed merger would be tax-free to each of Blaze and Brokat
and would be treated as a purchase for financial accounting purposes.
In performing its analyses, Chase H&Q used published research analyst
estimates of financial performance of Blaze and Brokat that are based on
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Blaze, Brokat or Chase H&Q. The analyses performed by Chase H&Q and summarized
below are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Because such analyses are inherently subject to uncertainty, being
based upon numerous factors or events beyond the control of Blaze, Brokat or
their respective advisors, neither Blaze, Chase H&Q nor any other person
assumes responsibility if future results or actual values are materially
different from the results of analyses based on forecasts or assumptions.
Additionally, analyses relating to the values of businesses do not purport to
be appraisals or to reflect the prices at which businesses or securities
actually may be acquired or bought or sold.
Chase H&Q's opinion is necessarily based upon market, economic, financial
and other conditions as they existed and can be evaluated as of the date of the
opinion and any subsequent change in such conditions would require a
reevaluation of such opinion. Although subsequent developments may affect its
opinion, Chase H&Q has assumed no obligation to update, revise or reaffirm it.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to summary description. The summary of Chase H&Q's
analyses set forth below summarizes the material analyses presented to the
Blaze board of directors but is not a complete description of the presentation
by Chase H&Q to the Blaze board of directors or the analysis performed by Chase
H&Q in connection with preparing its opinion. In arriving at its opinion, Chase
H&Q did not attribute any particular weight to any analyses or factors
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considered by it, but rather made subjective, qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Chase H&Q
believes that its analyses and the summary set forth below must be considered
as a whole and that selecting portions of its analyses, without considering all
analyses, or of the following summary, without considering all factors and
analyses, could create an incomplete view of the processes underlying the
analyses set forth in the Chase H&Q presentation to the Blaze board of
directors and Chase H&Q's opinion.
The terms of the proposed merger were determined through negotiations
between Blaze and Brokat and were approved by the Blaze board of directors.
Although Chase H&Q provided advice to Blaze during the course of these
negotiations, the decision to enter into the merger was solely that of the
Blaze board of directors. As described above, the opinion of Chase H&Q and its
presentation to the Blaze board of directors were only one of a number of
factors taken into consideration by the Blaze board of directors in making its
determination to approve the proposed merger.
The following is a brief summary of the material financial analyses
performed by Chase H&Q in connection with providing its opinion to the Blaze
board of directors on June 19, 2000. The summary includes information presented
in tabular format. You should read these tables together with the text of each
summary, because the tables alone are not a complete description of the
financial analysis.
Analysis of Publicly Traded Companies Considered Comparable to Blaze. This
analysis reviews a business' operating performance and outlook relative to a
group of peer companies to determine an implied value. Using published Wall
Street estimates, Chase H&Q compared, among other things, the equity values and
projected revenues for calendar years 2000 and 2001 for Blaze to corresponding
measures for certain publicly traded Internet software companies that Chase H&Q
considered comparable to Blaze. Chase H&Q used revenues when making its
comparisons, because valuations based on revenues are generally accepted in the
analysis of Internet software companies that, in many cases, have not achieved
profitability.
The Internet software companies that Chase H&Q considered comparable to
Blaze were:
. Accrue Software
. Allaire Corporation
. Broadbase Software
. Calico Commerce
. Interwoven
. Net Perceptions
. SilverStream Software
Chase H&Q determined mean and median revenue multiples for these companies.
Applying such multiples for the comparable companies to projected calendar year
2000 and 2001 revenues of Blaze resulted in a range of implied equity value and
equity value per share of Blaze set forth in the following table:
<TABLE>
<CAPTION>
Implied
Equity Value
Market Value to: Implied Equity Valuation per Share
---------------- ----------------------------- -------------
<S> <C> <C>
Calendar Year 2000E Revenues....... $325.9 million-$533.5 million $12.25-$20.00
Calendar Year 2001E Revenues....... $357.7 million-$481.5 million $13.50-$18.00
</TABLE>
Chase H&Q observed that the equity value and value per share in the proposed
merger of $535.7 million and $20.00 per share (based on the 20-day trading
average stock price of Brokat and the euro spot rate on June 16, 2000) fall
within the range of the implied equity valuation and implied equity value per
share indicated in the above table.
Analysis of Selected Transactions. This analysis provides a valuation range
based on financial information of selected public companies that have been
recently acquired and are in similar industries as the business
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being evaluated. Using published Wall Street estimates, Chase H&Q compared the
proposed merger with thirteen selected mergers and acquisitions transactions
involving companies in the Internet software industry. The acquirors and
targets in the transactions that Chase H&Q deemed comparable to the proposed
merger were:
. Vignette/OnDisplay
. webMethods/Active Software
. eGain/Inference
. 24/7 Media/Exactis.com
. Quintus/Mustang.com
. Kana Communications/Silknet
. BroadVision/Interleaf
. Calico Commerce/ConnectInc.com
. Nortel Networks/Clarify
. Sun Microsystems/Forte Software
. DoubleClick/NetGravity
. DoubleClick/Abacus Direct
. S1/Edify
In examining these transactions, Chase H&Q analyzed, among other things, the
multiples of offer prices to (1) revenues of the target for the last four
fiscal quarters preceding the public announcement of the transaction and (2)
projected revenues of the target for the calendar year following the public
announcement of the transaction. All multiples for the selected transactions
were based on public information available at the time of public announcement,
and Chase H&Q's analysis did not take into account different market and other
conditions during the two-year period during which the selected transactions
occurred. Applying the means and means excluding high and low of the foregoing
sets of multiples to Blaze' revenues for the four fiscal quarters preceding the
announcement of the merger and projected calendar year 2000 revenues resulted
in the ranges of implied equity per share values of Blaze set forth in the
following table:
<TABLE>
<CAPTION>
Implied
Equity Value
Multiple of Offer Price to: Implied Equity Value per Share
--------------------------- ----------------------------- -------------
<S> <C> <C>
Last Twelve Months Revenues....... $537.6 million-$680.6 million $20.25-$25.50
Forward Calendar Year 2000E
Revenues......................... $540.7 million-$686.1 million $20.25-$25.75
</TABLE>
Chase H&Q observed that the equity value and value per share in the proposed
merger of $535.7 million and $20.00 per share (based on the 20-day trading
average stock price of Brokat and the Euro spot rate on June 16, 2000) fall
below the range of the implied ranges indicated above.
Premium Analysis. Chase H&Q compared the implied premium as of June 16, 2000
of the consideration to be paid in the proposed merger to the implied premiums
paid in the comparable public company transactions listed above. Applying the
high and low premiums paid (excluding negative premiums) to the closing price
on June 16, 2000 and to the twenty trading days prior to June 16, 2000 of Blaze
common stock resulted in the following equity and per share values of Blaze.
<TABLE>
<CAPTION>
Implied
Control Equity Value
Date of Sales Price Premiums Implied Equity Value per Share
------------------- ------------ ----------------------------- -------------
<S> <C> <C> <C>
One Trading day Prior... 14.8%-58.0% $422.7 million-$581.8 million $16.00-$22.00
Twenty Trading Days
Prior.................. 13.0%-182.0% $270.3 million-$672.6 million $10.25-$25.50
</TABLE>
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Chase H&Q observed that the equity value and value per share in the proposed
merger of $535.7 million and $20.00 per share (based on the 20-day trading
average stock price of Brokat and the euro spot rate on June 16, 2000) fall
within the range of the implied ranges indicated above.
Exchange Ratio Analysis. Chase H&Q calculated the ratio of the historical
price of Blaze common stock to the historical price of Brokat common stock over
various periods. The results of such analysis are set forth below:
<TABLE>
<CAPTION>
Period Implied Exchange Ratio Implied per Share Price
------ ---------------------- ------------------------
<S> <C> <C>
June 16, 2000........... 0.1284 $14.06
5-trading day average... 0.1184 $12.97
10-trading day average.. 0.1151 $12.61
20-trading day average.. 0.1014 $11.11
30-trading day average.. 0.0987 $10.81
Trading-Day Average
Since IPO.............. 0.1315 $14.41
</TABLE>
Chase H&Q noted that the exchange ratio in the proposed merger of 0.1826 and
the implied price of $20.00 (based on the 20-day trading average stock price of
Brokat and the euro spot rate on June 16, 2000) per share of Blaze were greater
than the foregoing implied exchange ratio and per share price.
Chase H&Q also observed that no company or transaction used in the above
analysis is identical to Blaze or the proposed merger, and the reasons for and
circumstances surrounding each of the analyzed transactions are inherently
different. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex, qualitative considerations and
judgments, reflected in Chase H&Q's opinion, concerning differences in the
financial and operating characteristics of the compared companies, the
characteristics of the selected transactions and other factors that could
affect the public trading values of the comparable companies, Blaze and Brokat.
The foregoing description of Chase H&Q's opinion is qualified in its
entirety by reference to the full text of such opinion that is attached as
Annex B to this proxy statement/prospectus.
Certain Relationships; Terms of Engagement
Chase H&Q, as part of its investment banking services, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, strategic transactions, corporate restructurings, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Chase H&Q
has previously provided investment banking and other financial advisory
services to Blaze and has received fees for rendering these services. In the
ordinary course of business, Chase H&Q acts as a market maker and broker in the
publicly traded securities of Blaze, receives customary compensation in
connection therewith and provides research coverage for Blaze. In the ordinary
course of business, Chase H&Q actively trades in the equity and derivative
securities of Blaze for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities. Chase H&Q may in the future act as a market maker in the publicly
traded securities of Brokat and provide investment banking or other financial
advisory services to Brokat.
Pursuant to an engagement letter with Chase H&Q, Blaze has agreed to pay
Chase H&Q a customary fee in connection with the financial advisory services
provided by Chase H&Q and the delivery of the fairness opinion. Blaze also
agreed to reimburse Chase H&Q for its reasonable out-of-pocket expenses and to
indemnify Chase H&Q against certain liabilities, including liabilities under
the federal securities laws or relating to or arising out of Chase H&Q's
engagement as financial advisor.
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Interests of Certain Persons in the Merger
In considering the recommendation of the Blaze board of directors, you
should be aware that certain officers and directors of Blaze have interests in
the merger that are different from or in addition to yours.
Options Held by Blaze Executive Officers and Directors
Some of Blaze's most highly compensated executive officers have received
options to purchase common stock under which 50% of the unvested portion of the
option vests on the closing date of a change of control, subject to a minimum
aggregate vesting of two-thirds of the shares, if they are terminated without
cause within 12 months after the merger.
In July 1998, Mr. Kelly entered into an employment agreement to serve as
Blaze's president and chief executive officer. In conjunction with this
employment agreement, Blaze granted Mr. Kelly an option to purchase 300,000
shares of common stock at an exercise price of $0.80 per share. Of those
shares, 25% vested on the first anniversary of his commencement date, and one
thirty-sixth of the remaining shares vest monthly thereafter through the fourth
anniversary of the grant. In the event Mr. Kelly is terminated without cause
within 12 months after Blaze experiences a change of control, 50% of the
unvested portion of the option vests on the closing date of the transaction,
subject to a minimum aggregate vesting of two-thirds of the shares.
In June 1998, Mr. Shroyer entered into an employment agreement to serve as
Blaze's senior vice president and chief financial officer and commenced
employment in July 1998. In conjunction with this employment agreement, Blaze
granted Mr. Shroyer an option to purchase 75,000 shares of common stock at an
exercise price of $0.80 per share. Of these shares, 25% vested on July 20, 1999
and one thirty-sixth of the remaining shares vest monthly thereafter. In the
event Mr. Shroyer is terminated without cause within 12 months after Blaze
experiences a change of control, 50% of the unvested portion of the option
vests on the closing date of the transaction, subject to a minimum aggregate
vesting of two-thirds of the option.
In February 1998, Mr. Kintzer entered into an employment agreement to serve
as Blaze's vice president and chief technology officer and commenced his
employment in March 1998. In conjunction with this employment agreement, Blaze
granted Mr. Kintzer an option to purchase 75,000 shares of common stock at an
exercise price of $0.80 per share. Of those options, 25% vested on the first
anniversary of his commencement date, and one thirty-sixth of the remaining
shares vest monthly thereafter through the fourth anniversary of the grant. In
the event Mr. Kintzer is terminated without cause within twelve months after
Blaze experiences a change of control, 50% of the unvested portion of the
option vests on the closing date of the transaction, subject to a minimum
aggregate vesting of two-thirds of the option.
In July 1999, Mr. Masarich entered into an employment agreement to serve as
Blaze's vice president, sales. In conjunction with this employment agreement,
Blaze granted Mr. Masarich an option to purchase 431,771 shares of common stock
at an exercise price of $0.10 per share. Of those options, 25% vested on the
first anniversary of his commencement date, and one thirty-sixth of the
remaining shares vest monthly thereafter through the fourth anniversary of the
grant. In the event Mr. Masarich is terminated without cause within 12 months
after Blaze experiences a change of control, 50% of the unvested portion of the
option vests on the closing date of the transaction, subject to a minimum
aggregate vesting of two-thirds of the option. The employment agreement
provides that Joseph Masarich is employed "at-will" and the employment
relationship may be terminated for any reason at any time. If Blaze terminates
Mr. Masarich's employment without cause or following a change in control, Blaze
must pay Mr. Masarich a severance payment in four monthly installments of one
month's salary, each payable at the rate of the annual base salary in effect at
the time of such termination plus the amount of bonus prorated for such four-
month period at the target rate in effect on the effective date of such
termination. If Blaze terminates Mr. Masarich's employment without cause
subsequent to a change in control, Blaze must pay Mr. Masarich a severance
payment in six monthly installments of one month's salary, each payable at the
rate of the annual base salary in effect at the time of such termination plus
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the amount of bonus prorated for such six-month period at the target rate in
effect on the effective date of such termination.
In April 1999, William Seawick entered into an employment agreement to serve
as Blaze's vice president, marketing and commenced his employment in May 1999.
In conjunction with this employment agreement, Blaze granted Mr. Seawick an
option to purchase 305,422 shares of common stock at an exercise price of $0.10
per share. Of those options, 25% vested on the first anniversary of his
commencement date, and one thirty-sixth of the remaining shares vest monthly
thereafter through the fourth anniversary of the grant. In the event Mr.
Seawick is terminated without cause within 12 months after Blaze experiences a
change of control, 50% of the unvested portion of the option vests on the
closing date of the transaction, subject to a minimum aggregate vesting of two-
thirds of the option. The employment agreement provides that Mr. Seawick is
employed "at-will" and the employment relationship may be terminated for any
reason at any time. If Blaze terminates Mr. Seawick's employment without cause
or a change in control, Blaze must pay Mr. Seawick a severance payment in four
monthly installments of one month's salary, each payable at the rate of the
annual base salary in effect at the time of such termination plus the amount of
bonus prorated for such four-month period at the target rate in effect on the
effective date of such termination. If Blaze terminates Mr. Seawick's
employment without cause subsequent to a change in control, we must pay Mr.
Seawick a severance payment in six monthly installments of one month's salary,
each payable at the rate of the annual base salary in effect at the time of
such termination plus the amount of bonus prorated for such six-month period at
the target rate in effect on the effective date of such termination.
In addition, effective July 1, 2000, the Blaze board of directors approved
change-of-control arrangements with three of its directors, Charles M.
Boesenberg, Ken Goldman and L. George Klaus. The arrangements provide that all
options and stock held by these persons will immediately vest upon a change of
control, including the Blaze merger. Under these arrangements, as of the date
of this proxy statement/prospectus, a total of 75,000 shares would vest on the
date of closing of the merger.
As a result of these interests, the directors and officers of Blaze may be
more likely to vote to approve the merger agreement than if they did not hold
these interests. Blaze's stockholders should consider whether these interests
may have influenced these directors and officers to support or recommend the
merger.
Brokat's Reasons for the Merger; Recommendation of the Brokat Supervisory and
Management Boards
Brokat's management board and supervisory board determined that the merger
would be in the best long-term interests of the shareholders and employees of
Brokat. In particular, the merger with Blaze fits with Brokat's publicly stated
strategy of expanding its North American presence. In reaching their decision,
Brokat's management board and supervisory board considered a number of factors
including:
. the merger with Blaze would enable Brokat to gain market share in
software products in the United States;
. the software developed by Brokat and Blaze are complementary;
. Blaze and Brokat have complementary distribution strategies;
. the geographic coverage of Brokat and Blaze is complementary, with Blaze
having particular strength in the United States, where Brokat is under
represented;
. the combined research and development resources of Brokat and Blaze could
be used more efficiently; and
. Brokat believes that its international approach will appeal to Blaze
employees.
Brokat's management board and Brokat's supervisory board also considered the
following potentially negative factors in its deliberations concerning the
transaction:
. the limited trading history of Blaze's common stock on the Nasdaq
National Market;
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. the potential disruption of existing and prospective relationships with
Brokat's partners and customers that could result from the announcement
or consummation of the merger;
. the potential disruption and loss of Brokat's management team and key
employees that could result from the announcement or consummation of the
merger; and
. the risk that the anticipated benefits of the merger might not be
realized; and
. the risks described in "Risk Factors."
As a result of the foregoing considerations, Brokat's management board and
Brokat's supervisory board determined that the potential advantages of the
merger outweighed the benefits of remaining a separate company. Brokat's
management board and Brokat's supervisory board believe that the combined
company will have a far greater opportunity than Brokat alone to compete in its
industry.
In view of the variety of factors considered in connection with its
evaluation of the merger, Brokat's management board and Brokat's supervisory
board did not find it practicable to quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination and
did not do so. In addition, many of the factors contained elements that may
affect the fairness of the merger in both a positive and negative way. Except
as described above, both Brokat's management board and Brokat's supervisory
board, as a whole, did not attempt to analyze each individual factor separately
to determine how it impacted the fairness of the merger. Consequently,
individual members of each of Brokat's management board and Brokat's
supervisory board may have given different weights to different factors and may
have viewed different factors as affecting the determination of fairness
differently.
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THE MERGER AND THE MERGER AGREEMENT
The following is a summary of significant provisions of the merger
agreement. The merger agreement is attached as Annex A and is incorporated into
this proxy statement/prospectus by reference. You should read the merger
agreement for a complete understanding of its terms.
Structure of the Merger
The merger agreement provides that, following the approval of the merger
agreement by Blaze stockholders and the satisfaction or waiver of the other
conditions to the merger, a company formed at the direction and on behalf of
Brokat for the sole purpose to accomodate the transactions described in the
merger agreement will be merged with and into Blaze.
Immediately after the merger, the exchange agent will contribute all of the
shares of capital stock of the surviving corporation to Brokat in exchange for
Brokat ordinary shares representing the merger consideration on behalf of
former shareholders of Blaze. Immediately upon receipt, the exchange agent will
distribute to former Blaze stockholders the merger consideration in the form of
Brokat ADSs. As a result, former stockholders of Blaze will become holders of
Brokat ADSs.
Blaze Trust
The merger agreement also provides that, prior to the effective time of the
merger, Blaze will deliver to a trust established on June 14, 2000 and referred
to in this proxy statement/prospectus as the Blaze trust, the number of shares
of Blaze common stock corresponding to the total number of such shares
remaining to be issued by Blaze if, immediately before the merger, it were to
satisfy all its obligations under (i) all outstanding Blaze stock option plans,
and (ii) all outstanding warrants to purchase shares of Blaze common stock.
Effective Time and Effects of the Merger
Blaze and Brokat expect to complete the merger in the third calendar quarter
of 2000. The merger will be effective at the time a certificate of merger is
filed with the Delaware Secretary of State. Blaze and Brokat plan to file the
certificate of merger promptly following the approval of the merger agreement
by Blaze stockholders and the satisfaction or waiver of the other conditions to
the merger.
Merger Consideration
The merger agreement provides that, at the effective time of the merger,
each share of Blaze common stock outstanding immediately prior to the effective
time will be converted into 0.3652 Brokat ADSs, each Brokat ADS representing
0.50 Brokat ordinary shares.
The Exchange Agent Will Not Issue Fractional Brokat ADSs or Brokat Ordinary
Shares
The exchange agent will not issue fractional Brokat ADSs in the merger.
Instead, the exchange agent will pay Blaze stockholders for each fraction of a
Brokat ADS an amount of cash representing such stockholder's proportionate
interest in the net proceeds from the sale on the Nasdaq National Market of the
aggregate of the fractional Brokat ADSs. In addition, Blaze stockholders will
not receive any Brokat ordinary shares in the merger.
Exchange of Share Certificates
Following the merger, Blaze will cause the exchange agent to mail to each
record holder of Blaze common stock a letter of transmittal with which to
exchange Blaze common stock certificates for American depositary receipts
evidencing Brokat ADSs and any cash for fractional Brokat ADSs. Blaze will send
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instructions specifying details of the exchange with the letter of
transmittal. Blaze stockholders should not send their certificates until they
receive a letter of transmittal. However, at the effective time of the merger,
each certificate evidencing shares of Blaze common stock will no longer
represent shares of Blaze common stock and instead will represent the right to
receive the number of Brokat ADSs into which the shares of Blaze common stock
evidenced by that certificate have been converted, plus cash in lieu of
fractional ADSs.
Treatment of Blaze Common Stock Options
The merger agreement provides that, at the effective time of the merger,
each Blaze option to acquire shares of Blaze common stock outstanding
immediately prior to the effective time of the merger will be converted into
an option to acquire from the Blaze trust 0.3652 Brokat ADSs, rounded to the
nearest whole Brokat ADS if necessary, for each share of Blaze common stock
issuable upon exercise of the option immediately prior to the effective time
of the merger. The terms of the option to acquire Brokat ADSs will be
identical to the terms of Blaze common stock options, except with respect to
provisions relating to possible accelerations of maturity due to the merger.
Treatment of Blaze Warrants
The merger agreement provides that, at the effective time of the merger,
each Blaze warrant to acquire shares of Blaze common stock outstanding
immediately prior to the effective time of the merger will be converted into a
warrant to acquire from the Blaze trust 0.3652 Brokat ADSs, rounded to the
nearest whole Brokat ADS if necessary, for each share of Blaze common stock
issuable upon exercise of the warrant immediately prior to the effective time
of the merger, and at a per share price equal to the exercise price specified
in the Blaze warrant divided by 0.3652.
Representations and Warranties
Brokat and Blaze have made customary representations and warranties to each
other in the merger agreement relating, among other things, to:
. their organization, the organization of their subsidiaries, their
charter documents and similar corporate matters;
. their capital structure;
. their authority to deliver and execute the merger agreement, its legal
force and effect and the absence of conflict between such agreement and
their charter documents, the material contracts they have entered into,
and the laws applicable to them;
. governmental filings and consents in relation to the merger agreement;
. the absence of occurrences that have had material adverse effects;
. certain contracts and debt instruments;
. litigation issues;
. the possession of the intellectual property rights needed to conduct
business; and
. information required in the proxy statement/prospectus.
Blaze has also made some representations and warranties to Brokat in the
merger agreement relating to:
. the possession of all permits and licenses required to conduct their
respective businesses;
. employee benefit plans and employee relations;
. certain accounting and tax matters;
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. environmental matters;
. non-competition agreements; and
. agreements with regulatory agencies.
Certain Covenants
Blaze's Interim Operations
Under the merger agreement, Blaze has agreed that from the date of the
merger agreement until the effective time of the merger, it will operate its
operations in the ordinary course of business with no less diligence and effort
than would be applied in the absence of the merger agreement. Blaze has also
agreed that it will use commercially reasonable efforts to, and to cause each
of its subsidiary to, preserve intact its business organization and the
business organization of each of its subsidiaries, to keep available the
services of its present officers and key employees and of the present officers
and key employees of each of its subsidiaries, and to preserve the good will of
customers, suppliers and all other persons having business relationships with
it and its subsidiaries.
Prior to the effective time of the merger, Blaze has agreed that it will
not, and will not permit its subsidiaries to, without Brokat's prior approval:
. amend its certificate of incorporation or by-laws or the comparable
organizational documents of any of its subsidiaries, unless required by
applicable laws;
. issue, sell or pledge shares of its capital stock or other equity
securities, warrants or options other than certain issuances in
connection with employee stock options, rights under the employee stock
purchase plan, or repurchases from terminated employees or consultants;
. declare or pay any dividend or other distribution in respect of any
class or series of its capital stock other than between it and any of
its wholly owned subsidiaries;
. split, combine, subdivide, reclassify or redeem, purchase, propose to
redeem or purchase any shares of its capital stock, or other securities;
. increase the compensation or fringe benefits payable to, grant any
severance pay to or enter into any agreement providing for such a pay
with, its directors, officers or employees and the directors, officers
or employees of its subsidiaries, pay any benefit not required by any
existing plan, or take any action to accelerate rights under any
collective bargaining or any employee benefit plan for the benefit or
welfare of any directors, officers or current or former employees,
except in each case to the extent contemplated by the merger agreement,
required by applicable law or by any agreement entered into prior to the
date of the merger agreement;
. acquire or dispose of any assets, including capital stock of its
subsidiaries, or enter into any material commitment or transaction
outside the ordinary course of business, other than transactions between
it and a wholly owned subsidiary or between two wholly owned
subsidiaries;
. incur, assume indebtedness or guarantee, or make loans, capital
contributions to or investments in persons other than wholly owned
subsidiaries of Blaze, except in connection with the financing of
ordinary course trade payables, advances to customers in the ordinary
course of business or indebtedness between Blaze and any of its wholly
owned subsidiaries;
. terminate, cancel, request any material change to, or agree to
materially amend any contract that is material to it and its
subsidiaries taken as a whole, or enter into any contract material to
Blaze and its subsidiaries taken as a whole, other than in the ordinary
course of business, or authorize any capital expenditure, other than
capital expenditures that are not, in the aggregate, for any fiscal
year, in excess of U.S.$2,000,000 for it and its subsidiaries taken as a
whole;
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. change its accounting policies or procedures, other than actions in the
ordinary course of business and consistent with past practice or as
required pursuant to applicable law or U.S. GAAP in the reasonable
opinion of Blaze's independent certified accountants;
. waive, release, compromise, settle or assign any material rights, claims
or litigation;
. satisfy any material claim, liability, or obligation other than in the
ordinary course of business;
. enter into any agreements or agreement that materially limits or
otherwise restricts it, any of its subsidiaries, or any successor
corporation, or that would, after the effective time, limit or restrict
the surviving corporation and its affiliates, from engaging or competing
in any line of business or in any geographic area;
. make any tax election or settle or compromise any material federal,
state, local or foreign tax liability;
. authorize or enter into any formal or informal written or other
agreement or otherwise make any commitment to do any of the foregoing;
or
. take any action with the intent to directly or indirectly adversely
affect the merger.
Brokat's Interim Operations
During the term of the merger agreement, Brokat has agreed that it will not,
without the prior written consent of Blaze, which consent will not be
unreasonably withheld or delayed:
. adopt any amendment to its articles of association (Satzung) in any
manner that changes the fundamental attributes, or adversely affects the
value or rights, of its ordinary shares;
. declare or pay any dividend in respect of any class or series of its
capital share other than between it and any of its wholly owned
subsidiary;
. liquidate or adopt a plan of liquidation;
. purchase, redeem or otherwise acquire, directly or indirectly, any of
its ordinary shares or any share of any of its subsidiaries' capital
share in any amount that would adversely affect its financial condition
or liquidity;
. authorize or enter into any formal or informal agreement or otherwise
make any commitment to do any of the foregoing;
. take any action with the intent to directly or indirectly adversely
affect merger; or
. change its accounting policies or procedures, other than actions in the
ordinary course of business and consistent with past practice or as
required pursuant to applicable law or U.S. GAAP or German GAAP.
Stockholders Meetings
Blaze has agreed that promptly after the effective date of the registration
statement of which this proxy statement/prospectus is a part, it will cause a
stockholders meeting to be held for the purpose of voting upon the merger.
Blaze will distribute a proxy statement/prospectus to its stockholders, will
use its reasonable commercial efforts to solicit from its stockholders proxies
in favor of the adoption of the merger agreement and will take any other action
necessary to secure the stockholders vote required to approve such agreement.
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Conditions to the Merger
Conditions to Brokat's and Blaze's obligations
The respective obligations of Blaze and Brokat to consummate the
transactions contemplated by the merger agreement is subject to the
satisfaction or waiver prior to the effective time of the merger of the
following conditions:
. the merger agreement and the consummation of the merger shall have been
duly approved by Blaze stockholders and by Brokat's management board
(Vorstand) and supervisory board (Aufsichtsrat), and Brokat's share
capital increase and the issuance of the ordinary shares underlying
Brokat's ADSs will have been duly approved in accordance with applicable
law and Brokat's articles of association (Satzung);
. Brokat ADSs issuable to Blaze's stockholders shall have been authorized
for quotation on the Nasdaq National Market, upon official notice of
issuance;
. The waiting period applicable to the consummation of the merger under
the Hart-Scott-Rodino Act shall have expired or been terminated (this
occured in July);
. All consents, approvals and action of any governmental entity required
to permit the consummation of the merger, the share capital increase and
the other transactions contemplated by the merger agreement shall have
been obtained or made, free of any condition that could reasonably be
expected to result in a material adverse effect on Brokat or Blaze;
. No governmental entity of competent jurisdiction shall have enacted any
law or order that is in effect and prohibits the consummation of the
merger, the share capital increase or the other transactions
contemplated by the merger agreement; and
. The registration statement of which this proxy statement/prospectus is a
part shall have become effective under the U.S. Securities Act. No stop
order suspending the effectiveness of the registration statement shall
have been issued, and no proceedings for that purpose shall have been
initiated or be threatened by the U.S. SEC.
Conditions to Blaze's obligations
The obligation of Blaze to effect the merger and consummate the other
transactions contemplated by the merger agreement is also subject to the
satisfaction or waiver by Blaze at or prior to the effective time of the
following conditions:
. The representations and warranties of Brokat set forth in the merger
agreement that are qualified as to materiality shall be true and
correct, and the representations and warranties of Brokat set forth in
the merger agreement that are not so qualified shall be true and correct
in all material respects and Blaze shall have received a certificate
signed on behalf of Brokat by one of its executive officers to such
effect;
. Brokat shall have performed in all material respects all obligations
required to be performed by it under the merger agreement, and Blaze
shall have received a certificate signed on behalf of Brokat by one of
its executive officers to such effect;
. Since the date of the merger agreement, there shall have been no
material adverse effect on Brokat;
. Brokat shall have obtained the consent, approval or waiver of each
person that is not a governmental entity whose consent, approval or
waiver shall be required in order to consummate the transactions
contemplated by the merger agreement, except those for which failure to
obtain such consents, approval or waiver, individually or in the
aggregate, would have no material adverse effect on Brokat; and
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. Blaze shall have received the opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, its U.S. counsel, to the effect that
the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and
that each of Brokat, the merger subsidiary and Blaze will be a party to
that reorganization within the meaning of Section 368(b) of the Code.
Conditions to Brokat's obligations
The obligations of Brokat to consummate the transactions contemplated by the
merger agreement are also subject to the satisfaction or waiver by Brokat at or
prior to the effective time of the following conditions:
. The representations and warranties of Blaze set forth in the merger
agreement that are qualified as to materiality shall be true and
correct, and the representations and warranties of Blaze set forth in
the merger agreement that are not so qualified shall be true and correct
in all material respects, and Brokat shall have received a certificate
signed on behalf of Blaze by one of its executive officer to such
effect;
. Blaze shall have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the effective date, and Brokat will have received a certificate signed
on behalf of Blaze by one of its executive officer to such effect;
. Since the date of the merger agreement, there shall have been no
material adverse effect on Blaze;
. Blaze shall have obtained the consent, approval or waiver of each person
that is not a governmental entity whose consent, approval or waiver
shall be required in order to consummate the transactions contemplated
by the merger agreement, except those for which the failure to obtain
such consent, approval or waiver, individually or in the aggregate,
would have no material adverse effect on Blaze;
. Brokat shall have received the opinion of Paul, Weiss, Rifkind, Wharton
& Garrison, its U.S. counsel, to the effect that the merger will be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and that each of Brokat, the
merger subsidiary and Blaze will be a party to that reorganization
within the meaning of Section 368(b) of the Code; and
. Brokat shall have received an unqualified auditors' report from Blaze's
independent certified auditors on Blaze's consolidated balance sheet and
consolidated statement of income and of cash flows (including the
related notes and schedules) provided by Blaze to Brokat prior to the
signing of the merger agreement.
Amendment and Waiver
The merger agreement may be amended by action taken by or on behalf of the
boards of directors of the parties to such agreement, at any time prior to the
effective time of the merger. Such amendment may only be an instrument in
writing signed by the parties to the merger agreement. After the approval of
the merger agreement by Blaze's stockholders however, no amendment may be made
that would reduce the amount or change the type of consideration into which
each share of Blaze common stock shall be converted upon consummation of the
merger.
At any time prior to the effective time, any party to the merger agreement
may (a) extend the time for the performance of any obligation or other act of
any other party to the merger agreement, (b) waive any inaccuracy in the
representations and warranties contained in the merger agreement or in any
document delivered pursuant to the merger agreement, and (c) waive compliance
with any agreement or condition contained in the merger agreement. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
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No Solicitation by Blaze
Blaze has agreed that it will not, and will not authorize or permit any of
its subsidiaries or any of its or its subsidiaries' representatives to solicit,
initiate or encourage any inquiries with respect to:
. any merger, consolidation, share exchange, recapitalization or business
combination;
. any sale, lease, exchange, mortgage, transfer or other disposition, in a
single transaction or series of related transactions, of assets
representing 15% or more of the assets of Blaze and its subsidiaries,
taken as a whole; or
. any sale of shares of capital stock representing, individually or in the
aggregate, 10% or more of the voting power of Blaze other than to Blaze
or its subsidiaries, including by way of a tender offer or exchange
offer by any person (other than Blaze or its subsidiaries) for shares of
capital stock representing 5% or more of the voting power of Blaze,
other than the transactions contemplated by the merger agreement.
This restriction does not prevent Blaze from responding to an acquisition
proposal, furnishing nonpublic information to the person making the acquisition
proposal or entering into negotiations with the person making the acquisition
proposal, despite complying with this restriction, if the Blaze board of
directors determines in good faith, after consultation with its legal counsel
and its independent financial advisor, that the acquisition proposal would be
more favorable to its stockholders that the proposed merger with Brokat. Blaze
has agreed to promptly inform Brokat of any offer, proposal, inquiry relating
to any acquisition and to furnish Brokat copies of all information regarding
such acquisition proposal, the identity of the third party making the proposal.
Assuming a more favorable acquisition proposal would have been be brought to
Blaze's attention, Blaze has further agreed to keep Brokat informed of the
status of the discussions relating to such proposal and to terminate the merger
agreement and pay the termination fee before Blaze's board of directors
withdraws its recommendation to vote in favor of the approval of the merger
agreement at the meeting of Blaze stockholders.
Termination of the Merger Agreement
The merger agreement may be terminated:
. by mutual written consent of Brokat and Blaze duly authorized by the
board of directors of Blaze and by the management board of Brokat;
. by either Brokat or Blaze, if the effective time of the merger has not
occurred on or before December 31, 2000; however, the right to terminate
the merger agreement will not be available to the party whose failure to
fulfill any obligation under the merger agreement will have been cause
such delay;
. by either Brokat or Blaze, if any order, injunction or decree preventing
the consummation of the merger shall have been entered by any court of
competent jurisdiction or governmental entity and shall have become
final and nonappealable;
. by Brokat or Blaze, if Blaze stockholders fail to approve the merger
agreement;
. by Brokat, if Blaze breaches any material representation, warranty,
covenant or agreement it made in the merger agreement, or if any
representation or warranty of Blaze becomes untrue, in either case such
that certain conditions to Brokat's obligations to consummate the
transaction would not be satisfied, unless Blaze can cure such breach
through the exercise of commercially reasonable efforts and for so long
as Blaze continues to exercise such commercially reasonable efforts;
. by Blaze, if Brokat breaches any material representation, warranty,
covenant or agreement it made in the agreement, or if any representation
or warranty of Brokat becomes untrue, in either case such that certain
conditions to Blaze's obligations to consummate the transaction would
not be satisfied, unless Brokat can cure such breach through the
exercise of commercially reasonable efforts and for so long as Brokat
continues to exercise such commercially reasonable efforts;
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. by Brokat, if
. Blaze's board of directors withdraws, modifies or changes its
approval or recommendation of the merger agreement in a manner
adverse to Brokat or resolves to do so,
. Blaze's board of directors recommends to Blaze's stockholders an
acquisition proposal or resolves to do so, or
. a tender offer or exchange offer for 10% or more of the outstanding
shares of Blaze's capital stock is commenced by a person other than
Brokat and Blaze's board of directors fails to recommend against
acceptance of such tender offer or exchange offer by its
stockholders; or
. by Blaze, if the Blaze's Board of directors concludes in good faith
(after consultation with Blaze's counsel) that failure to so terminate
would be inconsistent with its fiduciary duties under applicable laws
and, on or prior to such date, a third party makes a public announcement
or communicates to Blaze and its stockholders with respect to an
acquisition proposal more advantageous for Blaze stockholders than the
proposal made by Brokat; however, such termination will not be effective
until Blaze has paid the termination fee to Brokat.
Expenses and Termination Fees
Payment of expenses of the merger generally
Except as described below, Brokat and Blaze will each pay its own fees and
expenses incurred in connection with the merger.
Payments from Blaze to Brokat under certain circumstances
Blaze will be required to pay a termination fee of $20,000,000 if:
. Blaze's board of directors withdraws, modifies or changes its approval
or recommendation of the merger agreement in a manner adverse to Brokat
or resolves to do so;
. Blaze's board of directors recommends to Blaze's stockholders an
acquisition proposal or resolves to do so;
. a tender offer or exchange offer for 10% or more of the outstanding
shares of Blaze's capital stock is commenced by a person other than
Brokat and Blaze's board of directors fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders;
or
. Blaze's Board of directors concludes in good faith (after consultation
with Blaze's counsel) that failure to so terminate would be inconsistent
with its fiduciary duties under applicable laws and, on or prior to such
date, a third party makes a public announcement or communicates to Blaze
and its stockholders with respect to an acquisition proposal more
advantageous for Blaze stockholders than the proposal made by Brokat;
however, such termination will not be effective until Blaze has paid the
termination fee to Brokat.
In addition, Blaze will be required to pay Brokat's actual and documented
out-of-pocket expenses up to a maximum reimbursable amount of $2,000,000.
Blaze will be reimburse Brokat's expenses, on demand, if the merger
agreement is terminated because Blaze stockholders fail to approve the merger
agreement and, at the time of Blaze's stockholders meeting, Blaze has received
a bona fide alternative acquisition proposal or a third party has made or
publicly announced its intention to make a bona fide acquisition proposal. In
addition, if, within 12 months after the termination of the merger agreement,
Blaze enters into a definitive agreement providing for an alternative
acquisition proposal
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with any third party or an alternative acquisition proposal is consummated with
any third party, Blaze will be required to pay the $20,000,000 termination fee.
Indemnification for Prior Acts
Brokat will cause the surviving corporation, in its charter documents, to
honor for not less than six years following the closing of the merger, Blaze's
obligations to indemnify its present and past directors, officers and employees
with respect to matters that occurred prior to the merger, on at least as
favorable terms as provided by Blaze and its subsidiaries. The right to
indemnification with respect to a claim asserted during the six-year period
will be extended until its final disposition. Brokat will also maintain for at
least six years the insurance Blaze currently maintains for its directors,
officers and employees, or similar insurance, unless the insurance premium to
be paid by Brokat exceeds 175% of the last insurance premium paid by Blaze
before the date of the merger agreement. If such insurance coverage is
unavailable to Brokat, it has agreed to obtain as much comparable insurance as
possible for such maximum annual premium.
Blaze Employees
For one year following the effective time and during their continuing
employment, Brokat will provide benefits and compensation to employees of Blaze
and its subsidiaries substantially equivalent, in the aggregate, to the
benefits and compensation provided to such employees on the date of the merger
agreement. The above provision will not apply to Blaze's 2000 employee stock
purchase plan, which will be terminated on or prior to the effective time of
the merger. Brokat will waive all limitations as to preexisting conditions,
exclusions and waiting periods with respect to any participation and coverage
requirements applicable to welfare plan to which such employees are eligible.
Brokat will also provide these employees with credit for co-payment and
deductibles paid prior to the effective time, for purposes of vesting and
eligibility, unless such credit would result in a duplication of benefits.
Voting Arrangements
In order to induce Brokat to enter into the merger agreement, Thomas Kelly,
Gary Shroyer, Eric Kintzer, Charles Boesenberg, George Klaus, Ken Goldman,
funds affiliated with TL Ventures and funds affiliated with Morgan Stanley Dean
Witter Venture Partners, which together own approximately 38.3% of Blaze common
stock on the date of the merger agreement, have entered into a stockholders
agreement with Brokat. They have agreed to vote in favor of the approval and
adoption of the merger agreement and against any action that would impede such
approval and adoption. They have agreed not to encourage, initiate or cooperate
in a stockholders' decision in opposition to or in competition with the
consummation of the merger and not to enter into voting agreements, voting
trusts or grant a proxy or power of attorney inconsistent with their
obligations under their voting agreement with Brokat. They have further agreed
not to transfer their shares of Blaze common stock other than to the exchange
agent, unless such transfer is consented to by Brokat and the transferee
becomes a party to a similar voting agreement. They will not encourage any
acquisition proposal of Blaze.
Regulatory Matters
Under the merger agreement, neither Brokat nor Blaze is required to complete
the merger unless any competition law waiting periods have expired or been
terminated.
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended and the rules promulgated thereunder, Blaze and Brokat
filed premerger notifications and report forms on July 7, 2000 with the
Antitrust Division of the Department of Justice and the Federal Trade
Commission and these institutions granted early termination of the waiting
period on July 19, 2000.
In connection with the merger agreement, Brokat is not required to make a
mandatory filing in Germany with the German local competition regulator.
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Restriction on Resales of Brokat ADSs
The Brokat ADSs to be issued in the merger will have been registered under
the U.S. Securities Act, thereby allowing such shares to be freely traded
without restriction by all former holders of Blaze common stock who are not
"affiliates" of Blaze at the time of the special meeting and who do not become
"affiliates" of Brokat after the merger. Persons who may be deemed to be
affiliates of Blaze or Brokat generally include individuals or entities that
control, are controlled by or are under the common control with, such party and
may include certain officers and directors of Blaze and Brokat, as well as
significant stockholders.
Brokat ADSs received by such stockholders of Blaze who are deemed to be
affiliates of Blaze may be resold without additional registration under the
U.S. Securities Act only in the manner permitted by Rule 145 under the U.S.
Securities Act or as otherwise permitted under the U.S. Securities Act.
This prospectus does not cover resales of Brokat ADSs received by any person
who may be deemed to be an affiliate of Blaze or Brokat.
Thomas Kelly, Gary Shroyer, Eric Kintzer, Charles Boesenberg, George Klaus,
Ken Goldman, the funds affiliated with TL Ventures and the funds affiliated
with Morgan Stanley Dean Witter Venture Partners have entered into a
stockholders agreement with Brokat. Under that stockholders agreement, the
Blaze management stockholders have agreed not to transfer the Brokat ADSs they
receive in connection with the merger for the first six months after the
closing of the merger.
Under the stockholders agreement, each of the funds affiliated with TL
Ventures and the funds affiliated with Morgan Stanley Dean Witter Venture
Partners have agreed:
. not to transfer the Brokat ADSs it receives in connection with the
merger for the first 60 days after the closing of the merger;
. not to transfer its shares for an additional 45-day period if Brokat
files a registration statement with the U.S. SEC for a primary offering
of capital stock for cash before the end of the 60-day period;
. after the two periods mentioned above, to limit its transfers to
. its own security holders; or
. in any 90-day period, up to (1) the average weekly trading volume in
Brokat ADSs reported through Nasdaq during the preceding four
calendar weeks if that shareholder is transferring Brokat ADSs, or
(2) the greater of 1% of the total number outstanding shares of
Brokat and the average weekly trading volume in Brokat ordinary
shares reported through the Neuer Markt during the preceding four
calendar weeks if that shareholder is transferring Brokat ordinary
shares
In addition, the Blaze stockholders subject to the stockholders agreement
have agreed not to transfer their shares during the 14-day period before, and
the 90-day period after, a public offering by Brokat in the United States.
Accounting Treatment
The merger is expected to be accounted for under the purchase method under
U.S. GAAP. This means that after the merger, Brokat will be required to record
on its balance sheet the excess of the consideration paid over the estimated
fair value of net assets acquired and will subsequently amortize this cost
against earnings.
Tax Treatment
The merger is structured to qualify as a tax-free "reorganization" for U.S.
federal income tax purposes with respect to your receipt of Brokat ADSs. See
"Material Tax Consequences--Federal income tax consequences of the merger."
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
What is reflected in Brokat's unaudited pro forma financial data
The following unaudited pro forma consolidated balance sheet as of June 30,
2000 reflects the offering of Brokat's 11 1/2% senior notes due 2010 and the
application of the net proceeds of such offering and gives effect to the
proposed acquisitions of Blaze and GemStone as if they had occurred on June 30,
2000.
The following unaudited pro forma consolidated statement of operations give
effect to the acquisitions of MeTechnology AG and Transaction Software
Technologies, Inc., the offering of the senior notes and the application of the
net proceeds of such offering and the proposed acquisitions of Blaze and
GemStone 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.
Brokat has adjusted MeTechnology and TST data because its fiscal year differed
from the fiscal years of those companies
The unaudited pro forma consolidated financial data are derived from
Brokat's historical consolidated financial statements and the historical
consolidated financial statements of MeTechnology and TST, which are included
elsewhere in this prospectus. Because Brokat's 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
Brokat's. 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.
While the fiscal year end of Blaze differs from Brokat's, this difference is
less than 93 days. Accordingly, the unaudited pro forma consolidated statements
for the years ended June 30, 1999 and for the six months ended December 31,
1999 and June 30, 2000 were developed using the financial statements of Blaze
for the comparable calendar periods.
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.
Brokat has provided pro forma financial data only for informational purposes
Brokat has provided the unaudited pro forma financial data for informational
purposes only and you should not consider the data indicative of actual results
that Brokat would have achieved had these transactions been completed on the
date or for the periods indicated. Brokat does 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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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 -- 246,668
-------- -------- ------- --------- -------- --------- ---------
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.
60
<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 (7e) 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) (418,095)
---------- ----------- -----------
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 (7e) 26,377,879
=========== ===========
</TABLE>
The notes to unaudited pro forma data are an integral part of this combined
pro forma statement of operations.
61
<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) (111,649) (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) 29,068,758 4,463,243 (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.
62
<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)
<CAPTION>
Total
Pro Forma
Combined
-----------
(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) (52,688) -- (62,280) (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) (157,850) (28,605) (74,931)
---------- ------- -------- ------- --------- ---------- ------- ---------
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) (41,668) (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) 29,538,219 4,463,246 (7e)
========== ========= === ========== ========= ===
<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.......... (58,469)
-----------
Total Operating
expenses........ (281,436)
-----------
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>
63
<PAGE>
The unaudited statement of operations of MeTechnology for the period July 1,
1998 to May 21, 1999 is:
<TABLE>
<CAPTION>
MeTechnology
------------------------------------------------
(Less) (Add)
January 1, January 1, January 1, July 1,
1998 thru 1998 thru 1999 thru 1998 thru July 1, 1998
December 31, June 30, May 21, May 21, Reconciliation thru
1998 1998 1999 1999 German GAAP to May 21, 1999
German GAAP German GAAP German GAAP German GAAP 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.
64
<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 Brokat 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
------- ------- ----- -------
2,686 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>
65
<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>
Current assets and other tangible
assets.............................. 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 (see Note 6)................ 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 Brokat's probable acquisitions of
Blaze and GemStone, which are based on Brokat's management's best estimates at
this time, are preliminary and subject to change. At present, Brokat has not
been able to perform a formal review of the net assets that it acquired of
these entities and, accordingly, for purposes of these pro forma financial
statements, has 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 Brokat assigned the entire purchase
price to an intangible asset such as software, which typically has a useful
life of three years, Brokat's 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
20000 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:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
June 30, December 31,
1999 1999
---------- ------------
<S> <C> <C>
Financing the acquisition of TST....................... 52 --
Interest expense on the notes.......................... 28,115 14,058
Amortization of deferred note issuance costs........... 880 440
Decrease in interest expense through the repayment of
indebtedness with the proceeds from the offering...... (468) (721)
------ ------
Total................................................ 28,579 13,777
====== ======
</TABLE>
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 Brokat's 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 using the effective interest method 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.
66
<PAGE>
(5) For the six months ended June 30, 2000 to account for:
. DM 14,058, respectively, related to current bond interest expense,
. DM 440, respectively, related to the recognition of deferred note
issuance costs and
. DM 721, respectively, 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.
Management used part of the proceeds from the senior notes 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 and GemStone (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 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 from the issuance
of 66,200 shares of Brokat ordinary shares.
(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 of DM 2,801 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 its acquisition of Blaze, Brokat will replace outstanding Blaze
stock options held by employees and directors of Blaze will Brokat 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 stock options issued to replace Blaze awards will be included as a
component of the purchase price for those Brokat options that are vested as of
the date of grant. For those Brokat options that are not exercisable at the
time of grant, the fair value of the Brokat 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 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.
67
<PAGE>
(8) Exchange rates used for conversion from US dollars to Deutsche marks:
<TABLE>
<S> <C>
September 30, 1998 (average for 12 months ended)........... $1.00 = DM 1.755
June 30, 1998 (average for 12 months ended)................ $1.00 = DM 1.745
May 29, 1999 (average for 12 months ended)................. $1.00 = DM 1.747
June 30, 1999 (average for 12 months ended)................ $1.00 = DM 1.876
December 31, 1999 (average for 6 months ended)............. $1.00 = DM 1.755
June 30, 2000 (average for six 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 Brokat
ordinary shares for issuance of future stock options to the employees of
GemStone and 413,000 Brokat ordinary 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.
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<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF BROKAT
The following table presents Brokat's selected historical consolidated
financial data derived from Brokat's historical consolidated financial
statements for the periods indicated.
The selected historical financial data for the years ended June 30, 1996,
1997, 1998 and 1999 and the six months ended December 31, 1999, were derived
from the audited consolidated financial statements of Brokat for those periods.
The consolidated financial statements for the years ended June 30, 1997, 1998
and 1999 and the six months ended December 31, 1999, are included elsewhere in
this proxy statement/prospectus. The consolidated financial statements for the
year ended June 30, 1996, are not included in this prospectus.
The selected historical financial data as of and for the year ended June 30,
1995 were derived from the unaudited consolidated financial statements of
Brokat for that period, which were prepared under German GAAP. These
consolidated financial statements are not included in this proxy
statement/prospectus.
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 Brokat's unaudited financial statements and, in Brokat's opinion,
reflect all adjustments necessary to present fairly the financial position and
results of operations for the periods presented.
Brokat's consolidated financial statements have been prepared in accordance
with U.S. GAAP since (but not including) the fiscal year ended June 30, 1995.
Since Brokat's inception through the fiscal year ended June 30, 1999,
Brokat's fiscal year ended on June 30. Brokat changed its fiscal year in 1999
to end on December 31. Brokat's 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. For
information relating to the currency exchange rates used in the following
table, you should read "Currency and Financial Statement Presentation."
You should carefully review Brokat's consolidated financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "Unaudited Pro Forma Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Brokat."
69
<PAGE>
Selected Financial Data
(Deutsche marks and dollars in thousands, except per share amounts)
<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>
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<PAGE>
RECENT ACQUISITIONS AND OTHER STRATEGIC INITIATIVES
The following is a summary of Brokat's recent significant acquisitions and
other strategic initiatives, in addition to the GemStone merger. You should
read the "Unaudited Pro Forma Condensed Consolidated Financial Information" and
the relevant historical financial statements included in this proxy statement/
prospectus for an understanding of their impact on Brokat's financial
situation.
Recent Strategic Initiatives
On November 7, 1999 Intel Atlantic Inc., Santa Clara, California subscribed
for new shares of Brokat by signing a subscription certificate in accordance
with the capital increase resolution of Brokat's management board dated
November 7, 1999 by which Brokat's management board (Vorstand) granted Intel,
against a contribution in cash amounting to a total of euro 10 million, the
exclusive right to subscribe for 279,573 new ordinary bearer shares without par
value (each representing 1 euro of the nominal capital) issued under the
authorized capital I (Genehmigtes Kapital I) of section 4(2) of Brokat's
articles of association. This investment was consummated on May 12, 2000, when
the Commercial Register of Stuttgart registered the capital increase.
On December 20, 1999, Brokat 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, Brokat acquired the remaining
74.9% of Fernbach's outstanding capital stock, effective as of January 1, 2000,
for 182,838 post-split ordinary shares 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, Brokat gained the expertise and specialized e-
finance software that will allow it to enhance its standardized software
packages offered to brokerage firms and banks.
As part of its marketing strategy, Brokat has also acquired minority
interests in Bremen Online Services Entwicklungs-und Betriebsgesellschaft mbH &
Co. KG, a German company and Customer Dialogue Systems NV, a Belgian company.
All of these companies provide e-services.
On August 3, 2000, Brokat acquired of 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 Brokat ordinary shares and the
remaining portion will be paid in cash. The MyAlert.com technology will allow
Brokat's customers to offer individual mobile information services. Brokat is
currently consummating the capital increase required to make the payment in
Brokat ordinary shares.
MeTechnology Acquisition
On May 21, 1999, Brokat 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 Brokat's
common stock having a value of DM 159.7 million on the date of acquisition.
Through the acquisition of MeTechnology and its merger into Brokat, Brokat
acquired technology and research personnel complementary to its existing
business, which will allow Brokat to widen the range of its products and
enhance its existing products.
TST Acquisition
On May 9, 1999, Brokat 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 provided Brokat with a corporate cash
management software application marketable in the United States and thus
enhanced its presence in the U.S. market.
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<PAGE>
DESCRIPTION OF BROKAT
General
Who Brokat is
Brokat is a leading provider of software for the rapidly expanding e-banking
market and the leading provider of this software to European banks. Brokat
designs, develops, markets and supports e-business software. Brokat has
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. Brokat intends to further use its leading position in the
European e-banking sector to expand its presence in other geographic areas and
in other e-business sectors, with the long-term objective of establishing its
core product as the industry standard platform for the delivery of e-business
services.
Brokat's Products and Services
Brokat's 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.
Brokat also offers 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,
provides a business with both customer relationship management and back office
integration functions. Brokat also provides a range of professional services,
such as consulting, customization, installation, training, and maintenance and
support related to the sales of its products.
Brokat's Distribution and Sales
Brokat distributes, implements and supports its products worldwide through
its subsidiaries and sales offices as well as through distribution partners,
such as consulting firms and value added resellers, and through joint ventures.
Brokat estimates 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 its products. Its
market share of the e-banking sector is approximately 80-90% in Germany and
Austria, and approximately 40% in the rest of Europe. Brokat believes that the
majority of all banks in Germany offering the e-banking services use its
software.
Brokat's Revenues
Brokat derives its 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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<PAGE>
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.
Brokat's Strengths
Brokat relies on the following key strengths to respond to the needs of the
e-business market:
Brokat's Products
Brokat's 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's consumers securely through a variety of electronic communication
media the consumers may be using. The platform allows communications over
multichannels simultaneously. Brokat's software offers:
. simplicity--Brokat's 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. Brokat
also believes, based on its experience in modifying the Twister platform
for its customers, that
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<PAGE>
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--Brokat's 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 Brokat's customers with its
software, Brokat believes that its products are generally stable and
fault-tolerant;
. scalability--based primarily on its experience in satisfying the volume
requirements of large German banks using its e-banking software, Brokat
believes that its 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 its products and its
experience with customizing its products for different operating systems,
Brokat believes that its products are compatible with a wide range of
major operating systems and industry standards for application
development.
Strategic Alliances
Brokat cooperates with several strategic partners that are engaged in
various aspects of e-business. Brokat is one of the original ten software
companies worldwide selected by Intel as a preferred business partner to
optimize its software for use with the newly developed generation of 64-bit
Intel processors. Brokat 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. Brokat was 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 its platform.
Continuity of Senior Management
Brokat benefits from the continuity of its senior management team. Messrs.
Roever, Anderer, Schlumpberger, Janssen and Schumacher have been with us since
the establishment of Brokat in 1994. Brokat's senior management has been
strengthened by the addition of Mr. Maestrini in 1999. As a group, our senior
management (excluding Mr. Maestrini who does not own ordinary shares of Brokat)
has a significant economic stake in Brokat, beneficially owning approximately
32.2% of outstanding shares.
Technical Expertise of Brokat's Personnel
Brokat benefits from a talented and motivated technical staff, with a broad
range of skills and expertise in the technologies relevant to its business.
Brokat's employees share in its financial success through participation in its
firm-wide employee stock option plans and its annual bonus scheme.
Market Position
Brokat has successfully established Brokat as a recognized brand name in the
European e-banking market. It intends to use its brand name recognition, its
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
Brokat's 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,
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<PAGE>
including personal computers, mobile telephones, call centers, personal
digital assistants and WebTV. The principal elements of Brokat's 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 Brokat's Twister platform, Brokat will seek to
maintain its technological leadership by refining elements of the platform.
Brokat developing Twister Version 4.0 for launch later this year. In this
version, it will offer a wireless application protocol feature, as well as
application development support that will enable Brokat's customers to develop
their own applications compatible with multi-industry standards. Brokat has
developed and tested a prototype of Twister 4.0 and is working on further
enhancement to its design and functionalities.
Expand Brokat's range of standardized software applications and enhance
Brokat's existing software applications based on its Twister platform
Through its own research and development activities and through joint
ventures and the efforts of our business partners, Brokat will seek both to
expand the range of affordable, quick and reliable applications targeted to
specific industry sectors and to enhance its existing software applications.
These applications will allow its 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. Its emphasis on both platform
technology and application technology gives Brokat a competitive advantage
over providers that offer one or the other, but not both, technologies.
Expand Brokat's presence throughout Europe, North America and the Asia-
Pacific region, through internal growth, joint ventures and strategic
acquisitions
Brokat intends to establish a global presence through internal growth,
joint ventures and strategic acquisitions. Brokat has established subsidiaries
and sales offices in 13 countries around the world outside of Germany. Its
geographic expansion efforts will be affected by differences in the e-business
environment, technology and the relative maturity of each targeted market.
Brokat seeks to adapt to the unique conditions to each of these geographic
markets by focusing on a market segment where it can quickly establish a
leading position through internal efforts, joint ventures or acquisitions. In
the United States, for example, Brokat is focused, as its initial e-finance
beachhead, on expanding the opportunities for the sale of corporate cash
management software products based on the Twister platform. Brokat markets
these products to banks which, in turn, can offer the cash management
capabilities to their corporate clients. In Singapore, Brokat now provides e-
finance services to three of the leading banks.
Continue to emphasize indirect sales through the strengthening and expansion
of Brokat's network of business partners, including through joint ventures
and value added resellers, consultants, system integrators and solution
providers
In recent years, Brokat has shifted the emphasis of its 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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Brokat believes that indirect sales and licensing through third parties will
give it the opportunity to increase revenues at a faster rate and at higher
margins than it could through direct sales.
Leverage Brokat's leading market position in the European e-banking services
sector and technological leadership to position itself to take advantage of
the development of other e-business segments and other aspects of e-business
Brokat believes that the participants in the e-banking sector are at the
forefront of the development of e-business. Brokat will seek to use its
resources to strengthen its 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. Brokat will seek to diversify into other e-business
sectors as opportunities arise for collaboration with its distribution and
joint venture partners in the countries in which Brokat does business.
Products
Twister
Brokat designs, develops, markets and supports 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 facilitate integration of
interactive capabilities, back-office systems and
and infrastructure for the generate the basis for the
e-front office software development of new business
applications 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. Brokat's 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 its Twister platform, Brokat
provides 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.
Brokat's 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, Brokat's
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 Brokat's customers and distribution partners to more easily
develop their customized software applications, Brokat has developed:
Twister Development Toolkit, which enables Brokat's business partners and
Brokat's 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
Brokat plans to offer its 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, Brokat 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. Brokat is developing these
application packages on the basis of its experience in the e-banking sector and
its expertise and specialized banking products gained through the acquisition
of Fernbach Financial Software S.A. Brokat has developed and tested a prototype
of these modules and is working on further improvements to their design. It
expects to launch these modules later this year.
Cash Management. Through its acquisition of TST, Brokat has acquired cost-
effective applications that allow banks to provide cash management services to
their middle market and small business customers. Brokat is 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. Brokat expects that it will complete these enhancements later this
year. The Internet-based cash management products that Brokat offers include:
balance reporting, stop payments, money market investment services and account
transfers. Brokat's 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. Brokat's customers using this application include Pago
International and TeleCash, German electronic payment system providers; DBS, a
Singapore bank; and the Swiss Postfinance. Brokat is working on additional
enhancements to the design and functionalities of this system to allow
electronic payment over mobile telephones. Brokat expects that it will complete
these enhancements later this year.
To simplify the marketing of Twister, Brokat has 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 Brokat an export license for the X.PRESSO security
package, under which Brokat may distribute this product worldwide from the
United States. This export permit will expire on July 31, 2001 unless renewed
or extended.
Brokat was 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
Brokat provides two types of services: professional services and customer
support.
Professional Services
Brokat's 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, Brokat advises companies on the feasibility and range of
potential projects. Brokat then adapts its products to its customers'
individualized needs. During the installation phase, Brokat adapts the
customers' information technology systems to enable the connection to
electronic communication channels and, if necessary, to further improve these
systems. Brokat's professional services staff works closely with Brokat's
various product divisions.
Customer Support
Brokat offers various types of customer support services. Under its standard
service contracts, Brokat offers world-wide support for the users of our
standard software, its customized software products, and software products
provided by third parties that are based on our products. Brokat provide
companies with software updates. Software problems are diagnosed online and
maintenance work is performed at the company's premises. Brokat's 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 its products. Following the installation of its
software, Brokat provides a framework for defining operating procedures,
developing surveillance systems for systems operators and implementing fault
information systems.
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Marketing
Brokat's marketing efforts are directed at rapid global market penetration
to establish Twister as the worldwide standard for conducting e-business
operations. Brokat intends to use its 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.
Brokat relies on a strategy of reference marketing to develop new clients.
When entering into a market, its 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 Brokat
concentrates on presenting industry specific applications to key participants
in the relevant industry sector. Brokat emphasizes flexible access to the
entire range of electronic communication channels at a reasonable cost. Once
key participants and projects are acquired, Brokat uses a more comprehensive
marketing campaign to attract other customers using its existing clients as
reference.
In its broader marketing campaigns, Brokat focuses on two levels. First, it
emphasizes the immediate and the mostly technological benefits of using its
platform and applications for the speedy deployment of mission-critical e-
business solutions. Second, it focuses, 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 its products have the potential to offer.
To broaden our brand name recognition, Brokat uses a variety of channels,
including advertising in print media, participation in key industry trade shows
and our web site. It targets 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.
Brokat has benefitted from this trend in Germany and intends 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,
Brokat is 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. Brokat expects 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, Brokat has focused primarily on the United
States, where it used the acquisition of a cash management software developer
as the vehicle for its entrance into the U.S. e-services market. Brokat intends
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, it
expects a growing demand for further improvement of the payment infrastructure.
Consequently, Brokat expects that the number of businesses using our XPAY
product will also increase.
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Insurance industry. Brokat believes 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, Brokat expects that the demand for its products in this
industry sector will increase.
Distribution and Sales
Brokat distributes its products in three regions: Europe, Middle East and
Africa, or EMEA; the Asia-Pacific region; and North America. Within each
region, Brokat has established sales offices or subsidiaries. On February 1,
2000, its sales organization included 59 sales representatives, managers and
pre-sale support staff. Brokat's 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, Brokat also uses distribution
partners to market and sell its products. Brokat's distribution partner
programs are managed from its headquarters in Stuttgart as well as through its
local sales operations. Brokat's distribution partners include:
. Twister System Integrators and Solution Providers, who offer to Brokat's
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.
Brokat is attempting to develop additional partner programs that will
attract opinion leaders, such as consulting or technology companies, to broaden
the industry support for its platform.
Brokat will seek to create a network of component suppliers to develop
industry- and region-specific software applications for Twister. Its
distribution partner programs are also directed at establishing lasting
business relationships with suppliers of products complementary to Twister.
Brokat acts as a reseller for the products of its distribution partners and it
receives a selling commission for its reselling activities. This commission is
based on the sales volume generated by Brokat.
Brokat's 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
Brokat research and development department consists of:
. the Twister division--which focuses on the further development of
Twister; and
. the commerce systems and financial systems divisions--which both focus on
the development of software applications for specific targeted industry
sectors.
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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. Brokat's total expenses for research and
development were to approximately:
. approximately DM 34.2 million for the twelve months ended June 30, 2000;
. approximately DM 8.7 million for the twelve months ended June 30, 1999;
. approximately DM 4.7 million for the twelve months ended June 30, 1998;
and
. approximately DM 1.5 million for the twelve months ended June 30, 1997.
As of June 30, 2000, Brokat's research and development department employed
257 staff members. To ensure the compliance of Brokat's products with market
requirements, the department closely cooperates with its professional services
staff as well as with the product marketing unit of its marketing department.
Brokat generally seeks to integrate innovations developed within the framework
of client projects into its 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
Brokat's success and ability to compete depend to a significant degree on
its proprietary technology. Brokat relies primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights and information. This
affords Brokat only limited protection. It is Brokat's policy to not allow a
third party access to its confidential intellectual property. Despite its
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy different aspects of its products or obtain and use information that
Brokat treats as proprietary.
Policing unauthorized use of its products is difficult, and while Brokat is
unable to determine the extent to which piracy of its products exists, software
piracy can be expected to be a persistent problem. The laws of some foreign
countries also do not protect its proprietary rights to the same extent as the
laws of the United States or the laws of the Federal Republic of Germany.
Brokat cannot assure you that its means of protecting its proprietary rights
will be adequate or that its competitors will not independently develop similar
technology.
Generally, it is Brokat's policy to enter into non-disclosure agreements
with its 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, Brokat cannot assure you that the non-
disclosure agreements would survive a legal challenge to their validity or
provide significant protection. Brokat has not generally executed post-
contractual non-competition agreements with employees, since Brokat believes
that this type of contractual restraint would hinder its recruiting efforts.
Patents
Brokat received a patent covering its core Twister technology from the
German Patent Office on May 31, 1999. Brokat 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, Brokat filed a patent application in Germany for its
methodology for digital authentication of messages sent over telephone
networks, or SMS banking. The application is pending. On March 23, 2000, the
German Patent and Trademark Office registered Brokat's utility model to protect
its technology for the process of validating e-business transactions.
Brokat cannot assure you that its patent would survive a legal challenge to
its validity or provide significant protection. Also, Brokat cannot assure you
that it will be issued patents under any of its pending applications.
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Trademarks
In Germany, Brokat has 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, XPAY, meSign and mSign, each a word-trademark;
. the BROKAT logo, 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 each of the meSign and mSign word/device trademark with the EU Office
for Harmonization in the Internal Market.
Licenses
For the development and production of its products, Brokat uses 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 Brokat pays the agreed licensing fees and are not in
breach of any other contractual arrangements. Encryption algorithms may also be
drawn from other sources.
Brokat generally does not provide exclusive licenses to use its products.
Brokat issues 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
Brokat has 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 Brokat
to use the Twister trademark in its 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. Brokat and Abode
have negotiated and executed a coexistence agreement.
Following objections from France Telecom and co-ex GemPlus, our X.PRESSO
trademark application with the competent European Union authority has been
temporarily suspended. Brokat is now a coexistence agreement.
Except as discussed above, Brokat is not aware that any of its products
infringe upon the proprietary rights of third parties. Brokat cannot assure
you, however, that third parties will not claim infringement by us related to
current or future products. Brokat expects that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in its 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
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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 it or at all, which could have a material
adverse effect upon its business, financial condition and results of
operations.
Competition
The market for Brokat's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Brokat's products are targeted at the
emerging market for e-business software and Brokat's competitors are diverse
and offer a variety of solutions directed at various segments of the e-business
market. Brokat distinguishes itself from the majority of its competitors by a
combination of factors, which include the simplicity, security, reliability,
scalability and openness of its products. However, Brokat expects the
competition in the market for e-business software from existing and new
software developers to grow further.
Brokat competes with suppliers of e-business software platforms and software
applications. Brokat's potential clients may also develop their own e-business
solutions.
Brokat's 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 Brokat's market share of approximately 40%, Brokat is 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. Brokat's 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.
Brokat also expects 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 Brokat's business,
financial condition and operating results. Brokat cannot assure you that Brokat
will be able to compete successfully against current and future competitors or
that competitive pressures faced by us will not materially and adversely affect
Brokat's business, financial condition and results of operations.
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Employees
Brokat 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 As of
-------------- December 31, 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 Brokat's 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
Brokat does not own any real estate, but leases all of its facilities.
Brokat's principal administrative, research and development, marketing and
sales facilities total approximately 8,245 square meters and are located in one
building in Stuttgart, Germany. Brokat also has 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 near Leipzig, Paderborn, Munich and Cologne, 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
Brokat is not a party to any legal proceedings that it expects to have a
material adverse effect on its business, operating results and financial
condition.
DESCRIPTION OF THE MERGER SUBSIDIARY
The merger subsidiary is a company formed on behalf and at the direction of
Brokat. It was incorporated in Delaware solely to participate in the merger and
has never conducted any other business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF BROKAT
Brokat's financial statements and, except as otherwise indicated, all
financial information about Brokat in this proxy statement/prospectus were
prepared in accordance with U.S. GAAP.
Overview
Brokat's Business
Brokat is a leading provider of software for the rapidly expanding e-banking
market and the leading provider of this kind of software to European banks.
Brokat designs, develops, markets and supports e-business software. Brokat has
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. Brokat intends to further take advantage of its leading
position in the European e-banking sector to expand its presence in other
geographic areas and in other e-business sectors, with the long-term objective
of establishing its core product as the industry standard platform for the
delivery of e-business services.
In May 1999, Brokat 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 Brokat 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.
Brokat's Revenue
Brokat's revenue is derived primarily from four sources:
Software licensing fees. Brokat derives licensing fees from the licensing of
the software it develops. Fees from the sale of licenses are recognized upon
delivery of the software to Brokat's customer if collection of the resulting
receivable is probable, an agreement has been signed, the fee is fixed or
determinable and Brokat has no significant obligations remaining. Revenue is
recognized over the duration of the project when Brokat is obligated to provide
a significant amount of professional services to customize the software to meet
its customer's requirements.
Professional service fees. Brokat derives 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. Brokat derives 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. Brokat derives 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 Brokat's Business
As is the case with many other software companies, there is a seasonal
variability to Brokat's business relating to the receipt of orders. Orders
generally increase in the fourth quarter of each calendar year, as
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business customers attempt to make full use of their software budgets before
year end. The CeBIT information 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
Brokat's revenue recognition policies, this seasonal variability in orders has
not resulted in any significant seasonal variability in revenue.
Brokat's Stock Option Plans
Under Brokat's 1998 and 1999 stock option plans for employees, Brokat has
issued options to acquire up to an aggregate of approximately 2.4 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," Brokat
recognized in its 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 Brokat's shares increases during an accounting period and decreases as the
market price declines. Brokat's consolidated balance sheets also reflect a
reserve in its deferred compensation account and a credit to additional paid-in
capital in respect of these options.
On May 26, 2000, Brokat's shareholders approved the establishment of an
employee participation program similar to its stock option programs with
convertible bonds of up to euro 2.6 million and a corresponding conditional
capital increase to provide a sufficient number of shares for Brokat's
employees who exercise their conversion rights under this program.
tbg Investment
By contract dated September 19, 1997, Technolgie-Beteiligungs-Gesellschaft
mbH, also known as tbg, invested DM 7 million in a silent participation in
Brokat. 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 Brokat. However,
the agreement did not allow for tbg to participate proportionately in any gains
of Brokat. Instead, tbg had the right to convert its silent participation into
equity interests in Brokat with a value of DM 7 million only in the event that
Brokat completes an initial public offering of its common stock or if a change
in control in Brokat, as defined, occurs. Accordingly, as tbg had the right to
convert its interests into equity at the same amount of its original
investments, during all periods presented, Brokat did not recognize any loss
participations in relation to this silent participation.
As a result of Brokat's initial public offering of common shares, tbg
exercised its right to convert its silent participation into equity of Brokat
and was issued common shares with a value of DM 7 million 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, Brokat's shareholders approved a change in its fiscal year
from a fiscal year ended June 30 to a calendar fiscal year ended December 31,
1999. For the transition period in 1999, its fiscal year began on July 1, 1999
and ended on December 31, 1999.
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Results of Operations
The following table presents for the periods indicated income and expense
items as a percentage of total revenue:
<TABLE>
<CAPTION>
Six
Six Months
Months Ended Fiscal Years
Ended December Ended
June 30, 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)% (80)% (100)% (14)% (29)% (76)%
</TABLE>
--------
* Brokat did not categorize its 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.
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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 Brokat's 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 as to
which we are not obligated to perform significant professional services.
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
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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. Brokat anticipates 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 Brokat's customers as direct sales of
Brokat's 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
Brokat's products and services in Great Britain and Scandinavia accounted for
24% of Brokat's 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 Brokat's
professional services and customer support departments, the costs for the use
of outside programmers and costs of purchasing third party products that Brokat
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 Brokat expects continued growth in indirect sales, it anticipates that
cost of sales will remain a significant expense as Brokat enters new markets
which will require it to use the professional skills of its 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 Brokat's sales and marketing department, costs of
travel and trade shows, and promotional and advertising costs, as well as the
costs of expanding our its 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 Brokat's continuing efforts to expand its sales and marketing capabilities
and activities. The smaller increase in selling expenses relative to the
increase in its 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 Brokat's sales and marketing department. Selling expenses,
particularly advertising and promotional costs, are expected to continue to
increase in line with its strategy to establish our brand name on a global
basis.
Research and development expenses. Research and development expenses
primarily consist of personnel costs in Brokat's 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 Brokat continues to reduce
duplicative administrative functions through the consolidation of MeTechnology
and TST into the existing Brokat organization, Brokat anticipates 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 Brokat's sources of funding from
the proceeds of its 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
Brokat's 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. Brokat's earnings before interest, tax,
depreciation, amortization and non-cash charges related to its 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
Brokat's 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 Brokat's software
to resellers reflecting the greater standardization of its 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 Brokat's 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 Brokat's customers entering into maintenance agreements with
it and in the absolute number of its 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 Brokat's 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 Brokat's 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 Brokat's business internationally, including the hiring of
administrative staff, primarily in finance and human resources, and the
implementation of new software for its 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, Brokat incurred net
interest income of DM 0.6 million, which represented a decrease in its 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 Brokat's sources of funding from
interest-bearing debt of silent partners to the proceeds of its 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
Brokat's 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 Brokat's software
products and services for e-banking as well as its 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, Brokat 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, Brokat 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
its revenue during the year ended June 30, 1997 and prior periods was derived
from the provision of professional services as Brokat 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 Brokat's increased international marketing and sales efforts,
including the opening of regional offices, that increased its 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, Brokat developed a range of more standardized software
products which it then was able to sell to its 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 Brokat's 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 Brokat's 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 Brokat's business activities and the corresponding higher funding
needs. In both periods its 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
Brokat's 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 its incorporation in September 1994, Brokat has met its 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. Brokat has not been profitable
since the fiscal year ended June 30, 1996 and has 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.
Brokat expects to continue to generate losses for the foreseeable future as
Brokat continues to pursue its strategy to establish our Twister platform as
the industry standard for the delivery of e-business services. Brokat
anticipates that its current cash and cash equivalents, plus the net proceeds
from the sale of the notes, will be sufficient to meet its cash requirements
for at least the next twelve months. However, Brokat's 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, Brokat's
EBITDA and adjusted EBITDA were negative. Moreover, Brokat 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, respectively.
If Brokat continues to operate at a net loss and experience negative cash
flow, Brokat may need to incur additional debt or obtain equity financing,
which may not be available to it on a timely basis, at acceptable terms or at
all. If Brokat cannot obtain acceptable financing, it may be forced to
discontinue its development programs or its business expansion.
Current Assets and Liabilities
As of June 30, 2000, Brokat 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 Brokat 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 Brokat 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 Brokat 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
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based on market conditions. The facility contains customary financial and
operational covenants. Brokat may prepay loans at month-end; and
. an unsecured revolving bank credit facility under which Brokat 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.
Brokat's ability to incur indebtedness under these arrangements or
otherwise is severely constrained by the terms of the indenture governing its
outstanding 11 1/2% senior notes due 2010.
Brokat also has outstanding obligations owed to the former shareholders 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 Brokat's
ordinary 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,
Brokat realized net cash proceeds of DM 83.0 million from an initial public
offering of its shares. In the year ended June 30, 1998, Brokat raised DM 10.0
million through the issuance of equity and DM 11.0 million through the
investment of TBG.
In May 2000, Brokat received cash proceeds of DM 19.6 million from an
investment in its equity shares by a subsidiary of Intel Corporation.
Expansion Activities
Since 1998, Brokat has invested approximately DM 163.8 million in its
expansion. Brokat used about 76% of this investment to finance its internal
growth and 20% for the external growth through the acquisition of TST. Brokat
expects that it will continue to invest in our business in similar amounts and
proportions, but since Brokat, like other companies operating in its market,
requires high degree of flexibility, these amounts and proportions may change.
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Quantitative and Qualitative Disclosures About Market Risk
Brokat does not use market-sensitive instruments, such as derivative
financial instruments. Brokat's primary market risk is in the area of exchange
rate fluctuations.
Brokat maintains its 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. Brokat does not consider its exposure to
interest rate and exchange rate fluctuation risks to be material to its
deposits and investments.
Interest Rate and Exchange Rate Risk
Brokat has financial instruments that are subject to interest rate risk,
principally short-term investments and debt obligations. Brokat has not
experienced material gains or losses due to interest rate changes. Brokat does
not consider its interest rate risk to be material to its short-term
investments and debt obligations.
Foreign Currency Exchange Risk
A significant portion of Brokat's revenues and expenses are denominated in
currencies other than the Deutsche mark and euro. Approximately 20% of its
revenues for the fiscal year ended June 30, 1999 and 38% of Brokat's revenues
for the six months ended December 31, 1999 and 30% of its 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
Brokat's products and services in the United Kingdom accounted for 12% of its
revenue, the United States accounted for 13%, Asia-Pacific region accounted for
3%, and Switzerland accounted for 2% of its revenue. The majority of Brokat's
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
Brokat prepared a sensitivity analysis to assess the impact of exchange rate
fluctuations on its 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, Brokat estimates that a 10% adverse change in the rates
of exchange of Deutsche marks against the basket of currencies comprising its
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. Brokat's 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.
Brokat has not entered into any derivative hedging instruments to reduce the
risk of exchange rate fluctuations.
Accounting for Income Taxes
Brokat utilizes 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
Brokat 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 its history of operating
losses, the
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probability that Brokat can make use of its loss-carryforwards in the future
must be regarded as less than 50%, so Brokat booked valuation allowances on the
deferred tax asset when the deferred tax assets equal the deferred tax
liabilities.
Recent Accounting Pronouncements
Accounting for Derivatives
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. Brokat are assessing the potential
effects of this new standard. Based on its current and expected levels of use
of derivative instruments, the adoption of this new standard is not expected to
have a material effect on Brokat's financial condition or results of
operations.
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MANAGEMENT
In compliance with German law governing a stock corporation, Brokat has 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 Brokat's
interests and those of its 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 Brokat's 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, 35 Chief executive officer and
2003 management board spokesperson
Dr. Boris Anderer....... 1994 February 28, 41 Management board co-
2003 spokesperson
Mr. Michael Janssen..... 1996 February 28, 34 Management board member and
2003 chief financial officer
Mr. Achim 1994 34 Management board member and
Schlumpberger.......... February 28, head of Twister Development
2003 Division
Mr. Michael Schumacher.. 1994 38 Management board member and
February 28, head of Financial Systems
2003 Division
Mr. Angelo Maestrini.... 1999 October 1, 39 Management board member and
2003 chief operating officer
</TABLE>
The composition of the management board will remain the same immediately
following the Blaze merger.
Stefan Roever is Brokat's chief executive officer and spokesperson of the
management board. Mr. Roever is in charge of the implementation of Brokat's
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
Brokat's 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 fur 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
Brokat's 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 Brokat's 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 Brokat's day-to-day
business according to the Stock Corporation Act, Brokat's 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 Brokat. If more than one management board member is
appointed, then Brokat 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, Brokat's 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, and in no event, less than once
every quarter, to the supervisory board. However, there is information on the
status of Brokat's 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 Brokat's 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.
Brokat's management board consists of six members. The members of the
management board can be contacted at Brokat's 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, May 2002 60 Chairman Managing director,
1998 Technologieholding VC GmbH
Munich
Dr. Hermann Wundt....... April 1, May 2002 56 Deputy Attorney at law, Tax
1998 Chairman advisor, Accountant
Mr. Ernst G. Mayer...... April 1, May 2002 46 Member Managing director,
1998 Technologie Beteiligungs-
Gesellschaft mbH
Prof. Dr. Wolfgang
Koenig................. May 5, 1998 May 2002 48 Member Professor of business
administration, Universitat
Frankfurt am Main
Ms. Angelika Pohlenz.... April 1, May 2002 51 Member Secretary General,
1998 International Chamber of
Commerce
Dr. Peter Page.......... November 18, November 60 Member Consultant, former
1999 2003 management board member of
Software AG and Siemens AG
</TABLE>
The principal function of Brokat's 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 duly held
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. 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.
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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 the supervisory board can be contacted through Brokat's
offices in Stuttgart.
Management and employee incentive arrangements
Compensation
The aggregate amount of compensation paid by us to the members of Brokat's
management board in the six months ended December 31, 1999 amounted to
approximately DM 770,000. 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
remuneration. The May 7, 1998 shareholders' meeting passed a resolution to fix
the aggregate remuneration of the supervisory board at DM 70,000. 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 Brokat's current supervisory board for the six months
ended December 31, 1999 amounted to DM 35,000.
Annual bonus scheme
All of the members of the management board and all of Brokat's employees
receive part of their salary in bonuses tied to revenue or other achievement
targets.
Employee stock option plans
Brokat has 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 Brokat's success by providing employees the opportunity to acquire
common stock.
On September 16, 1998, under its 1998 stock option plan, Brokat has issued
to its employees options to acquire approximately 1.2 million shares of its
common stock. The option rights entitle the bearer to purchase its 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 its 1999 stock option plan, Brokat has issued to
its employees options to acquire approximately 1.2 million shares of its 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 Brokat's stock--based on a comparison of 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.
Brokat's principal investors have issued 200,460 option rights for the
purchase of Brokat's shares from their private holdings to several senior
employees of Brokat. These rights entitle the bearer to purchase shares
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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.
In the course of the fiscal year ended June 30, 1999, the employees of one
of its subsidiaries were given options to acquire Brokat's shares. These
options were not granted by Brokat, but pro rata by Brokat's shareholders using
their own shares.
On May 26, 2000, Brokat's shareholders approved the establishment of an
employee participation program similar to Brokat's 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 its
employees who exercise their conversion rights under this program.
Former management shareholders of MeTechnology AG have issued options for a
portion of the Brokat shares received in consideration of all of their shares
of MeTechnology AG. These options were issued to the present employees of a
former subsidiary of MeTechnology AG (now a subsidiary of Brokat) on July 26,
1999 per share, and entitle the holders to purchase up to 135,150 of Brokat's
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 were exercisable.
The options are scheduled to become exercisable between November 2000 and June
2004.
Gemstone and Blaze options
In connection with the GemStone and Blaze mergers, outstanding options and
warrants to purchase shares of the common stock of the acquired companies will
be converted into options to acquire ordinary shares of Brokat, subject to
adjustment for the exchange ratios applicable to the mergers.
As of August 14, 2000, GemStone had granted options to purchase its common
stock under two separate option plans. Under GemStone's 1992 option plan, there
were outstanding options to purchase 634,000 shares of common stock at a
weighted average exercise price of $2.16 per share. Options under the 1992 plan
expire ten years from the date of grant, from September 10, 2002 through
October 20, 2007. Under GemStone's 2000 stock option plan, there were
outstanding options to purchase 793,750 shares of its common stock at a
weighted average exercise price of $8.00. Options under the 2000 plan expire
ten years from the date of grant, from January 31, 2010 through May 15, 2010.
As of August 14, 2000, Blaze had granted options to purchase its common
stock under two separate option plans. Under Blaze's 1996 option plan, there
were outstanding options to purchase 4,598,425 shares of common stock at a
weighted average exercise price of $1.16 per share. Options under the 1996 plan
expire ten years from the date of grant. Under Blaze's 2000 stock option plan,
there were outstanding options to purchase 670,233 shares of its common stock
at a weighted average exercise price of $10.48. Options under the 2000 plan
expire ten years from the date of grant. As of August 14, 2000, Blaze had an
outstanding warrant to purchase 1,005 shares of common stock at an exercise
price of $5.60. This warrant expires on August 14, 2007.
Following the GemStone and Blaze mergers, Brokat currently intends to issue
additional options to purchase approximately 626,000 ordinary shares of Brokat
to employees and officers of Blaze and GemStone.
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MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS OF BROKAT
License agreement with Fernbach Software S. A.
Effective December 30, 1999, Brokat entered into a license agreement with
Fernbach Software S.A. 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 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 Brokat's acquisition of TST, Brokat 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, Brokat 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 Brokat's 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 392,600;
. for the six months ended December 31, 1999, DM 251,000;
. for the year ended June 30, 1999 DM 301,000; and
. for the year ended June 30, 1998 DM 2,000;
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 Brokat. The managing partner of RWT is
the deputy chairman of Brokat's supervisory board, Dr. Hermann Wundt. Brokat
has not paid any charges for services to RWT for the three months ended June
30, 2000. Charges for prior services by RWT to Brokat were:
. for the six months ended December 31, 1999, DM 53,000;
. for the year ended June 30, 1999, DM 351,000;
. for the year ended June 30, 1998, DM 62,000; and
. for the year ended June 30, 1997, DM 88,000.
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<PAGE>
Brokat's management believes that these related party transactions were
under terms no less favorable to Brokat than those arranged with other third
parties because:
. Brokat obtained Fernbach licenses under the terms of their standard
agreements with standard discounts;
. Brokat 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 Brokat based on
their standard rates.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Brokat 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 30,
2000 (following the GemStone merger). Shares issued and outstanding have no par
value. The portion of the share capital attributable to each share is euro
1.00.
Brokat's ordinary shares trade on the Neuer Markt 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 Brokat's ordinary shares for each person who
owns more than 10% of Brokat's ordinary shares; and for members of Brokat's
management board as a group. Apart from the persons listed below, Brokat is not
aware of any person holding directly or indirectly 5% or more of Brokat's
ordinary shares.
<TABLE>
<CAPTION>
Percent
Amount 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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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF BLAZE
The following table sets forth certain information regarding the beneficial
ownership of Blaze's common stock by (i) each person or entity who is known by
Blaze to own beneficially 5% or more of Blaze's outstanding common stock; (ii)
each member of Blaze's board of directors; (iii) each of the named executive
officers (as defined in Item 402(a)(3) of Regulation S-K); and (iv) all current
directors and executive officers of Blaze as a group. All information contained
in the table below is based on beneficial ownership as of August 14, 2000.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------
Percentage
Beneficial Owner Number Ownership
---------------- ------ --------------
<S> <C> <C>
Mark J. DeNino(1)................................. 4,791,161 20.6%
Funds Affiliated with TL Ventures
435 Devon Park Drive
Building 700
Wayne, PA 19087
William Harding(2)................................ 3,451,168 14.9%
Funds Affiliated with Morgan Stanley Dean Witter
Venture Partners
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Funds Affiliated with Alta Partners(3)............ 1,530,927 6.6%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Funds Affiliated with Sofinnova Ventures(4)....... 1,420,202 6.1%
140 Geary Blvd., 10th Floor
San Francisco, CA 94108
Funds Managed by or Affiliated with Burr, Egan,
Deleage & Company(5)............................. 1,168,860 5.0%
One Post Office Suite
Suite 3800
Boston, MA 02109
Thomas F. Kelly(6)................................ 300,000 1.3%
Gary Shroyer(7)................................... 194,501 *
Eric Knitzer(8)................................... 39,500 *
Joseph Masarich(9)................................ 1,500 *
William Seawick(10)............................... 225,000 *
Charles M. Boesenberg(11)......................... 39,006 *
L. George Klaus(12)............................... 53,011 *
Ken Goldman(13)................................... 32,003 *
All executive officers and current directors as a
group (10 persons)(14)........................... 9,126,850 39.3%
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 125,789 shares held by TL Ventures III Interfund L.P., 3,852,380
shares held by TL Ventures III L.P. and 806,392 shares held by TL Ventures
III Offshore L.P. Also includes 6,600 shares held by Mr. DeNino, one of
our directors and the general partner of TL Ventures. Mr. DeNino disclaims
beneficial ownership of the shares held by these funds except to the
extent of his pecuniary interest therein.
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(2) Includes 569,902 shares held by Morgan Stanley Venture Fund II, C.V.,
2,287,565 shares held by Morgan Stanley Venture Capital Fund II, LP, and
593,701 shares held by Morgan Stanley Venture Investors LP. Dr. Harding,
one of our directors, is a general partner of these funds. Dr. Harding
disclaims beneficial ownership of the shares held by these funds except to
the extent of his pecuniary interest therein.
(3) Includes 1,493,849 shares held by Alta California Partners L.P. and 37,077
shares held by Alta Embarcadero Partners LLC.
(4) Includes 854,978 shares by C.V. Sofinnova Ventures, 280,112 shares held by
Sofinnova Capital III FCPR, 272,409 shares held by Sofinnova Venture
Partners IV, L.P. and 7,703 shares held by Sofinnova Venture Affiliates
IV. Also includes 5,000 shares held by Mr. Alain Azan, one of our former
directors and the general partner of Sofinnova Ventures. Mr. Azan
disclaims beneficial ownership of the shares held by these funds except to
the extent of his pecuniary interest therein.
(5) Includes 988,396 shares held by Alta IV L.P. ("Alta") 180,466 shares held
by C.V. Sofinnova Partners Five ("Sofinnova" and together with Alta, the
"BEDFunds"). Burr, Egan, Deleage & Co. directly or indirectly provides
investment advisory services to Alta IV Limited Partnership and C.V.
Sofinnova Partners Five. The respective general partners of these funds
exercise sole voting and investment power in respect to the shares owned
by such funds. The principals of Burr, Egan, Deleage & Co. are general
partners of Alta IV Management Partners, L.P. (which is a general partner
of Alta IV Limited Partnership). As general partners of the fund, they may
be deemed to share voting and investment powers for the shares held by the
fund. Burr, Egan, Deleage & Co. serves as an advisor to C.V. Sofinnova
Partners Five. The principals of Burr, Egan, Deleage & Co. disclaim
beneficial ownership of the shares held by these funds except to the
extent of their pecuniary interest therein.
(6) As of August 14, 2000, Mr. Kelly had exercised options to purchase 300,000
shares of common stock. Mr. Kelly holds exercisable options to purchase
1,168,376 shares of common stock. Of the shares represented by these
options and the shares issued to Mr. Kelly upon the exercise of his
options, 784,188 shares are fully vested.
(7) As of August 14, 2000, Mr. Shroyer had exercised options to purchase
194,501 shares of common stock, of which 32,102 shares are subject to a
repurchase option held by us. Mr. Shroyer holds exercisable options to
purchase 140,921 shares of common stock. Of the shares represented by
these options and the shares issued to Mr. Shroyer upon the exercise of
his options, 162,399 shares are fully vested.
(8) As of August 14, 2000, Mr. Kintzer had exercised options to purchase
39,500 shares of common stock. Mr. Kintzer holds exercisable options to
purchase 395,139 shares of common stock. Of the shares represented by
these options and the shares issued to Mr. Kintzer upon the exercise of
his options, 238,175 shares are fully vested.
(9) All shares are held by Mr. Masarich's sons. As of August 14, 2000, Mr.
Masarich holds exercisable options to purchase 431,771 shares of common
stock. Of the shares represented by these options, 116,938 shares are
fully vested.
(10) As of August 14, 2000, Mr. Seawick had exercised options to purchase
225,000 shares of common stock, all of which are subject to a repurchase
option held by us. Mr. Seawick holds exercisable options to purchase
305,422 shares of common stock. Of the shares represented by these
options and the shares issued to Mr. Seawick upon the exercise of his
options, 95,444 shares are fully vested.
(11) Mr. Boesenberg had exercised options to purchase 25,000 shares of common
stock, all of which will vest upon the consummation of the merger.
(12) Includes 21,008 shares held by the L. George Klaus Trust and 7,003 shares
held by Julie Tafel Klaus, Mr. Klaus' spouse. Mr. Klaus also had
exercised options to purchase 25,000 shares of common stock, all of which
will vest upon the consummation of the merger.
(13) Mr. Goldman also had exercised options to purchase 25,000 shares of
common stock, all of which will vest upon the consummation of the merger.
(14) Includes 75,000 shares that will vest upon the consummation of the
merger.
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<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF BLAZE
The following table presents some of Blaze's selected historical
consolidated financial data derived from Blaze's historical consolidated
financial statements for the periods indicated.
The summary historical financial data as of March 31, 1999 and 2000, and for
the years ended March 31, 1998, 1999 and 2000 were derived from the audited
consolidated financial statements of Blaze for those periods. These
consolidated financial statements are included elsewhere in this proxy
statement/prospectus.
The summary historical financial data as of March 31, 1996, 1997 and 1998,
and for the years ended March 31, 1996 and 1997 were derived from the audited
consolidated financial statements of Blaze for those periods. These
consolidated financial statements are not included in this proxy
statement/prospectus.
The selected historical financial data for the three months ended June 30,
1999 and 2000 were derived from Blaze's unaudited financial statements and, in
Blaze's opinion, reflect all adjustments necessary to present fairly the
results of operations for the periods presented.
Blaze's consolidated financial statements have been prepared in accordance
with U.S. GAAP.
You should carefully review Blaze's consolidated financial statements
included elsewhere in this proxy statement/prospectus and the information
provided in "Unaudited Pro Forma Consolidated Financial Information," "Selected
Historical Consolidated Financial Data of Blaze" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Blaze."
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<PAGE>
Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended March 31, June 30,
-------------------------------------------- --------------------
1996 1997 1998 1999 2000 1999 2000
------- ------- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data
Net revenues:
Product licenses...... $ -- $ 3,296 $ 3,559 $ 3,722 $ 8,486 $ 1,394 $ 3,320
Services and
maintenance.......... -- 327 803 5,332 9,710 1,926 3,914
------- ------- ------- ------- -------- --------- ---------
Total revenues...... -- 3,623 4,362 9,054 18,196 3,320 7,324
------- ------- ------- ------- -------- --------- ---------
Cost of revenues:
Product licenses...... -- 180 74 40 67 10 10
Services and
maintenance.......... -- 463 512 2,892 6,808 1,187 3,194
------- ------- ------- ------- -------- --------- ---------
Total cost of
revenues........... -- 643 586 2,932 6,875 1,197 3,204
------- ------- ------- ------- -------- --------- ---------
Gross profit............ -- 2,980 3,776 6,122 11,321 2,123 4,030
------- ------- ------- ------- -------- --------- ---------
Operating expenses:
Research and
development.......... 1,138 1,370 1,938 3,843 5,079 1,260 1,902
Sales and marketing... 2,512 2,342 3,702 5,586 12,226 1,894 5,959
General and
administrative....... 1,026 957 1,106 2,205 3,785 638 1,838
Stock-based
compensation......... -- -- -- -- 16,400 -- 4,330
------- ------- ------- ------- -------- --------- ---------
Total operating
expenses........... 4,676 4,669 6,746 11,634 37,490 3,792 14,029
------- ------- ------- ------- -------- --------- ---------
Operating loss.......... (4,676) (1,689) (2,970) (5,512) (26,169) (1,669) (9,999)
------- ------- ------- ------- -------- --------- ---------
Net loss from continuing
operations............. $(5,748) $(2,723) $(3,631) $(5,848) $(26,424) $ (1,783) $ (8,983)
======= ======= ======= ======= ======== ========= =========
Basic and diluted loss
per share from
continuing operations.. $ (2.56) $ (3.56) $(37.37) $(19.15) $ (6.68) $ (0.71) $ (0.42)
======= ======= ======= ======= ======== ========= =========
Number of shares used in
calculation of basic
and diluted loss per
share.................. 2,246 920 125 371 5,781 2,211 21,864
</TABLE>
<TABLE>
<CAPTION>
March 31,
--------------------------------------------- As of June 30,
1996 1997 1998 1999 2000 2000
------ -------- -------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............ $1,117 $ 2,258 $ 6,591 $ 2,129 $69,293 $ 67,920
Working capital
(deficit).............. (1,519) (3,324) 628 (4,316) 63,018 65,504
Total assets............ 12,642 10,615 13,854 7,765 78,359 79,645
Capital lease
obligations, net of
current portion........ 646 236 91 19 256 211
Accumulated deficit..... (3,044) (11,800) (17,051) (22,651) (58,157) (67,262)
Mandatory redeemable
preferred stock........ 3,275 9,684 19,624 20,882 -- --
Total stockholders'
equity (deficit)....... (2,583) (10,795) (17,563) (24,203) 65,769 69,567
</TABLE>
The Company has never paid any cash dividends on its capital stock.
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<PAGE>
DESCRIPTION OF BLAZE
Overview
Blaze is a leading provider of software that enables companies to provide
their customers, employees, partners and suppliers with adaptable and
personalized interactions that are consistent across all company communications
channels, including the Internet, automated telephone response systems, manned
customer service centers, automated self-service electronic kiosks and others.
Computer programs can draw upon the rules encoded in our software to determine
the display of information and interaction with a user of a Web site, telephone
response system, automated self-service electronic kiosk, manned customer
service center, or other communication channel. Typical rules reflecting a
business's policies, practices and procedures may include setting special
pricing discounts for certain types of customers, checking for regulatory
compliance before allowing a transaction to complete, or offering different
promotional items to each user. Because these policies constitute a set of
rules under which the company has decided its business should be conducted,
they are commonly referred to as business rules.
Blaze Products
Blaze Advisor Solutions Suite. The Blaze Advisor Solutions Suite allows a
company's policies, practices, and procedures for conducting business to be
expressed in an intuitive language specifically designed to formalize these
rules in business terms. It contains a graphical development environment to
allow companies to build e-business personalization solutions with our
software. The Blaze Advisor Solutions Suite is designed to increase speed and
ease of development in enterprise-scale e-business applications. Putting
formalized policies into production use is facilitated by a powerful processing
component and runtime software that puts policy changes into effect without
interrupting business operations. Blaze Advisor stores business rules apart
from other programming instructions so companies can use the rules in multiple
business applications and communications channels. Blaze Advisor can be
deployed at Blaze's customers' locations or hosted by third parties, such as
application service providers.
The Blaze Advisor Solutions Suite consists of four products.
. Blaze Advisor Builder is a visual development environment for defining,
editing and testing business rules. Blaze Advisor Builder allows business
persons to write and modify rules in an intuitive business rule language
and to make use of graphical design and review tools to clearly model
business processes and components. Fill-in-the-blank forms and choice
lists are designed to simplify and speed the creation of standard
business rule elements. Blaze Advisor Builder is offered in English,
Chinese, French, German, Italian, Japanese, Korean, Portuguese, and
Spanish versions to facilitate application creation in worldwide markets.
. Blaze Advisor Rule Engine is the runtime environment for monitoring,
executing and optimizing the performance of rules created with Blaze
Advisor Builder. Blaze Advisor Rule Engine allows flexibility in choosing
what computers to run a system on, with rule processing performed on a
workstation server or mainframe. Blaze Advisor Rule Engine is designed to
intelligently determine rules that need to be examined under any set of
circumstances and to execute them in an efficient manner. Programming
interfaces allow integration of Blaze Advisor Rule Engine with custom-
built, data architectures or with third-party products.
. Blaze Advisor Rule Server provides ready-to-use support for deploying
personalized e-business applications powered by Blaze Advisor Builder and
processed by the Blaze Advisor Rule Engine. Blaze Advisor Rule Server
addresses the complex production issues involved in providing services to
many users at the same time in high availability e-business applications.
It offers simple interfaces to common means of transferring data,
automatically manages the replacement and updating of business rules, and
allows systems personnel to control the most efficient use of computing
resources.
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. Blaze Advisor Innovator was released in June 2000. Blaze Advisor
Innovator further simplifies the creation and modification of business
rules by non-technical business persons. It allows business managers to
bypass the Blaze Advisor Builder development environment by accessing
company-defined forms through any common Web browser. Business rules can
be presented in a customizable format, allowing users to inspect, change,
add or delete criteria that affect the interactive customer experience.
Blaze Expert. Blaze Expert is the predecessor to Blaze Advisor. It offers
business rules definition, modification and processing in C and C++
applications running on Windows or Unix platforms.
Blaze's Professional Services
Blaze's professional services organization plays an integral role in
implementing Blaze's software for its customers as well as supporting and
training our customers. Its worldwide professional services organization is
focused on ensuring the successful implementation and support of each customer.
Blaze has invested significantly in the deployment strategy, services and
support required to implement our technology. As of March 31, 2000, Blaze's
professional services organization in North America consisted of 47 employees.
Its professional services offerings include:
. Training. Blaze courses, developed and taught by Blaze's education
services personnel, offer hands-on, role-based training. Blaze provides
courses specifically designed for business analysts, beginning and
advanced developers, business rule writers and system architects. The
primary goal of these courses is to accelerate a customer's learning
process, so they can become proficient as quickly as possible. Blaze
offers courses at its offices as well as customer locations. It is also
able to customize training courses for customers with unique educational
requirements.
. Service and Support. Blaze's customers have direct access to us for
technical support. It provides direct-to-the-engineer telephone support
to ensure rapid response. Its support organization delivers the
responsive service required by business managers, information technology
professionals, system integration partners and independent software
vendors to support mission-critical systems. Blaze offers problem
resolution services via telephone, email, fax and the Internet. Its
technical support Web site, the Blaze Online Support System, offers
information on specific technical issues, interactive searches for
relevant cases, status updates on open technical support inquiries,
product documentation and release notes, tutorials and product use
examples, and other materials of use to our customers.
. Consulting Services. Blaze's professional services include system
architecture and design, business rule design, business rule writing,
software integration and project planning and management. Its
professional services are focused on providing its customers and partners
with the skills and experience necessary to take a project from planning
and development to implementation and support. Its professional services
group has developed substantial experience in the development and
integration of business rule technology. Customers benefit from the
practical development and implementation skills that Blaze has derived
from working on a wide range of applications across many industry
segments. Working closely with customers, its product specialists analyze
business problems and user requirements and transform business policies
into executable business rules in Blaze Advisor or Blaze Expert rule
syntax. Blaze generally charges for its professional services on a time
and materials basis and provides them worldwide through our offices in
the United States, Europe and Japan. Consulting engagements vary in
length according to customer requirements.
Blaze's Strategy
Key objectives of Blaze's strategy include:
. True One-to-One Interaction. Blaze seeks to develop products that enable
companies to provide the individualized responses necessary to maximize
benefits from customer interactions and to better attract and retain
customers.
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. Adaptability. Blaze promotes solutions that enable companies to quickly
change business rules while an e-business application is running,
enabling companies to respond to market conditions while providing
continuous service. Business persons without complex computer programming
skills can modify an e-business application's underlying business rules
without involvement by information technology professionals or
alterations to the application.
. Company Differentiation. Blaze seeks to achieve products' flexibility in
order to allow companies to express their corporate styles, practices,
and personalities by incorporating their business rules in e-business
applications. In this way, a company's identity can be communicated to
customers through Web sites, automated telephone response systems, manned
customer service centers, electronic kiosks, and other communication
channels, allowing companies to differentiate themselves from their
competitors.
. Enterprise Consistency. Blaze seeks to enable companies to consistently
present their corporate personality and style and apply their business
rules from transaction to transaction. A single set of business rules can
be accessed through Web sites, manned customer service centers, voice-
response systems, sales persons, and other customer contact points to
provide consistent customer interaction across an organization.
. High Performance and Scalability. Blaze's products are designed to
efficiently process increasingly complex and numerous business rules in
support of expanding e-business applications. Blaze's products can be
deployed on sophisticated computer architectures to provide high
throughput with heavy transaction volumes.
. Faster Time to Market. Blaze's products aim at allowing companies to
implement rules-based personalization systems quickly. Blaze also enable
software vendors to incorporate its personalization technology in their
e-commerce application software without investing significant time and
expense developing their own solutions.
Research and Development
Blaze's research and development organization is responsible for developing
new software products, product architectures, core technologies, product
testing, quality assurance and ensuring the compatibility of our products with
hardware platforms, and software platforms. In addition, this organization
supports pre-sale and customer support activities. Blaze's research and
development organization incorporates the input of our professional services,
technical support, and sales and marketing organizations to extend and enhance
product features and functionality.
As of March 31, 2000, Blaze's research and development organization in North
America consisted of 40 employees, including software engineers, quality
assurance engineers, and technical writers. Our total expenses for research and
development on continuing operations were $5.1 million for fiscal 2000, $3.8
million for fiscal 1999 and $1.9 million for fiscal 1998.
Sales and Marketing
Blaze sells its products primarily through our direct sales force to
corporate customers as well as to independent software vendors that incorporate
its products into their offerings. Blaze typically approaches both business
persons and information technology professionals with an integrated team from
its sales and professional services organizations. Blaze's sales cycles
typically include a demonstration and physical evaluation of our product
capabilities followed by one or more detailed technical reviews. As of March
31, 2000, our sales and marketing organization in North America consisted of 55
employees. Blaze's sales offices are located in San Jose, California; Denver,
Colorado; New York, New York; Charlotte, North Carolina; Dallas, Texas; Sidney,
Australia; Toronto, Canada; Bracknell, England; Paris, France; Frankfurt,
Germany; and Tokyo, Japan. Blaze intends to expand the number of sales and
service teams in major geographic markets in the United States.
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Blaze uses a variety of marketing programs to build market awareness of the
company, its brand name and its products, as well as to attract potential
customers. These programs include advertising, product and strategy updates
with industry analysts, public relations activities, direct mail programs,
seminars, trade shows, Web seminars and Web site marketing. Blaze is currently
developing co-marketing arrangements with independent software vendors and
system integrators to expand market awareness and generate sales leads. Blaze
expects to conduct telemarketing and telesales in the future. Blaze's marketing
organization also supports sales to prospective customers by producing
marketing materials such as brochures, data sheets, white papers, presentations
and demonstrations.
Customers
Blaze's customers are primarily large corporations and independent software
vendors. Blaze also sells products to system integrators including Unisys
Corporation, Ephorma AS, EDS, Andersen Consulting, PathTech Software Solutions
and IBM. Blaze has sold its products to customers in the technology, financial,
insurance, manufacturing, telecommunications, and healthcare industries and its
software is embedded in many leading e-business software applications. These
software applications include TrueComp from Callidus Software, Customer
Interaction System from Blue Martini Software, ActiveWorks from Active
Software, ChannelEdge from freefire.com, ZEOLogix Internet Enterprise
Applications from Buzzeo and WebSphere Commerce Suite from IBM.
Unisys Corporation accounted for 23% of total revenues in fiscal 2000 and
19% of total revenues in fiscal 1999. This was for products and services used
in support of its design and development work in connection with the deployment
at Norwest Financial Information Services.
Competition
The market for Blaze's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants.
Blaze competes primarily with:
. in-house development efforts by potential customers or partners;
. Web content developers engaged to develop custom software or to integrate
other application software into custom solutions; and
. vendors of application software directed at interactive commerce,
interactive financial services and enterprise business-logic automation,
such as Art Technology Group Inc., Computer Associates International,
Inc., ILOG, Inc., Net Perceptions, Inc., Trilogy Software, Inc. and
Versata Inc.
Many of Blaze's competitors have longer operating histories, significantly
greater financial, technical, marketing, or other resources, or greater name
recognition than we do. Blaze's competitors may be able to respond more quickly
to new or emerging opportunities, technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products than we can. Current and potential competitors may have more
extensive customer bases that could be leveraged, thereby gaining market share
to our detriment. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies, and offer more
attractive terms to purchasers. Moreover, certain of Blaze's indirect and
potential competitors, such as BroadVision, IBM, Oracle and SAP, may bundle
their products in a manner that may discourage users from purchasing products
offered by Blaze. Furthermore, independent software vendors that incorporate
Blaze's products into their offerings may be perceived by potential customers
as offering alternatives to the use of Blaze's products on a stand-alone basis.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition could seriously harm our ability to
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sell additional software, maintenance renewals, and services on terms favorable
to us. Competitive pressures could reduce Blaze's market share or require Blaze
to reduce the price of its products and services, any of which could harm
Blaze's business.
Blaze competes on the basis of certain factors, including:
. quality, depth and breadth of functionality offered;
. ease of application development;
. time required for application development;
. adherence to industry standards;
. reliability, scalability, maintainability, personalization and other
features;
. quality of services and customer support; and
. price.
Blaze believes that it presently competes favorably with respect to each of
these factors. However, the market for its products is still rapidly evolving
and it may not be able to compete successfully against current and potential
competitors.
Intellectual Property and Other Proprietary Rights
Blaze's future success depends in part on legal protection of its
technology. To protect its technology, Blaze relies on a combination of the
following methods, among others:
. technologies that limit installation and use of the software to
authorized companies and individuals;
. license agreements;
. employee and third-party nondisclosure agreements and confidentiality
procedures;
. copyright laws;
. trade secret laws;
. patent laws; and
. trademark laws.
Blaze's end-user licenses are designed to prohibit unauthorized use, copying
and disclosure of our software and technology. However, these provisions may be
unenforceable under the laws of some jurisdictions and foreign countries. In
addition, some of its licensed users may allow unauthorized users to install
our software, and if Blaze does not detect such use we could lose potential
license fees. Unauthorized third parties may be able to copy some portions of
its products or reverse engineer or obtain and use information and technology
that Blaze regards as proprietary. Third parties could also independently
develop competing technology or design around Blaze's technology. If Blaze is
unable to successfully detect infringement and enforce its rights in its
technology, Blaze may lose competitive position in the market. Blaze cannot
guarantee that its means of protecting its proprietary rights in the United
States or abroad will be adequate or that competing companies will not
independently develop similar technology. From time to time, Blaze may
encounter disputes over rights and obligations concerning intellectual
property. Blaze believes that its products do not infringe the intellectual
property rights of third parties. However, Blaze cannot guarantee that it will
prevail in all intellectual property disputes. Blaze has not conducted a search
for existing patents and other intellectual property registrations, and Blaze
cannot guarantee that its products do not infringe upon issued patents. In
addition, because patent applications in the United States are not publicly
disclosed until the patent is issued, applications may have been filed which
would relate to our products.
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Blaze indemnifies some of its customers against claims that its products
infringe upon the intellectual property rights of others. Blaze could incur
substantial costs in defending itself and its customers against infringement
claims. In the event of a claim of infringement, Blaze or its customers may be
required to obtain one or more licenses from third parties. Blaze cannot
guarantee that such licenses could be obtained from third parties at a
reasonable cost, or at all. Defense of any lawsuit or failure to obtain any
such required license would have a material adverse effect on Blaze's business.
Blaze has received one patent and has a variety of trademarks and it has
applied for additional trademark and patent protection. Blaze, Blaze Advisor,
Blaze Advisor Solutions Suite, Blaze Advisor Builder, Blaze Advisor Rule
Engine, Blaze Advisor Rule Server, Blaze Advisor Innovator, Blaze Expert, Blaze
Presenter, Beyond Personalization, Open Interface and the Blaze logo are
Blaze's trademarks. Blaze's pending trademark and patent applications may not
be allowed. Its patents and trademarks may not provide it a competitive
advantage. Competitors may successfully challenge the validity and scope of our
patents and trademarks.
Other service marks, trademarks and trade names referred to in this proxy
statement/prospectus are the property of their respective owners.
Employees
As of March 31, 2000, Blaze employed 199 people. Thirty employees worked
outside of North America. Of the full-time employees in North America, 27 are
in general and administrative functions, 55 in sales and marketing, 47 in
professional services, and 40 in research and development. From time to time
Blaze also employs independent contractors to support its professional
services, product development, sales, marketing and business development
organizations.
None of Blaze's employees are represented by a labor union and we have never
experienced an employee-related work stoppage. Management considers its
employee relations to be good.
Description of Properties
Blaze's headquarters are located in San Jose, California in leased office
space of approximately 41,000 square feet. Blaze also leases office space in
Irvine, California; Denver, Colorado; New York, New York; Philadelphia,
Pennsylvania; Charlotte, North Carolina; Dallas, Texas; Sydney, Australia;
Toronto, Canada; Bracknell, England; Paris, France; Frankfurt, Germany; and
Tokyo, Japan.
Legal Proceedings
On January 6, 2000, Patrick Perez, a founder and former director of Blaze,
notified Blaze of claims that he may assert against it. Mr. Perez contends that
his personal equity ownership of Blaze was diluted improperly in connection
with Blaze's Series AA preferred stock financing that closed in June and
September 1999. In particular, Mr. Perez 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 Mr. Perez had participated in the financing, he
would have been able to purchase up to 1,710,949 shares. Blaze believes that
Mr. Perez's assertions are without merit and intend to vigorously defend any
claims that Mr. Perez may bring against it. On March 17, 2000, Blaze filed a
complaint against Mr. Perez in the United States District Court for the
Northern District of California asking for declaratory relief regarding Mr.
Perez's allegations. Mr. Perez has filed an answer to Blaze's complaint. Should
any litigation be decided adversely to Blaze, it may be required to pay
substantial damages or issue additional shares to Mr. Perez. In addition, other
stockholders that did not participate in the financing may assert similar
claims against Blaze. If it is required to issue additional shares to Mr. Perez
or other stockholders, then-existing stockholders would experience dilution of
their ownership and Blaze would need to record an accounting charge in its
statement of operations equal to the fair market value of the shares at the
time of issuance.
From time to time, Blaze may become involved in litigation relating to
claims arising from its ordinary course of business. Blaze believes that there
are no claims or actions pending or threatened against it, the ultimate
disposition of which would have a material adverse effect on it.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BLAZE
Overview
Blaze was incorporated in California as Neuron Data, Inc. in 1985. It
introduced its first software product in December 1986, a rules-based expert
system development and execution tool known as Nexpert. Blaze introduced Open
Interface in 1991 to help customers design display forms and interactive
behavior for presenting and accepting information in computer applications,
known as user interfaces. Almost all of its product license revenues until
fiscal 1997 consisted of sales of these two C-language products, which are now
called Blaze Expert and Blaze Presenter. In June 1997, it released a new Java-
based product for the development and execution of business rules, known as
Blaze Advisor, which has become the core of the Blaze Advisor Solutions Suite.
Customer demand for C/C++ cross-platform user interface development software
has substantially diminished over the past two years as the use of Java and
HTML has increased. Therefore, Blaze significantly decreased research and
development activities related to its products used for designing user
interfaces. In December 1999, its board of directors decided to discontinue
operations related to its user interface design products, which included Blaze
Presenter. Operating results related to the discontinued operations have been
excluded from our continuing operations and reported separately as discontinued
operations. In July 2000, Blaze signed an agreement to sell its user interface
line of business effective May 1, 2000. The financial statements as of, and for
the three months ended, June 30, 2000 reflect the sale of the user interface
line of business. Blaze may receive future royalty payments for a period of two
years after the effective date of the agreement. No such royalty payments were
made in the three months ended June 30, 2000.
Blaze has focused its engineering and marketing efforts on the Blaze Advisor
Solutions Suite, first released in October 1999, which consists of Blaze
Advisor Builder, Blaze Advisor Rule Engine, and Blaze Advisor Rule Server. In
addition, in June 2000 it released Blaze Advisor Innovator and added it to the
Blaze Advisor Solutions Suite.
In August 1999 Blaze changed its name from Neuron Data, Inc. to Blaze
Software, Inc. and reincorporated from the state of California to the state of
Delaware in March 2000. It also completed an initial public offering of
4,000,000 shares of common stock in March 2000, raising net proceeds of
approximately $57 million. In April 2000, in connection with the initial public
offering, the underwriters purchased an additional 600,000 shares of common
stock resulting in additional net proceeds of approximately $9 million.
Blaze derives all of its revenues from continuing operations from the Blaze
Advisor Solutions Suite and Blaze Expert. It sells products to corporate
customers and to system integrators and distributors that install and provide
support for its products. Blaze also licenses its products to independent
software vendors that incorporate its technology into their offerings. Blaze
sells products that comprise the Blaze Advisor Solutions Suite in various
configurations. Pricing of Blaze's products is based on development and
deployment rights. Blaze Advisor Builder is priced at a fixed amount for each
licensed user. Blaze Advisor Rule Engine is priced on a sliding scale based on
the total number of processors used to support the deployed application. Blaze
Advisor Rule Server is priced as a percentage of the negotiated deployment fee
for Blaze Advisor Rule Engine. Deployment product revenues typically exceed
development product revenues for most customer sales. Pricing for independent
software vendors is usually offered at a base price for unlimited use of the
full Blaze Advisor Solutions Suite in developing a marketable product, plus a
negotiated royalty fee calculated as a percentage of the developed
application's sale price to the vendor's customers. Blaze expects cumulative
royalties over time to exceed the initial use fee for most independent software
vendor sales.
Product licenses revenues consist of license fees and royalty payments.
Blaze recognizes software license revenues upon shipment of a product if
collection of the resulting receivable is probable, an executed agreement or
purchase order has been received, the fee is fixed or determinable and
objective evidence of fair
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value exists to allocate revenue to any undelivered elements of the
arrangement. If an acceptance period is provided, Blaze recognizes revenue upon
the earlier of customer acceptance or the expiration of that period. For sales
made through distributors, Blaze recognizes revenue upon shipment 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
to us that a valid end-user for the product exists. 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.
Service and maintenance revenues consist primarily of professional services,
maintenance, support and training fees for the associated products. Blaze
generally recognizes revenues from maintenance contracts ratably over the term
of the contract. Blaze recognizes consulting and services revenues as the
training, implementation or consulting services are performed. If professional
or maintenance services are included in an arrangement that involves a license
agreement, amounts related to support or professional services are allocated
based upon objective evidence of fair value which is based on the price when
such elements are sold separately, or when not sold separately, the price
established by management having the relevant authority to do so.
Blaze markets its software and services primarily through its direct sales
organizations in the United States, Australia, Canada, France, Germany, Japan,
and the United Kingdom, and to a lesser extent through distributors, system
integrators and independent software vendors. Its future success will depend,
in part, on the successful development of international markets for its
products. In order to increase sales, Blaze needs to expand its direct sales
force by hiring additional salespersons, sales engineers and sales management
personnel and establish and maintain relationships with distributors, system
integrators, independent software vendors and other third parties.
Blaze's future success also depends on its continued investment in research
and development and the continued expansion of its sales, marketing and
professional services organization in order to build an infrastructure to
support its long-term growth strategy. As a result of this investment in its
infrastructure, Blaze has incurred significant net losses in each fiscal year
since fiscal 1996. It incurred net losses from continuing operations of $26.4
million in fiscal 2000, $5.8 million in fiscal 1999 and $3.6 million in fiscal
1998. It had an accumulated deficit of $58.2 million as of March 31, 2000.
Blaze expects to experience significant growth in its operating expenses for
the foreseeable future in order to grow its business. As a result, it
anticipates that operating expenses will constitute a significant use of its
cash resources and that it will continue to generate net losses for the
foreseeable future.
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Results of Operations
The following table presents certain financial data as a percentage of the
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended March Three Months
31, Ended June 30,
------------------------ -----------------
2000 1999 1998 2000 1999
------ ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data
Net revenues:
Product licenses............... 46.6% 41.1% 81.6% 45.9% 42.0%
Services and maintenance....... 53.4 58.9 18.4 54.1 58.0
------ ----- ------- ------- ------
Total revenues............... 100.0 100.0 100.0 100.0 100.0
------ ----- ------- ------- ------
Cost of revenues:
Product licenses............... 0.4 0.4 1.7 0.1 0.3
Services and maintenance....... 37.4 31.9 11.7 44.2 35.7
------ ----- ------- ------- ------
Total cost of revenues....... 37.8 32.3 13.4 44.3 36.0
------ ----- ------- ------- ------
Gross profit..................... 62.2 67.7 86.6 55.7 64.0
------ ----- ------- ------- ------
Operating expenses:
Research and development....... 27.9 42.4 44.4 26.3 38.0
Sales and marketing............ 67.2 61.7 84.9 82.4 57.0
General and administrative..... 20.8 24.4 25.3 25.4 19.2
Stock-based compensation....... 90.1 -- -- 59.8 --
------ ----- ------- ------- ------
Total operating expenses..... 206.0 128.5 154.6 193.9 114.2
------ ----- ------- ------- ------
Operating loss................... (143.8) (60.8) (68.0) (138.2) (50.2)
Interest expense, net............ (0.5) (2.8) (13.6) 14.1 (3.1)
------ ----- ------- ------- ------
Net loss from continuing
operations before income taxes.. (144.3) (63.6) (81.6) (124.1) (53.3)
Provision for income taxes....... (0.9) (1.0) (1.6) (0.1) (0.4)
------ ----- ------- ------- ------
Net loss from continuing
operations...................... (145.2) (64.6) (83.2) (124.2) (53.7)
Income (loss) from discontinued
user interface business......... 14.6 2.7 (49.8) (1.7) 19.6
------ ----- ------- ------- ------
Net loss......................... (130.6)% (61.9)% (133.0)% (125.9)% (34.1)%
====== ===== ======= ======= ======
</TABLE>
Three months ended June 30, 2000 and 1999
Total Revenues
Total revenues increased $3.9 million, or 118%, to $7.2 million for the
three months ended June 30, 2000 from $3.3 million for the comparable period in
1999. This increase was due to an increase in the number and average size of
sales of Blaze's products and services and maintenance generated. Total
revenues from sales to customers outside the Americas were $1.7 million, or
24%, of total revenues for the three months ended June 30, 2000 and $436,000,
or 13%, of total revenues for the three months ended June 30, 1999. Unisys
Corporation accounted for 13% of total revenues for the three months ended June
30, 2000 and 20% of total revenues for the three months ended June 30, 1999.
This was for products and services used in support of Unisys' design and
development work in connection with the deployment at Norwest Financial
Information Services.
Product Licenses. Product license revenues increased $1.9 million, or 138%,
to $3.3 million for the three months ended June 30, 2000 from $1.4 million for
the comparable period in 1999.
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Services and Maintenance. Services and maintenance revenues increased $2.0
million, or 103%, to $3.9 million for the three months ended June 30, 2000,
from $1.9 million for the comparable period in 1999.
Cost of Revenues
Product Licenses. Cost of product licenses consists of packaging,
documentation and associated shipping costs. Cost of product licenses was
unchanged for the three months ended June 30, 2000 from $10,000 for the
comparable period in 1999. This expense did not increase proportionately to
revenue due to the increased usage of electronic product transfer, which does
not have shipping charges. As a percentage of product licenses revenues, cost
of product licenses was less than 1% in both the three months ended June 30,
2000 and 1999.
Services and Maintenance. Cost of services and maintenance consists of
personnel and other costs related to professional services, training and
technical support. Cost of services and maintenance increased $2.0 million, or
169%, to $3.2 million for the three months ended June 30, 2000 from $1.2
million for the comparable period in 1999. As a percentage of services and
maintenance revenues, cost of services and maintenance was 82% for the three
months ended June 30, 2000 and 62% for the comparable period in 1999. This
increase in dollars and as a percentage of services and maintenance revenues
was due to increased personnel costs as Blaze shifted personnel from supporting
the user interface business in order to meet customer requirements for its
Blaze Advisor Solutions Suite. Cost of services and maintenance as a percentage
of services and maintenance revenues may vary between periods due to Blaze's
use of third-party professional services, and varying gross margins on customer
engagements.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, project managers
and quality assurance personnel, payments to outside software developers, and
general corporate overhead allocations for facilities and equipment used in the
research and development process. Research and development expenses increased
$642,000, or 51%, to $1.9 million for the three months ended June 30, 2000 from
$1.3 million for the comparable period in 1999. This increase was due to
increased costs associated with third-party consultants and increased personnel
costs associated with research and development for the Blaze Advisor Solutions
Suite. Research and development expenses represented 26% of total revenues for
the three months ended June 30, 2000 and 38% of total revenues for the
comparable period in 1999. Blaze believes that a significant increase in its
research and development expenses will be necessary to expand its market
presence and to expand its technology and product leadership. Therefore, Blaze
expects that research and development expenses will increase in the future.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions and bonuses for sales, marketing and support personnel, and costs
related to travel, trade shows, promotional expenses and general corporate
overhead. Sales and marketing expenses increased $4.1 million, or 215%, to $6.0
million for the three months ended June 30, 2000 from $1.9 million for the
comparable period in 1999. This increase was due to increased sales and
marketing efforts for Blaze Advisor Solutions Suite and a shift in personnel
from supporting the user interface business to supporting Blaze Advisor and
Blaze Expert. Sales and marketing expenses represented 82% of total revenues
for the three months ended June 30, 2000 and 57% of total revenues for the
comparable period in 1999. Blaze believes that a significant increase in our
sales and marketing expenses will be necessary to expand its market presence.
Blaze intends to expand its direct sales force by hiring additional
salespersons, sales engineers and sales management personnel. Therefore, Blaze
expects that sales and marketing expenses will increase significantly in the
future.
General and Administrative. General and administrative expenses consist of
salaries and benefits for administrative officers and support personnel, travel
expenses, legal, accounting and general corporate overhead expenses. General
and administrative expenses increased $1.2 million, or 188%, to $1.8 million
for the three months ended June 30, 2000 from $638,000 for the comparable
period in 1999. This increase was due to
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increased infrastructure costs to support Blaze's expanding activities, costs
associated with being a public company and additional rent on Blaze's new
corporate headquarters. General and administrative expenses represented 25% of
total revenues for the three months ended June 30, 2000 and 19% of total
revenues for the comparable period in 1999. Blaze believes that its general and
administrative expenses will continue to increase as a result of additional
infrastructure costs as Blaze expands its business and expenses associated with
being a public company, including annual and other public reporting costs,
increased directors and officers liability insurance, investor relations
programs and accounting and legal fees.
Interest Expense
Interest expense consists of interest expense incurred on Blaze's line of
credit, bridge loans and capital leases. Interest expense decreased $84,000, or
75%, to $28,000 for the three months ended June 30, 2000 from $112,000 for the
comparable period in 1999. The decrease was due to the repayment of Blaze's
bank borrowings and bridge loan.
Other Income and (Expense), Net
Other income and (expense) consists primarily of interest income earned on
Blaze's cash equivalents and short-term investments. Other income was $1.1
million for the three months ended June 30, 2000 compared to $10,000 for the
comparable period in 1999. The increase was the result of increased interest
income on our cash equivalents and short-term investments subsequent to Blaze's
initial public offering.
Provision for Income Taxes
Provision for income taxes consists of foreign and de minimis domestic taxes
paid. Provision for income taxes decreased $6,000, or 100%, to $6,000 for the
three months ended June 30, 2000 from $12,000 for the comparable period in
1999. No provision for federal and state income taxes has been recorded because
we have experienced significant net losses, which have resulted in deferred tax
assets. In light of our recent history of operating losses, Blaze has provided
a full valuation allowance for all deferred tax assets as we are presently
unable to conclude that it is more likely than not that the deferred tax asset
will be realized.
Income (Loss) from Discontinued Operations, Net of Income Taxes
Income (loss) from discontinued operations, net of income taxes, decreased
$773,000, or 119%, to a loss of $121,000 for the three months ended June 30,
2000 compared with income of $652,000 for the comparable period in 1999. This
decrease was due to a $1.0 million decrease in revenue to $174,000 for the
three months ended June 30, 2000 from $1.2 million for the three months ended
June 30, 1999, offset by a decrease of $272,000, or 48%, in expenses to
$295,000 for the three months ended June 30, 2000, from $567,000 for the
comparable period in 1999. These decreases in revenues and costs resulted from
the sale of the user interface line of business effective May 1, 2000.
Liquidity and Capital Resources
Since its inception, Blaze has financed its operations through private sales
of preferred stock, internally generated funds, the use of its receivables
based line of credit and an initial public offering completed in March 2000. As
of June 30, 2000, Blaze had $67.9 million of cash, cash equivalents and short-
term investments.
Net cash used in operating activities was $8.4 million for the three months
ended June 30, 2000 and $1.2 million for the comparable period in 1999. Net
cash used for operating activities for both periods was due to net losses. Net
cash used for operating activities for the three months ended June 30, 2000 was
partially offset by the non-cash charges from the amortization of stock-based
compensation.
Net cash used in investing activities was $12.4 million for the three months
ended June 30, 2000 and $20,000 for the comparable period in 1999. Net cash
used in investing activities included purchases of property and equipment and,
for three months ended June 30, 2000, net purchases of $10.9 million of short-
term investments.
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Net cash provided by financing activities was $8.7 million for the three
months ended June 30, 2000 and $2.9 million for the comparable period in 1999.
Net cash provided by financing activities for the three months ended June 30,
2000 was due the underwriters purchase of an additional 600,000 shares of
common stock as a result of the exercise of their over-allotment option. Net
cash provided by financing activities for the three months ended June 30, 1999
was due to proceeds from the issuance of preferred and common stock and
borrowings under our line of credit facility.
Blaze currently anticipates that its available cash resources will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months. If cash generated from operations
is insufficient to satisfy its liquidity requirements, Blaze may need to raise
additional funds to finance more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of Blaze's stockholders will be reduced and such
securities may have rights, preferences or privileges senior to those of its
stockholders. Blaze cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, Blaze's ability to fund its
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. Blaze's business, results of operations and financial
condition could be materially adversely affected by such limitation.
Years Ended March 31, 2000 and 1999
Total Revenues
Total revenues increased $9.1 million, or 101%, to $18.2 million in fiscal
2000 from $9.1 million in fiscal 1999. This increase was due to an increase in
the number and average size of sales of Blaze's products and services and
maintenance generated. Total revenues from sales to customers outside the
Americas were $3.1 million, or 17%, of total revenues in fiscal 2000 and $2.1
million, or 23%, of total revenues in fiscal 1999. Unisys Corporation accounted
for 23% of total revenues in fiscal 2000 and 19% of total revenues in fiscal
1999. This was for products and services used in support of their design and
development work in connection with the deployment at Norwest Financial
Information Services.
Product Licenses. Product licenses revenues increased $4.8 million, or 128%,
to $8.5 million in fiscal 2000 from $3.7 million in fiscal 1999.
Services and Maintenance. Services and maintenance revenues increased $4.4
million, or 82%, to $9.7 million in fiscal 2000, from $5.3 million in fiscal
1999.
Cost of Revenues
Product Licenses. Cost of product licenses consists of packaging,
documentation and associated shipping costs. Cost of product licenses increased
$27,000, or 68%, to $67,000 in fiscal 2000 from $40,000 in fiscal 1999. As a
percentage of product licenses revenues, cost of product licenses were 1% in
both fiscal 2000 and fiscal 1999.
Services and Maintenance. Cost of services and maintenance consists of
personnel and other costs related to professional services, training and
technical support. Cost of services and maintenance increased $3.9 million, or
135%, to $6.8 million in fiscal 2000 from $2.9 million in fiscal 1999. As a
percentage of services and maintenance revenues, cost of services and
maintenance were 70% in fiscal 2000 and 54% in fiscal 1999. This increase in
dollars and as a percentage of services and maintenance revenues was due to
increased personnel costs as Blaze shifted personnel from supporting the user
interface business in order to meet customer requirements for Blaze Advisor
Solutions Suite. Cost of services and maintenance as a percentage of
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services and maintenance revenues may vary between periods due to Blaze's use
of third-party professional services, and varying gross margins on customer
engagements.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, project managers,
and quality assurance personnel, payments to outside software developers, and
general corporate overhead allocations for facilities and equipment used in the
research and development process. Research and development expenses increased
$1.2 million, or 32%, to $5.1 million in fiscal 2000 from $3.8 million in
fiscal 1999. This increase was due to increased costs associated with third-
party consultants and increased personnel costs associated with research and
development for the Blaze Advisor Solutions Suite. Research and development
expenses represented 28% of total revenues in fiscal 2000 and 42% of total
revenues in fiscal 1999. Blaze believes that a significant increase in our
research and development expenses will be necessary to expand its market
presence and to expand its technology and product leadership. Therefore, Blaze
expects that research and development expenses will increase in the future.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions and bonuses for sales, marketing and support personnel, and costs
related to travel, trade shows, promotional expenses and general corporate
overhead. Sales and marketing expenses increased $6.6 million, or 119%, to
$12.2 million in fiscal 2000 from $5.6 million in fiscal 1999. This increase
was due to increased sales and marketing efforts for Blaze Advisor Solutions
Suite and a shift in personnel from supporting the user interface business to
supporting Blaze Advisor and Blaze Expert. Sales and marketing expenses
represented 67% of total revenues in fiscal 2000 and 62% of total revenues in
fiscal 1999. Blaze believes that a significant increase in our sales and
marketing expenses will be necessary to expand its market presence. Blaze
intends to expand our direct sales force by hiring additional salespersons,
sales engineers and sales management personnel. Therefore, Blaze expects that
sales and marketing expenses will increase significantly in the future.
General and Administrative. General and administrative expenses consist of
salaries and benefits for administrative officers and support personnel, travel
expenses, legal, accounting and general corporate overhead expenses. General
and administrative expenses increased $1.6 million, or 72%, to $3.8 million in
fiscal 2000 from $2.2 million in fiscal 1999. This increase was due to
increased infrastructure costs to support Blaze's expanding activities and
additional rent on its new corporate headquarters. General and administrative
expenses represented 21% of total revenues in fiscal 2000 and 24% of total
revenues in fiscal 1999. Blaze believes that its general and administrative
expenses will continue to increase as a result of expenses associated with
being a public company, including annual and other public reporting costs,
increased directors and officers liability insurance, investor relations
programs and accounting and legal fees.
Net Interest Expense
Net interest expense consists of interest expense incurred on Blaze's line
of credit, bridge loans and capital leases, offset by interest income earned on
our cash equivalents and short-term investments. Net interest expense decreased
$147,000, or 59%, to $102,000 in fiscal 2000 from $249,000 in fiscal 1999. The
decrease was the result of increased interest income on Blaze's cash
investments subsequent to its initial public offering and the repayment of its
bank borrowings.
Provision for Income Taxes
Provision for income taxes consists of foreign and de minimis domestic taxes
paid. Provision for income taxes increased $66,000, or 76%, to $153,000 in
fiscal 2000 from $87,000 in fiscal 1999. No provision for federal and state
income taxes has been recorded because Blaze has experienced significant net
losses, which have resulted in deferred tax assets. In light of its recent
history of operating losses, Blaze has provided a full
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valuation allowance for all deferred tax assets as it is presently unable to
conclude that it is more likely than not that the deferred tax asset will be
realized.
Income from Discontinued Operations, Net of Income Taxes
Income from discontinued operations, net of income taxes, increased $2.4
million to $2.7 million in fiscal 2000 from $248,000 in fiscal 1999. This
increase was due to a $4.1 million decrease in revenue to $5.0 million in
fiscal 2000 from $9.1 million in fiscal 1999, offset by a $6.5 million decrease
in expenses to $2.4 million in fiscal 2000 from $8.8 million in fiscal 1999.
Years Ended March 31, 1999 and 1998
Total Revenues
Total revenues increased $4.7 million, or 108%, to $9.1 million in fiscal
1999 from $4.4 million in fiscal 1998. Of this increase, 43% was due to
increased requirements by Norwest Financial Information Services Group for on-
site professional services and training and maintenance related to Blaze
Expert. Total revenues from sales to customers outside the Americas were $2.1
million, or 23% of total revenues in fiscal 1999 and $871,000, or 20% of total
revenues in fiscal 1998. Unisys Corporation accounted for 19% of total revenues
for fiscal 1999 for products and services used in support of their design and
development work in connection with the deployment at Norwest Financial
Information Services Group. No customer accounted for more than 10% of total
revenues in fiscal 1998.
Product Licenses. Product licenses revenues increased $163,000, or 5%, to
$3.7 million in fiscal 1999 from $3.6 million in fiscal 1998.
Services and Maintenance. Services and maintenance revenues increased $4.5
million, or 560%, to $5.3 million in fiscal 1999 from $803,000 in fiscal 1998.
Cost of Revenues
Product Licenses. Cost of product licenses decreased $34,000, or 46%, to
$40,000 in fiscal 1999 from $74,000 in fiscal 1998. As a percentage of product
licenses revenues, cost of product licenses was 1% in fiscal 1999 and 2% in
fiscal 1998.
Services and Maintenance. Cost of services and maintenance increased $2.4
million, or 465%, to $2.9 million in fiscal 1999 from $512,000 in fiscal 1998.
As a percentage of services and maintenance revenues, cost of services and
maintenance was 54% in fiscal 1999 and 64% in fiscal 1998. This increase in
cost of services and maintenance is consistent with the increase in services
and maintenance revenues. Cost of services and maintenance revenues as a
percentage of service and maintenance revenues may vary between periods due to
our use of third-party professional services, and varying gross margins on
customer engagements.
Operating Expenses
Research and Development. Research and development expenses increased $1.9
million, or 100%, to $3.8 million in fiscal 1999 from $1.9 million in fiscal
1998. This increase was due to increased personnel costs as we shifted research
and development efforts to the Blaze Advisor Solutions Suite. Research and
development expenses represented 42% of total revenues in fiscal 1999 and 44%
of total revenues in fiscal 1998.
Sales and Marketing. Sales and marketing expenses increased $1.9 million, or
51%, to $5.6 million in fiscal 1999 from $3.7 million in fiscal 1998. This
increase was due to sales and marketing efforts for the Blaze Advisor Solutions
Suite. Sales and marketing expenses represented 62% of total revenues in fiscal
1999 and 85% of total revenues in fiscal 1998.
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General and Administrative. General and administrative expenses increased
$1.1 million, or 99%, to $2.2 million in fiscal 1999 from $1.1 million in
fiscal 1998. This increase was due to increased headcount and related payroll
costs, and higher legal and executive travel expenses. General and
administrative expenses represented 24% of total revenues in fiscal 1999 and
25% of total revenues in fiscal 1998.
Net Interest Expense
Net interest expense decreased $344,000, or 58%, to $249,000 in fiscal 1999
from $593,000 in fiscal 1998. The decrease was the result of reduced debt
balances on Blaze's bank borrowings and capital lease obligations.
Provision for Income Taxes
Provision for income taxes increased $19,000, or 28%, to $87,000 for fiscal
1999 from $68,000 for fiscal 1998. No provision for federal and state income
taxes has been recorded because Blaze has experienced significant net losses,
which have resulted in deferred tax assets. In light of Blaze's recent history
of operating losses, it has provided a full valuation allowance for all
deferred tax assets as it is presently unable to conclude that it is more
likely than not that the deferred tax asset will be realized.
Income (Loss) from Discontinued Operations, Net of Income Taxes
Loss from discontinued operations, net of income taxes decreased $2.4
million to income of $248,000 in fiscal 1999 from loss of $2.2 million in
fiscal 1998. This decrease was due to a $9.2 million decrease in revenue to
$9.1 million in fiscal 1999 from $18.3 million in fiscal 1998, offset by an
$11.7 million decrease in expenses to $8.8 million in fiscal 1999 from $20.5
million in fiscal 1998.
Liquidity and Capital Resources
Since inception, Blaze has financed its operations through private sales of
preferred stock, internally generated funds, the use of Blaze's receivables
based line of credit and an initial public offering completed in March 2000. As
of March 31, 2000, Blaze had $69.3 million of cash, cash equivalents and short-
term investments.
Net cash used in operating activities was $3.7 million in fiscal 2000, $4.3
million in fiscal 1999 and $5.1 million in fiscal 1998. Net cash used for
operating activities was due to net losses, offset by the non-cash charges from
the amortization of stock-based compensation.
Net cash used in investing activities was $13.4 million in fiscal 2000,
$779,000 in fiscal 1999 and $140,000 in fiscal 1998. Cash used in investing
activities included purchases of property and equipment and, for fiscal 2000,
the purchase of $12.0 million of short-term investments from the proceeds of
the initial public offering.
Net cash provided by financing activities was $72.1 million in fiscal 2000,
$448,000 in fiscal 1999 and $9.6 million in fiscal 1998. Cash provided by
financing activities during these periods was due to proceeds from the issuance
of preferred and common stock, bridge loans with Blaze's existing investors and
borrowings under Blaze's line of credit facility. In addition, in fiscal 2000
Blaze received approximately $57.1 from the proceeds from its initial public
offering.
Blaze currently anticipates that its available cash resources will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months. If cash generated from operations
is insufficient to satisfy its liquidity requirements, Blaze may need to raise
additional funds to finance more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of its stockholders
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will be reduced and such securities may have rights, preferences or privileges
senior to those of our stockholders. Blaze cannot assure you that additional
financing will be available on terms favorable to it, or at all. If adequate
funds are not available or are not available on acceptable terms, Blaze's
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures would be significantly limited. Its business, results of operations
and financial condition could be materially adversely affected by such
limitation.
Year 2000 Compliance
Blaze has tested its Blaze Advisor Solutions Suite and its prior products
and believes that they are year 2000 compliant. It has also inquired of
significant vendors of our internal accounting, management and product
development systems as to their year 2000 readiness, and it has also tested its
material internal systems. Blaze believes that, based on these tests and
assurances of our vendors, it will not incur material costs to resolve year
2000 issues for its products and internal systems. Furthermore, Blaze has not
experienced any year 2000 problems and it has not been informed of any material
year 2000 problems by any of its customers or vendors.
Blaze believes that it has identified all of the major information systems
used in connection with its internal operations and substantially completed all
modification, upgrades or replacements to minimize the possibility of material
disruption of its business from year 2000 problems. If it comes to its
attention that there are any year 2000 problems with its products or that some
of its third-party hardware and software used in its internal systems or its
products are not year 2000 compliant, then Blaze will endeavor to make
modifications to its products and internal systems, or purchase new internal
systems, to quickly respond to the problem. Although it does not believe that
the cost of these modifications and replacements, if any, will materially
affect its operating results, Blaze has no other contingency plan to address
effects of year 2000 problems with its products and internal systems. The cost
already incurred by it and its future cost related to year 2000 compliance is
not material.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Blaze's cash equivalents and short-term investments are subject to market
risk, primarily interest rate and credit risk. Its investments are managed by
outside professional managers within guidelines it establishes. The guidelines,
which include security type, credit quality and maturity, are intended to limit
market risk by restricting its investments to high-quality debt instruments
with short-term maturities. Due to the relatively short-term duration of our
investments at March 31, 2000, a 1% (100 basis point) increase in short-term
interest rates would not have a significant impact on the market value of its
investments. Blaze's investments in debt securities are classified as
available-for-sale, therefore, it does not recognize gains or losses due to
changes in interest rates unless such securities are sold prior to maturity.
Blaze generally holds securities until maturity and carries the securities at
amortized cost, which approximates market value.
Foreign Currency Risk
Blaze develops products in the United States and sells them in North
America, the Pacific Rim and Europe. As a result, its financial results could
be adversely affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Since its sales in Europe
and the Pacific Rim are currently denominated in foreign currencies and
generally translated on a monthly basis to U.S. dollars, it could be adversely
affected by fluctuations in foreign currency exchange rates.
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MATERIAL TAX CONSEQUENCES
General
Each Blaze stockholder is urged to consult his or her own tax advisor as to
the U.S. Federal income tax consequences and German tax consequences of the
merger, and the ownership and disposition of the Brokat ADSs and Brokat
ordinary shares, to him or her, in each case in light of the facts and
circumstances that may be unique to him or her, and as to any U.S. estate,
gift, state, local or non-U.S. and non-German tax consequences of the merger.
Each Blaze stockholder who resides outside the United States is urged to
consult his or her own tax advisor about the applicable tax laws of the country
in which he or she resides.
German Taxation
In the opinion of Gleiss Lutz Hootz Hirsch, German counsel for Brokat
regarding German tax matters, the following is a discussion of the material
German tax consequences for beneficial owners of Brokat ordinary shares or ADSs
who are not German residents for German income tax purposes and who do not hold
ordinary shares or ADSs as part of a permanent establishment or a fixed base in
Germany. Throughout this section, these owners are referred to as Non-German
holders. However, German holders are German residents. Non-German holders who
are U.S. residents are referred to in this section as U.S. holders.
This summary is based on German law and typical tax and other treaties
between Germany and other countries as they are in effect as of the date
hereof, and is subject to changes in German law or such treaties. In
particular, the corporate income tax imputation system outlined below and the
applicable tax rates will be subject to changes as of January 1, 2001 as a
result of the reform of the taxation of enterprises passed in the German
legislature in July 2000 (referred herein as the Business Tax Reform). See "--
Business Tax Reform" below for details. The following discussion is not meant
to be a comprehensive discussion of all of the German tax consequences which
may be relevant for Non-German holders. You should consult your tax adviser
regarding the German tax consequences of the purchase, ownership and
disposition of shares and the procedures for the refund of German taxes
withheld from dividends.
Dividends
Taxation of Corporations and Imputation
At present, German corporations are generally subject to corporate income
tax at a rate of 40% on non-distributed profits. Usually, profits distributed
by German corporations are subject to corporate income tax at a reduced rate of
30%. In addition, a further "solidarity surcharge" of 5.5% of the amount of
corporate income tax payable by the corporation applies. Only German holders
are entitled to a refundable tax credit in the amount of three-sevenths of the
gross amount of profit distributed, before dividend withholding tax. The credit
is not available to Non-German holders.
The corporate tax imputation system will be abrogated as a result of the
Business Tax Reform as of January 1, 2001. See "--Business Tax Reform" below.
Taxation of Dividends
In addition to corporation tax, dividend distributions by a German
corporation are subject to a 25% withholding tax (Kapitalertragsteuer) plus a
solidarity surcharge of 5.5%, in aggregate 26.375%. For German holders, the
withholding tax functions as a tax credit on the personal income tax liability
of the shareholders. This credit, as well as the refundable corporation tax,
reduces the basis for the 5.5% surcharge on the German taxpayer's income tax
liability. If you are a Non-German holder, the withholding tax rate may be
reduced by an applicable income tax treaty. Under most tax treaties the
withholding tax rate is reduced to 15%. You would receive this reduction by
applying for a refund of the difference between the tax withheld at the
statutory rate of 26.375% and the applicable treaty rate to the German tax
authorities, located at the Bundesamt fur Finanzen,
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Friedhofstrasse 1, D-53225 Bonn, Germany. If you are a Non-German holder of
ADSs, you may be entitled to the benefits of the income tax treaty between the
United States and Germany (referred to herein as the Treaty), in which case a
special refund procedure may apply, which is described below under "--Dividend
Refund Procedure for Non-German holders."
U.S. Holders
Under the Treaty, qualifying U.S. holders are entitled to an additional
reduction in German tax equal to 5% of the gross amount of the dividend, which
is refundable together with the general treaty refund discussed in the
preceding paragraph. The right of U.S. holders to this reduction assumes that
the corporate tax imputation system continues to apply to individuals under
German law. As explained above, the corporate tax imputation system will be
abrogated as a consequence of the Business Tax Reform as of January 1, 2001.
Special U.S. tax rules applicable to this additional refund are discussed below
under "--Dividend Refund Procedure for Non-German holders."
U.S. holders are entitled to claim a refund of a portion of the German
withholding tax, and will be treated as receiving additional dividend income
from Brokat, under the mechanism described below. Under the Treaty, a U.S.
holder will be entitled to receive a payment from the German tax authorities
equal to 16.375% of the declared dividend. The Treaty provides that a portion
of this payment, equal to 11.375% of the declared dividend, will be treated for
U.S. tax purposes as a reduction in German withholding tax to the generally
applicable treaty rate of 15%, and the remainder of the payment, or 5% of the
declared dividend, will be treated as the net amount of an additional dividend
of 5.88% of the declared dividend that has been subject to a 15% German
withholding tax ([90 x 100] : 85-100). Accordingly, if Brokat declared a
dividend of 100, a U.S. holder initially will receive 73.625, or 100 minus the
26.375% withholding tax. The U.S. holder could then claim a refund from the
German authorities of 16.375 and thereby would receive a total cash payment of
90, or 90% of the declared dividend. Thus, the holder would be deemed to have
received total dividends of 105.88, consisting of the declared dividend of 100
plus the deemed additional dividend of 5.88 that is associated with the Treaty
refund.
Dividend Refund Procedure for Non-German holders
For Brokat ordinary shares and ADSs which are kept in custody with the
Depositary Trust Company in New York or one of its participating banks, the
German tax authorities have introduced a collective procedure for the refund of
German withholding tax and surtax, on a trial basis. Under this procedure, the
Depositary Trust Company may submit claims for refunds payable to U.S. holders
under the Treaty collectively to the German tax authorities on behalf of these
U.S. holders. The German federal tax office (Bundesamt fur Finanzen) will pay
the refund amounts on a preliminary basis to the Depositary Trust Company,
which will redistribute these amounts to the U.S. holders according to the
regulations governing the procedure. The federal tax office may review whether
the refund conforms with the law within four years after making the payment to
the Depositary Trust Company. Details of this collective refund procedure are
available from the Depositary Trust Company.
Individual claims for refund are made on a special German form, which must
be filed with the German authorities at the Bundesamt fur Finanzen,
Friedhofstrasse 1, D-53225 Bonn, Germany. Copies of the required form may be
obtained from the German tax authorities at the same address or from the
embassy of the federal Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998.
As part of the individual refund claim, a U.S. holder must submit to the
German tax authorities the original bank voucher (or certified copy thereof)
issued by the paying entity documenting the tax withheld, and an official
certification on IRS Form 6166 of its last United States Federal income tax
return. IRS Form 6166 may be obtained by filing a request with the Internal
Revenue Service Center in Philadelphia, Pennsylvania, Foreign Certification
Request, P.O. Box 16347, Philadelphia. PA 19114-0447. Requests for
certification must include the holder's name, Social Security Number or
Employer Identification Number, tax return form
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number, and tax period for which the certification is requested. Requests for
certification can include a request to the Internal Revenue Service to send the
certification directly to the German tax authorities. If no such request is
made, the Internal Revenue Service will send a certificate on IRS Form 6166 to
the U.S. holder, which then must submit the certification with its claim for
refund.
Capital gains
Under German domestic tax law, capital gains derived by a Non-German holder
from the sale or other disposition of ordinary shares or ADSs are subject to
tax in Germany only if such Non-German holder has held, directly or indirectly,
ordinary shares or ADSs representing 10% or more of the registered share
capital of the company at any time during the 5-year period immediately
preceding the disposition. According to the Business Tax Reform, the taxable
shareholding in the event of a sale will be reduced to 1%. Most German tax
treaties provide that Non-German holders are not subject to German tax even in
that case. This also applies to the Treaty even though in some rare cases
Germany has the right of taxation.
Inheritance and gift tax
Under German law, German gift or inheritance tax will be imposed on
transfers of Brokat ordinary shares or ADSs by a gift or on the death of a Non-
German holder only in the following situations:
. If the donor or transferor, or the heir, donee or other beneficiary was
domiciled in Germany at the time of the transfer or, with respect to
German citizens who are not domiciled in Germany, if the donor,
transferor or beneficiary has not been continuously outside of Germany
for a period of more than 5 years; or
. If the ordinary shares or ADSs subject to such transfer form part of a
portfolio which represents 10% or more of the registered share capital of
the company and which has been held directly or indirectly by the donor
or transferor himself or together with a related person.
The few German estate tax treaties currently in force, including the treaty
with the United States, usually provide that German gift or inheritance tax may
only be imposed in situations falling under the first condition above.
Other taxes
No German transfer, stamp or other similar taxes apply to the sale or other
disposition of Brokat ordinary shares or ADSs by Non-German holders.
Business Tax Reform
On July 14, 2000, the Business Tax Reform Bill was passed. This bill
introduces a fundamental change in corporate taxation effective from January 1,
2001. Some of the major changes are the following:
. The corporate income tax imputation system will be abolished and German
holders will no longer be entitled to receive a credit refund of
corporate income tax paid by Brokat. In effect, such holders will be
treated like Non-German holders;
. Profits will be taxed at a single corporate income tax rate, irrespective
of whether they are distributed, of 25% (not including the solidarity
surcharge). In addition, the German trade tax (approximately 12-15%) is
unchanged and still payable;
. Only 50% of dividends received by a German holder will be subject to
personal income tax or half (half-income procedure). Dividends received
by German corporate shareholders will not be taxable at all. For foreign
shareholders, the taxation is subject to the respective jurisdiction. The
system of withholding taxation (Kapitalertragsteuer) will be unchanged;
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. Capital gains derived by a German holder are subject to tax as with
dividends. For corporate shareholders, the capital gain is tax-free. Non-
corporate shareholders are subject to income tax on a half-income basis
if they have held 1% or more of the registered share capital of the
company at any time during the five-year period immediately preceding the
disposition. The taxation of non-German and non-corporate holders also
applies unless there is an exemption under an applicable income tax
treaty;
. As a consequence of the abolishment of the imputation system, the
additional reduction of withholding tax in the amount of 5% for U.S.
holders will no longer be applicable (see above under "Dividends--U.S.
Holders").
The last two bullet points will apply for income derived after December 31,
2001 (with respect to corporations having the calendar year as their business
year).
U.S. Federal Income Tax Considerations
In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, U.S. tax counsel
to Brokat, and Wilson Sonsini Goodrich & Rosati, U.S. tax counsel to Blaze, the
following is a discussion of the material U.S. Federal income tax consequences
of the merger to holders of Blaze common stock, and the material U.S. Federal
income tax consequences applicable to the ownership and disposition of Brokat
ADSs and ordinary shares by such holders. This summary is based upon existing
U.S. Federal income tax law, including the Internal Revenue Code of 1986, as
amended (referred to herein as the Code), administrative pronouncements,
judicial decisions and treasury regulations, all as in effect as of the date
hereof, and all of which are subject to change, possibly with retroactive
effect. This discussion is limited to holders who, at all relevant times, have
held Blaze common shares as capital assets and who will hold Brokat ADSs and
Brokat ordinary shares as capital assets. This summary does not address state,
local or foreign tax considerations. Nor does this summary discuss all the tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, including
certain financial institutions, regulated investment companies, insurance
companies, dealers in securities, tax-exempt organizations, persons who hold
Blaze common shares as part of a straddle, hedging or conversion transaction,
and persons who acquired their Blaze common shares through the exercise or
cancellation of employee stock options or otherwise as compensation for
services.
The following discussion applies to U.S. holders and Non-U.S. holders of
Blaze common shares. As used in this section, a U.S. holder is a beneficial
owner of Blaze common shares, Brokat ADSs or Brokat ordinary shares that is (i)
a citizen or individual resident of the U.S., (ii) a corporation or partnership
created or organized under the laws of the U.S. or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. Federal income
taxation regardless of its source, or (iv) a trust if a U.S. court is able to
exercise supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust. A
Non-U.S. holder is a holder that is not a U.S. holder.
No ruling will be sought from the Internal Revenue Service with respect to
the U.S. Federal income tax consequences described below and, as a result,
there can be no assurance that the Internal Revenue Service will agree with, or
that a court will uphold, any of the conclusions set forth herein. As a
condition to each of Brokat's and Blaze's obligation to consummate the merger,
each must receive the opinion of their respective tax counsel to the effect
that the merger will qualify as a "reorganization" within the meaning of
Section 368 of the Code. These opinions neither bind nor preclude the Internal
Revenue Service from adopting a contrary position. In addition, the tax
opinions will be subject to certain assumptions and qualifications and will be
based in part on the truth and accuracy of certain representations made by
Brokat, the merger subsidiary formed on behalf of Brokat, and Blaze.
Holders of Blaze common stock should consult their own tax advisors
regarding the application of the U.S. Federal income tax laws to their
particular circumstances, as well as any state, local, foreign and other
consequences relevant to such holder's particular circumstances.
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United States Federal Income Tax Consequences of the Merger
U.S. holders
It is the intent of Brokat and Blaze that the merger constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code for U.S.
Federal income tax purposes. If the merger so qualifies, U.S. holders of Blaze
common stock will not recognize gain or loss upon their receipt of Brokat ADSs
solely in exchange for their shares of Blaze common stock pursuant to the
merger. (As further discussed below, different rules apply to cash received in
lieu of a fractional ADS and to any U.S. holder who will own, actually or
constructively, at least five percent of Brokat by vote or value immediately
after the merger). The aggregate tax basis of Brokat ADSs received in the
merger will be the same as the aggregate tax basis of the Blaze common shares
surrendered therefor (decreased by the amount of any tax basis allocable to a
Brokat ADS for which cash is received). The holding period of the Brokat ADSs
will include the holding period of the Blaze common shares exchanged therefor.
If a U.S. holder of Blaze common stock receives cash in lieu of a fractional
Brokat ADS, the cash amount will be treated as received in exchange for the
fractional Brokat ADS. The difference between the cash amount received for the
fractional Brokat ADS and the proportion of the U.S. holder's tax basis in
Blaze common stock exchanged and allocable to the fractional Brokat ADS will be
capital gain or loss. The capital gain or loss will be long-term capital gain
or loss with respect to Blaze common shares held for more than 12 months at the
effective time of the merger.
A U.S. holder of Blaze common shares who will own, actually or
constructively, at least five percent of Brokat by vote or value immediately
after the merger will qualify for non-recognition treatment as described herein
only if the holder files a "gain recognition agreement" with the Internal
Revenue Service. Any such U.S. holder is urged to consult with his or her tax
advisor concerning the decision to file a "gain recognition agreement" and the
procedures to be followed in connection with that filing.
Non-U.S. holders
Non-U.S. holders will not recognize gain or loss for U.S. Federal income tax
purposes upon their receipt of Brokat ADSs in exchange for Blaze common stock
pursuant to the merger. In addition, no gain or loss will be recognized by a
Non-U.S. holder for U.S. Federal income tax purposes on the receipt of cash in
lieu of a fractional Brokat ADS pursuant to the merger, unless (i) the gain is
effectively connected with the conduct of a trade or business of the Non-U.S.
holder in the U.S., or, if a tax treaty applies, is attributable to a permanent
establishment maintained by the Non-U.S. holder in the U.S., or (ii) the Non-
U.S. holder is an individual who is present in the U.S. for 183 days or more in
the taxable year of disposition, and certain other conditions are met.
United States Federal Income Tax Consequences of the Ownership of Brokat
Ordinary Shares and Brokat ADSs
For U.S. Federal income tax purposes, holders of Brokat ADSs will be treated
as the owners of the underlying ordinary shares that are represented by Brokat
ADSs, and deposits and withdrawals of Brokat ordinary shares by holders in
exchange for Brokat ADSs will not be subject to U.S. Federal income tax. Unless
the context otherwise requires, all references in this section to "ordinary
shares" are deemed to refer likewise to ADSs representing an ownership interest
in ordinary shares.
Taxation of Dividends
U.S. holders
Under U.S. Federal income tax law, a U.S. holder must include in income the
gross amount of any dividend paid by Brokat out of its current or accumulated
earnings and profits (as determined for U.S. Federal
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income tax purposes). A U.S. holder must include any German tax withheld from
the dividend payment and any additional dividend associated with the Treaty
refund in this gross amount even though such holder did not in fact receive
such amounts. (See the last paragraph under "German Taxation--Dividends" for an
example of how to compute the amount of dividends received). The dividend is
ordinary income that the U.S. holder must include in income when the
depositary, in the case of ADSs, or the U.S. holder, in the case of ordinary
shares, receives the dividend, actually or constructively. The dividend will
not be eligible for the dividends-received deduction generally allowed to U.S.
corporations in respect of dividends received from other U.S. corporations. The
amount of the dividend that a U.S. holder will include in its income will be
the U.S. dollar value of the euro payments made, determined at the spot
euro/U.S. dollar rate on the date the dividend distribution is includible in
income, regardless of whether the payment is in fact converted into U.S.
dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the U.S. holder included the
dividend payment in income to the date such holder converts the payment into
U.S. dollars will be treated as ordinary income or loss. Such gain or loss
generally will be income from sources within the U.S. for U.S. foreign tax
credit purposes. Distributions in excess of current and accumulated earnings
and profits will be treated as a tax-free return of capital to the extent of
the U.S. holder's basis in the ordinary shares or ADSs and thereafter as
capital gain.
Subject to certain limitations, the German tax withheld in accordance with
German law or the Treaty paid over to Germany will be creditable against a U.S.
holder's U.S. Federal income tax liability. To the extent a refund of the tax
withheld is available under German law or under the Treaty, the amount of tax
withheld that is refundable will not be eligible for credit against a U.S.
holder's Federal income tax liability. See "German Taxation--Dividend Refund
Procedure for Non-German holders" above, for the procedures for obtaining a tax
refund.
Dividends constitute income from sources outside the U.S. and generally will
be "passive income" or "financial services income," which are treated
separately from other types of income for purposes of computing the applicable
foreign tax credit. The rules governing the foreign tax credit are complex and
U.S. holders are urged to consult their tax advisors regarding the availability
of the foreign tax credit under their particular circumstances.
Non-U.S. holders
Dividends paid to a Non-U.S. holder in respect of ordinary shares or ADSs
will not be subject to United States Federal income tax unless such dividends
are effectively connected with the conduct of a trade or business of the Non-
U.S. holder within the United States (or are attributable to a permanent
establishment that the U.S. holder maintains in the United States, if that is
required by an applicable income tax treaty as a condition for subjecting the
Non-U.S. holder to United States taxation on a net income basis). In such cases
a Non-U.S. holder will be taxed in the same manner as a U.S. holder. For
corporate Non-U.S. holders, effectively connected dividends may, under certain
circumstances, be subject to an additional branch profits tax at a 30% rate or
at a lower rate if such holders are eligible for the benefits of an income tax
treaty that provides for a lower rate.
Sale, Exchange or Other Taxable Disposition of Brokat ADSs or Ordinary Shares
U.S. holders
Upon a sale, exchange or other taxable disposition of Brokat ADSs or
ordinary shares, a U.S. holder will recognize gain or loss for U.S. Federal
income tax purposes in an amount equal to the difference between the U.S.
dollar value of the amount realized and the U.S. holder's tax basis, determined
in U.S. dollars, in the Brokat ADSs or ordinary shares. Such gain or loss will
be long-term capital gain or loss with respect to Brokat ADSs or ordinary
shares held for more than 12 months at the time of the sale, exchange or other
taxable disposition and any gain recognized generally will be income from
sources within the U.S. for foreign tax credit limitation purposes.
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Non-U.S. holders
Non-U.S. holders will not be subject to U.S. Federal income tax on gain
recognized on the sale, exchange or other taxable disposition of ADSs or
ordinary shares unless (i) such gain is effectively connected with the conduct
of a trade or business of the Non-U.S. holder in the United States (or the gain
is attributable to a permanent establishment that the Non-U.S. holder maintains
in the U.S., if that is required by an applicable income tax treaty as a
condition for subjecting the Non-U.S. holder to U.S. taxation on a net income
basis), or (ii) the Non-U.S. holder is an individual who has been present in
the U.S. for 183 days or more in the taxable year of the sale, exchange or
other taxable disposition and certain other conditions are met. For a corporate
Non-U.S. holder, effectively connected gains recognized may also, under certain
circumstances, be subject to an additional branch profits tax at a 30% or lower
rate if such holder is eligible for the benefits of an income tax treaty that
provides for a lower rate.
U.S. Federal Income Tax Backup Withholding
Dividends and payments of the proceeds from a sale of ordinary shares or
ADSs that are paid within the U.S. or through certain U.S.-related financial
intermediaries 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. Non-
U.S. holders generally are not subject to information reporting or backup
withholding. However, such a holder may be required to provide certification to
establish its non-U.S. status in connection with payments received within the
U.S. or from certain U.S.-related payors.
Amounts withheld under the backup withholding rules may be credited against
a U.S. holder's U.S. Federal income tax liability and any excess amount
withheld may be refunded by filing the appropriate claim for refund with the
Internal Revenue Service.
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CORPORATE STRUCTURE OF BROKAT
General Corporate Information
Brokat's corporate name is "BROKAT Aktiengesellschaft." It has its
registered office in Stuttgart, Germany. Its fiscal year ends on December 31.
Brokat was incorporated on July 3, 1998 by registration with the commercial
register of the Local Court (Amtsgericht) Stuttgart under the identification
number HRB 19292. It is established for an indefinite period of time. Brokat's
corporate purposes include (i) the development and sale of software and
hardware solutions; (ii) the consulting on the application and use of software
and hardware solutions for secure data transmission in heterogeneous internal
company-wide networks and intra-company networks; and (iii) the acquisition and
sale of software and hardware solutions, whether directly or indirectly, by
taking shares in or acquiring companies whose corporate purpose consists of the
activities mentioned under (i) and (ii). Brokat may conduct all transactions
that are suited directly or indirectly to promote its purpose. It may form,
acquire, take shares in and manage the business of companies of the same or
similar type. Brokat may establish branch offices in Germany and abroad. Such
branch offices may bear a corporate name that varies in whole or in part from
the corporate name of the principal office.
The Brokat Group of Companies
Brokat is the parent company of a group of companies, including wholly and
partly owned subsidiaries in Germany and abroad. It also holds minority stakes
in other companies. Brokat holds 98% of the shares in MeTechnology Kft.,
Budapest, Hungary. Brokat has established wholly owned subsidiaries for the
purpose of selling and distributing its products in:
. Atlanta, Georgia, United States (Brokat Americas, Inc.);
. Singapore (Brokat Asia Pte. Ltd.);
. Sydney, Australia (Brokat Australasia Pty Ltd.);
. Tokyo, Japan (Brokat Japan Ltd.);
. London, United Kingdom (Brokat Limited);
. Zurich, Switzerland (Brokat Systeme AG);
. Austria (Brokat Infosystems Ges.m.b.H);
. Luxembourg (Brokat Infosystems s.a.r.l.);
. Milan, Italy (Brokat Italy s.a.r.l.);
. Stockholm, Sweden (Brokat Svenska A.B.); and
. Hong Kong, China (Brokat (Hong Kong) Ltd.).
Brokat also holds all the shares of Fernbach Financial Software S.A., a
company located in Luxembourg, and has a majority interest of 51% in GO
Solutions, a company located in Wilhelmshaven (Germany). It has minority
interests in Bremen Online Services Entwicklungs-und Betriebsgesellschaft mbH &
Co. KG, a company located in Bremen (Germany) and Customer Dialogue Systems
N.V., a company located in Leuven (Belgium).
On August 3, 2000, Brokat acquired of 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 Brokat ordinary shares and the
remaining portion will be paid in cash. The MyAlert.com technology will allow
Brokat's customers to offer individual mobile information services. Brokat is
currently consummating the capital increase required to make the payment in
Brokat ordinary shares.
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DESCRIPTION OF CAPITAL STOCK OF BROKAT
The following description of the material terms of the share capital of
Brokat does not purport to be complete and is qualified in its entirety by
reference to Brokat's organizational documents. For information with respect to
the Deposit Agreement pursuant to which the Brokat ordinary shares will be held
on behalf of U.S. shareholders, see "Description of American Depositary
Receipts."
General
Subscribed Share Capital
Without giving effect to the Blaze and GemStone merger, as of August 15,
2000, Brokat had a subscribed share capital of euro 27,311,184 consisting of
27,311,184 Brokat ordinary shares, all of which are issued in bearer form and
are freely transferable. All Brokat ordinary shares are no par value shares
(Stuckaktien). The portion of the share capital attributable to each share is
euro 1.00. There are no unpaid contributions to the subscribed capital.
Authorized and Contingent Capital
Under the German Stock Corporation Act, the shareholders may authorize the
management board to issue shares with the consent of the supervisory board. The
shareholders shall give this authorization for a specific amount of shares, not
exceeding 50% of the issued share capital at the time the authorization is
given. This authorization may not be valid for more than five years.
Authorized Capital
Brokat's articles of association authorize the management board, subject to
the supervisory board's consent, to increase Brokat's share capital at any
time, until June 30, 2003. Brokat's management board may issue new ordinary
shares in return for cash and non-cash contributions on one or more occasions
for a maximum aggregate amount of euro 10,337,589 (referred to as authorized
capital I). The management board, with the supervisory board's approval, may
decide not to give effect to Brokat's shareholders' preemptive right. The
increase in the number of ordinary shares comprising the authorized capital I
will become effective, and the newly issued shares will be considered issued
and outstanding, as soon as the capital increase is registered with the German
commercial register.
In addition, the articles of association authorize the management board,
subject to the supervisory board's consent, to further increase Brokat's share
capital at any time, until June 30, 2003. Brokat's management board may issue
new shares in return for cash and non-cash contributions on one or more
occasions for a maximum aggregate amount of euro 2,600,000 (referred to as
authorized capital II). The management board, with the supervisory board's
approval, may decide not to give effect to Brokat's shareholders' preemptive
right, so long as the subscription price for the newly issued shares is not
materially below the market price of exchange-traded shares of the same class.
The increase in the number of ordinary shares comprising the authorized capital
II will become effective, and the newly issued shares will be considered issued
and outstanding, as soon as the capital increase is registered with the German
commercial register.
Contingent Capital
Brokat's articles of association provide for two types of contingent share
capital (referred to as contingent capital I and contingent share capital II).
There are, in the aggregate, 2,409,629 ordinary shares, for a value of euro
2,409,629, included in contingent share capital I. This contingent share
capital I may only be used to enable members of the management boards and
employees of Brokat and its affiliated companies to exercise options to
purchase ordinary shares of Brokat that they have or may receive. The ordinary
shares comprising
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contingent share capital I will be issued and outstanding to the extent such
members of the management board and employees exercise their options.
There are, in the aggregate, 2,600,000 ordinary shares, for a value of euro
2,600,000, included in contingent share capital II. This contingent share
capital II may be used to enable holders of the convertible bonds that have
been issued pursuant to a decision of Brokat's shareholders, to convert their
bonds into ordinary shares. The ordinary shares comprising contingent share
capital II will be issued and outstanding to the extent the bondholders
exercise their conversion right.
Development of Share Capital
On November 18, 1999, the shareholders decided to:
. convert Brokat's share capital from Deutsche marks into euro at the
official exchange rate of euro 1 = DM 1.95583 (Brokat's share capital
was then euro 22,879,266,09);
. increase the maximum aggregate amount of authorized capital I and II up
to euro 10,800,000 and euro 2,600,000;
. issue ordinary shares as a consideration for the conversion of reserves
into share capital, increasing Brokat's issued and outstanding share
capital by euro 3,969,506.91 from euro 22,879,266.09 to euro
26,848,773.00; and
. amend Brokat's articles of association by stating that each ordinary
share held would represent 3 ordinary shares, no par value, bringing the
share capital to 26,848,773 ordinary shares without par value, but a
portion of the share capital attributable to each share is euro 1.00.
On May 26, 2000, the shareholders decided to:
. increase the authorized share capital by euro 2,600,000 (up to a maximum
aggregate amount of 2,600,000 ordinary shares) to enable holders of
convertible bonds to convert their bonds into ordinary shares
(contingent capital II); and
. authorize Brokat to purchase its own shares for 18 months starting May
26, 2000, and for a maximum aggregate amount of 10% of the share capital
(which was euro 27,311,184 at that date).
In connection with the acquisition of GemStone, on August 14, 2000, the
management board resolved to increase the amount of ordinary shares comprising
the authorized capital I by issuing 2,648,748 new ordinary shares. As a result
Brokat's authorized share capital will increase from euro 27,331,184 to euro
29,959,932. Of the newly issued ordinary shares, 2,576,715 were subscribed by
The Bank of New York, acting as exchange agent in the GemStone merger. It
distributed these Brokat ordinary shares to former GemStone shareholders. The
remaining 72,033 newly issued ordinary shares were subscribed by Lex Magna
Limited, a former shareholder of Gemstone. The supervisory board authorized the
capital increase by decisions dated August 21, 2000. The capital increase
became effective with entry in the commercial register on August 29, 2000.
On August 14, 2000, Brokat's management board also decided to increase the
amount of ordinary shares comprising authorized capital I by issuing 96,149 new
ordinary shares. The supervisory board authorized the capital increase by
decisions dated August 21, 2000. As a result, Brokat's share capital increased
from euro 29,959,932 to euro 30,056,081. Myalertcom S.A. was the sole
subscriber to the newly issued ordinary shares. This capital increase will
become effective with entry in the commercial register in September 2000.
After giving effect to the Blaze merger, Brokat's share capital will be euro
35,468,209 consisting of 35,468,209 Brokat ordinary bearer shares with no par
value. The portion of the share capital attributable to each share is euro
1.00. In connection with the Blaze merger, Brokat will issue 5,412,128 ordinary
shares with no par value, increasing its share capital by euro 5,412,128. On
July 7, 2000 and September 6, 2000, the management board did and will take all
actions to nullify the existing shareholders' preemptive rights in order
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to allow Brokat to issue these ordinary shares to Blaze's stockholders. The
supervisory board has consented to the management board's decision.
Dividend Rights
Dividends, if any, are declared at the annual general meeting of
shareholders, which must be held within eight months from the end of a fiscal
year, and are paid once a year. Under German law, Brokat may declare and pay
dividends only from balance sheet profits as they are shown in Brokat's
financial statements. In determining the distributable balance sheet profits,
the management board and the supervisory board may allocate to profit reserves
up to one half of the annual surplus remaining after allocations to statutory
reserves and losses carried forward. Brokat's articles of association provide
that the management board and the supervisory board may allocate to other
revenue reserves up to an additional 25% of the annual surplus in accordance
with Section 58(2) of the German Stock Corporation Act. The general meeting of
the shareholders, in determining the distribution of profits, may allocate
additional amounts to profit reserves and may carry forward profits in part or
in full.
Dividends approved at the general meeting of the shareholders are payable on
the first stock exchange trading day after that meeting, unless decided
otherwise at the general meeting of the shareholders. Where shareholders hold
physical certificates, they may present the appropriate dividend coupon to
receive such dividends. When shareholders hold ordinary shares that are
entitled to dividends in a clearing system, the dividends are paid according to
that clearing system's rules. Brokat will publish notice of dividends paid and
the paying agent or agents appointed in the German federal gazette.
Liquidation Rights
In accordance with the German Stock Corporation Act (Aktiengesetz), upon a
liquidation of Brokat, any liquidation proceeds remaining after paying all of
Brokat's liabilities would be distributed among the holders of Brokat ordinary
shares in proportion to the total nominal value of the ordinary shares held by
each holder.
Preemptive Rights
Under the German Stock Corporation Act, an existing shareholder in a stock
corporation has a preferential right to subscribe for any issue of new shares
by such corporation in proportion to the number of shares such shareholder
holds in the corporation's existing share capital. These rights do not apply to
shares issued out of conditional capital. These rights also apply to securities
that may be converted into shares, securities with warrants, profit sharing
certificates and securities with dividend rights.
Under German law, the shareholders may decide not to give effect to this
preemptive right, if they decide so at the same time as they authorize the
capital increase. The decision requires the approval of at least 75% of the
shares present or represented at the meeting and entitled to vote. The decision
also requires a "special justification," based on the principle that the
interest of the company in deciding not to give effect to the preemptive rights
outweighs the shareholders' interest in giving effect to their preemptive
rights. If such a special justification is lacking, the resolution increasing
the capital can be challenged by the shareholders within one month from the day
that the resolution was passed.
Preemptive rights will not apply to the authorized capital I described under
"--General--Authorized Capital" if the management board decides so and the
supervisory board approves such decision. Preemptive rights will not apply to
the authorized capital II described under "--General--Authorized Capital" if
the Brokat ordinary shares are issued at a price not materially below Brokat
ordinary shares. Preemptive right does not apply to the conditional capital
described under "--General--Conditional Capital." This treatment of preemptive
rights has been authorized by the shareholders of Brokat prior to the merger.
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Preemptive rights resulting from a capital increase may generally be
transferred and may be traded on the Neuer Markt of the Frankfurt Stock
Exchange for a limited number of days prior to the final date on which the
preemptive rights may be exercised.
Shareholders' Meetings and Voting Rights
Each Brokat ordinary share entitles the holder to one vote at general
meetings of the shareholders of Brokat. Resolutions are passed at a general or
special meeting of the shareholders of Brokat by a majority of the votes cast,
unless a higher vote is required by law or Brokat's articles of association.
The German Stock Corporation Act requires that the following significant
resolutions be passed by a majority of at least 75% of the capital represented
in connection with the vote taken on such resolution: changes or amendments to
the scope of business; certain capital increases; capital decreases; a
dissolution of Brokat; a merger of Brokat into or a consolidation of Brokat
with another company, a transfer of all of Brokat's assets; a change of
Brokat's corporate form; and the elimination of preemptive rights. Brokat's
articles of association only require a majority vote unless a higher majority
is required by law.
A general or special meeting of the shareholders of Brokat may be called by
Brokat's management board. Notice of shareholder meetings must be published in
the German Federal gazette (Bundesanzeiger) at least one month prior to the
last day on which the Brokat shares must be deposited in order for the holder
of such shares to be entitled to vote at the shareholders' meeting. Pursuant to
the articles of association of Brokat, notice of shareholder meetings will also
be published in a national daily newspaper (official stock exchange bulletin)
if the stock exchanges on which Brokat securities are listed require so.
The right to attend and vote at a meeting of the shareholders is only
accorded to those shareholders who deposit their shares with Brokat, a German
notary public, or a bank for central deposit of securities, or with any other
agent designated in the notice of the general meeting not later than the end of
normal business hours on the fifth business day prior to the meeting date.
Brokat's shareholders have to keep their shares at the depositary until the end
of the general meeting. If the period to deposit shares ends a Saturday, Sunday
or a holiday, the preceding business day shall be deemed the day on which the
shares shall be deposited. If the ordinary shares are deposited with a German
notary public or with a bank for central deposit of securities, such German
notary public or such bank will issue a confirmation for the deposit that shall
be submitted to the Brokat cashier no later than the first business day after
the end of the deposit period. The ordinary shares shall also be deemed
deposited, if, with the consent of the depositary, such shares are blocked in a
bank account until the end of the general meeting. If Brokat has not issued
share certificates, the management board shall determine in the notice to the
general meeting the conditions under which the shareholders may exercise their
voting and motion rights at the general meeting.
Although notice of each shareholder meeting (whether the annual general
meeting or a special meeting) is required to be given as described above,
neither the German Stock Corporation Act nor the organizational documents of
Brokat have any minimum quorum requirement applicable to such meetings. This
means that holders of a minority of Brokat shares could control the outcome of
decisions not requiring a specified majority of the outstanding share capital
of Brokat.
For a discussion of the procedures to be followed by the depositary to
enable holders of ADRs to give voting instructions with respect to the Brokat
ordinary shares represented by their ADSs, see "Description of American
Depositary Receipts."
Disclosure Requirements
The German Securities Trading Act requires each person whose share holding
reaches, exceeds or, after exceeding, falls below 5%, 10%, 25%, 50% or 75%
voting rights thresholds of a listed company such as Brokat to notify Brokat
and the Federal Supervisory Authority for Securities Trading in writing within
seven calendar days after they have reached exceeded or fallen below such
threshold. In their notification, they must also state
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the number of shares they hold. Such holders cannot exercise any rights from
those shares until they have satisfied this disclosure requirement. In
addition, the German Securities Trading Act contains various rules designed to
ensure the attribution of shares to the person who has effective control over
the exercise of the voting rights attached to those shares.
Repurchase of Brokat's Own Shares
Brokat may not acquire its own shares unless authorized by the general
meeting of the shareholders or in other very limited circumstances set out in
the German Stock Corporation Act. Shareholders may not grant a share repurchase
authorization lasting more than 18 months. The rules in the German Stock
Corporation Act generally limit repurchases to 10% of Brokat's share capital
and resales must be made either on the stock exchange, in a manner that treats
all shareholders equally or in accordance with the rules that apply to
preemptive rights relating to capital increase. On May 26, 2000 and for a
period of 18 months, Brokat's shareholders authorized the management board to
acquire ordinary shares for an amount not exceeding, in the aggregate, 10% of
Brokat's share capital. So long as these ordinary shares are listed on the
Neuer Markt of the Frankfurt Stock Exchange, the consideration for these
ordinary shares shall not be below 85% or above 110% of the market price of
Brokat's ordinary shares. The general meeting authorized the management board
to dispose of these ordinary shares otherwise than by selling them on the Neuer
Markt of the Frankfurt Stock Exchange. Subject to the supervisory board's prior
consent, the management board may also offer them to Brokat's shareholders if
such shares are offered for a consideration not substantially below the market
price of shares of the same class at the date of the disposal.
LIMITATIONS AFFECTING SECURITY HOLDERS
At the current time, Germany does not restrict the export or import of
capital, except for investments in Iraq and Libya in accordance with applicable
resolutions adopted by the United Nations and the European Union. However, for
statistical purposes only, every individual or corporation residing in Germany
must report to the German Central Bank (Bundesbank), subject only to certain
immaterial exceptions, any payment received from or made to an individual or a
corporation resident outside Germany if such payment exceeds DM 5,000 or euro
2,500 (or the equivalent in a foreign currency). In addition, German residents
must report any claims against or any liabilities payable to nonresidents if
such claims or liabilities, in the aggregate, exceed DM 3 million or euro 1.5
million (or the equivalent in a foreign currency) during any one month. German
residents must also report any direct investment outside Germany if such
investment exceeds DM 100,000.
There are no limitations on the right of non-resident or foreign owners to
hold or vote Brokat's shares or ADSs imposed by German law or Brokat's articles
of association.
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COMPARISON OF RIGHTS OF
BLAZE STOCKHOLDERS AND BROKAT SHAREHOLDERS
The rights of Blaze stockholders are currently governed by the Delaware
General Corporation Law and the Blaze certificate of incorporation and bylaws.
The rights of Brokat shareholders are currently governed by German law,
including the German Stock Corporation Act (Aktiengesetz) and Brokat's articles
of association (Satzung). As a result of the merger, stockholders of Blaze will
receive ADSs representing ordinary shares of Brokat. As such, their rights will
be in part governed by Brokat's articles of association and by German law.
There are a number of differences between the rights of Blaze stockholders and
the rights of Brokat shareholders. The following is a summary of the material
differences. To understand these differences fully, you should read the
relevant provisions of the Delaware General Corporation Law, the German Stock
Corporation Act (Aktiengesetz), Blaze's certificate of incorporation and
bylaws, and Brokat's articles of association (Satzung). An English translation
of Brokat's articles of association is filed as an exhibit to the registration
statement of which this proxy statement/prospectus is a part.
Blaze' certificate of organization and bylaws may be obtained by writing or
telephoning the secretary of Blaze at the following address:
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, California 95113
Tel: (408) 275-6900
Brokat's articles of association may be obtained by writing or telephoning
the secretary of Brokat at the following address:
Brokat Aktiengesellschaft
Industriestrasse 3,
70565 Stuttgart, Germany
Tel: (011-49) 711-788-440
Duties of Directors
Blaze
Delaware law provides that the board of directors has the ultimate
responsibility for managing the business and affairs of a corporation. In
discharging this function, directors of Delaware corporations owe fiduciary
duties of care and loyalty to the corporations for which they serve as
directors. Directors of Delaware corporations also owe fiduciary duties of care
and loyalty to stockholders.
Delaware courts have held that the directors of a Delaware corporation are
required to exercise an informed business judgment in the performance of their
duties. An informed business judgment means that the directors have informed
themselves of all material information reasonably available to them.
A director of a Delaware corporation, in the performance of such director's
duties, is fully protected in relying, in good faith, upon the records of the
corporation and upon such information, opinions, reports or statements
presented to the corporation by any of the corporation's officers or employees,
or committees of the board of directors, or by any other person as to matters
the director reasonably believes are within such other person's professional or
expert competence and who has been selected with reasonable care by or on
behalf of the corporation. However, Delaware courts have imposed a heightened
standard of conduct upon directors of a Delaware corporation who take any
action designed to defeat a threatened change in control of the corporation.
The Delaware General Corporation Law does not contain any statutory
provision permitting the board of directors, committees of the board and
individual directors, when discharging the duties of their respective
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positions, to consider the interests of any constituencies other than the
corporation or its stockholders. It is unclear under the current state of
development of the Delaware law the extent to which the board of directors,
committees of the board and individual directors of a Delaware corporation may,
in considering what is in the corporation's best interests or the effects of
any action on the corporation, take into account the interests of any
constituency other than the stockholders of the corporation. In addition, the
duty of the board of directors, committees of the board and individual
directors of a Delaware corporation may be enforced directly by the corporation
or may be enforced by a stockholder, as such, by an action in the right of the
corporation, or may, in certain circumstances, be enforced directly by a
stockholder or by any other person or group.
Under Delaware law, it is presumed that the directors of a Delaware
corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interest of the corporation. This
presumption may be overcome, however, if it is shown by a preponderance of the
evidence that the directors' decision involved a breach of fiduciary duty such
as fraud, overreaching, lack of good faith, failure of the board to inform
itself properly or actions by the board to entrench itself in office.
Brokat
As required by the German Stock Corporation Act (Aktiengesetz), Brokat has a
two-tier board system consisting of the Brokat management board (Vorstand) and
the Brokat supervisory board (Aufsichtsrat). The Brokat management board is
responsible for managing Brokat and representing Brokat in its dealings with
third parties, while the Brokat supervisory board appoints and removes the
members of the Brokat management board, adopts the rules of procedures
governing the functioning of Brokat management board and oversees the
management of Brokat. German law prohibits the Brokat supervisory board from
making management decisions. The rules of procedure for the Brokat management
board provide that some actions and business measures require prior approval by
a two-thirds majority of the votes of all the members of the Brokat supervisory
board.
The Brokat management board must submit regular reports on the operations of
Brokat to the Brokat supervisory board, and the Brokat supervisory board is
also entitled to request special reports at any time. German law prohibits
simultaneous membership on the board of management and the supervisory board of
a company. The members of the Brokat management board and the members of the
Brokat supervisory board owe a duty of loyalty and care to Brokat.
In carrying out their duties, members of the Brokat management board and the
Brokat supervisory board must exercise the standard of care of a prudent and
diligent businessman and have the burden of proving that they did so if it is
ever contested. The interests of Brokat are deemed to include the interests of
the stockholders, the interests of the work force and, to some extent, the
common interest, and both the Brokat management board and the Brokat
supervisory board must take all these interests into account when taking
actions or decisions. The Brokat management board is required to respect the
rights of all shareholders to equal treatment and equal information. The Brokat
management board also has a duty to maintain the confidentiality of corporate
information. Members of the Brokat management board who violate their duties
may be held jointly and severally liable by the corporation for any resulting
damages, unless their actions were validly approved by resolution at a general
meeting of the shareholders. The members of the Brokat supervisory board have
similar liabilities in respect of the corporation if they violate their duties.
Claims of the corporation against the members of the Brokat management board
and of the Brokat supervisory board will be asserted if the general meeting of
the shareholders so resolves by simple majority or upon request of shareholders
holding in the aggregate at least 10% of the issued shares. The meeting of the
shareholders or a court of competent jurisdiction, upon request by shareholders
holding in the aggregate at least 10% (or, under special circumstances, 5%) of
the issued shares shall appoint a special auditor to assert such a claim. For
limitations on the liability of directors, see "--Limitation on Directors'
Liability--Brokat" and "--Shareholder Suits--Brokat."
German law does not provide for a specific standard of conduct applicable to
the members of the management board and of the supervisory board of a German
Aktiengesellschaft in the context of a threatened
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change in control. The German Takeover Code provides that the target company's
management board may not take any measures that run counter to the interest of
the shareholders in taking advantage of the tender offer. This rule of conduct
derives from the general principle that the target company's management board
has a duty vis-a-vis the shareholders to remain neutral.
Size and Classification of the Board of Directors
Blaze
The Blaze certificate of incorporation provides that the board is divided
into three classes, as nearly as equal in number as possible, with the term of
office of the directors of each class to expire at the third succeeding annual
meeting after their election. The Blaze bylaws provide that the Blaze board of
directors shall consist of 8 members. Such number may be changed by an
amendment of Blaze's bylaws, duly adopted by the board of directors or by the
stockholders or by an amendment to the certificate of incorporation.
Brokat
The Brokat supervisory board consists of 6 members. The supervisory board
elects its chairman and one or more vice-chairman at the meeting following the
general meeting of the shareholders at which the new members of the supervisory
board have been elected. The maximum term of office for members of the Brokat
management board is limited to five years according to the German Stock
Corporation Act.
The Brokat management board consists of one or more persons. The number of
members of the management board, as well as its chairpersons and one or more
vice-chairpersons, are determined by Brokat supervisory board. According to the
rules of procedure for Brokat's management board, Brokat's current management
board consists of six members. According to the Brokat articles of association,
the term of office for members of the Brokat supervisory board is the longest
term permissible under German law, provided, however, that the general meeting
of shareholders may determine that a shorter term of office applies. German law
disregards the fiscal year in which the term of office begins and extends the
term until the general meeting of the shareholders in the year following the
fourth fiscal year.
Members of both the Brokat management board and the Brokat supervisory board
may be re-elected for additional terms, and there is no limit on the number of
such additional terms.
Removal of Directors; Filling Vacancies on the Board of Directors
Blaze
The stockholders of Blaze may remove any director only for cause and fill
the vacancy created by such removal, by an affirmative vote of the majority of
the shares entitled to vote at such meeting, provided that a quorum is present.
The court may also remove a director and fill the vacancy created by such
removal. The Blaze bylaws provide that if vacancies are created by the vote of
Blaze stockholders or by court order, such vacancies may be filled by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present. Otherwise, any vacancy in the Blaze
board, including any vacancy resulting from an increase in the number of
directors, may be filled by the vote of a majority, although less than a
quorum, of the directors in office at the time such increase becomes effective.
Directors so elected hold office until the next annual meeting of the
stockholders or until a successor has been elected.
Brokat
The members of the Brokat management board may be removed prior to the
expiration of their terms by the Brokat supervisory board only for serious
cause, such as gross breach of duty, inability to manage the company properly,
or a withdrawal of confidence by the shareholders. In the case of vacancies,
the Brokat supervisory board may fill the vacancy by appointing a new member of
the Brokat management board.
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Members and alternate members of the Brokat supervisory board are elected by
the shareholders at the general meeting. Members of the Brokat supervisory
board may be removed upon the affirmative vote of a 75% of all votes cast at
the general meeting of the shareholders. Any member of the Brokat supervisory
board can be removed for good cause, including gross breach of duty, by a court
decision upon request of the Brokat supervisory board. In such case, the Brokat
supervisory board's determination to take such action requires a simple
majority vote with the member affected having no voting power. In the case of
vacancies, the competent court upon a motion by the management board, by a
member of the supervisory board, by a shareholder or by an employee
representative, may fill the vacancy for the interim period until the next
election by the shareholders.
Information Available to Shareholders
Under the terms of the indenture governing Brokat's 11 1/2% senior notes
issued in March 2000, Brokat is required to file annual, quarterly and current
reports at times and containing information similar to those filed by a U.S.
reporting company. Once such notes are no longer outstanding, Brokat will be
subject to the requirements of the Exchange Act relating to foreign private
issuers. These requirements will be similar to, but not the same as, those to
which a U.S. company such as Blaze is subject. Brokat, for example, will be
required to file annual and other periodic reports with the SEC. However, it
will not be required under the Exchange Act to file quarterly reports.
Furthermore, under Section 14 of the Exchange Act and the proxy rules
promulgated under the Exchange Act, Blaze is required to comply with certain
notice and disclosure requirements relating to the solicitation of proxies in
respect of stockholder meetings. As a foreign private issuer, Brokat will not
be subject to the proxy rules. However, Brokat is subject to the German Stock
Corporation Act (Aktiengesetz) and the listing rules of the Frankfurt Stock
Exchange regulating notices of general meetings of the shareholders. With
respect to the shares issued in the merger, Brokat will be subject to the
liability provisions of Sections 11 and 12 of the U.S. Securities Act and Rule
10b-5 under the U.S. Exchange Act.
Shareholder Meetings
Blaze
Under the Blaze bylaws the annual stockholders meeting must be held each
year on a date and at a time designated by the board of directors. If the
annual meeting for the election of directors is not held on a designated date,
the directors are required to cause such meeting to be held as soon thereafter
as may be convenient. If they fail to do so for a period of 30 days after the
designated date, or if no date has been designated for a period of 13 months
after the organization of the corporation or after its last annual meeting, the
Delaware Court of Chancery may summarily order a meeting to be held upon
application of any stockholder or director.
A special meeting of stockholders of Blaze may be called by the Blaze board,
its chairman, or Blaze's president. See "Shareholders' Proposals--Blaze."
A quorum for a meeting of the stockholders of Blaze consists of the holders
of shares constituting a majority of the voting power of the outstanding shares
of Blaze entitled to vote. A majority of the stock having voting power present
in person or by proxy is required for an action by the stockholders of Blaze
unless otherwise required by the Delaware General Corporation Law or Blaze's
charter documents.
Brokat
The general meeting is convened by the management board. Under certain
circumstances, namely, whenever the interests of the company so require, it may
be convened by the supervisory board. Notice of a general meeting shall be
given no later than one month prior to the date of the meeting. The notice, the
agenda and the text of proposed resolutions (drafted by the management board
and the supervisory board or only by the supervisory board) shall be published
in the company's designated journals. There are no quorum
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requirements for general meetings of Brokat. Additionally, resolutions are
passed at a general meeting of the shareholders of Brokat by a majority of the
votes cast, unless a higher vote is required by law. See "Description of
Capital Stock--Shareholders' Meetings and Voting Rights."
Shareholders' Proposals
Blaze
The Blaze bylaws establish procedures that must be followed for a
stockholder to submit a proposal, including nominations of directors, at an
annual meeting of stockholders. Such proposal must be timely filed with the
secretary of Blaze in a written statement setting forth specified information,
including a brief description of the proposal and the reasons for bringing such
business before the annual meeting, the name and address of the person making
the proposal, the class and number of shares of capital stock of Blaze
beneficially owned by such person, and any material interest of the stockholder
in such business together with such stockholder's name and the number of shares
he or she owns.
Brokat
According to the German Stock Corporation Act (Aktiengesetz), shareholders
holding in the aggregate shares representing at least 5% of the issued shares
are entitled to require that a matter is put on the agenda for resolution and
that the board of management submit a proposal at the respective shareholders'
meeting and to publish this proposal in the German Federal Gazette
(Bundesanzeiger). The request must be made in writing stating the purpose and
the reasons therefor. Proposals duly published may be submitted to the general
meeting of the shareholders for decision. In addition, if the agenda for the
meeting is duly published, then shareholders may nominate individuals for
election at the general meeting of the shareholders, even if they have not
availed themselves of the procedures to make such nominations in advance of the
general meeting of the shareholders and to have the board of management notify
shareholders of such nominations in advance of the general meeting of the
shareholders. Each shareholder may also submit at the general meeting of the
shareholders counter proposals to the proposals submitted by the management
board and the supervisory board.
Required Vote for Authorization of Certain Actions
Blaze
Under the Delaware General Corporation Law, fundamental corporate
transactions (such as mergers, sales of all or substantially all of the
corporation's assets and dissolutions) require the approval of the holders of a
majority of the shares outstanding and entitled to vote. The Delaware General
Corporation Law permits a corporation to increase the minimum percentage vote
required. Blaze's certificate of incorporation and bylaws require the
affirmative vote of two-thirds of the shares of Blaze capital stock outstanding
and entitled to vote, for the stockholders to amend provisions of the bylaws
relating to stockholders' meetings, stockholders' action by written consent,
advance notice provisions, and the classification, appointment, removal and
indemnification of directors.
Brokat
According to German law, the following resolutions may be passed only by a
majority of at least 75% of the share capital present or represented and
entitled to vote: some capital increases (contingent capital; authorized
capital), capital decreases, a dissolution of Brokat, a merger of Brokat or any
other form of transformation (Umwandlung) of Brokat, including, without
limitation, spin-offs (Spaltungen), a transfer of all or virtually all of
Brokat's assets, a change of Brokat's corporate form, and the exclusion of
preemptive rights (Bezugsrecht).
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Amendment of Corporate Charter and Bylaws
Blaze
Under the Delaware General Corporation Law, amendment of the certificate of
incorporation requires the approval of the holders of a majority of each class
of shares entitled to vote. However, the Blaze certificate of incorporation
provides that the affirmative vote of two-thirds of the shares of Blaze capital
stock outstanding and entitled to vote shall be required to amend the
provisions of the certificate of incorporation relating to the indemnification
and appointment of the directors, the classification of the board, the
authorization to set forth in Blaze's bylaws of a procedure concerning
stockholders' proposals and nominations for directors, the prohibition of any
stockholders' action taken by written consent and amendments of the certificate
of incorporation. The corporation's bylaws may also be amended by the
affirmative vote of a majority of the members of the board of directors, or by
the affirmative vote of the holders of a majority of the shares of Blaze,
except for the provisions relating to the stockholders' meetings, the
stockholders' written consents, and the appointment, removal and
indemnification of directors. In such cases, the affirmative vote of the
holders of at least two-thirds of the shares of Blaze will be required, except
as otherwise set forth in Blaze's certificate of incorporation.
Brokat
Amendments of the Brokat articles of association may be proposed either
jointly by the Brokat supervisory board and the Brokat management board or by a
stockholder or group of stockholders holding a minimum of 5% of the issued
shares. A resolution amending the Brokat articles of association must be passed
by a majority of the share capital present or represented and entitled to vote
unless the German law requires that the resolution be passed by at least three-
quarters of the shares issued present or represented and entitled to vote at
the meeting.
Appraisal Rights
Blaze
Stockholders of a Delaware corporation have rights of appraisal in
connection with certain mergers or consolidations if they are required to
accept in exchange for their shares anything other than (i) shares of stock of
the corporation surviving or resulting from such merger or consolidation, or
depository receipts in respect thereof, (ii) shares of stock of any other
corporation or depository receipts in respect thereof, which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or held of record by more than 2,000 stockholders, (iii)
cash in lieu of fractional shares or fractional depository receipts of a
corporation described in (i) and (ii) above or (iv) any combination of the
shares of stock, depository receipts and cash in lieu of fractional shares or
fractional depositary receipts described in (i), (ii) and (iii) above, provided
that no appraisal rights exist where, (A) on the record date fixed to determine
the stockholders entitled to vote on the merger or consolidation, the stock of
the corporation is listed on a national securities exchange, the NASDAQ
National Market or is held of record by more than 2,000 stockholders, and (B)
holders of shares of a class or series of stock of the surviving corporation
and the merger did not require the vote of the holders of that class or series
of such corporation's stock.
In determining fair value, any valuation method may be used that is
generally acceptable in the financial community.
Brokat
A valuation proceeding (Spruchverfahren) is available to Brokat's
shareholders under the German Stock Corporation Act (Aktiengesetz) and the
German Transformation Act (Umwandlungsgesetz) to determine the adequacy of the
consideration to be paid in certain corporate transactions. These transactions
include (a) a consolidation or merger of companies according to the provisions
of the German Transformation Act; (b) a
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control and profit transfer agreement between a controlling shareholder and its
dependent company; and (c) the forced withdrawal of minority shareholders from
a corporation upon the corporation's integration with its parent corporation
holding shares representing at least 95% of the nominal capital of the
corporation to be integrated; provided, in each case the shareholder complies
with the procedural requirements specified in the respective statutory
provisions.
Preemptive Rights
Blaze
Under the Delaware General Corporation Law, stockholders have no preemptive
rights to subscribe to additional issues of stock or to any security
convertible into such stock unless, and except to the extent that, such rights
are expressly provided for in the certificate of incorporation. The Blaze
certificate does not provide for preemptive rights.
Brokat
Under the German Stock Corporation Act (Aktiengesetz), an existing
shareholder has a general preemptive right (Bezugsrecht) to subscribe for any
issue by such corporation of shares, debt instruments convertible into shares
and participating debt instruments in proportion to the shares held by such
shareholder in the existing capital of such corporation. The German Stock
Corporation Act (Aktiengesetz) provides that this preemptive right can be
excluded only by a resolution of the general meeting of the shareholders, or,
if authorized to do so by the general meeting of the shareholders, by the
management board with the consent of the supervisory board. A majority of at
least three-quarters of the issued shares represented at the meeting is
required for the exclusion. See "Description of Brokat Capital Stock--
Preemptive Rights."
Limitation on Directors' Liability
Blaze
The Blaze certificate currently eliminates a director's personal liability
for monetary damages to the fullest extent permitted by Delaware law. As a
result, a Blaze director presently has no monetary liability except for
liability for:
. breach of the duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. declaration of an improper dividend or improper redemption of stock; or
. any transaction from which the director derived an improper personal
benefit.
Brokat
Under compulsory provisions of the German Stock Corporation Act
(Aktiengesetz), a stock corporation is not allowed to limit or eliminate the
personal liability of the members of either the management board or the
supervisory board for damages due to breach of duty in their official capacity.
For a discussion of the standard of conduct of the Brokat management board and
the Brokat supervisory board, see "--Duties of Directors--Brokat." Brokat may,
however, waive its claims for damages due to a breach of duty or reach a
settlement with regard to such claims if more than three years have passed
after such claims have arisen, but only with the approval of the general
meeting of the shareholders, provided that such waiver may not be granted and
such settlement may not be reached if shareholders holding in the aggregate at
least 10% of the issued shares file an objection to the protocol.
Indemnification of Officers and Directors
Blaze
The Blaze certificate of incorporation and the Blaze by-laws require
indemnification of its directors and officers to the fullest extent permitted
under Delaware law. Indemnification of directors, officers, employees
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and certain others for expenses incurred by reason of their position with the
corporation, is allowed under Delaware law, if he or she has acted in good
faith, with a reasonable belief that his or her conduct was in the best
interest of the corporation.
The Blaze certificate of incorporation and bylaws contain provisions for
advancing expenses to purchase and maintain insurance for directors and
officers against liability for expenses, judgments or settlements whether or
not Blaze would have the power to indemnify such persons therefor. The merger
agreement requires Brokat to cause the surviving corporation to have its
charter documents provide substantially similar protections and for Brokat to
maintain the current Blaze insurance or similar insurance in effect for six
years after the merger with regard to occurrences before the merger.
The Blaze bylaws also provide for the indemnification against any expenses
incurred by Blaze's agents or former agents.
Under the Delaware General Corporation Law, the statutory provisions for
indemnification are nonexclusive with respect to any other rights, such as
contractual rights, to which a person seeking indemnification may be entitled.
Delaware law does not expressly permit such contractual or other rights to
provide for indemnification against judgments and settlements paid in a
derivative action. Delaware case law has not made clear whether and to what
extent Delaware courts will enforce such a broad right of indemnification,
which is included in the Blaze's certificate of incorporation.
Brokat
Under German law, Brokat may indemnify its officers (LTD. Angestellte), and,
under certain circumstances, German labor law requires a stock corporation to
do so. However, Brokat may not, as a general matter, indemnify members of the
Brokat management board or the Brokat supervisory board. A German stock
corporation (Aktiengesellschaft) may, however, purchase directors and officers
insurance. Such insurance may be subject to any mandatory restrictions imposed
by German law. In addition, German law may permit a corporation to indemnify a
member of the board of management or the supervisory board for attorneys' fees
incurred if such member is the successful party in a suit in a country, such as
the U.S., where winning parties are required to bear their own costs, if German
law would have required the losing party to pay such member's attorneys' fees
had the suit been brought in Germany.
Members of the Brokat management board are covered by liability insurance,
including insurance against liabilities under the Securities Act.
Conflict-of-Interest Transactions
Blaze
The Delaware General Corporation Law generally permits transactions
involving a Delaware corporation and an interested director of that corporation
if (a) the material facts as to his relationship or interest are disclosed and
a majority of disinterested directors consents, (b) the material facts are
disclosed as to his relationship or interest and holders of a majority of
shares entitled to vote thereon consent, or (c) the transaction is fair to the
corporation at the time it is authorized by the board of directors, a committee
of the board of directors or the stockholders.
Brokat
In any transaction or contract between Brokat and any member of the Brokat
management board, Brokat is represented by the Brokat supervisory board. See
"--Duties of Directors--Brokat."
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Dividends
Blaze
The Delaware General Corporation Law permits dividends to be paid out of (i)
surplus (the excess of net assets of the corporation over capital), or (ii) if
the corporation does not have adequate surplus, net profits for the current or
immediately preceding fiscal year, unless the net assets are less than the
capital of any outstanding preferred stock. If the capital of the corporation
has been decreased to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock having a preference upon the
distribution of assets, no dividends may be declared out of net profits. In
determining the amount of surplus of a Delaware corporation, the assets of the
corporation, including stock of subsidiaries owned by the corporation, must be
valued at their fair market value as determined by the board of directors,
without regard to their historical book value.
Brokat
According to the German Stock Corporation Act (Aktiengesetz), dividends may
be paid out of the corporation's distributable profits as determined by
resolution of the stockholders general meeting for the preceding fiscal year.
See "Description of Brokat Capital Stock--Dividend Rights."
Loans to Directors
Blaze
Under the Delaware General Corporation Law, loans can generally be made to
officers, directors or employees upon approval by the board of directors.
Brokat
German law requires that any loan made by Brokat exceeding a month's salary
to any director or general manager or to their spouses or minor children must
be authorized by a resolution of the Brokat supervisory board. Loans made by
Brokat to a member of the Brokat supervisory board require an affirmative vote
of the Brokat supervisory board. For purposes of this resolution, the member of
the Brokat supervisory board who would be the borrower is not entitled to vote.
Shareholder Suits
Blaze
Under the Delaware General Corporation Law, a stockholder may bring a
derivative action on behalf of the corporation to enforce the rights of the
corporation. An individual also may commence a class action suit on behalf of
himself and other similarly situated stockholders where the requirements for
maintaining a class action under Delaware law have been met. A person may
institute and maintain such a suit only if such person was a stockholder at the
time of the transaction that is the subject of the suit or his or her stock
thereafter came to him or her by operation of law. Additionally, under Delaware
case law, the plaintiff generally must be a stockholder not only at the time of
the transaction which is the subject of the suit, but also through the duration
of the derivative suit. Delaware law also requires that the derivative
plaintiff make a demand on the directors of the corporation to assert the
corporate claim before the suit may be prosecuted by the derivative plaintiff,
unless such demand would be futile.
Brokat
German law does not provide for class actions, and does not generally permit
shareholder derivative suits, even in the case of breach of duty by the members
of the board of management or the supervisory board. The
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general meeting of the shareholders, acting by a simple majority of the votes
cast, or a minority of the shareholders holding in the aggregate at least 10%
of the issued shares, is entitled to request Brokat to claim damages against
certain persons, but is not entitled to assert any rights on behalf of Brokat.
This right to claim damages includes claims for liability incurred in
connection with Brokat's formation, or claims against members of the management
board or the supervisory board for liabilities incurred in connection with the
management of Brokat. Upon request, the corporation will prosecute such claim.
If such request is not complied with, the court will appoint a special auditor
upon a motion of shareholders with either shares representing at least 10%
(under special circumstances 5%) of the issued shares. The general meeting of
the shareholders may appoint any disinterested party as a special auditor for
these proceedings. To avoid abuse, shareholders exercising the minority right
described above must establish that they have held their shares for at least
three months prior to the general meeting of the shareholders in which they
make the request. The shareholder group must reimburse Brokat for all costs of
litigation if such proceedings are unsuccessful or only partially successful,
but only in the latter case to the extent that such costs exceed any amounts
awarded to Brokat in such a proceeding. Each shareholder who was present at the
general meeting of the shareholders and has objected to the resolution in the
minutes may within one month after adoption of the respective resolution of the
general meeting of the shareholders take action against the company to contest
the resolution (Anfechtungsklage).
Rights of Inspection
Blaze
Under the Delaware General Corporation Law, every stockholder, upon proper
written demand stating the purpose thereof, may inspect the corporate books and
records during normal business hours as long as such inspection is for a proper
purpose. Under the statute, a proper purpose is any purpose reasonably related
to the interests of the inspecting person as a stockholder.
Brokat
German law does not permit shareholders to inspect corporate books and
records. However, section 131 of the German Stock Corporation Act provides each
shareholder with a right to information at the general meeting of the
shareholders, to the extent that such information is necessary to permit a
proper evaluation of the relevant item on the agenda.
The right to information is a right only to oral information at a general
meeting of the shareholders. Information may be given in writing to
shareholders, but they are neither entitled to receive written information nor
to inspect any documents of the corporation. As a practical matter,
shareholders may receive certain written information about Brokat through its
public filings with the commercial register (Handelsregister) and the Federal
Gazette (Bundesanzeiger) and other places for publication of the company.
Stock Repurchases
Blaze
Under Delaware General Corporation Law, a corporation may purchase or redeem
its own shares unless the capital of the corporation is impaired or when such
purchase or redemption would cause an impairment of the capital of the
corporation. A Delaware corporation may, however, purchase or redeem out of
capital any of its preferred shares if such shares will be retired upon
acquisition, thereby reducing the capital of the corporation.
Brokat
German law allows a stock corporation (Aktiengesellschaft) like Brokat to
acquire its own shares if (i) it has been authorized by a resolution of the
general meeting of the shareholders, provided, that it acquires no more than
10% of its issued shares, or (ii) for certain defined purposes (e.g., for
transfer to employees).
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Anti-Takeover Statutes
Blaze
Section 203 of the Delaware General Corporation Law prohibits a corporation
which has securities traded on a national securities exchange or on Nasdaq or
held of record by more than 2,000 stockholders from engaging in certain
business combinations with anybody who acquires, or enters into an agreement or
understanding to acquire, 15% or more of the corporation's stock within three
years of the acquisition transaction, unless (1) the board of directors gives
prior approval to the transaction in which the 15% ownership level is exceeded;
(2) the interested stockholder acquires in the transaction at least 85% of the
corporation's stock (excluding shares owned by directors, officers or employee
stock plans in which employees do not have a confidential right to determine
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (3) the business combination is approved by the board of
directors and authorized at a meeting of stockholders by the holders of at
least two-thirds of the outstanding voting stock, excluding shares owned by the
interested stockholder. A Delaware corporation may elect not to be governed by
this provision. Blaze has made no such election.
Brokat
German law does not specifically regulate business combinations with
interested stockholders. However, certain general principles of German law may
restrict business combinations under certain circumstances.
Disclosure of Interests
Acquirors of shares of Blaze common stock are subject to disclosure
requirements under Section 13(d) of the Exchange Act and related rules. These
rules generally require a person who becomes the beneficial owner or more than
5% of a class a company's stock to make specified filings with the SEC
disclosing specified information, and to send a copy of the filings to the
company and to the principal securities exchange on which the security is
traded within 10 days after such acquisition. Some institutional investors are
permitted to report annually on Schedule 13G.
After the merger, acquirors of Brokat ordinary shares will be required to
comply with, among other things, Section 13(d) of the Exchange Act and the
related rules.
Under the German Stock Corporation Act, any company that becomes the holder
of more than 25% of Brokat's share capital, has a duty to notify Brokat in
writing. No rights shall attach to the Brokat shares held by such company, so
long as such disclosure has not been made. These rules also apply to foreign
companies. For the disclosure requirements under the German Securities Trading
Act see "Description of Capital Stock of Brokat--Disclosure Requirements."
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DESCRIPTION OF THE BROKAT AMERICAN DEPOSITARY SHARES
American Depositary Shares
Brokat is selling its ordinary shares in the form of ADSs. ADSs are American
depositary shares that are evidenced by American Depositary Receipts or ADRs.
The ADSs represent interests in Brokat's ordinary shares or other deposited
securities deposited with a custodian on behalf of The Bank of New York. Each
Brokat ADS will represent 0.50 Brokat ordinary shares. The Bank of New York
will issue the ADSs. Because ADSs usually make owning foreign shares easier,
ADSs are commonly used in offerings by foreign companies. Brokat is using them
because Brokat believes they will provide you with the following benefits:
. The Bank of New York will normally convert the cash dividends and other
payments Brokat makes from euros to U.S. dollars for you. The Bank of
New York will also assist you in claiming refunds for German withholding
taxes.
. In those cases where Brokat solicits your vote, Brokat expects The Bank
of New York to put in place procedures to allow you to vote the ordinary
shares, so you will not need to come to Germany or comply with German
law to exercise your right to vote.
. Brokat expects to make the information Brokat sends to its shareholders
in Germany available in English. The Bank of New York will make this
information available in the United States.
. Because each Brokat ADS represents 0.50 Brokat ordinary shares, Brokat
expects that its ADSs will trade at a price that is appropriate to the
U.S. market.
. Although you must pay the fees associated with owning Brokat ADSs, you
will not need to make special custody arrangements and pay custody fees
to hold the shares in Germany.
Your specific rights in Brokat's ADSs and in Brokat's ordinary shares
underlying the ADSs are set out in an agreement among Brokat, The Bank of New
York and you, as an ADS holder. To understand the terms of the ADSs, you should
carefully read the section in this proxy statement/prospectus entitled
"Description of American Depositary Shares" which describes the agreement.
Brokat also encourages you to read the agreement, which is an exhibit to this
registration statement.
Description of American Depositary Shares
The Bank of New York will issue the ADSs. Each ADS will represent ownership
interests in 0.50 Brokat ordinary shares (or the right to receive 0.50 ordinary
shares) which will be deposited with and held by Dresdner Bank AG in Germany on
behalf of The Bank of New York. Each ADS will also represent securities, cash
or other property deposited with The Bank of New York but not distributed to
ADS holders. The Bank of New York's corporate trust office is located at 101
Barclay Street, New York, New York 10286, and its principal executive office is
located at One Wall Street, New York, New York 10286. Dresdner Bank AG's office
is located at KS F1/ KBZ, Juergen-Ponto-Platz 1, D-60301 Frankfurt, Germany.
You may hold Brokat's ADSs either directly or indirectly through your broker
or other financial institution. If you hold Brokat's ADSs directly, you are an
ADS holder. This description assumes you hold your Brokat's ADSs directly. If
you hold the ADSs indirectly, you must rely on the procedures of your broker or
other financial institution to assert the rights of ADS holders described in
this section. You should consult with your broker or financial institution to
find out what those procedures are.
Because The Bank of New York will actually hold the shares, you must rely on
it to exercise the rights of a shareholder. The obligations of The Bank of New
York are set out in an agreement among Brokat, The Bank of New York and you, as
an ADS holder. The agreement and the ADSs are generally governed by New York
law.
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The following is a summary of the agreement. Because it is a summary, it
does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADS.
Directions on how to obtain copies of these are provided on page . --"Where
you can find more information."
Share Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or Dresdner Bank AG receives on ordinary shares, after
deducting its fees and expenses. You will receive these distributions in
proportion to the number of its ordinary shares your ADSs represent.
. Cash. The Bank of New York will convert any cash dividend or other cash
distribution Brokat pays on the ordinary shares into U.S. dollars, if it
can do so on a reasonable basis and can transfer the U.S. dollars to the
United States. If that is not possible or if any approval from the
German government is needed and can not be obtained, the agreement
allows The Bank of New York to distribute the euros only to those ADS
holders to whom it is possible to do so. It will hold the euros it
cannot convert for the account of the ADS holders who have not been
paid. It will not invest the euros and it will not be liable for any
interest.
Before making a distribution The Bank of New York will deduct any
withholding taxes that must be paid under German laws. See "Material Tax
Consequences." It will distribute only whole U.S. dollars and cents and
will round fractional cents to the nearest whole cent. If the exchange
rates fluctuate during a time when The Bank of New York cannot convert the
euros, you may lose some or all of the value of the distribution.
. Shares. The Bank of New York may distribute new ADSs representing any
ordinary shares Brokat distributes as a dividend or free distribution,
if Brokat furnishes it promptly with satisfactory evidence that it is
legal to do so. The Bank of New York will only distribute whole ADSs. It
will sell shares which would require it to issue a fractional ADS and
distribute the net proceeds in the same way as it does with cash. If The
Bank of New York does not distribute additional ADSs, each ADS will also
represent the new ordinary shares.
. Rights to receive additional shares. If Brokat offers holders of its
securities any rights to subscribe for additional ordinary shares or any
other rights, The Bank of New York may make these rights available to
you. Brokat must first instruct The Bank of New York to do so and
furnish it with satisfactory evidence that it is legal to do so. If
Brokat does not furnish this evidence and/or give these instructions,
and The Bank of New York decides it is practical to sell the rights, The
Bank of New York will sell the rights and distribute the proceeds in the
same way as it does with cash. The Bank of New York may allow rights
that are not distributed or sold to lapse. In that case, you will
receive no value for them.
If The Bank of New York makes rights available to you, upon instruction from
you, it will exercise the rights and purchase the shares on your behalf. The
Bank of New York will then deposit the shares and issue ADSs to you. It will
only exercise rights if you pay it the exercise price and any other charges the
rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation, and
transfer of the ADSs issued after the exercise of rights. For example, you may
not be able to trade the ADSs freely in the United States. In this case, The
Bank of New York may issue the ADSs under a separate restricted deposit
agreement which will contain the same provisions as the agreement, except for
changes needed to put the restrictions in place.
. Other Distributions. The Bank of New York will send to you anything else
Brokat distributes on deposited securities by any means it thinks is
legal, fair and practical. If it cannot make the distribution
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in that way, The Bank of New York has a choice. It may decide to sell what
Brokat distributed and distribute the net proceeds, in the same way as it
does with cash. Or, it may decide to hold what Brokat distributed, in
which case ADSs will also represent the newly distributed property.
The Bank of New York is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. Brokat has no
obligation to register ADSs, shares, rights or other securities under the U.S.
Securities Act. Brokat also has no obligation to take any other action to
permit the distribution of ADSs, shares, rights or anything else to ADS
holders. This means that you may not receive the distributions Brokat makes on
its shares or any value for them if it is illegal or impractical for it to make
them available to you.
Deposit, Withdrawal and Cancellation
How does the Depositary issue ADSs?
The Bank of New York will issue ADSs if you or your broker deposit ordinary
shares or evidence of rights to receive ordinary shares with Dresdner Bank AG.
Upon payment of its fees and expenses and of any taxes or charges, such as
stamp taxes or stock transfer taxes or fees, The Bank of New York will register
the appropriate number of ADSs in the names you request and will deliver the
ADSs at its office to the persons you request.
How do ADS holders cancel an ADS and obtain shares?
You may turn in your ADSs at The Bank of New York's office. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will deliver (1) the underlying
ordinary shares to an account designated by you with electronic book-entry
settlement system and (2) any other deposited securities underlying the ADS at
the office of Dresdner Bank AG. Or, at your request, risk and expense, The Bank
of New York will deliver the ordinary shares deposited at its office.
Voting Rights
How do you vote?
You may instruct The Bank of New York to vote the shares underlying your
ADSs, but only if Brokat asks The Bank of New York to ask for your
instructions. Otherwise, you will not be able to exercise your right to vote
unless you withdraw the shares. However, you may not know about the meeting
enough in advance to withdraw the shares.
If Brokat asks for your instructions, The Bank of New York will notify you
of the upcoming vote and arrange to deliver its voting materials to you. The
materials will (1) describe the matters to be voted on and (2) explain how you,
on a certain date, may instruct The Bank of New York to vote the ordinary
shares underlying your ADSs as you direct. For instructions to be valid, The
Bank of New York must receive them on or before the date specified. The Bank of
New York will try, as far as practical, subject to German law and the
provisions of Brokat's articles of association (Satzung) to vote or to have its
agents vote the ordinary shares as you instruct. The Bank of New York will only
vote or attempt to vote as you instruct.
Brokat can not assure you that you will receive the voting materials in time
to ensure that you can instruct The Bank of New York to vote your ordinary
shares. In addition, The Bank of New York and its agents are not
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responsible for failing to carry out voting instructions or for the manner of
carrying out voting instructions. This means that you may not be able to
exercise your right to vote and there may be nothing you can do if your shares
are not voted as you requested.
Fees and Expenses
<TABLE>
<CAPTION>
ADS holders must pay: For:
<C> <S>
$5.00 (or less) per 100 ADSs . Each issuance of an
ADS, including as a
result of a
distribution of
shares or rights or
other property
. Each cancellation of
an ADS, including if
the agreement
terminates
$.02 (or less) per ADS . Any cash payment
Registration or transfer fees . Transfer and
registration of
shares on--the
Electronic Book-
entry Settlement
System--share
register of the
Foreign Registrar--
from your name to
the name of The Bank
of New York or its
agent when you
deposit or withdraw
shares
Expenses of The Bank of New York . Conversion of euros
to U.S. dollars
. Cable, telex and
facsimile
transmission
expenses
Taxes and other governmental charges The Bank of . As necessary
New York or Dresdner Bank AG have to pay on any
ADS or share underlying an ADS, for example,
stock transfer taxes, stamp duty or withholding
taxes
</TABLE>
Payment of Taxes
You will be responsible for any taxes or governmental charges payable on
your ADSs or on the deposited securities underlying your ADSs. The Bank of New
York may refuse to transfer your ADSs until such taxes or other charges are
paid. The Bank of New York may deduct the amount of any taxes or other charges
owed from any payments to you. It may also sell deposited securities, by public
or private sale, to pay any taxes or other charges owed. You will remain liable
for any deficiency if the proceeds of the sale are not enough to pay the taxes
or other charges owed. If The Bank of New York sells deposited securities, it
will, if appropriate, reduce the number of ADSs to reflect the sale and pay to
you any proceeds, or send to you any property, remaining after it has paid the
taxes and other charges.
Reclassifications, Recapitalizations and Mergers
Then:
If Brokat:
The cash, shares or other
. Changes the nominal or par value securities received by The Bank of
of its shares New York will become deposited
securities. Each ADS will
automatically represent its equal
share of the new deposited
securities.
. Reclassifies, splits up or
consolidates any of the
deposited securities
. Distributes securities on the The Bank of New York may, and will
shares that are not distributed if Brokat asks them to, distribute
to you some or all of the cash, shares or
other securities it received. It
may also issue new ADSs or ask you
to surrender your outstanding ADSs
in exchange for new ADSs
identifying the new deposited
securities.
. Recapitalizes, reorganizes,
merges, liquidates, sells all or
substantially all of its assets,
or takes any similar action
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Amendment and Termination
How may the agreement be amended?
Brokat may agree with The Bank of New York to amend the agreement and the
ADSs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or certain
registration fees, cable, telex or facsimile transmission costs or other such
expenses of The Bank of New York, or prejudices an important right of ADS
holders, it will only become effective 30 days after The Bank of New York
notifies you of the amendment. At the time an amendment becomes effective, you
are considered, by continuing to hold your ADS, to agree to the amendment and
to be bound by the ADSs and the agreement as amended.
How may the agreement be terminated?
The Bank of New York will terminate the agreement if Brokat asks it to do
so. The Bank of New York may also terminate the agreement if The Bank of New
York has told it that it would like to resign and Brokat have not appointed a
new depositary bank within 45 days. In both cases, The Bank of New York must
notify you at least 90 days before termination.
After termination, The Bank of New York and its agents will be required to
do only the following under the agreement: (1) advise you that the agreement is
terminated, (2) collect distributions on the deposited securities, and (3)
deliver shares and other deposited securities upon cancellation of ADSs. One
year after termination, The Bank of New York will, if practical, sell any
remaining deposited securities by public or private sale. One year after
termination, The Bank of New York will hold the proceeds of the sale, as well
as any other cash it is holding under the agreement for the pro rata benefit of
the ADS holders that have not surrendered their ADSs. It will not invest the
money and has no liability for interest. The Bank of New York's only
obligations will be to account for the proceeds from the sale and other cash.
After termination its only obligations will be with respect to indemnification
and to pay certain amounts to The Bank of New York.
Limitations on Obligations and Liability to ADS Holders
Limits on Brokat's obligations and the obligations of the depositary; limits
on liability to holders of ADSs
The agreement expressly limits Brokat's obligations and the obligations of
The Bank of New York. It also limits Brokat's liability and the liability of
The Bank of New York. Brokat and The Bank of New York:
. are only obligated to take the actions specifically set forth in the
agreement without negligence or bad faith;
. are not liable if either of them is prevented or delayed by law or
circumstances beyond its control from performing its obligations under
the agreement;
. are not liable if either of them exercises discretion permitted under
the agreement;
. have no obligation to become involved in a lawsuit or other proceeding
related to the ADSs or the agreement on your behalf or on behalf of any
other party;
. may rely upon any documents it believes in good faith to be genuine and
to have been signed or presented by the proper party.
In the agreement, Brokat and The Bank of New York agree to indemnify each
other under certain circumstances.
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<PAGE>
Requirements for depositary actions
Before The Bank of New York will issue or register transfer of an ADS, make
a distribution on an ADS, or permit withdrawal of ordinary shares, The Bank of
New York may require:
. payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any shares or other deposited securities;
. production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
. compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADSs generally when the transfer books of The Bank of New York, Brokat or
the book-entry settlement system-foreign registrar are closed or at any time if
The Bank of New York or Brokat thinks it advisable to do so.
Your right to receive the ordinary shares underlying your ADSs
You have the right to cancel your ADSs and withdraw the underlying ordinary
shares at any time except:
. When temporary delays arise because: (i) The Bank of New York or Brokat
has closed its transfer books; (ii) the transfer of ordinary shares is
blocked to permit voting at a shareholders' meeting; or (iii) Brokat is
paying a dividend on the ordinary shares.
. When you or other ADS holders seeking to withdraw ordinary shares owe
money to pay fees, taxes and similar charges.
. When it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or to the withdrawal
of ordinary shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
agreement.
Pre-Release of ADSs
In certain circumstances, subject to the provisions of the agreement, The
Bank of New York may issue ADSs before deposit of the underlying ordinary
shares. This is called a pre-release of the ADS. The Bank of New York may also
deliver shares upon cancellation of pre-released ADSs (even if the ADSs are
canceled before the pre-release transaction has been closed out). A pre-release
is closed out as soon as the underlying ordinary shares are delivered to The
Bank of New York. The Bank of New York may receive ADSs instead of shares to
close out a pre-release. The Bank of New York may pre-release ADSs only under
the following conditions: (1) before or at the time of the pre-release, the
person to whom the pre-release is being made must represent to The Bank of New
York in writing that it or its customer owns the ordinary shares or ADSs to be
deposited; (2) the pre-release must be fully collateralized with cash or other
collateral that The Bank of New York considers appropriate; and (3) The Bank of
New York must be able to close out the pre-release on not more than five (5)
business days' notice. In addition, The Bank of New York will limit the number
of ADSs that may be outstanding at any time as a result of pre-release,
although The Bank of New York may disregard the limit from time to time, if it
thinks it is appropriate to do so.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of Brokat ordinary shares or ADSs in the public
market in the United States or Germany could adversely affect prevailing market
prices of Brokat shares and ADSs. Furthermore, many of the Brokat ordinary
shares or ADSs issued in connection with the mergers with Blaze and GemStone
will be subject to contractual and legal restrictions on resale after this
offering as described below. Sales of substantial numbers of Brokat ordinary
shares or ADSs in the public market after these restrictions lapse may
adversely affect the prevailing market price and Brokat's ability to raise
equity capital or effect acquisitions in the future.
Upon completion of the mergers with Blaze and GemStone, Brokat will have
outstanding approximately 35,468,209 ordinary shares, assuming no exercise of
outstanding options or warrants.
The Brokat ADSs and underlying Brokat ordinary shares to be issued in the
Blaze merger have been registered under the Securities Act, thereby allowing
such shares to be freely traded without restriction by all former holders of
Blaze common stock who are not "affiliates" of Blaze at the time of the special
meeting and who do not become "affiliates" of Brokat after the merger. Persons
who may be deemed to be affiliates of Blaze or Brokat generally include
individuals or entities that control, are controlled by or are under the common
control with, such party and may include certain officers and directors of
Blaze and Brokat, as well as significant stockholders.
Brokat ADSs received by stockholders of Blaze who are affiliates of Blaze or
Brokat may be resold without additional registration under the U.S. Securities
Act only in the manner permitted by Rule 145 under the U.S. Securities Act or
as otherwise permitted under the U.S. Securities Act.
This registration statement does not cover resales of Brokat ADSs received
by an affiliate of Blaze or Brokat.
Lock-up Agreements
Some members of Blaze's management, the funds affiliated with TL Ventures
and the funds affiliated with Morgan Stanley Dean Witter Venture Partners have
entered into a stockholders' agreement with Brokat. Under that stockholders
agreement, the Blaze management shareholders have agreed not to transfer the
Brokat ADSs they receive in connection with the merger for the first six months
after the closing of the merger.
Under the stockholders agreement, the funds affiliated with TL Ventures and
the funds affiliated with Morgan Stanley Dean Witter Venture Partners have
agreed:
. not to transfer the Brokat ADSs they receive in connection with the
merger for the first 60-days after the closing of the merger;
. not to transfer their shares for an additional 45-day period if Brokat
files a registration statement with the U.S. SEC for a primary offering
of capital stock for cash before the end of the 60-day period;
. after the two periods mentioned above, to limit its transfers to
. its own security holders; or
. in any 90-day period, up to (1) the average weekly trading volume in
Brokat ADSs reported through Nasdaq during the preceding four
calendar weeks if that shareholder is transferring Brokat ADSs, or
(2) the greater of 1% of the total number outstanding shares of
Brokat and the average weekly trading volume in Brokat ordinary
shares reported through the Neuer Markt during the preceding four
calendar weeks if that shareholder is transferring Brokat ordinary
shares
In addition, the Blaze shareholders subject to the stockholders agreement
have agreed not to transfer their shares during the 14-day period before, and
the 90-day period after, a public offering by Brokat in the United States.
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Regulation S
Regulation S under the U.S. Securities Act provides that shares owned by any
person may be sold without registration in the United States in an offshore
transaction involving no directed selling efforts in the United States, as
these terms are defined in Regulation S. In general, this means that Brokat
shares may be sold on the Neuer Markt or in some other manner outside the
United States without registration under the Securities Act.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
Brokat or Blaze employees, consultants or advisors who purchase shares from
Brokat in connection with the exercise of options granted to them by Blaze will
be eligible to resell such shares in reliance on Rule 144, without compliance
with some restrictions, including the holding period, contained in Rule 144.
Stock Options
After consummation of the Blaze merger, Brokat intends to file a
registration statement under the U.S. Securities Act covering ordinary shares
reserved for issuance under employee incentive plans. This registration
statement is expected to be filed and become effective as soon as practicable
after consummation of the Blaze merger. Accordingly, ordinary shares registered
under this registration statement will be available for sale in the open market
immediately, subject to vesting provisions and Rule 144 volume limitations
applicable to affiliates.
ENFORCEABILITY OF CIVIL LIABILITIES
Brokat is a stock corporation organized under the laws of Germany. Most of
its management board and supervisory board members and executive officers
reside outside the United States. All or a substantial portion of its assets
and most of its management board and supervisory board members also are located
outside the United States. Because of the location of Brokat's assets and board
members, it may not be possible for investors to serve process within the
United States upon Brokat or such persons with respect to 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 under the civil liability provisions of the United States federal
securities laws.
Brokat has been advised by its special counsel as to German law, Gleiss Lutz
Hootz Hirsch, that there is doubt as to the enforceability in Germany, in
original actions or in actions for enforcement of judgments of United States
courts, of civil liabilities predicated solely upon the federal securities laws
of the United States. In addition, awards of punitive damages in actions
brought in the United States or elsewhere may be unenforceable in Germany.
Brokat has appointed CT Corporation System, 111 Eighth Avenue, New York, New
York 10011 as its agent to receive service of process in any action against it
in any state or federal court in the State of New York arising out of the
transaction described in this proxy statement/prospectus or any purchase or
sale of the notes in connection with this offering.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
their proposals to Blaze in a timely manner.
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Blaze will hold an annual meeting in the year 2000 only if the merger is not
completed. If the merger is not completed and Blaze schedules a 2000 annual
meeting to be held after September 29, 2000, stockholders may present a
proposal for inclusion in Blaze's proxy statement and presentation at the
annual meeting a reasonable time before Blaze begins to print and mail its
proxy materials.
LEGAL MATTERS
Material United States federal income tax consequences of the merger will be
passed upon for Brokat by Paul, Weiss, Rifkind, Wharton & Garrison, U.S.
counsel for Brokat. The legality and validity of the Brokat ordinary shares to
be issued under the merger agreement will be passed upon by Gleiss Lutz Hootz
Hirsch, Stuttgart, Federal Republic of Germany, German counsel for Brokat.
Material United States federal income tax consequences of the merger will be
passed upon for Blaze by Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation. Wilson, Sonsini, Goodrich & Rosati, Professional Corporation acts
as counsel for Blaze. Attorneys at Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation beneficially own 26,963 shares of Blaze common stock.
Material German tax consequences of holding Brokat ADSs or Brokat ordinary
shares will be passed upon by Gleiss Lutz Hootz Hirsch, Stuttgart, Federal
Republic of Germany, German counsel for Brokat.
EXPERTS
The consolidated financial statements of:
(1) Brokat Aktiengesellschaft 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
(2) MeTechnology AG and its predecessor, ESD
Vermoegensverwaltungsgesellschaft mbH as of December 31, 1998 and 1997
and for the years then ended,
included in this proxy statement/prospectus, have been audited by Arthur
Andersen Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH,
independent public accountants, as set forth in their reports thereon appearing
elsewhere in this proxy statement/prospectus, and are included in this
registration statement in reliance upon the authority of such 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-45 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 at March 31, 1999 and 2000,
and for each of the three years in the period ended March 31, 2000 appearing in
this proxy statement/prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of GemStone Systems, Inc. at December
31, 1999 and 1998, and for each of the two years in the period ended December
31, 1999, included in the Proxy Statement of Blaze Software, Inc., which is
referred to and made a part of this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
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WHERE YOU CAN FIND MORE INFORMATION
Blaze files annual, quarterly and other reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information on file at the SEC's public reference room located at 450
Fifth Street, NW, Washington, DC 20549 or at one of the SEC's other public
reference rooms in New York, New York and Chicago, Illinois. You can call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
The SEC filings are also available to the public from commercial document
retrieval services and at the Internet world wide web site maintained by the
SEC at www.sec.gov.
Brokat has filed a registration statement on Form F-4 to register with the
SEC the Brokat ordinary shares underlying the Brokat ADSs which Blaze
stockholders will receive in the merger. Brokat has filed a separate
registration statement on Form F-6 relating to the Brokat ADSs. This proxy
statement/prospectus is a part of the registration statement on Form F-4. This
proxy statement/prospectus is a prospectus of Brokat as well as being a proxy
statement of Blaze for its special meeting.
You should rely only on the information contained in this proxy
statement/prospectus in making your decision about how to vote on the approval
and adoption of the merger agreement. Neither Blaze nor Brokat has authorized
anyone to provide you with information that is different from what is contained
in this proxy statement/prospectus. You should not assume that the information
in this proxy statement/prospectus is accurate as of any other date other than
the date set forth on the cover and should view neither the mailing of this
proxy statement/prospectus to stockholders nor the issuance of Brokat ADSs in
the merger as implying otherwise.
TRADEMARKS AND SERVICE MARKS OF BROKAT
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, mesign and msign as our word
trademarks in various jurisdictions. All other trademarks, registered
trademarks, service marks and registered service marks used in this proxy
statement/prospectus are the property of their owners.
TRADEMARKS AND SERVICE MARKS OF BLAZE
Blaze Software, Blaze Advisor, Blaze Advisor Solutions Suite, and Beyond
Personalization are trademarks of Blaze Software, Inc. All other trademarks,
registered trademarks, service marks and registered service marks used in this
proxy statement/prospectus are the property of their owners.
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INDEX TO FINANCIAL STATEMENTS
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Page
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<S> <C>
BROKAT Aktiengesellschaft
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-57
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
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<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 September 1, 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> <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
F-32
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares of Brokat AG and is expected to be closed by October 2000. The purchase
of GemStone was made through the issuance of 2,648,748 new shares of Brokat AG
and closed at August 30, 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
Angelo Maestrini Systems Division"
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)
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>
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.
F-43
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Dr. Peter Page Chairman
Prof. Dr. Wulf von Schimmelmann
Deputy Chairman
Dr. Hans-Joachim Korber
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 of 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
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
by and between
BLAZE SOFTWARE, INC.
and
BROKAT AKTIENGESELLSCHAFT
June 19, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
RECITALS.................................................................. 1
ARTICLE I THE MERGER...................................................... 1
Section 1.1 The Merger............................................... 1
Section 1.2 Effective Time........................................... 2
Section 1.3 Closing.................................................. 2
Section 1.4 Effects of the Merger.................................... 2
Section 1.5 The Certificate of Incorporation......................... 2
Section 1.6 The By-Laws.............................................. 2
Section 1.7 Directors of Surviving Corporation....................... 2
Section 1.8 Officers of Surviving Corporation........................ 2
ARTICLE II EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF
CERTIFICATES............................................................. 3
Section 2.1 Conversion of Capital Stock.............................. 3
Section 2.2 Exchange of Certificates................................. 3
Section 2.3 No Appraisal Rights...................................... 6
Section 2.4 Adjustments to Prevent Dilution.......................... 6
Section 2.5 Withholding Rights....................................... 6
Section 2.6 Treatment of Stock Options/Restricted Stock.............. 6
Section 2.7 Treatment of Warrants.................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 8
Section 3.1 Organization and Qualification; Subsidiaries............. 8
Section 3.2 Certificate of Incorporation and By-Laws................. 8
Section 3.3 Capitalization........................................... 9
Section 3.4 Authority................................................ 10
Section 3.5 No Conflict.............................................. 10
Section 3.6 Required Filings and Consents............................ 11
Section 3.7 Permits; Compliance with Law............................. 11
Section 3.8 SEC Filings; Financial Statements........................ 11
Section 3.9 Absence of Certain Changes or Events..................... 12
Section 3.10 Employee Benefit Plans; Employee Relations............... 13
Section 3.11 Accounting and Tax Matters............................... 15
Section 3.12 Contracts; Debt Instruments.............................. 15
Section 3.13 Litigation............................................... 15
Section 3.14 Environmental Matters.................................... 15
Section 3.15 Intellectual Property.................................... 16
Section 3.16 Taxes.................................................... 18
Section 3.17 Non-Competition Agreements............................... 18
Section 3.18 Agreements with Regulatory Agencies...................... 18
Section 3.19 Opinion of Financial Advisor............................. 18
Section 3.20 Brokers.................................................. 18
Section 3.21 Certain Statutes......................................... 19
Section 3.22 Information.............................................. 19
Section 3.23 Vote Required............................................ 19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT................... 19
Section 4.1 Organization and Qualification; Subsidiaries............. 19
Section 4.2 Charter Documents........................................ 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 4.3 Capitalization......................................... 20
Section 4.4 Authority.............................................. 21
Section 4.5 No Conflict............................................ 21
Section 4.6 Required Filings and Consents.......................... 22
Section 4.7 Financial Statements................................... 22
Section 4.8 Absence of Certain Changes or Events................... 22
Section 4.9 Accounting and Tax Matters............................. 23
Section 4.10 Litigation............................................. 23
Section 4.11 Intellectual Property.................................. 23
Section 4.12 Taxes.................................................. 24
Section 4.13 Brokers................................................ 24
Section 4.14 Information............................................ 24
ARTICLE V COVENANTS..................................................... 24
Section 5.1 Conduct of Business of the Company..................... 24
Section 5.2 Certain Interim Operations of the Parent............... 26
Section 5.3 Notification of Certain Matters........................ 27
Section 5.4 Proxy Statement........................................ 27
Section 5.5 Company Stockholders Meeting........................... 28
Section 5.6 Access to Information; Confidentiality................. 29
Section 5.7 No Solicitation........................................ 29
Section 5.8 Employee Benefits Matters.............................. 30
Section 5.9 Directors' and Officers' Indemnification and 31
Insurance..............................................
Section 5.10 Letters of Accountants................................. 32
Section 5.11 Commercially Reasonable Efforts........................ 32
Section 5.12 Consents; Filings; Further Action...................... 32
Section 5.13 Plan of Reorganization................................. 33
Section 5.14 Public Announcements................................... 33
Section 5.15 Stock Exchange Listings and De-Listings................ 33
Section 5.16 Expenses............................................... 33
Section 5.17 Takeover Statutes; Exon-Florio......................... 34
Section 5.18 Dividends.............................................. 34
Section 5.19 Control of the Company's Operations.................... 34
Section 5.20 Certain Obligations of the Parent...................... 34
ARTICLE VI CONDITIONS................................................... 34
Section 6.1 Conditions to Each Party's Obligation to Effect the 34
Merger.................................................
Section 6.2 Conditions to Obligations of the Parent................ 35
Section 6.3 Conditions to Obligation of the Company................ 36
ARTICLE VII TERMINATION................................................. 36
Section 7.1 Termination............................................ 36
Section 7.2 Effect of Termination.................................. 37
Section 7.3 Expenses Following Certain Termination Events.......... 38
ARTICLE VIII MISCELLANEOUS.............................................. 39
Section 8.1 Certain Definitions.................................... 39
Section 8.2 Survival............................................... 39
Section 8.3 Counterparts........................................... 39
Section 8.4 GOVERNING LAW; WAIVER OF JURY TRIAL.................... 39
Section 8.5 Notices................................................ 40
Section 8.6 Entire Agreement....................................... 41
Section 8.7 No Third Party Beneficiaries........................... 41
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 8.8 Amendment.............................................. 41
Section 8.9 Waiver................................................. 41
Section 8.10 Obligations of the Parent and of the Company........... 41
Section 8.11 Severability........................................... 41
Section 8.12 Interpretation......................................... 41
Section 8.13 Assignment............................................. 41
Section 8.14 Specific Performance................................... 42
Section 8.15 Submission to Jurisdiction; Waivers; Consent to Service 42
of Process.............................................
EXHIBITS
Exhibit A Company Voting Agreements
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated June 19, 2000, by and
between BLAZE SOFTWARE, INC., a Delaware corporation (the "Company"), and
BROKAT AKTIENGESELLSCHAFT, a German corporation which is in the process of
changing its name from BROKAT Infosystems Aktiengesellschaft (the "Parent").
RECITALS
(a) The management board (Vorstand) of the Parent and the board of directors
of the Company have determined that the merger of Merger Sub with and into the
Company on the terms and subject to the conditions set forth on this Agreement
(the "Merger"), with the Company surviving as a wholly owned subsidiary of the
Parent, is advisable and that it is in the best interests of their respective
corporations and stockholders to combine the respective businesses of the
Parent and the Company, and consequently have approved the merger of Merger Sub
with and into the Company (the "Merger") and have approved and adopted the
Merger and this Agreement, in accordance with the General Corporation Law of
the State of Delaware (the "DGCL") and the laws of Germany.
(b) Concurrently with the execution of this Agreement, as a condition to the
willingness of the Parent to enter into this Agreement, (i) certain holders
(the "Principal Stockholders") of the Company's common stock, par value $0.0001
per share ("Company Common Stock"), are entering into one or more stockholders'
agreements, dated as of the date hereof, with the Parent and the Company,
copies of which are attached to this Agreement as Exhibit A (the "Company
Voting Agreements").
(c) For federal income tax purposes it is intended that the Merger shall
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the rules and
regulations promulgated under the Code.
(d) Certain terms used in this Agreement which are not capitalized have the
meanings specified in Section 8.1.
NOW, THEREFORE, the parties to this Agreement, intending to be legally bound
by this Agreement, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger.
(a) As promptly as practicable following the date hereof, the Parent and
the Company shall appoint a United States bank or trust company or other
independent financial institution in the United States (the "Exchange
Agent") to act as exchange agent for the Share Exchange (as defined in
Section 2.2 (a)(ii) hereof) and the delivery of the Merger Consideration
(as defined in Section 2.1(c) hereof). Following such appointment, the
Exchange Agent (as agent for the Parent) shall cause to be incorporated
pursuant to the DGCL a corporation which shall be a constituent company in
the Merger ("Merger Sub") and which shall not transact any business other
than participating in the Merger as described herein. To accommodate the
transactions described in this Article I and Article II, the Exchange Agent
shall hold all the issued and outstanding shares of common stock, par value
$0.01 per share, of the Merger Sub (the "Merger Sub Common Stock") as agent
for the Parent; at and following the Effective Time, the Exchange Agent
shall receive and hold the Merger Consideration and the Exchange Fund
solely as agent for the Company's shareholders. The Parent and the Company
shall enter into an exchange agent agreement with the Exchange Agent in
form and substance reasonably satisfactory to the Parent and the Company,
which agreement shall set forth the duties, responsibilities and
obligations of the Exchange Agent consistent with the terms of this
Agreement.
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(b) Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, in accordance with the DGCL, Merger Sub
shall be merged with and into the Company in accordance with this Agreement
and the separate corporate existence of Merger Sub shall cease. The Company
shall be the surviving corporation in the Merger (sometimes referred to as
the "Surviving Corporation") and shall continue to be governed by the laws
of the State of Delaware, and the separate corporate existence of the
Company with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger.
Section 1.2 Effective Time. As soon as practicable following the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VI but in no event later than the third business day following such
satisfaction or waiver (unless another date is agreed to by each of the parties
in writing), the Company, Merger Sub and the Parent will cause a Certificate of
Merger (the "Certificate of Merger") to be signed, acknowledged and delivered
for filing with the Secretary of State of the State of Delaware as provided in
Section 251 of the DGCL. The Merger shall become effective at the time when a
Certificate of Merger has been duly filed with the Secretary of State of the
State of Delaware or such other subsequent date or time as shall be agreed upon
by the parties and set forth in the Certificate of Merger and in accordance
with the DGCL (the "Effective Time").
Section 1.3 Closing. Subject to the satisfaction or waiver of all of the
conditions to closing contained in Article VI hereof, the closing of the Merger
(the "Closing") shall take place (a) at the offices of Paul, Weiss, Rifkind,
Wharton & Garrison, New York, New York at 12:00 (noon, New York time) on the
third business day after the day on which the last to be fulfilled or waived of
such conditions (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the fulfillment or waiver of those
conditions) shall be satisfied or waived in accordance with this Agreement or
(b) at such other place and time or on such other date as the Company and the
Parent may agree in writing (the "Closing Date").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the DGCL, including Section 259 of the DGCL, and in accordance
therewith, at the Effective Time, all the properties, rights, privileges,
powers and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger
Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 1.5 The Certificate of Incorporation. The certificate of
incorporation of Merger Sub in effect immediately prior to the Effective Time
shall, from and after the Effective Time, be the certificate of incorporation
of the Surviving Corporation until duly amended as provided therein or by
applicable law; provided, however, that at the Effective Time, the certificate
of incorporation of the Surviving Corporation shall be amended so that the name
of the Surviving Corporation shall be ABlaze Software, Inc."
Section 1.6 The By-Laws. The by-laws of Merger Sub in effect immediately
prior to the Effective Time shall, from and after the Effective Time, be the
by-laws of the Surviving Corporation until duly amended as provided therein or
by applicable law.
Section 1.7 Directors of Surviving Corporation. The directors of Merger Sub
at the Effective Time shall, from and after the Effective Time, be the
directors of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Certificate of Incorporation and by-laws of the
Surviving Corporation.
Section 1.8 Officers of Surviving Corporation. The officers of the Company
at the Effective Time shall, from and after the Effective Time, be the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation.
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ARTICLE II
EFFECT OF THE MERGER ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
Section 2.1 Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without 4any action on the part of the holder of any capital
stock of the Company:
(a) Capital Stock of Merger Sub. Each share of Merger Sub Common Stock
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
share of common stock, par value $0.0001 per share, of the Surviving
Corporation ("Surviving Corporation Common Stock").
(b) Cancellation of Treasury Stock and Parent-Owned Stock. All shares of
Company Common Stock that are owned by the Company as treasury stock or by
the Parent, Merger Sub or any Parent Subsidiary issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder of any such shares, no longer
be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist; provided, however, that
all shares of Company Common Stock that are owned by any trust established
pursuant to Section 2.6 hereof shall remain issued and outstanding and the
holders thereof shall be entitled to the Merger Consideration.
(c) Exchange Ratio. Each share of the common stock, par value $0.0001
per share, of the Company (the "Company Common Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
Company Common Stock that are owned by the Company as treasury stock or by
the Parent or any Parent Subsidiary) shall be converted into the right to
receive (the "Exchange Ratio") 0.3652 American Depositary Shares of the
Parent ("Parent ADSs"), each representing 0.5 shares (stuckaktien) of the
Parent ("Parent Common Stock"), subject to adjustment as provided in
Section 2.4 and subject to cash in lieu of fractional Parent ADSs, if any,
pursuant to Section 2.2(f) (collectively, the "Merger Consideration"). At
the Effective Time, all shares of Company Common Stock shall no longer be
outstanding, shall be canceled and retired and shall cease to exist, and
each certificate (a "Certificate") formerly representing any Shares of
Company Common Stock (other than shares of Company Common Stock owned by
the Company or by the Parent, Merger Sub or any Parent Subsidiary) shall
thereafter represent only the right to receive the Merger Consideration and
any distribution or dividend under Section 2.2(c) in each case without
interest.
Section 2.2 Exchange of Certificates.
(a) The Share Exchange. Consistent with the terms of this Agreement, as
soon as practicable following the signing of this Agreement and in no event
later than five business days following the Effective Time (unless
otherwise agreed to by each of the parties in writing):
(i) the Parent shall issue the Parent Common Stock underlying the
Parent ADSs to be issued on behalf of the Parent in connection with the
Merger and cause American Depositary Receipts ("ADRs") representing
Parent ADSs representing such Parent Common Stock (such Parent ADSs,
together with any dividends or distributions with respect thereto to
which the holders of Certificates may be entitled pursuant to Section
2.2(c) and with the proceeds held in the Exchange Trust, being
hereinafter referred to as the "Exchange Fund") to be delivered to the
Exchange Agent, for the benefit of the holders of Certificates, for
exchange in accordance with this Article II, through the Exchange
Agent, issuable pursuant to Section 2.1(c) in exchange for outstanding
shares of Company Common Stock; and
(ii) the Exchange Agent shall contribute, on behalf of the former
stockholders of the Company, all of the issued and outstanding shares
of Surviving Corporation Common Stock to the Parent as a contribution
in kind (the "Share Exchange").
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Subject to Section 5.20, the Share Exchange shall be effected in accordance
with Sections 52, 203, 185 et seq. (including in particular Section 187) of the
German Stock Corporation Law (Aktiengesetz), in each case to the extent each
such provision may be applicable, by registering the increase of the Parent
stated share capital by contribution-in-kind (the "Share Capital Increase")
with the commercial register (Handelsregister) for the Parent. At the Effective
Time, the obligation of the parties to effect the Share Exchange shall be
unconditional.
(b) Exchange Procedures. Promptly after the Effective Time, and in no
event later than five business days thereafter (unless otherwise agreed to
by each of the parties in writing), the Surviving Corporation shall cause
the Exchange Agent to mail to each holder of record of a Certificate (other
than the Company, the Parent, Merger Sub or any Parent Subsidiary) (i) a
letter of transmittal specifying that delivery shall be effected, and that
risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates (or affidavits of loss in lieu of
Certificates) to the Exchange Agent, in a form and with other customary
provisions reasonably specified by the Parent and the Company, and (ii)
instructions for surrendering the Certificates to the Exchange Agent in
exchange for (A) an ADR representing the number of whole Parent ADSs
pursuant to Section 2.2(f), (B) cash in lieu of any fractional Parent ADSs,
and (C) any unpaid dividends and other distributions (if any) pursuant to
Section 2.2(c). Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of that Certificate shall be entitled to receive in exchange (1) an
ADR representing that number of whole Parent ADSs that the holder is
entitled to receive under this Article II, (2) a check in the amount (after
giving effect to any required tax withholding) of (x) any cash in lieu of
fractional Parent ADSs plus (y) any unpaid dividends (other than stock
dividends) and any other dividends or other distributions that such holder
has the right to receive under the provisions of this Article II (if any),
and the Certificate so surrendered shall immediately be canceled. No
interest will be paid or accrued on any amount payable upon due surrender
of the Certificates. In the event of a transfer of ownership of shares of
Company Common Stock that is not registered in the transfer records of the
Company, an ADR representing the proper number of Parent ADSs, together
with a check for any cash to be paid upon the surrender of the Certificate
and any other dividends or distributions (if any) in respect of those
shares, may be issued or paid to such a transferee if the Certificate
formerly representing such Shares of Company Common Stock is presented to
the Exchange Agent, accompanied by all documents required to evidence and
effect the transfer and to evidence that any applicable stock transfer
taxes have been paid. If any ADRs for shares of Parent ADSs is to be issued
in a name other than that in which the surrendered Certificate is
registered, it shall be a condition of such exchange that the person
requesting such exchange shall pay any transfer or other taxes required by
reason of the issuance of certificates for shares of Parent Common Stock in
a name other than that of the registered holder of the surrendered
Certificate, or shall establish to the satisfaction of the Parent or the
Exchange Agent that such tax has been paid or is not applicable.
(c) Distributions with Respect to Unexchanged Company Common
Stock. Whenever a dividend or other distribution is declared by the Parent
in respect of Parent Common Stock and the record date for that dividend or
other distribution is at or after the Effective Time, that declaration
shall include dividends or other distributions in respect of all ADSs
issuable under this Agreement. No dividends or other distributions in
respect of the Parent ADSs shall be paid to any holder of any unsurrendered
Certificate until that Certificate is surrendered for exchange in
accordance with this Article II. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be issued or paid
to the holder of the ADRs representing whole shares of Parent ADSs issued
in exchange therefor, without interest, (i) at the time of such surrender,
the dividends or other distributions with a record date at or after the
Effective Time and a payment date on or prior to the date of issuance of
such whole Parent ADSs and not previously paid, and (ii) at the appropriate
payment date, the dividends or other distributions payable with respect to
such whole shares of Parent Common Stock with a record date at or after the
Effective Time but with a payment date subsequent to surrender. For
purposes of dividends or other distributions in respect of Parent ADSs, all
Parent ADSs to be issued pursuant to the Merger shall be deemed issued and
outstanding as of the Effective Time.
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(d) No Further Ownership Rights in Company Common Stock. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the ADR representing Parent ADSs and cash in lieu of any fractional
Parent ADSs, as contemplated by this Section 2.2. All Parent ADSs, together
with any cash paid under Section 2.2(c) or Section 2.2(f) issued upon the
surrender for or exchange of Certificates in accordance with the terms of
this Agreement, shall be deemed to have been issued in full satisfaction of
all rights pertaining to the shares of Company Common Stock formerly
represented by such Certificates.
(e) No Further Transfers. After the Effective Time, the stock transfer
books of the Company shall be closed and there shall be no further
registration of transfers on the records of the Company of the shares of
Company Common Stock that were outstanding immediately prior to the
Effective Time.
(f) Fractional Shares.
(i) No ADRs representing fractional Parent ADSs shall be issued upon
the surrender for exchange of Certificates, and such fractional
interest will not entitle its owner to receive dividends or to any
other rights of a holder of Parent ADSs. Notwithstanding any other
provision of this Agreement, each holder of shares of Company Common
Stock exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a Parent ADS (after taking into
account all Certificates delivered by such holder) shall receive from
the Exchange Agent, in accordance with the provisions of this Article
II, a cash payment in lieu of such fractional Parent ADS, as
applicable, representing such holder's proportionate interest, if any,
in the net proceeds from the sale by the Exchange Agent in one or more
transactions (which sale transactions shall be made at such times, in
such manner and on such terms as the Exchange Agent shall determine in
its reasonable discretion) on behalf of all such holders of the
aggregate of the fractional Parent ADSs, as applicable, which would
otherwise have been issued (the "Excess Parent ADSs"). The sale of the
Excess Parent ADSs by the Exchange Agent shall be executed on the
Nasdaq National Market, at such time the Parent ADSs are quoted on the
Nasdaq National Market, and shall be executed in round lots to the
extent practicable. Until the net proceeds of such sale or sales have
been distributed to the holders of Certificates, the Exchange Agent
will hold such proceeds in trust (the "Exchange Trust") for the holders
of Certificates. All commissions, transfer taxes and other out-of-
pocket transaction costs, including the expenses and compensation of
the Exchange Agent, incurred in connection with this sale of the Excess
Parent ADSs shall be paid by the Parent. As soon as practicable after
the determination of the amount of cash, if any, to be paid to holders
of Certificates in lieu of any fractional shares of Parent ADSs, the
Exchange Agent shall make available such amounts to such holders of
Certificates without interest. The Exchange Agent shall determine the
portion of such net proceeds to which each holder of shares of Company
Common Stock shall be entitled, if any, by multiplying the amount of
the aggregate net proceeds by a fraction the numerator of which is the
amount of the fractional share interest to which such holder of shares
of Company Common Stock is entitled (after taking into account all
shares of Company Common Stock then held by such holder) and the
denominator of which is the aggregate amount of fractional interests to
which all holders of Certificates representing shares of Company Common
Stock are entitled.
(ii) Notwithstanding the provisions of subsection (i) of this
Section 2.2(f), the Parent may elect, at its option exercised prior to
the Effective Time and in lieu of the issuance and sale of Excess
Parent ADSs and the making of the payments contemplated in such
subsection, to pay to the Exchange Agent an amount in cash sufficient
for the Exchange Agent to pay each holder of shares of Company Common
Stock an amount in cash equal to the product obtained by multiplying
(A) the fractional interest to which such holder would otherwise be
entitled (after taking into account all shares of Company Common Stock
held at the Effective Time by such holder) by (B) the closing price for
a share of Parent ADSs on the Nasdaq National Market (or, if there is
not yet a closing price for Parent ADSs on such market, the closing
price for the Parent Common Stock underlying such Parent ADS on the
Neuer Market (as defined in Section 4.6)) on the first business day
immediately following the Effective Time and, in such case, all
references in this Agreement to the cash proceeds
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of the sale of the Excess Shares and similar references shall be deemed
to mean and refer to the payments calculated as set forth in this
Section 2.2(f)(ii).
(g) Termination of Exchange Fund. Any Parent ADSs and any portion of the
Exchange Fund or of dividends or other distributions with respect to the
Parent ADSs deposited by the Parent with the Exchange Agent (including the
proceeds of any investments of those funds) that remains unclaimed by the
former stockholders of the Company within one year after the Effective Time
shall be delivered by the Exchange Agent to a depositary bank deposited by
the Parent, upon demand, whereupon such depositary bank shall hold the
Exchange Fund on behalf of holders of unsurrendered Certificates, and any
former stockholders of the Company who have not theretofore complied with
this Article II shall thereafter look only to such depositary bank for
payment of their claim for Merger Consideration and any dividends and other
distributions issuable or payable pursuant to Section 2.1 and Section
2.2(c) upon due surrender of their Certificates (or affidavits of loss in
lieu of Certificates), in each case, without any interest and the Parent
shall cause the depositary bank to satisfy such claim. Notwithstanding the
foregoing, none of the Parent, the Surviving Corporation, the Exchange
Agent, the depositary bank or any other person shall be liable to any
former holder of shares of Company Common Stock for any amount properly
delivered to a public official under applicable abandoned property, escheat
or similar laws.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such Certificate to be lost, stolen or
destroyed and the posting by such person of a bond in the form customarily
required by the Parent as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate the Parent ADSs,
any unpaid dividends or other distributions and any cash payment in lieu of
a fractional share in respect of that Certificate issuable or payable under
this Article II upon due surrender thereof and deliverable in respect of
the shares of Company Common Stock represented by such Certificate under
this Agreement, in each case, without interest.
(i) No Liability. None of the Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any Parent ADSs,
any dividends or distributions with respect to Parent ADSs or any cash from
the Exchange Fund, in each case properly delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Section 2.3 No Appraisal Rights. In accordance with Section 262(b)(1) of the
DGCL, no appraisal rights shall be available to holders of shares of Company
Common Stock in connection with the Merger.
Section 2.4 Adjustments to Prevent Dilution. In the event that prior to the
Effective Time there is a change in the number of shares of Company Common
Stock or shares of Parent Common Stock or securities convertible or
exchangeable into or exercisable for shares of Company Common Stock or shares
of Parent Common Stock issued and outstanding as a result of a distribution,
reclassification, stock split (including a reverse stock split), stock dividend
or distribution or other similar transaction, the Exchange Ratio shall be
equitably adjusted to eliminate the effects of that event.
Section 2.5 Withholding Rights. Each of the Exchange Agent and Parent shall
be entitled to deduct and withhold from any amounts otherwise payable pursuant
to this Agreement to any holder of a Certificate such amounts as it is required
to deduct and withhold with respect to the making of such payment under the
Code, or any provisions of Law (as defined in Section 3.5(a)(ii) hereof). To
the extent that amounts are so withheld by the Exchange Agent or the Parent, as
the case may be, such withheld amounts shall be treated for purposes of this
Agreement as having been paid to the holder of a Certificate in respect to
which such deduction and withholding was made by the Exchange Agent or Parent,
as the case may be.
Section 2.6 Treatment of Stock Options/Restricted.
(a) On June 14, 2000, the Company established a trust, which trust was
funded by the Company promptly after its establishment with shares of the
Company Common Stock in order to satisfy the
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obligations of the Company under the outstanding Company Stock Options and
the outstanding Company Warrants (as defined in Section 2.7(a)) (the
"Trust"). Prior to the Effective Time, the Company shall issue and deliver
to the Trust such number of shares of Company Common Stock to satisfy the
obligations under all outstanding Company Stock Options immediately prior
to the Effective Time.
(b) Each Company Stock Option granted prior to the Effective Time and
which remains outstanding immediately prior to the Effective Time shall
cease to represent a right to acquire shares of Company Common Stock and
shall be converted, at the Effective Time, into an option to acquire from
the Trust, on the same terms and conditions as were applicable under the
Company Stock Option (but taking into account any changes thereto, except
for any acceleration thereof, by reason of this Agreement or the
transactions contemplated hereby as may be provided for in the Company's
Option Plans, in any award agreement or in such option), that number of
Parent ADSs determined by multiplying the number of shares of Company
Common Stock subject to such Company Stock Option by the Exchange Ratio,
rounded, if necessary, to the nearest whole Parent ADS, at a price per
share (rounded to the nearest one-hundredth of a cent) equal to the per
share exercise price specified in such Company Stock Option divided by the
Exchange Ratio; provided, however, that in the case of any Company Stock
Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the option price, the number
of shares subject to such option and the terms and conditions of exercise
of such option shall be determined in a manner consistent with the
requirements of Section 424(a) of the Code.46
(c) At the Effective Time, each right of the Company to repurchase
shares of Company Common Stock from optionees pursuant to the Company's
Option Plans ("Repurchase Right") shall be assigned to the Trust, and shall
apply to the Parent ADSs received in exchange for the shares of Company
Common Stock pursuant to Section 2.2 hereof, on the same terms and
conditions as were applicable under the Company's Option Plans (but taking
into account any changes thereto, except for any acceleration thereof, by
reason of this Agreement or the transactions contemplated hereby as may be
provided for in the Company's Option Plans, in any award agreement or in
such option). Prior to the Effective Time, the Company shall obtain from
holders of the shares of Company Common Stock subject to Repurchase Rights
(such shares being referred to as "Company Restricted Stock") waivers (as
may be reasonably requested by the Parent and in the form reasonably
satisfactory to the Parent) waiving any and all rights to accelerate the
vesting of the shares of Company Common Stock.
(d) Prior to the Effective Time, the Company shall (i) cause the plan
administrator of each of the Company's Option Plans to determine that the
adjustments pursuant to this Section 2.6 are sufficient to not cause any
vesting in connection with the Merger, and (ii) deliver to the holders of
Company Stock Options and Company Restricted Stock appropriate notices
setting forth such holders' rights (including that (A) such Company Stock
Options or Company Restricted Stock have not accelerated in connection with
the Merger, and (B) the Trust shall satisfy the obligations under the
Company Stock Options) and the agreements evidencing the grants of such
Company Stock Options shall continue in effect on the same terms and
conditions (subject to the adjustments required by this Section 2.6).
(e) No later than 15 business days following the Effective Time, the
Parent shall file a registration statement on Form S-8 (or any successor or
other appropriate forms), with respect to the Parent ADSs subject to such
Company Stock Options or shares of Company Restricted Stock and shall use
commercially reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as
such Company Stock Options or shares of Company Restricted Stock remain
outstanding.
Section 2.7 Treatment of Warrants.
(a) Each warrant to purchase shares of Company Common Stock ("Company
Warrant") granted prior to the Effective Time and which remains outstanding
immediately prior to the Effective Time shall cease to represent a right to
acquire shares of Company Common Stock and shall be converted, at the
Effective Time, into a warrant to acquire from the Trust, on the same terms
and conditions as were applicable under
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the Company Warrants, that number of shares of Parent ADSs determined by
multiplying the number of shares of Company Common Stock subject to such
Company Warrant by the Exchange Ratio, rounded, if necessary, to the
nearest whole Parent ADS, at a price per share (rounded to the nearest one-
hundredth of a cent) equal to the per share exercise price specified in
such Company Warrant divided by the Exchange Ratio. As soon as practicable
after the Effective Time, the Parent shall deliver to the holders of
Company Warrants appropriate notices setting forth such holders' rights and
the agreements evidencing the grants of such Company Warrants shall
continue in effect on the same terms and conditions.
(b) Prior to the Effective Time, the Company shall deliver to the
holders of Company Warrants appropriate notices setting forth such holders'
rights (including that the Trust shall satisfy the obligations under the
Company Warrants) and the agreements evidencing the grants of such Company
Warrants shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 2.7).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Parent, subject to such
exceptions or qualifications to specific representations and warranties as are
disclosed in writing in the disclosure letter previously delivered by the
Company to the Parent (the "Company Disclosure Letter"), that:
Section 3.1 Organization and Qualification; Subsidiaries.
(a) Each of the Company and each subsidiary of the Company
(collectively, the "Company Subsidiaries") has been duly organized and is
validly existing and in good standing under the laws of the jurisdiction of
its incorporation or organization, as the case may be, and has the
requisite power and authority and all necessary governmental approvals to
own, lease and operate its properties and to carry on its business as it is
now being conducted. Each of the Company and each Company Subsidiary is
duly qualified or licensed to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or
licensed and in good standing that, individually or in the aggregate, have
no Material Adverse Effect on the Company. For purposes of this Agreement,
"Material Adverse Effect on the Company" means any state of affairs or
change that has had, or will have, a material adverse effect on the
business, assets, properties, results of operations or condition (financial
or otherwise) of the Company and the Company Subsidiaries, taken as a
whole, or that has materially impaired or will materially impair the
ability of the Company to perform its obligations under this Agreement or
to consummate the Merger and the other transactions contemplated by this
Agreement, except that none of the following shall be deemed in themselves
to constitute a Material Adverse Effect on the Company: (i) any change in
the market price or trading volume of the Company Common Stock after the
date hereof, (ii) any change in general economic conditions, (iii) any
adverse change affecting the e-commerce industry generally, and (iv)
transaction costs, taxes, accounting changes, integration costs and other
effects that result directly from the announcement or consummation of the
transactions contemplated by this Agreement.
(b) Section 3.1 (b) of the Company Disclosure Letter sets forth a
complete and correct list of all of the Company Subsidiaries, their
jurisdiction of organization and the ownership or other interest therein of
the Company and of each other Company Subsidiary. Neither the Company nor
any Company Subsidiary holds any interest in any person other than the
Company Subsidiaries so listed.
Section 3.2 Certificate of Incorporation and By-Laws. The copies of the
Company's certificate of incorporation and by-laws, each as amended through the
date of this Agreement that are filed as exhibits to the Company's registration
statement on Form S-1 (Registration No. 333-94549) are complete and correct
copies of those documents. Such certificate of incorporation and by-laws and
all comparable organizational documents
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of the Company Subsidiaries are in full force and effect. The Company is not in
violation of any of the provisions of such certificate of incorporation or by-
laws.
Section 3.3 Capitalization.
(a) The authorized capital stock of the Company consists of (i)
200,000,000 shares of Company Common Stock and (ii) 10,000,000 shares of
undesignated preferred stock, $0.0001 par value (the "Company Preferred
Stock"). As of May 31, 2000 (i) 22,624,834 shares of Company Common Stock
were issued and outstanding (of which 680,891 shares were subject to
repurchase rights/options and shall be deemed to be Company Restricted
Stock for purposes of this Agreement and treated pursuant to Section 2.6
hereof), all of which were validly issued and are fully paid, nonassessable
and not subject to preemptive rights, (ii) no shares of Company Common
Stock were held in the treasury of the Company or by the Company
Subsidiaries, (iii) 4,719,424 shares of Company Common Stock were reserved
for issuance upon exercise of outstanding Company Stock Options, (iv) an
additional 813,059 shares of Company Common Stock were reserved for grants
of additional Company Stock Options pursuant to the Company's 1996 Stock
Option Plan and 2000 Stock Option Plan, (v) 750,000 shares of Company
Common Stock were reserved for issuance pursuant to the Company's 2000
Employee Stock Purchase Plan, and (vi) 1,005 shares of Company Common Stock
were reserved for issuance upon the exercise of outstanding Warrants.
Except as set forth above, as of May 31, 2000, no shares of capital stock
or other voting securities of the Company were issued, reserved for
issuance or outstanding and, since such date, no shares of capital stock or
other voting securities or options in respect thereof have been issued
except upon the exercise of the Company Stock Options outstanding on such
date.
(b) Between May 31, 2000 and the date of this Agreement, (i) an
aggregate of 31,500 options to purchase shares of Company Common Stock
("Company Stock Options") have been granted by the Company under the
Company's 1996 Stock Option Plan and the Company's 2000 Stock Option Plan
(collectively, the "Company's Option Plans"), and (ii) no shares of Company
Common Stock vested pursuant to the Company's Option Plans and are not
subject to any repurchase options/rights. Except for (i) Company Stock
Options to purchase an aggregate of 5,782,483 shares of Company Common
Stock outstanding or available for grant to the extent permitted under
Section 5.1(b) hereof under the Company's Option Plans, (ii) the Warrants
to purchase 1,005 shares of Company Common Stock or (iii) under agreements
or arrangements described in Section 3.3(b) of the Company Disclosure
Letter, there are no options, warrants, calls, conversion rights, stock
appreciation rights, redemption rights, repurchase rights or other rights,
agreements, arrangements or commitments of any character to which the
Company is a party or by which the Company is bound relating to the issued
or unissued capital stock of the Company or any Company Subsidiary or
obligating the Company or any Company Subsidiary to issue or sell any
shares of capital stock of, other equity interests in, or securities
exchangeable for or convertible into capital stock or other equity
interests in, the Company or any Company Subsidiary. Section 3.3(b) of the
Company Disclosure Letter sets forth, as of the date of this Agreement, (x)
the persons to whom Company Stock Options have been granted and the persons
who hold Company Restricted Stock, (y) the exercise price for the Company
Stock Options held by each such person and (z) whether such Company Stock
Options (or Company Restricted Stock issued upon exercise of any Company
Stock Options) are subject to vesting and, if subject to vesting, the dates
on which each of those Company Stock Options (or Company Restricted Stock
issued upon exercise of any Company Stock Options) vest. None of the
Company Stock Options or Company Restricted Stock which are subject to
vesting will vest as a result of the consummation of the Merger and the
transactions contemplated by this Agreement.
(c) All shares of Company Common Stock subject to issuance, upon
issuance prior to the Effective Time on the terms and conditions specified
in the instruments under which they are issuable, will be duly authorized,
validly issued, fully paid, nonassessable and will not be subject to
preemptive rights. There are no outstanding contractual obligations of the
Company or any Company Subsidiary to repurchase, redeem or otherwise
acquire any shares of Company Common Stock or any capital stock of any
Company Subsidiary. Each outstanding share of capital stock of each Company
Subsidiary is duly authorized,
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validly issued, fully paid, nonassessable and not subject to preemptive
rights and each such share owned by the Company or a Company Subsidiary is
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on the Company's or such
other Company Subsidiary's voting rights, charges and other encumbrances of
any nature whatsoever (collectively, "Liens"). There are no outstanding
material contractual obligations of the Company or any Company Subsidiary
to provide funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any Company Subsidiary that is not wholly
owned by the Company or in any other person.
Section 3.4 Authority
(a) The Company has all necessary corporate power and authority to
execute and deliver this Agreement and, subject to adoption of this
Agreement by the affirmative vote by a majority of the holders of the
outstanding Company Common Stock (the "Requisite Company Vote"), to perform
its obligations under this Agreement and to consummate the Merger and the
other transactions contemplated by this Agreement to be consummated by the
Company. The execution and delivery of this Agreement by the Company and
the consummation by the Company of such transactions have been duly and
validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate such transactions, other than, with respect to
the Merger, the adoption of this Agreement by the Requisite Company Vote.
This Agreement has been duly authorized and validly executed and delivered
by the Company and constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
(b) The Board of Directors of the Company (i) has unanimously adopted
the plan of merger set forth in this Agreement and approved this Agreement
and the other transactions contemplated by this Agreement and (ii) has
declared that the Merger and this Agreement and the other transactions
contemplated by this Agreement are advisable.
Section 3.5 No Conflict
(a) The execution and delivery of this Agreement by the Company do not,
and the performance of this Agreement by the Company will not:
(i) conflict with or violate any provision of the Company's
certificate of incorporation or by-laws or any comparable
organizational documents of any Company Subsidiary;
(ii) assuming that all consents, approvals, authorizations and other
actions described in Section 3.6 have been obtained and all filings and
obligations described in Section 3.6 have been made, conflict with or
violate any foreign or domestic law, statute, ordinance, rule,
regulation, order, judgment or decree ("Law") applicable to the Company
or any Company Subsidiary or by which any property or asset of the
Company or any Company Subsidiary is or may be bound or affected; or
(iii) result in any breach of or constitute a default (or an event
which with or without notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on
any property or asset of the Company or any Company Subsidiary under
any note, bond, mortgage, indenture, contract, agreement, commitment,
lease, license, permit, franchise or other instrument or obligation
(collectively, "Contracts") to which the Company or any Company
Subsidiary is a party or by which any of them or their assets or
properties is or may be bound or affected, except for any such
breaches, defaults or other occurrences which, individually or in the
aggregate, have no Material Adverse Effect on the Company.
(b) Section 3.5(b) of the Company Disclosure Letter sets forth a list of
all Contracts to which the Company or any Company Subsidiaries are a party
or by which they or their assets or properties are or may be bound or
affected under which consents or waivers are or may be required prior to
consummation of the transactions contemplated by this Agreement, except for
those Contracts under which the
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Company's failure to obtain the required consents or waivers, individually
or in the aggregate, would not result in a Material Adverse Effect on the
Company.
Section 3.6 Required Filings and Consents. The execution and delivery of
this Agreement by the Company do not, and the performance of this Agreement by
the Company will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any domestic or foreign national,
federal, state, provincial or local governmental, regulatory or administrative
authority, agency, commission, court, tribunal or arbitral body or self-
regulated entity (each, a "Governmental Entity"), except (i) for applicable
requirements of the United States Securities Exchange Act of 1934 as amended
(together with the rules and regulations promulgated thereunder, the "Exchange
Act"), applicable requirements of the United States Securities Act of 1933, as
amended (together with the rules and regulations promulgated thereunder, the
"Securities Act"), applicable requirements of state securities or "blue sky"
laws ("Blue Sky Laws"), the rules and regulations of the Nasdaq National
Market, applicable requirements of Takeover Statutes, the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder (the
"HSR Act"), for the filing of the Certificate of Merger as required by the DGCL
and (ii) where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, individually or in the
aggregate, would have no Material Adverse Effect on the Company.
Section 3.7 Permits; Compliance with Law. Each of the Company and the
Company Subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Entity necessary for the
Company or any Company Subsidiary to own, lease and operate its properties or
to carry on its business as it is now being conducted (collectively, the
"Company Permits"), except where the failure to have, or the suspension or
cancellation of, any of the Company Permits, individually or in the aggregate,
has no Material Adverse Effect on the Company, and, as of the date of this
Agreement, no suspension or cancellation of any of the Company Permits is
pending or, to the knowledge of the Company, threatened, except where the
failure to have, or the suspension or cancellation of, any of the Company
Permits, individually or in the aggregate, has no Material Adverse Effect on
the Company. Neither the Company nor any Company Subsidiary is in conflict
with, or in default or violation of, (i) any Law applicable to the Company or
any Company Subsidiary or by which any property or asset of the Company or any
Company Subsidiary is or may be bound or affected or (ii) any Company Permits,
except for any such conflicts, defaults or violations that, individually or in
the aggregate, have no Material Adverse Effect on the Company.
Section 3.8 SEC Filings; Financial Statements
(a) Prior to March 23, 2000, the Company was not subject to the periodic
reporting requirements of the Exchange Act or was otherwise required to
file any documents with the SEC or any national securities exchange or
quotation service or comparable Governmental Entity. The Company has filed
all forms, reports, schedules, statements and other documents (including
all exhibits, annexes, supplements and amendments to such documents)
required to be filed by it under the Exchange Act and the Securities Act
since January 12, 2000 (collectively, including any such documents filed
subsequent to the date of this Agreement, the "Company SEC Reports") and
the Company has made available to the Parent each Company SEC Report filed
with the United States Securities and Exchange Commission (the "SEC"). The
Company SEC Reports, including any financial statements or schedules
included or incorporated therein by reference, at the time they were filed,
(i) complied in all material respects with the requirements of the Exchange
Act or the Securities Act or both, as the case may be, applicable to those
Company SEC Reports and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or
necessary in order to make the statements made in those Company SEC
Reports, in the light of the circumstances under which they were made, not
misleading. No Company Subsidiary is subject to the periodic reporting
requirements of the Exchange Act or is otherwise required to file any
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documents with the SEC or any national securities exchange or quotation
service or comparable Governmental Entity.
(b) Each of the consolidated balance sheets included in or incorporated
by reference into the Company SEC Reports (including the related notes and
schedules) fairly presented, in all material respects, the consolidated
financial position of the Company as of the dates set forth in those
consolidated balance sheets. Each of the consolidated statements of income
and of cash flows included in or incorporated by reference into the Company
SEC Reports (including any related notes and schedules) fairly presented,
in all material respects, the consolidated results of operations and cash
flows, as the case may be, of the Company and the consolidated Company
Subsidiaries for the periods set forth in those consolidated statements of
income and of cash flows (subject, in the case of unaudited quarterly
statements, to notes and normal year-end audit adjustments that will not be
material in amount or effect), in each case in conformity with United
States generally accepted accounting principles ("U.S. GAAP") (except, in
the case of unaudited quarterly statements, as permitted by Form 10-Q of
the SEC) consistently applied throughout the periods indicated. All of such
balance sheets and statements complied as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto.
(c) The consolidated balance sheet as of March 31, 2000 provided by the
Company to the Parent (including the related notes and schedules) fairly
presented, in all material respects, the consolidated financial position of
the Company as of such date. The consolidated statement of income and of
cash flows for the year ended March 31, 2000 provided by the Company to the
Parent (including the related notes and schedules) fairly presented, in all
material respects, the consolidated results of operations and cash flows,
as the case may be, of the Company and the consolidated Company
Subsidiaries for such period, in conformity with U.S. GAAP consistently
applied with previous periods. All of such balance sheets and statements
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto.
(d) Except as and to the extent set forth on the consolidated balance
sheet of the Company and the consolidated Company Subsidiaries as of March
31, 2000 including the related notes, neither the Company nor any Company
Subsidiary has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on a balance sheet or in the related notes prepared in accordance
with U.S. GAAP, except for liabilities or obligations incurred in the
ordinary course of business that, individually or in the aggregate, have no
Material Adverse Effect on the Company.
Section 3.9 Absence of Certain Changes or Events
(a) Since March 31, 2000, the Company and the Company Subsidiaries have
conducted their businesses only in the ordinary course and, since such
date, there has not been any Material Adverse Effect on the Company.
(b) Except as set forth in Section 3.9(b) of the Company Disclosure
Letter, or except as disclosed in the Company SEC Reports filed with the
SEC since March 23, 2000 and which have been filed and are publicly
available prior to the date of this Agreement (the "Company Filed SEC
Reports") and except as permitted pursuant to Section 5.1, since March 31,
2000, there has not been:
(i) any damage, destruction or other casualty loss with respect to
any asset or property owned, leased or otherwise used by it or any
Company Subsidiaries, whether or not covered by insurance, which
damage, destruction or loss, individually or in the aggregate, has a
Material Adverse Effect on the Company;
(ii) any material change by the Company in its or any Company
Subsidiary's accounting methods, principles or practices, except as
required by U.S. GAAP and disclosed in Section 3.9(b) of the Company
Disclosure Letter;
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(iii) any declaration, setting aside or payment of any dividend or
distribution in respect of Shares of Company Common Stock or any
redemption, purchase or other acquisition of any of the Company's
securities other than the repurchase at cost of unvested shares held by
employees of the Company on the termination of their employment;
(iv) any increase in the compensation or benefits or establishment
of any bonus, insurance, severance, deferred compensation, pension,
retirement, profit sharing, stock option (including, the granting of
stock options, stock appreciation rights, performance awards or
restricted stock awards), stock purchase or other employee benefit
plan, or any other increase in the compensation payable or to become
payable to any executive officers of the Company or any Company
Subsidiary except as required by applicable Law other than any increase
or modification in the ordinary course of business;
(v) (A) any incurrence or assumption by the Company or any Company
Subsidiary of any indebtedness for borrowed money or (B) any guarantee,
endorsement or other incurrence or assumption of material liability
(whether directly, contingently or otherwise) by the Company or any
Company Subsidiary for the obligations of any other person (other than
any wholly owned Company Subsidiary), other than indebtedness of less
than U.S. $500,000 in the aggregate in the ordinary course of business;
(vi) any creation or assumption by the Company or any Company
Subsidiary of any Lien on any material asset of the Company or any
Company Subsidiary, other than (i) in the ordinary course of business,
or (ii) Liens arising after the date of this Agreement by operation of
Law or without the Company's consent, in each case that has no Material
Adverse Effect on the Company;
(vii) any making of any loan, advance or capital contribution to or
investment in any person by the Company or any Company Subsidiary,
other than in the ordinary course of business, and not in excess of
U.S. $500,000;
(viii) (A) any contract or agreement entered into by the Company or
any Company Subsidiary on or prior to the date hereof relating to any
material acquisition or disposition of any assets or business or (B)
any modification, amendment, assignment or termination of or
relinquishment by the Company or any Company Subsidiary of any rights
under any other Contract (including any insurance policy naming it as a
beneficiary or a loss payable payee) that has, individually or in the
aggregate, a Material Adverse Effect on the Company other than
transactions, commitments, contracts or agreements in the ordinary
course of business or those contemplated by this Agreement;
(ix) any adverse change in the Company's relationships with its
material customers, except for changes that, individually or in the
aggregate, have no Material Adverse Effect on the Company.
Section 3.10 Employee Benefit Plans; Employee Relations
(a) Section 3.10(a) of the Company Disclosure Letter contains a true and
complete list of each "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), including multiemployer plans within the meaning of
ERISA section 3(37) of ERISA), stock purchase, stock option, severance,
employment, change-in-control, fringe benefit, welfare benefit, collective
bargaining, bonus, incentive, deferred compensation and all other employee
benefit plans, agreements, programs, policies or other arrangements,
whether or not subject to ERISA (including any funding mechanism therefor
now in effect or required in the future as a result of the transaction
contemplated by this Agreement or otherwise), whether formal or informal,
oral or written, legally binding or not, under which any employee or former
employee of the Company has any present or future right to benefits or
under which the Company has any present or future liability. All such
plans, agreements, programs, policies and arrangements shall be
collectively referred to as the "Benefit Plans." Where appropriate all
references to the "Company" in this Section 3.10 shall refer to the Company
and any member of its "controlled group" within the meaning of Section 414
of the Code.
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(b) The Company has, with respect to each Benefit Plan, if applicable,
delivered or made available to the Parent true and complete copies of: (i)
all plan texts and agreements and related trust agreements (or other
funding vehicles); (ii) the most recent summary plan descriptions and
material employee communications; (iii) the most recent annual report
(including all schedules thereto); (iv) the most recent annual audited
financial statement and opinion; (v) if the plan is intended to qualify
under Section 401(a) of the Code, the most recent determination letter
received from the Internal Revenue Service; and (vi) all material
communications with any Governmental Entity (including the Pension Benefit
Guaranty Corporation and the Internal Revenue Service) given or received
within the past three years.
(c) Except as set forth on Section 3.10(c) of the Company Disclosure
Letter, all amounts properly accrued as liabilities to or expenses of any
Benefit Plan have been properly reflected on the Company's most recent
financial statements to the extent required by U.S. GAAP. Since December
31, 1998, there has been no amendment or change in interpretation by the
Company relating to any Benefit Plan which would materially increase the
cost thereof.
(d) No Benefit Plan is subject to either Section 412 of the Code or
Title IV of ERISA.
(e) Each Benefit Plan is in material compliance with all applicable laws
and regulations. Each Benefit Plan which is intended to qualify under
Section 401(a) of the Code has been issued a favorable determination,
opinion, notification or advisory letter by the Internal Revenue Service
and has not been amended in a manner, and no event has occurred since such
date, which would cause any such plan to fail to remain so qualified. Each
Benefit Plan that requires registration with a relevant Governmental Entity
has been so registered.
(f) Except as set forth on Section 3.10(f) of the Company Disclosure
Letter, there are no actions, liens, suits or Claims pending or threatened
(other than routine claims for benefits) with respect to any Benefit Plan
as to which the Company has or could reasonably be expected to have any
direct or indirect actual or contingent material liability.
(g) Each Benefit Plan which is a "group health plan" (as defined in
Section 607(1) of ERISA) is in material compliance with the provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, the
Health Insurance Portability and Accountability Act and any other
applicable federal, state or local law.
(h) There are no (i) Benefit Plans maintained by the Company pursuant to
which welfare benefits are provided to current or former employees beyond
their retirement or other termination of service, other than coverage
mandated by applicable Law, the cost of which is fully paid by the current
or former employees or their dependents; or (ii) unfunded Benefit Plan
obligations with respect to any employee of the Company which are not
fairly reflected by reserves shown on the Company's financial statements
for March 31, 2000.
(i) The consummation of the transactions contemplated by this Agreement
will not (i) except as disclosed in Section 3.10(i) of the Company
Disclosure Letter, entitle any current or former employee of the Company to
severance pay, unemployment compensation or any similar payment, (ii)
except as disclosed in Section 3.10(i) of the Company Disclosure Letter,
accelerate the time of payment or vesting, or increase the amount of any
compensation due to, any current or former employee of the Company, or
(iii) constitute or involve a prohibited transaction (as defined in Section
406 of ERISA or Section 4975 of the Code), constitute or involve a breach
of fiduciary responsibility within the meaning of Section 502(l) of ERISA
as to which the Company has or reasonably could be expected to have any
direct or indirect actual material liability.
(j) No Benefit Plan is a "multiemployer plan" or "multiple employer
plan" within the meaning of the Code or ERISA or the regulations
promulgated thereunder.
(k) Neither the Company nor any Benefit Plan, or to the knowledge of the
Company, any "disqualified person" (as defined in Section 4975 of the Code)
or any "party in interest" (as defined in
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Section 3(18) of ERISA), has engaged in any non-exempt prohibited
transaction (within the meaning of Section 4975 of the Code or Section 406
of ERISA) which could reasonably be expected to result in any material
liability to the Company.
(l) None of the employees is represented by a union, and no union
organizing efforts have been conducted within the last five years or are
now being conducted. The Company does not currently have, nor to knowledge
of the Company, is there now threatened, a strike, picket, work stoppage,
work slowdown or other organized labor dispute. The Company has not as of
the date hereof incurred any liability or obligation under the Worker
Adjustment and Retraining Notification Act, as it may have been amended
from time to time, or any similar state law.
Section 3.11 Accounting and Tax Matters. Neither the Company nor, to the
knowledge of the Company, any of its affiliates has taken or agreed to take any
action, nor is the Company aware of any agreement, plan or other circumstance,
that would prevent the Merger from constituting a transaction qualifying as a
reorganization under Section 368(a) of the Code.
Section 3.12 Contracts; Debt Instruments. Except for the Contracts filed as
exhibits to the Company's Registration Statement on Form S-1 and subsequent
Contracts disclosed in Section 3.12 of the Company Disclosure Letter (copies of
which have been made available to the Parent), there is no Contract that is
material to the business, financial condition or results of operations of the
Company and the Company Subsidiaries taken as a whole. Each of the Contracts to
which the Company or a Company Subsidiary is a party or by which it or any of
its properties or assets is or may be bound or affected, constitutes a valid
and legally binding obligation of the Company or such Company Subsidiary and of
the other parties thereto, enforceable in accordance with its terms, and is in
full force and effect, except to the extent the failure to be so valid, binding
or enforceable, individually or in the aggregate, has no Material Adverse
Effect on the Company. Neither the Company nor any Company Subsidiary, nor to
the Company's knowledge, any other person, is in violation of or in default
under (nor does there exist any condition which with the passage of time or the
giving of notice would cause such a violation of or default under) any Contract
to which the Company or a Company Subsidiary is a party or by which it or any
of its properties or assets is or may be bound or affected, except for
violations or defaults that, individually or in the aggregate, have no Material
Adverse Effect on the Company. Set forth in Section 3.12 of the Company
Disclosure Letter is a description of any material changes to the amount and
terms of the indebtedness of the Company and the consolidated Company
Subsidiaries as described in the notes to the financial statements set forth in
the Company's consolidated financial statements for the year ended March 31,
2000 provided by the Company to the Parent prior to the execution of this
Agreement.
Section 3.13 Litigation. Except as disclosed in Section 3.13 of the Company
Disclosure Letter, and except as disclosed in the Company Filed SEC Reports,
there is no suit, claim, action, proceeding or investigation (collectively,
"Claims") pending or, to the knowledge of the Company, threatened against the
Company or any Company Subsidiary before any Governmental Entity that, if
adversely determined, individually or in the aggregate, has a Material Adverse
Effect on the Company. Neither the Company nor any Company Subsidiary is
subject to any outstanding order, writ, injunction or decree which,
individually or in the aggregate, has a Material Adverse Effect on the Company.
Section 3.14 Environmental Matters. Except as has no Material Adverse Effect
on the Company or as disclosed in the Company Filed SEC Reports:
(a) the Company and the Company Subsidiaries are and have been in
compliance with all applicable Laws relating to pollution, protection of
the environment or health and safety ("Environmental Laws");
(b) there is no claim pursuant to Environmental Laws or principles of
common law relating to pollution, protection of the environment or health
and safety (an "Environmental Claim") pending or threatened against the
Company or any Company Subsidiary; and
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(c) there is no civil, criminal or administrative judgment or notice of
violation outstanding against the Company or any Company Subsidiary
pursuant to Environment Laws or principles of common law relating to
pollution, protection of the environment or health and safety.
Section 3.15 Intellectual Property.
(a) For purposes of this Agreement, "Intellectual Property" means all of
the following as they exist in any jurisdiction throughout the world, in
each case, to the extent owned by, licensed to, or otherwise used or held
for use by the Company:
(i) patents, patent applications and the inventions, designs and
improvements described and claimed therein, patentable inventions, and
other patent rights (including any divisions, continuations,
continuations-in-part, substitutions, or reissues thereof, whether or
not patents are issued on any such applications and whether or not any
such applications are amended, modified, withdrawn, or resubmitted)
(collectively, "Patents");
(ii) trademarks, service marks, trade dress, trade names, brand
names, Internet domain names, designs, logos, or corporate names
(including, in each case, the goodwill associated therewith), whether
registered or unregistered, and all registrations and applications for
registration thereof (collectively, "Trademarks");
(iii) copyrights, including all renewals and extensions, copyright
registrations and applications for registration, and non-registered
copyrights (collectively, "Copyrights");
(iv) trade secrets, confidential business information, concepts,
ideas, designs, research or development information, processes,
procedures, techniques, technical information, specifications,
operating and maintenance manuals, engineering drawings, methods, know-
how, data, mask works, discoveries, inventions, modifications,
extensions, improvements, and other proprietary rights (whether or not
patentable or subject to copyright, trademark, or trade secret
protection) (collectively, "Technology");
(v) computer software programs, including all source code, object
code, and documentation related thereto ("Software"); and
(vi) all licenses, and sublicenses, and other agreements or
permissions related to the property described in Section 3.15(a).
(b) Disclosure.
(i) Section 3.15(b)(i) of the Company Disclosure Letter sets forth
all United States and foreign patents and patent applications,
trademark and service mark registrations and applications, Internet
domain name registrations and applications, and copyright registrations
and applications owned or licensed by the Company or any Company
Subsidiary or otherwise used or held for use by the Company or any
Company Subsidiary (excluding off-the-shelf software licensed to the
Company and licenses or sublicenses that are not material to the
business of the Company and the Company Subsidiaries, taken as a
whole), specifying as to each item, as applicable: (A) the nature of
the item, including the title; (B) the owner of the item; (C) the
jurisdictions in which the item is issued or registered or in which an
application for issuance or registration has been filed; and (D) the
issuance, registration or application numbers and dates.
(ii) Section 3.15(b)(ii) of the Company Disclosure Letter sets forth
all licenses, sublicenses and other agreements or permissions ("IP
Licenses") under which the Company or any Company Subsidiary is a
licensee or otherwise is authorized to use or practice any Intellectual
Property other than licenses of off-the-shelf software and licenses or
sublicenses that are not material to the business of the Company and
the Company Subsidiaries, taken as a whole.
(iii) Section 3.15(b)(iii) of the Company Disclosure Letter sets
forth and describes the status of any material agreements (including
licenses and sublicenses, but excluding off-the-shelf software
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licensed to the Company) involving Intellectual Property currently in
negotiation or proposed ("Proposed Intellectual Property Agreements")
by the Company or any Company Subsidiary.
(c) Ownership. Except as set forth on Section 3.15(c) of the Company
Disclosure Letter, the Company owns, free and clear of all Liens, has valid
and enforceable rights in, and has the unrestricted right to use, sell,
license, transfer or assign, all Intellectual Property that is material to
the business of the Company and the Company Subsidiaries, taken as a whole.
(d) Licenses. The Company has a valid and enforceable license to use all
Intellectual Property not owned by the Company that is material to the
business of the Company and the Company Subsidiaries, taken as a whole.
(e) Claims.
(i) No claim or action is pending or threatened and the Company does
not know of any basis for any claim that challenges the validity,
enforceability, ownership, or right to use, sell or license any
Intellectual Property, and no item of Intellectual Property is subject
to any outstanding order, ruling, decree, stipulation, charge or
agreement restricting in any manner the use or the licensing thereof,
except for those claims, actions, orders, rulings, decrees,
stipulations, charges and agreements which, individually or in the
aggregate, have no Material Adverse Effect on the Company.
(ii) The Company has not received any notice that it has infringed
upon or otherwise violated the intellectual property rights of third
parties or received any claim, charge, complaint, demand or notice
alleging any such infringement or violation, or knows of any basis for
any such claim.
(iii) To the knowledge of the Company, no third party is infringing
upon or otherwise violating any material Intellectual Property.
(iv) The Company's products have been marked as required by the
applicable Patent statute and the Company has given the public notice
of its Copyrights and notice of its Trademarks as required by the
applicable Trademark and Copyright statutes, in each case except to the
extent the failure to do so has no Material Adverse Effect on the
Company.
(f) Administration and Enforcement. The Company has taken all reasonable
actions to maintain and protect the Intellectual Property owned by the
Company.
(g) Protection of Intellectual Property. The Company has taken
reasonable precautions to protect the secrecy, confidentiality, and value
of its trade secrets and the proprietary nature and value of the
Intellectual Property.
(h) Software. All Software that is material to the Company's business is
described in Section 3.15(h) of the Company Disclosure Letter. The Software
performs in material conformance with its documentation and may following
the Merger be used by the Surviving Corporation on identical terms and
conditions as the Company enjoyed immediately prior to the Merger.
(i) Year 2000 Compliance. All Software, hardware, databases and embedded
control systems (collectively, the "Systems") used by the Company (i)
accurately process date and time data (including calculating, comparing,
and sequencing) from, into, and between the twentieth and twenty-first
centuries, the years 1999 and 2000, and leap year calculations and (ii)
operate accurately with other software and hardware that use standard date
format (4 digits) for representation of the year.
(j) Employee Breaches. To the Company's knowledge, no employee of the
Company or any of the Company Subsidiaries has transferred Intellectual
Property or confidential or proprietary information to the Company or any
of the Company Subsidiaries or to any third party in violation of any Law
or any term of any employment agreement, patent or invention disclosure
agreement or other contract or agreement relating to the relationship of
such employee with the Company or any of the Company Subsidiaries or any
prior employer.
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(k) Related Parties; Etc. The Company and the Company Subsidiaries do
not use any Intellectual Property owned by any director, officer, employee
or consultant of the Company. At no time during the conception or reduction
to practice of any of the Intellectual Property owned by the Company or any
of the Company Subsidiaries was any developer, inventor or other
contributor to such Intellectual Property operating under any grants from
any Governmental Entity or subject to any employment agreement, invention
assignment, nondisclosure agreement or other Contract with any person that
could adversely affect the rights of the Company or any of the Company
Subsidiaries to any Intellectual Property that is material to the business
of the Company and the Company Subsidiaries, taken as a whole.
Section 3.16 Taxes. Except to the extent that failure to do so, individually
or in the aggregate, has no Material Adverse Effect on the Company, the Company
and the Company Subsidiaries have filed all Tax returns and reports to be filed
by them and have paid, or established adequate reserves for, all Taxes required
to be paid by them. Except as, individually or in the aggregate, has no
Material Adverse Effect on the Company, no deficiencies for any Taxes have been
proposed, asserted or assessed against the Company or any Company Subsidiaries,
and no requests for waivers of the time to assess any such Taxes are pending.
As used in this Agreement, "Taxes" shall mean all federal, state, local and
foreign income, property, sales, excise and other taxes, tariffs or
governmental charges of any nature whatsoever.
Section 3.17 Non-Competition Agreements. Neither the Company nor any Company
Subsidiary is a party to any Contract which purports to restrict or prohibit in
any material respect the Company and the Company Subsidiaries collectively
from, directly or indirectly, engaging in any business involving the
development, marketing and offering of computer software and the provision of
related services currently engaged in by the Company, any Company Subsidiary or
any other persons affiliated with the Company. None of the Company's officers,
directors or key employees is a party to any agreement which, by virtue of such
person's relationship with the Company, restricts in any material respect the
Company or any Company Subsidiary or affiliate of either of them from, directly
or indirectly, engaging in any of the businesses described above.
Section 3.18 Agreements with Regulatory Agencies. Neither the Company nor
any of the Company Subsidiaries is subject to any cease-and-desist or other
order issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of (each, whether or not listed in Section
3.18 of the Company Disclosure Letter, a "Company Regulatory Agreement"), any
Governmental Entity that restricts the conduct of its business or that in any
manner relates to its management or its business, except for any Company
Regulatory Agreements that, individually or in the aggregate, have no Material
Adverse Effect on the Company or could reasonably be expected, following
consummation of the Merger, to impair the Parent's ability to conduct the
business of the Surviving Corporation, the Parent or any Parent Subsidiary, as
presently conducted. Neither the Company nor any Company Subsidiary has been
advised by any Governmental Entity that such Governmental Entity is considering
issuing or requesting any Company Regulatory Agreement, except for any such
proposed Company Regulatory Agreements that, individually or in the aggregate,
has no Material Adverse Effect on the Company.
Section 3.19 Opinion of Financial Advisor. Chase Securities, Inc. (the
"Company Financial Advisor") has delivered to the Board of Directors of the
Company its oral opinion to the effect that, as of the date of this Agreement,
the Exchange Ratio is fair to the Company's stockholders from a financial point
of view, which opinion was or will promptly after the date of this Agreement be
confirmed in writing and accompanied by an authorization to include a copy of
such opinion in the Proxy Materials. The Company has delivered or will,
promptly after receipt of such written opinion, deliver a signed copy of that
written opinion to the Parent.
Section 3.20 Brokers. No broker, finder or investment banker other than the
Company Financial Advisor is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the
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Company. Prior to the date of this Agreement, the Company has made available to
the Parent a complete and correct copy of all agreements between the Company
and the Company Financial Advisor under which the Company Financial Advisor
would be entitled to any payment relating to the Merger or such other
transactions.
Section 3.21 Certain Statutes. The Board of Directors of the Company has
taken or will take all appropriate and necessary actions to ensure that the
restrictions on business combinations in Section 203 of the DGCL will not have
any effect on the Merger or the other transactions contemplated by this
Agreement. No "fair price," "moratorium," "control share acquisition" or other
similar state or federal anti-takeover statute or regulation (each a "Takeover
Statute") is, as of the date of this Agreement, applicable to the Merger or
such other transactions.
Section 3.22 Information. To the best of the Company's knowledge, none of
the information to be supplied by the Company for inclusion or incorporation by
reference in the Proxy Statement or the Registration Statement will, in the
case of the Registration Statement, at the time it becomes effective and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated in that Registration Statement or
necessary to make the statements in that Registration Statement not misleading,
or, in the case of the Proxy Statement or any amendments of or supplements to
the Proxy Statement, at the time of the mailing of the Proxy Statement and any
amendments of or supplements to the Proxy Statement and at the time of the
Company Stockholders Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated in that Proxy
Statement or necessary in order to make the statements in that Proxy Statement,
in light of the circumstances under which they are made, not misleading. The
Proxy Statement (except for those portions of the Proxy Statement that relate
only to the Parent or the Parent Subsidiaries or affiliates of the Parent) will
comply as to form in all material respects with the provisions of the Exchange
Act.
Section 3.23 Vote Required. The Requisite Company Vote is the only vote of
the holders of any class or series of the Company's capital stock necessary
(under the Company Charter Documents, the DGCL, other applicable Law or
otherwise) to approve this Agreement, the Merger or the other transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT
The Parent represents and warrants to the Company, subject to such
exceptions or qualifications to specific representations and warranties as are
disclosed in writing in the disclosure letter previously delivered by the
Parent to the Company (the "Parent Disclosure Letter"):
Section 4.1 Organization and Qualification; Subsidiaries.
(a) The Parent has been duly organized and is validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, and has the requisite power and authority and all necessary
governmental approvals to own, lease and operate its properties and to
carry on its business as it is now being conducted. Each of the Parent and
the subsidiaries of the Parent (each a "Parent Subsidiary") is duly
qualified or licensed to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or
licensed and in good standing that, individually or in the aggregate, has
no Material Adverse Effect on the Parent. For purposes of this Agreement,
"Material Adverse Effect on the Parent" means any state of affairs or
change that has had, or will have, a material adverse effect on the
business, assets, properties, results of operations or condition (financial
or otherwise) of the Parent and the Parent Subsidiaries, taken as a whole,
or that has materially impaired or will materially impair the ability of
the Parent to perform its obligations under this
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Agreement or to consummate the Merger and the other transactions
contemplated by this Agreement, except that none of the following shall be
deemed in themselves to constitute a Material Adverse Effect on the Parent:
(i) any change in the market price or trading volume of the securities of
the Parent after the date hereof, (ii) any change in general economic
conditions, (iii) any adverse change involving the e-commerce industry
generally, and (iv) transaction costs, taxes, accounting changes,
integration costs and other effects that result directly from the
announcement or consummation of the transactions contemplated by this
Agreement.
(b) Section 4.1(b) of the Parent Disclosure Letter sets forth a complete
and correct list of all of the Parent Subsidiaries, their jurisdiction of
organization and the ownership or other interest therein of the Parent and
of each other Parent Subsidiary. Neither the Parent nor any Parent
Subsidiary holds any interest in any person other than the Parent
Subsidiaries so listed.
Section 4.2 Charter Documents. The copies of the Parent's articles of
incorporation (Satzung) and management board (Vorstand) Rules of Procedure
(Geschaftsordnung), each as amended through the date of this Agreement that
have been furnished to the Company (collectively, the "Parent Charter
Documents"), are complete and correct copies of those documents. The Parent is
not in violation of any of the provisions of such charter documents.
Section 4.3 Capitalization.
(a) As of May 19, 2000, (i) 27,311,184 shares of Parent Common Stock
were issued and outstanding, all of which were validly issued and are fully
paid, nonassessable and not subject to preemptive rights, (ii) the
authorized I capital of the Parent consisted of 10,337,589 shares of Parent
Common Stock, (iii) the authorized II capital of the Parent consisted of
2,600,000 shares of Parent Common Stock, and (iv) 2,409,639 shares of
Parent Common Stock were reserved for issuance upon exercise of outstanding
Parent Stock Options. Except as set forth above, as of May 19, 2000, no
shares of capital stock or other voting securities of the Parent were
issued, reserved for issuance or outstanding and, since such date, no
shares of capital stock or other voting securities or options in respect
thereof have been issued except upon the exercise of the Parent Stock
Options outstanding on such date. On May 26, 2000, the Parent's
shareholders authorized the issuance of convertible bonds in an aggregate
principal amount of Euro 2,600,000 which may be used in connection with
employee participation scheme and the Parent's shareholders resolved to
create a new Contingent Capital II in the amount of Euro 2,600,000 non-par
value bearer shares and authorized the management board to purchase own
shares of up to 10% of the share capital for a time period of 18 months. No
other increase of share capital has been resolved since May 19, 2000. The
Parent has sufficient authorized share capital to proceed with the Share
Capital increase as set forth in this Agreement.
(b) Between December 31, 1999 and the date of this Agreement, no options
to purchase shares of Parent Common Stock ("Parent Stock Options") have
been granted by the Parent under the Parent's 1998 Plan or the Parent's
1999 Plan (collectively, the "Parent's Option Plans"). Except (i) Parent
Stock Options to purchase an aggregate of 2,409,639 shares of Parent Common
Stock outstanding or available for grant under the Parent's Option Plans,
or (ii) under agreements or arrangements described in Section 4.3(b) of the
Parent Disclosure Letter, there are no options, warrants, calls, conversion
rights, stock appreciation rights, redemption rights, repurchase rights or
other rights, agreements, arrangements or commitments of any character to
which the Parent is a party or by which the Parent is bound relating to the
issued or unissued capital stock of the Parent or any Parent Subsidiary or
obligating the Parent or any Parent Subsidiary to issue or sell any shares
of capital stock of, other equity interests in, or securities exchangeable
for or convertible in the capital stock or other equity interest in the
Parent or any Parent Subsidiary. None of the Parent Stock Options which are
subject to vesting will vest as a result of the consummation of the Merger.
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(c) Subject to Section 5.20, the shares of Parent Common Stock that
underlie the Parent ADSs to be delivered in connection with the Merger have
been duly authorized by all necessary corporate action, and when issued in
accordance with this Agreement, will be validly issued, fully paid,
nonassessable and will not be subject to preemptive rights. Each
outstanding share of capital stock of each Parent Subsidiary is duly
authorized, validly issued, fully paid, nonassessable and not subject to
preemptive rights and each such share owned by the Parent or a Parent
Subsidiary is free and clear of all security interests, liens, claims,
pledges, options, rights of first refusal, agreements, limitations on the
Parent's or such other Parent Subsidiary's voting rights, charges and other
encumbrances or any nature whatsoever (collectively, "Liens"), except where
failure to own such shares free and clear, individually or in the
aggregate, has no Material Adverse Effect on the Parent.
Section 4.4 Authority.
(a) The Parent has all necessary corporate power and authority to
execute and deliver this Agreement and, subject to compliance with Section
52 of the German Stock Corporation Law (Aktiengesetz), the resolutions of
the management board (Vorstand) and the supervisory board (Aufsichtsrat) of
the Parent with respect to the Share Capital Increase, the appointment of
an auditor and the preparation of an audit (valuation) report by such
auditor in connection with the Share Capital Increase and the registration
of the Share Capital Increase with the commercial register
(Handelsregister) for the Parent (the "Requisite Parent Approval"), to
perform its obligations under this Agreement and to consummate the Merger
and the other transactions contemplated by this Agreement to be consummated
by the Parent. This Agreement has been validly executed and delivered by
the Parent, and assuming the due authorization, execution and delivery by
the other parties hereto and subject to Section 5.20, constitutes a legal,
valid and binding obligation of the Parent, enforceable against the Parent
in accordance with its terms.
Section 4.5 No Conflict.
(a) Except as set forth in Section 4.5 of the Parent Disclosure Letter,
the execution and delivery of this Agreement by the Parent do not, and the
performance of this Agreement by the Parent will not:
(i) conflict with or violate any provision of the Parent's articles
of association (Satzung) or management board (Vorstand) rules of
procedure (Geschaftsordnung) of the Parent;
(ii) assuming that all consents, approvals, authorizations and other
actions described in Section 4.6 have been obtained and all filings and
obligations described in Section 4.6 have been made, conflict with or
violate any Law applicable to the Parent or by which any property or
asset of the Parent is or may be bound or affected, except for any such
conflicts or violations that, individually or in the aggregate, have no
Material Adverse Effect on the Parent; or
(iii) result in any breach of or constitute a default (or an event
which with or without notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on
any property or asset of the Parent or any Parent Subsidiary under, any
Contract to which the Parent or any Parent Subsidiary is a party or by
which any of them or their assets or properties is or may be bound or
affected, except for any such breaches, defaults or other occurrences
which, individually or in the aggregate, have no Material Adverse
Effect on the Parent.
(b) Section 4.5(b) of the Parent Disclosure Letter sets forth a list of
all Contracts to which the Parent or any Parent Subsidiaries are a party or
by which they or their assets or properties are or may be bound or affected
under which consents or waivers are or may be required prior to
consummation of the transactions contemplated by this Agreement, except for
those Contracts under which the Parent's failure to obtain the required
consents or waivers, individually or in the aggregate, would not result in
a Material Adverse Effect on the Parent.
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Section 4.6 Required Filings and Consents. The execution and delivery of
this Agreement by the Parent do not, and the performance of this Agreement by
the Parent will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any Governmental Entity except (i) for
applicable requirements of the Exchange Act, applicable requirements of the
Securities Act, applicable requirements of Blue Sky Laws, the rules and
regulations of the Nasdaq National Market, the rules and regulations of the
Neuer Markt segment of the Frankfurt Stock Exchange (the "Neuer Markt"),
applicable requirements of Takeover Statutes, the pre-merger notification
requirements of the HSR Act, the filing of the Certificate of Merger as
required by the DGCL, compliance with Section 52 of the German Stock
Corporation Law (Aktiengesetz) and the registration of the Share Capital
Increase with the commercial register (Handelsregister) for the Parent, and
(ii) where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, individually or in the
aggregate, have no Material Adverse Effect on the Parent. Neither the Parent
nor any of the Parent Subsidiaries is a party to, bound by, any contract or
other agreement that would prohibit or materially delay the transactions
contemplated by this Agreement. Except as set forth in Section 4.6 of the
Parent Disclosure Letter, as of the date of this Agreement, neither the Parent
nor any of the Parent Subsidiaries is in negotiations in respect of an
acquisition of a business, corporation, partnership, association or other
business organization or division thereof that would require the inclusion in
the Registration Statement (as defined in Section 5.4(a)) pro forma financial
information regarding such acquisition.
Section 4.7 Financial Statements.
(a) The Parent has provided the Company with true and complete copies of
(i) the audited consolidated balance sheet of the Parent 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 fiscal years
ended June 30, 1999 (including all related notes and schedules thereto)
(collectively, including any such documents provided subsequent to the date
of this Agreement, the "Parent Financial Statements").
(b) Each of the consolidated balance sheets included in the Parent
Financial Statements (including the related notes and schedules) fairly
presented, in all material respects, the consolidated financial position of
the Parent as of the dates set forth in those consolidated balance sheets.
Each of the consolidated statements of income and of cash flows included in
the Parent Financial Statements (including any related notes and schedules)
fairly presented, in all material respects, the consolidated results of
operations and cash flows, as the case may be, of the Parent and the
consolidated Parent Subsidiaries for the periods set forth in those
consolidated statements of income and of cash flows, in each case in
conformity with generally accepted accounting principles in Germany
("German GAAP") or U.S. GAAP, as noted in the Parent Financial Statements,
consistently applied throughout the periods indicated.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the Parent and the consolidated Parent Subsidiaries as of December
31, 1999 including the related notes, neither the Parent nor any Parent
Subsidiary has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on a balance sheet or in the related notes, except for
liabilities or obligations incurred in the ordinary course of business
since December 31, 1999 that, individually or in the aggregate, have no
Material Adverse Effect on the Parent.
Section 4.8 Absence of Certain Changes or Events.
(a) Since December 31, 1999, the Parent and the Parent Subsidiaries have
conducted their businesses only in the ordinary course and, since such
date, there has not been any Material Adverse Effect on the Parent.
(b) Except as set forth in Section 4.8(b) of the Parent Disclosure
Letter and except as permitted pursuant to Section 5.2, since December 31,
1999, there has not been:
(i) any damage, destruction or other casualty loss with respect to
any asset or property owned, leased or otherwise used by it or any
Parent Subsidiaries, whether or not covered by insurance, which
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damage, destruction or loss, individually or in the aggregate, has a
Material Adverse Effect on the Parent;
(ii) any material change by the Parent in its or any Parent
Subsidiary's accounting methods, principles or practices, except as
required by U.S. GAAP or German GAAP and disclosed in Section 4.8(b) of
the Parent Disclosure Letter;
(iii) any declaration, setting aside or payment of any dividend or
distribution in respect of Parent Shares or any redemption, purchase or
other acquisition of any of the Parent's securities;
(iv) any increase in the compensation or benefits or establishment
of any bonus, insurance, severance, deferred compensation, pension,
retirement, profit sharing, stock option (including, the granting of
stock options, stock appreciation rights, performance awards or
restricted stock awards), stock purchase or other employee benefit
plan, or any other increase in the compensation payable or to become
payable to any executive officers of the Parent or any Parent
Subsidiary except in the ordinary course of business or except as
required by applicable Law;
(v) (A) any incurrence or assumption by the Parent or any Parent
Subsidiary of any indebtedness for borrowed money or (B) any guarantee,
endorsement or other incurrence or assumption of material liability
(whether directly, contingently or otherwise) by the Parent or any
Parent Subsidiary for the obligations of any other person (other than
any wholly owned Parent Subsidiary), other than in the ordinary course
of business;
(vi) any creation or assumption by the Parent or any Parent
Subsidiary of any Lien on any material asset of the Parent or any
Parent Subsidiary, other than (i) in the ordinary course of business,
or (ii) Liens arising after the date of this Agreement by operation of
Law or without the Parent's consent, in each case that has no Material
Adverse Effect on the Parent;
(vii) any making of any loan, advance or capital contribution to or
investment in any person by the Parent or any Parent Subsidiary, other
than in the ordinary course of business, and not in excess of
U.S.$500,000;
(viii) (A) any contract or agreement entered into by the Parent or
any Parent Subsidiary on or prior to the date hereof relating to any
material acquisition or disposition of any assets or business or (B)
any modification, amendment, assignment or termination of or
relinquishment by the Parent or any Parent Subsidiary of any rights
under any other Contract (including any insurance policy naming it as a
beneficiary or a loss payable payee) that has, individually or in the
aggregate, a Material Adverse Effect on the Parent other than
transactions, commitments, contracts or agreements in the ordinary
course of business or those contemplated by this Agreement;
(ix) any adverse change in the Parent's relationships with its
material customers, except for changes that, individually or in the
aggregate, have no Material Adverse Effect on the Parent.
Section 4.9 Accounting and Tax Matters. Neither the Parent, nor to the
knowledge of the Parent, any of Parent's affiliates has taken or agreed to take
any action, nor is the Parent aware of any agreement, plan or other
circumstance, that (i) would prevent the Merger from constituting a transaction
qualifying as a reorganization under Section 368(a) of the Code or (ii) prevent
the exchange of shares of Parent Common Stock from meeting the requirements of
Treasury Regulation Section 1.367(a)-3(c)(1).
Section 4.10 Litigation. Except as disclosed in Section 4.10 of the Parent
Disclosure Letter, there is no Claim pending or, to the knowledge of the
Parent, threatened against the Parent or any Parent Subsidiary before any
Governmental Entity that, individually or in the aggregate, has a Material
Adverse Effect on the Parent. Neither the Parent nor any Parent Subsidiary is
subject to any outstanding order, writ, injunction or decree which,
individually or in the aggregate, has a Material Adverse Effect on the Parent.
Section 4.11 Intellectual Property. The Parent owns, or is validly licensed
or otherwise has the right to use all Intellectual Property that is material to
the conduct of the business of the Parent and the Parent
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Subsidiaries, taken as a whole. To the reasonable knowledge of the Parent, as
of the date of this Agreement, no suits, actions or proceedings are pending,
and no person has threatened in a writing delivered to the Parent since January
1, 1999 to commence any suit, action or proceeding, alleging that the Parent or
any Parent Subsidiaries are infringing the rights of any person with regard to
any Intellectual Property, except for suits, actions or proceedings that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Parent. To the knowledge of the Parent, no person is infringing the
Intellectual Property rights of the Parent or any Parent Subsidiary, except for
infringements which, individually or in the aggregate, would not have a
Material Adverse Effect on the Parent.
Section 4.12 Taxes. Except to the extent that failure to do so, individually
or in the aggregate, has no Material Adverse Effect on the Parent, the Parent
and the Parent Subsidiaries have filed all Tax returns and reports to be filed
by them and have paid, or established adequate reserves for, all Taxes required
to be paid by them. Except as, individually or in the aggregate, has no
Material Adverse Effect on the Parent, no deficiencies for any Taxes have been
proposed, asserted or assessed against the Parent or any Parent Subsidiaries,
and no requests for waivers of the time to assess any such Taxes are pending.
Section 4.13 Brokers. No broker, finder or investment banker other than the
Parent Financial Advisor is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the other transactions contemplated
by this Agreement based upon arrangements made by or on behalf of the Parent.
Prior to the date of this Agreement, the Parent has made available to the
Company a complete and correct copy of all agreements between the Parent and
the Parent Financial Advisor under which the Parent Financial Advisor would be
entitled to any payment relating to the Merger or such other transactions.
Section 4.14 Information. To the best of the Parent's knowledge, none of the
information to be supplied by the Parent for inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement will, in the
case of the Registration Statement, at the time it becomes effective and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated in that Registration Statement or
necessary to make the statements in that Registration Statement not misleading,
or, in the case of the Proxy Statement or any amendments of or supplements to
the Proxy Statement, at the time of the mailing of the Proxy Statement and any
amendments of or supplements to the Proxy Statement and at the time of the
Company Stockholders Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated in that Proxy
Statement or necessary in order to make the statements in that Proxy Statement,
in light of the circumstances under which they are made, not misleading. The
Proxy Statement (except for those portions of the Proxy Statement that relate
only to the Company or the Company Subsidiaries or affiliates of the Company)
and the Registration Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the Securities Act, respectively.
ARTICLE V
COVENANTS
Section 5.1 Conduct of Business of the Company. Except as contemplated by
this Agreement or with the prior written approval of the Parent, during the
period from the date of this Agreement to the Effective Time, the Company will,
and will cause each of the Company Subsidiaries to, conduct its operations only
in the ordinary course of business and, to the extent consistent therewith,
with no less diligence and effort then would be applied in the absence of this
Agreement, will use commercially reasonable efforts to, and to cause each
Company Subsidiary to, preserve intact the business organization of the Company
and each of the Company Subsidiaries, to keep available the services of the
present officers and key employees of the Company and the Company Subsidiaries,
and to preserve the good will of customers, suppliers and all other persons
having business relationships with the Company and the Company Subsidiaries.
Without limiting the generality of the foregoing, and except as otherwise
contemplated by this Agreement or disclosed in Section 5.1 of the
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Company Disclosure Letter, prior to the Effective Time, the Company will not,
and will not permit any Company Subsidiary to, without the prior written
approval of the Parent:
(a) except as required by applicable Law, adopt any amendment to the
certificate of incorporation or by-laws of the Company or the comparable
organizational documents of any Company Subsidiary;
(b) except for (i) issuances of capital stock of Company Subsidiaries to
the Company or a wholly owned Company Subsidiary, (ii) issuances of options
to purchase shares of Company Common Stock pursuant to the Company's 2000
Stock Option Plan effected in accordance with Section 5.8, (iii) grants of
rights pursuant to the Company's 2000 Employee Stock Purchase Plan, and
(iv) repurchases of unvested shares at cost in connection with the
termination of a relationship with any employee, consultant or director
pursuant to stock option or purchase agreement in effect on the date
hereof, issue, reissue, sell or pledge, or authorize the issuance,
reissuance, sale or pledge of (x) additional shares of capital stock or
other equity securities of any class, or securities convertible into
capital stock or other equity securities or any rights, warrants or options
to acquire any such convertible securities or capital stock or other equity
securities, other than the issue of Company Common Stock, in accordance
with the terms of the instruments governing such issuance on the date
hereof, pursuant to the exercise of Company Stock Options outstanding on
the date hereof, or (y) any other securities in respect of, in lieu of, or
in substitution for, Company Common Stock outstanding on the date hereof;
(c) declare, set aside, make or pay any dividend or other distribution
(whether in cash, securities or property or any combination thereof) in
respect of any class or series of its capital stock other than between the
Company and any wholly owned Company Subsidiary;
(d) directly or indirectly, split, combine, subdivide, reclassify or
redeem, retire, purchase or otherwise acquire, or propose to redeem, retire
or purchase or otherwise acquire, any shares of its capital stock, or any
of its other securities;
(e) except for (A) increases in salary, wages and benefits of officers
or employees of the Company or the Company Subsidiaries or increases in
salary, wages and benefits granted to officers and employees of the Company
or the Company Subsidiaries in conjunction with new hires, promotions or
other changes in job status or increases in salary, wages and benefits to
employees of the Company or the Company Subsidiaries pursuant to collective
bargaining agreements entered into in the ordinary course of business, and
(B) the modification of the terms of the 75,000 Company Stock Options
issued to certain members of the board of directors of the Company prior to
the date of this Agreement to allow for such Company Stock Options to vest
immediately but expire by June 30, 2000, (i) increase the compensation or
fringe benefits payable or to become payable to its directors, officers or
employees (whether from the Company or any Company Subsidiaries), (ii) pay
any benefit not required by any existing plan or arrangement (including the
granting of stock options, stock appreciation rights, shares of restricted
stock or performance units) or grant any severance or termination pay to
(except pursuant to existing agreements, plans or policies), or enter into
any employment or severance agreement with, any director, officer or other
employee of the Company or any Company Subsidiaries or (iii) establish,
adopt, enter into, amend or take any action to accelerate rights under any
collective bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, savings, welfare, deferred
compensation, employment, termination, severance or other employee benefit
plan, agreement, trust, fund, policy or arrangement for the benefit or
welfare of any directors, officers or current or former employees, except
in each case to the extent required by applicable Law; provided, however,
that nothing in this Agreement will be deemed to prohibit the payment of
benefits as they become payable or prevent the Company from fulfilling any
obligation entered into prior to the date of this Agreement;
(f) acquire, sell, lease, license, transfer, pledge, encumber, grant or
dispose of (whether by merger, consolidation, purchase, sale or otherwise)
any assets, including capital stock of Company Subsidiaries (other than the
acquisition and sale of inventory or the disposition of used or excess
equipment and the purchase of raw materials, supplies and equipment, or
licensing the Company's products, in each case in the ordinary course of
business), or enter into any material commitment or transaction outside the
ordinary
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course of business, other than transactions between a wholly owned Company
Subsidiary and the Company or another wholly owned Company Subsidiary;
(g) (i) incur, assume or prepay any long-term indebtedness or incur or
assume any short-term indebtedness (including, in either case, by issuance
of debt securities), (ii) assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person, or (iii) make any loans, advances or
capital contributions to, or investments in, any other person except for
loans, advances, capital contributions or investments between any wholly
owned Company Subsidiary and the Company or another wholly owned Company
Subsidiary, except (A) in connection with the financing of ordinary course
trade payables, (B) advances to customers in the ordinary course of
business, or (C) indebtedness between the Company and any directly or
indirectly wholly owned subsidiary of the Company; or
(h) terminate, cancel or request any material change in, or agree to any
material change in any Contract which is material to the Company and the
Company Subsidiaries taken as a whole, or enter into any Contract which
would be material to the Company and the Company Subsidiaries taken as a
whole, in each case other than in the ordinary course of business; or make
or authorize any capital expenditure, other than capital expenditures that
are not, in the aggregate, for any fiscal year, in excess of U.S.$2,000,000
for the Company and the Company Subsidiaries taken as a whole;
(i) change the Company's accounting policies or procedures, other than
actions in the ordinary course of business and consistent with past
practice or as required pursuant to applicable Law or U.S. GAAP in the
reasonable opinion of the Company's independent certified accountants;
(j) waive, release, assign, settle or compromise any material rights,
claims or litigation;
(k) pay, discharge or satisfy any material claim, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) other than in the ordinary course of business;
(l) Ienter into any agreement or arrangement that materially limits or
otherwise restricts the Company or any Company Subsidiary or any successor
thereto, or that would, after the Effective Time, limit or restrict the
Surviving Corporation and its affiliates (including Parent) or any
successor thereto, from engaging or competing in any line of business or in
any geographic area;
(m) make any Tax election or settle or compromise any material federal,
state, local or foreign Tax liability;
(n) authorize or enter into any formal or informal written or other
agreement or otherwise make any commitment to do any of the foregoing; or
(o) take any action with the intent to directly or indirectly adversely
affect the Merger.
Section 5.2 Certain Interim Operations of the Parent. The Parent covenants
and agrees that, except as expressly provided in this Agreement or as disclosed
in Section 5.2 of the Parent Disclosure Letter, during the term of this
Agreement, without the prior written consent of the Company, which consent will
not be unreasonably withheld or delayed, the Parent will not:
(A) adopt any amendment to the articles of incorporation (Satzung) of
the Parent in any manner that changes the fundamental attributes, or
adversely affects the value or rights, of the Parent Common Stock;
(b) declare, set aside, make or pay any dividend or other distribution
(whether in cash, securities or property or any combination thereof) in
respect of any class or series of its capital stock other than between the
Parent and any wholly owned Parent Subsidiary;
(c) liquidate or adopt a plan of liquidation;
(d) purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of the Parent or any Parent Subsidiary in any
amount that would adversely affect the Parent's financial condition or
liquidity;
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(e) authorize or enter into any formal or informal written or other
agreement or otherwise make any commitment to do any of the foregoing;
(f) take any action with the intent to directly or indirectly adversely
affect Merger; or
(g) change the Parent's accounting policies or procedures, other than
actions in the ordinary course of business and consistent with past
practice or as required pursuant to applicable Law or U.S. GAAP or German
GAAP.
Section 5.3 Notification of Certain Matters. The Parent and the Company
shall promptly notify each other of (a) the occurrence or non-occurrence of any
fact or event which could reasonably be expected (i) to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date of this Agreement
to the Effective Time, (ii) to cause any material covenant, condition or
agreement hereunder not to be complied with or satisfied in all material
respects or (iii) to result in, in the case of Parent, a Material Adverse
Effect on the Parent; and, in the case of the Company, a Material Adverse
Effect on the Company, (b) any failure of the Company or the Parent, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder in any material respect;
provided, however, that no such notification shall affect the representations
or warranties of any party or the conditions to the obligations of any party
hereunder, (c) any notice or other material communications from any
Governmental Entity in connection with the transactions contemplated by this
Agreement and (d) the commencement of any suit, action or proceeding that seeks
to prevent, seeks damages in respect of, or otherwise relates to the
consummation of the transactions contemplated by this Agreement.
Section 5.4 Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement,
the Parent and the Company shall jointly prepare and file with the SEC a
single document that will constitute (i) the proxy statement of the Company
relating to the special meeting of the Company's stockholders (the "Company
Stockholders Meeting") to be held to consider approval and adoption of this
Agreement and the Merger, (ii) the registration statement on Forms F-4 and
F-6 of the Parent (together with all amendments thereto, the "Registration
Statement"), in connection with the registration under the Securities Act
of the Parent ADSs (and the Parent Common Stock underlying such Parent
ADSs) to be issued to the stockholders of the Company in connection with
the Merger and the prospectus included in the Registration Statement (such
single document, together with any amendments thereof or supplements
thereto, the "Proxy Statement"). Substantially contemporaneously with the
filing of the Proxy Statement with the SEC, copies of the Proxy Statement
shall be provided to the Nasdaq National Market. The Parent and the Company
each shall use commercially reasonable efforts to cause the Registration
Statement to become effective as promptly as practicable, and, prior to the
effective date of the Registration Statement (the "Registration Statement
Effective Date"), the Parent shall take all or any action required under
any applicable Law in connection with the issuance of Parent ADSs pursuant
to the Merger. The Parent or the Company, as the case may be, shall furnish
all information concerning the Parent or the Company as the other party may
reasonably request in connection with such actions and the preparation of
the Proxy Statement. As promptly as practicable after the Registration
Statement Effective Date, the proxy statement and prospectus included in
the Proxy Statement (collectively, the "Proxy Materials") will be mailed to
the stockholders of the Company. The Parent and the Company shall cause the
Proxy Statement to comply as to form and substance in all material respects
with the applicable requirements of (i) the Exchange Act, including
Sections 14(a) and 14(d) thereof and the respective regulations promulgated
thereunder, (ii) the Securities Act, (iii) the rules and regulations of the
Nasdaq National Market principal securities exchanges and quotation
services on which the common stock, (iv) the DGCL and (v) any other
applicable law.
(b) The Proxy Statement shall include the unconditional recommendation
of the Board of Directors of the Company to the stockholders of the Company
that they vote in favor of the adoption of this Agreement and the Merger;
provided, however, that the Board of Directors of the Company may, at any
time prior to the Effective Time, withdraw, modify or change any such
recommendation if the Board of
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Directors of the Company determines in good faith (after consultation with
the Company's counsel) that failure to so withdraw, modify or change its
recommendation would be inconsistent with its fiduciary duties to the
Company's stockholders under applicable Laws. In addition, the Proxy
Statement and the Proxy Materials will include a copy of the written
opinion of the Company Financial Advisor referred to in Section 3.19.
(c) No amendment or supplement to the Proxy Statement will be made
without the approval of each of the Parent and the Company, which approval
shall not be unreasonably withheld or delayed. Each of the Parent and the
Company will advise the other, promptly after it receives notice thereof,
of the time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any stop order,
of the suspension of the qualification of Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or of
any request by the SEC or the Nasdaq National Market for amendment of the
Proxy Statement or comments thereon and responses thereto or requests by
the SEC for additional information.
(d) The information supplied by the Company for inclusion in the Proxy
Statement shall not, at (i) the time the Registration Statement is declared
effective, (ii) the time the Proxy Materials (or any amendment of or
supplement to the Proxy Materials) is first mailed to the stockholders of
Company, (iii) the time of the Company Stockholders Meeting, and (iv) the
Effective Time, contain any untrue statement of a material fact or fail to
state any material fact required to be stated in the Proxy Statement or
necessary in order to make the statements in the Proxy Statement not
misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any Company Subsidiary, or their
respective officers or directors, should be discovered by the Company that
should be set forth in an amendment or a supplement to the Proxy Statement,
the Company shall promptly inform the Parent. All documents that the
Company is responsible for filing with the SEC in connection with the
transactions contemplated by this Agreement will comply as to form and
substance in all material respects with the applicable requirements of the
DGCL, the Securities Act and the Exchange Act.
(e) The information supplied by the Parent for inclusion in the Proxy
Statement shall not, at (i) the time the Registration Statement is declared
effective, (ii) the time the Proxy Materials (or any amendment of or
supplement to the Proxy Materials) are first mailed to the stockholders the
Company, (iii) the time of the Company Stockholders Meeting, and (iv) the
Effective Time, contain any untrue statement of a material fact or fail to
state any material fact required to be stated in the Proxy Statement or
necessary in order to make the statements in the Proxy Statement not
misleading. If, at any time prior to the Effective Time, any event or
circumstance relating to the Parent or any Parent Subsidiary, or their
respective officers or directors, should be discovered by the Parent that
should be set forth in an amendment or a supplement to the Proxy Statement,
the Parent shall promptly inform the Company. All documents that the Parent
is responsible for filing in connection with the transactions contemplated
by this Agreement will comply as to form and substance in all material
aspects with the applicable requirements of the DGCL, the Securities Act
and the Exchange Act.
Section 5.5 Company Stockholders Meeting.
The Company shall call and hold the Company Stockholders Meeting as promptly
as practicable after the Registration Statement Effective Date for the purpose
of voting upon the adoption of this Agreement and the Parent and the Company
will cooperate with each other to cause the Company Stockholders Meeting to be
held as soon as practicable following the mailing of the Proxy Materials to the
stockholders of the Company. The Company shall use commercially reasonable
efforts (through its agents or otherwise) to solicit from its stockholders
proxies in favor of the adoption of this Agreement, and shall take all other
action necessary or advisable to secure Requisite Company Vote, except to the
extent that the Board of Directors of the Company determines in good faith
(after consultation with the Company's counsel) that doing so would be
inconsistent with its fiduciary duties to the Company's stockholders under
applicable Laws.
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Section 5.6 Access to Information; Confidentiality.
(a) Except as required under any confidentiality agreement or similar
agreement or arrangement to which the Parent or the Company or any of their
respective subsidiaries is a party or under applicable Law or the
regulations or requirements of any securities exchange or quotation service
or other self regulatory organization with whose rules the parties are
required to comply, from the date of this Agreement to the Effective Time,
the Parent and the Company shall (and shall cause their respective
subsidiaries to): (i) provide to the other (and its officers, directors,
employees, accountants, consultants, legal counsel, financial advisors,
investment bankers, agents and other representatives (collectively,
"Representatives")) access at reasonable times upon prior notice to the
officers, employees, agents, properties, offices and other facilities of
the other and its subsidiaries and to the books and records thereof; and
(ii) furnish promptly such information concerning the business, properties,
Contracts, assets, liabilities, personnel and other aspects of the other
party and its subsidiaries as the other party or its Representatives may
reasonably request. No investigation conducted under this Section 5.6 shall
affect or be deemed to modify any representation or warranty made in this
Agreement.
(b) The parties shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under
the Confidentiality Agreement, dated May 17, 2000 (the "Confidentiality
Agreement"), between the Parent and the Company with respect to the
information disclosed under this Section 5.6.
Section 5.7 No Solicitation.
(a) The Company agrees that, prior to the Effective Time, it shall not,
and shall not authorize or permit any Company Subsidiaries or any of its or
the Company Subsidiaries' Representatives, directly or indirectly, to (i)
solicit, initiate or encourage any inquiries or the making of any offer or
proposal with respect to (x) any merger, consolidation, share exchange,
recapitalization, business combination or similar transaction, (y) any
sale, lease, exchange, mortgage, transfer or other disposition, in a single
transaction or series of related transactions, of assets representing 15%
or more of the assets of the Company and the Company Subsidiaries, taken as
a whole, or (z) any sale of shares of capital stock representing,
individually or in the aggregate, 10% or more of the voting power of the
Company other than to the Company or a Company Subsidiary, including by way
of a tender offer or exchange offer by any person (other than the Company
or a Company Subsidiary) for shares of capital stock representing 5% or
more of the voting power of the Company, other than the transactions
contemplated by this Agreement (any of the foregoing inquiries, offers or
proposals being referred to in this Agreement as a "Takeover Proposal"),
(ii) negotiate or otherwise engage in substantive discussions with any
person (other than the Parent, Merger Sub or their respective
Representatives) that has submitted or proposed to submit any Takeover
Proposal, (iii) provide to any person any non-public information or data
relating to the Company or any Company Subsidiary for the purpose of
facilitating the making of any Takeover Proposal, or (iv) agree to approve
or recommend any Takeover Proposal or otherwise enter into any agreement,
arrangement or understanding requiring it to abandon, terminate or fail to
consummate the Merger or any other transactions contemplated by this
Agreement; provided, however, that if the Board of Directors of the Company
determines in good faith (after consultation with the Company's legal
counsel) that failure to do so would be inconsistent with its fiduciary
duties to the Company's stockholders under applicable Laws, the Company
may, in response to any Superior Proposal, or any Takeover Proposal that
would reasonably be expected to lead to a Superior Proposal, which proposal
was not solicited by it and which did not otherwise result from a breach of
this Section 5.7, and subject to providing prior written notice of its
decision to take such action to the Parent and compliance with the other
requirements of this Section 5.7, (A) furnish information with respect to
the Company and the Company Subsidiaries to any person making a Superior
Proposal pursuant to a customary confidentiality agreement (as determined
in good faith by the Company after consultation with its independent legal
counsel), (B) participate in discussions or negotiations regarding such
Superior Proposal or (C) enter into a definitive agreement providing for
the implementation of a Superior Proposal (as defined below) if the Company
or the Board of Directors is simultaneously terminating this Agreement
pursuant to Section 7.1(h).
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(b) In addition to the obligations of the Company set forth in paragraph
(a) of this Section 5.7, the Company shall as promptly as is practicable
advise the Parent orally and in writing of any request for information
relating to any Takeover Proposal, the material terms and conditions of
such request or Takeover Proposal and the identity of the person making
such request or Takeover Proposal. The Company will keep the Parent
informed of the status (including amendments or proposed amendments) of any
such request or Takeover Proposal.
(c) Nothing contained in this Section 5.7 shall prohibit the Company
from taking and disclosing to its stockholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act, or from making any other
disclosure to the Company's stockholders, that is required by applicable
Law or by the Board of Directors' fiduciary duties.
(d) The Company will immediately cease and cause to be terminated any
existing activities, discussions or negotiations by the Company or its
Representatives with any parties conducted heretofore with respect to any
of the foregoing, and will promptly inform the Representatives of the
obligations undertaken in this Section 5.7.
(e) The Board of Directors of the Company will not withdraw or modify,
or propose to withdraw or modify, in any manner adverse to the Parent, its
approval or recommendation of this Agreement or the Merger except in
connection with a Superior Proposal and then only upon or after the
termination of this Agreement pursuant to Section 7.1(h) and payment to the
Parent of the amounts referred to in Section 7.3(b).
(f) For purposes of this Agreement:
(i) "Superior Proposal" means any bona fide written proposal made by
a third party to acquire, directly or indirectly, including pursuant to
a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, reorganization, liquidation, dissolution
or similar transaction, for consideration to the Company's stockholders
consisting of cash and/or securities, over 50% of the shares of the
Company's capital stock then outstanding on terms which the Board of
Directors of the Company determines in their good faith judgment (after
consultation with the Company's financial advisors), to be more
favorable to the Company's stockholders than the Merger and for which
financing, to the extent required, is then committed or which a
majority of the members of the Board of Directors of the Company
determines in their good faith judgment (after such consultation), is
likely to be obtained by such third party.
(ii) "Acquisition Agreement" means any letter of intent, agreement
in principle, definitive acquisition or merger agreement or other
similar agreement, contract or commitment related to any Takeover
Proposal.
Section 5.8 Employee Benefits Matters.
(a) Effective as of the Effective Time and for a one-year period
following the Effective Time, the Parent shall provide, or cause the
Surviving Corporation and its subsidiaries and successors to provide, those
persons who, at the Effective Time, were employees of the Company and its
subsidiaries ("Covered Employees"), with benefits and compensation during
their continuing employment that are substantially equivalent, in the
aggregate, to the compensation and benefits provided to such employees as
of the date of this Agreement; provided that the foregoing shall not apply
to the Company's 2000 Employee Stock Purchase Plan, which shall be
terminated upon or prior to the Effective Time; provided, further, that
nothing herein shall restrict the Parent or the Surviving Corporation from
terminating the employment of any such employees in accordance with
applicable laws and contractual rights, if any, of such employees.
(b) The Parent will, or will cause the Surviving Corporation to: (i)
waive all limitations as to pre-existing conditions, exclusions and waiting
periods with respect to participation and coverage requirements applicable
to the Covered Employees under any welfare plan that such employees may be
eligible to participate in after the Effective Time; (ii) provide each such
Covered Employee with credit for any co-payment and deductibles paid prior
to the Effective Time in satisfying any applicable deductible or out-of-
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pocket requirements under any welfare plans that such employees are
eligible to participate in after the Effective Time; and (iii) provide each
Covered Employee with credit for purposes of vesting and eligibility for
all service with the Company and its affiliates under each employee benefit
plan, program, or arrangement of the Parent or its affiliates in which such
employees are eligible to participate to the extent such service was
credited for similar purposes under similar plans of the Company or its
subsidiaries; provided, however, that in no event shall the Covered
Employees be entitled to any credit to the extent that it would result in a
duplication of benefits with respect to the same period of service.
(c) The Parent shall (i) cause the Surviving Corporation after the
consummation of the Offer to pay all amounts provided under all of the
Company's Benefit Plans in accordance with their terms, and (ii) honor and
cause the Surviving Corporation to honor all rights, privileges and
modifications to or with respect to any Benefit Plans which become
effective as a result of such change in control in accordance with their
terms, subject in each case to all rights amend or terminate any Benefit
Plan in accordance with its terms.
(d) The Parent and the Company shall jointly determine, no later than
June 30, 2000, an appropriate number of options to be granted between the
date of this Agreement and the Effective Time. The Parent and the Company
shall, in good faith, jointly identify the optionees and determine the
amount and terms of individual grants.
Section 5.9 Directors' and Officers' Indemnification and Insurance.
(a) The Parent agrees that the Certificate of Incorporation and By-laws
of the Surviving Corporation will contain provisions with respect to
exculpation and indemnification at least as favorable to employees, agents,
directors or officers of the Company and the Company Subsidiaries (the
"Indemnified Parties") as those provided in the certificate of
incorporation or by-laws of the Company as in effect on the date hereof,
which provisions will not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who, immediately
prior to the Effective Time, were directors, officers, employees or agents
of the Company, unless such modification is required by law; provided,
however, that in the event any claim or claims are asserted or made within
such six-year period, all rights to indemnification in respect of any such
claim or claims shall continue until final disposition of any and all such
claims. The foregoing parties are expressly made third party beneficiaries
to the provisions of this Section 5.9. The Parent also agrees to indemnify
all Indemnified Parties to the fullest extent permitted by applicable law
with respect to all acts and omissions arising out of such individuals'
services as officers, directors, employees or agents of the Company or any
of the Company Subsidiaries or as trustees or fiduciaries of any plan for
the benefit of employees, or otherwise on behalf of, the Company or any of
the Company Subsidiaries, occurring prior to the Effective Time, including
the transactions contemplated by this Agreement. Without limiting of the
foregoing, in the event any such Indemnified Party is or becomes involved
in any capacity in any action, proceeding or investigation in connection
with any matter, including the transactions contemplated by this Agreement,
occurring prior to, and including, the Effective Time, the Parent will pay
as incurred such Indemnified Party's legal and other expenses (including
the cost of any investigation and preparation) incurred in connection
therewith.
(b) The Parent agrees that the Company and, at and after the Effective
Time, the Surviving Corporation shall cause to be maintained in effect for
not less than six years from the Effective Time the current policies of the
directors' and officers' liability insurance maintained by the Company;
provided that the Surviving Corporation may substitute therefor policies of
at least the same coverage containing terms and conditions which are at
least as favorable and provided that such substitution shall not result in
any gaps or lapses in coverage with respect to matters occurring prior to
the Effective Time; and provided, further, that the Surviving Corporation
shall not be required to pay an annual premium in excess of 175% of the
last annual premium paid by the Company prior to the date of this Agreement
and if the Surviving Corporation is unable to obtain the insurance required
by this Section 5.9(b) it shall obtain as much comparable insurance as
possible for an annual premium equal to such maximum amount.
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Section 5.10 Letters of Accountants.
(a) The Company shall cause to be delivered to the Parent "comfort"
letters of PricewaterhouseCoopers LLP, the Company's independent public
accountants, dated and delivered on the Registration Statement Effective
Date and as of the Effective Time, and addressed to the Parent in form and
substance reasonably satisfactory to the Parent and reasonably customary in
scope and substance for letters delivered by independent public accountants
in connection with transactions contemplated by this Agreement.
(b) The Parent shall cause to be delivered to the Company "comfort"
letters of Arthur Andersen, the Parent's independent public accountants,
dated and delivered the Registration Statement Effective Date and as of the
Effective Time, and addressed to the Company, in form and substance
reasonably satisfactory to the Company and reasonably customary in scope
and substance for letters delivered by independent public accountants in
connection with transactions contemplated by this Agreement.
Section 5.11 Commercially Reasonable Efforts. Subject to the terms and
conditions provided in this Agreement and to applicable legal requirements,
each of the parties to this Agreement agrees to use commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, and to assist and cooperate with the other parties to this Agreement in
doing, as promptly as practicable, all things necessary, proper or advisable
under applicable laws and regulations to ensure that the conditions set forth
in Article VI are satisfied and to consummate and make effective the
transactions contemplated by this Agreement. If at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, including the execution of additional instruments, the proper
officers and directors of each party to this Agreement shall take all such
necessary or desirable action.
Section 5.12 Consents; Filings; Further Action.
(a) Upon the terms and subject to the conditions of this Agreement, each
of the parties to this Agreement shall use commercially reasonable efforts
to (i) take, or cause to be taken, all appropriate action, and do, or cause
to be done, all things necessary, proper or advisable under applicable Law
or otherwise to consummate and make effective the Merger and the other
transactions contemplated by this Agreement, (ii) obtain from Governmental
Entities any consents, licenses, permits, waivers, approvals,
authorizations or orders required to be obtained or made by the Parent or
the Company or any of their subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the
consummation of the Merger and the other transactions contemplated by this
Agreement, (iii) make all necessary filings, and thereafter make any other
submissions either required or deemed appropriate by each of the parties,
with respect to this Agreement and the Merger and the other transactions
contemplated by this Agreement required under (A) the Securities Act, the
Exchange Act and any other applicable federal or Blue Sky Laws, (B) the HSR
Act, (C) the DGCL and the German Stock Corporation Law (Aktiengesetz), (D)
any other applicable Law and (E) the rules and regulations of the Nasdaq
National Market. The parties to this Agreement shall cooperate and consult
with each other in connection with the making of all such filings,
including by providing copies of all such documents to the nonfiling party
and its advisors prior to filing, and none of the parties will file any
such document if any of the other parties shall have reasonably objected to
the filing of such document. No party to this Agreement shall consent to
any voluntary extension of any statutory deadline or waiting period or to
any voluntary delay of the consummation of the Merger and the other
transactions contemplated by this Agreement at the behest of any
Governmental Entity without the consent and agreement of the other parties
to this Agreement, which consent shall not be unreasonably withheld or
delayed.
(b) Without limiting the generality of Section 5.12(a), each party to
this Agreement shall promptly inform the others of any material
communication from the Federal Trade Commission, the Department of Justice
or any other domestic or foreign government or governmental or
multinational authority regarding any of the transactions contemplated by
this Agreement. If any party or any affiliate thereof receives a request
for additional information or documentary material from any such government
or authority with
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respect to the transactions contemplated by this Agreement, then such party
will endeavor in good faith to make, or cause to be made, as soon as
reasonably practicable and after consultation with the other party, an
appropriate response in compliance with such request. The Parent will
advise the Company promptly in respect of any understandings, undertakings
or agreements (oral or written) which the Parent proposes to make or enter
into with the Federal Trade Commission, the Department of Justice or any
other domestic or foreign government or governmental or multinational
authority in connection with the transactions contemplated by this
Agreement. In furtherance and not in limitation of the foregoing, the
Parent shall use commercially reasonable efforts to resolve such
objections, if any, as may be asserted with respect to the transactions
contemplated by this Agreement under any antitrust, competition or trade
regulatory laws, rules or regulations of any domestic or foreign government
or governmental authority or any multinational authority. Notwithstanding
the foregoing, nothing in this Section 5.12 shall require, or be construed
to require, the Parent or the Company, in connection with the receipt of
any regulatory approval, to proffer to, or agree to (A) sell or hold
separate and agree to sell, divest or to discontinue or limit, before or
after the Effective Time, any assets, businesses, or interest in any assets
or businesses of the Parent, the Company or any of their respective
affiliates (or to the consent to any sale, or agreement to sell, or
discontinuance or limitation by the Parent or the Company, as the case may
be, of any of its assets or businesses) or (B) agree to any conditions
relating to, or changes or restriction in, the operations of any such asset
or businesses which, in either case, could reasonably be expected to result
in a Material Adverse Effect on the Parent or a Material Adverse Effect on
the Company.
Section 5.13 Plan of Reorganization. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Section 1.368-2(g)
of the income tax regulations promulgated under the Code. From and after the
date of this Agreement and until the Effective Time, each party to this
Agreement shall use commercially reasonable efforts to cause the Merger to
qualify, and will not, without the prior written consent of the parties to this
Agreement, take any actions or cause any actions to be taken which could
prevent the Merger from qualifying, as a reorganization under the provisions of
Section 368(a) of the Code. Following the Effective Time, and consistent with
any such consent, (i) none of the Surviving Corporation, the Parent or any of
their affiliates shall take any action or cause any action to be taken which
would cause the Merger to fail to so qualify as a reorganization under Section
368(a) of the Code and (ii) the Surviving Corporation and the Parent shall
comply with the record keeping and reporting requirements of Sections 368(a)
and 367 of the Code.
Section 5.14 Public Announcements. The initial press release concerning the
Merger shall be a joint press release and, thereafter, the Parent and Merger
Sub and the Company shall consult with each other before issuing any press
release or otherwise making any public statements with respect to this
Agreement or any of the transactions contemplated by this Agreement and shall
not issue any such press release or make any such public statement prior to
such consultation, except to the extent required by applicable Law or the
requirements of the Nasdaq National Market and the Neuer Markt, in which case
the issuing party shall use commercially reasonable efforts to consult with the
other parties before issuing any such release or making any such public
statement.
Section 5.15 Stock Exchange Listings and De-Listings. Each of the Company
and the Parent shall use commercially reasonable efforts to cause (i) the
Parent ADSs to be issued in the Merger to be approved for quotation on the
Nasdaq National Market subject to official notice of issuance, prior to the
Effective Time, and (ii) if necessary, the Parent Common Stock underlying the
Parent ADSs to be approved for listing on the Neuer Markt subject to official
notice of issuance, prior to the Effective Time. The parties shall use their
commercially reasonable efforts to cause the Surviving Corporation to cause the
Company Common Stock to be de-listed from Nasdaq National Market and de-
registered under the Exchange Act as soon as practicable following the
Effective Time.
Section 5.16 Expenses. Except as otherwise provided in Section 7.3, whether
or not the Merger is consummated, all Expenses incurred in connection with this
Agreement and the Merger and the other transactions contemplated by this
Agreement shall be paid by the party incurring such Expense, except that
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Expenses incurred in connection with the filing fee for the Proxy Statement and
printing and mailing the Proxy Materials (other than legal, accounting,
investment and banking, expert and consultant fees and expenses) and the filing
fee under the HSR Act shall be shared equally by the Parent and the Company.
Section 5.17 Takeover Statutes; Exon-Florio. If any Takeover Statute is or
may become applicable to the Merger or the other transactions contemplated by
this Agreement, each of the Parent and the Company and its respective board of
directors shall grant such approvals and take such actions as are necessary so
that such transactions may be consummated as promptly as practicable on the
terms contemplated by this Agreement, any necessary filings are made and
otherwise act to eliminate or minimize the effects of such statute or
regulation on such transactions. In addition, if the Parent so requests, the
Parent and the Company shall cooperate to file a notification pursuant to
Section 721(a) of the Exon-Florio Amendment to the Defense Production Act of
1950
Section 5.18 Dividends. The Company shall coordinate with the Parent the
declaration, setting of record dates and payment dates of dividends on Company
Common Stock so that holders of Company Common Stock do not receive dividends
on both Company Common Stock and Parent ADS received in the Merger in respect
of any calendar quarter or fail to receive a dividend on either Company Common
Stock or Parent Common Stock received in the Merger in respect of any calendar
quarter.
Section 5.19 Control of the Company's Operations. Nothing contained in this
Agreement shall give the Parent or the Company, directly or indirectly, rights
to control or direct the other party's operations prior to the Effective Time.
Section 5.20 Certain Obligations of the Parent.
(a) Certain obligations of the Parent set forth in this Agreement,
including those obligations designed to survive the consummation of the
Share Exchange, may require additional corporate actions specified in the
German Stock Corporation Law (Aktiengesetz), including Sections 52, 203 and
185 et seq. thereof, be taken by or with respect to the Parent. As required
by law, certain of such obligations of the Parent shall be incorporated in
agreements in connection with the contributions in kind to the Parent,
which agreements shall be entered into by the Parent and the Exchange Agent
in the context of the Share Exchange pursuant to Sections 52 and 183 et
seq. of the German Stock Corporation Law (Aktiengesetz).
(b) Effective as of the Effective Time and during the period in which
any of the Company Stock Options remain outstanding, the Parent shall not
cause the Surviving Corporation to commence a bankruptcy or insolvency
proceeding under any applicable Law.
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to consummate the other transactions
contemplated by this Agreement to be consummated on the Closing Date is subject
to the satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. This Agreement and consummation of the Merger
shall have been duly approved by holders of outstanding Company Common
Stock by the Requisite Company Vote, and this Agreement, the consummation
of the Merger, the Share Capital Increase (including the approvals of the
Parent's management board (Vorstand) and supervisory board (Aufsichtsrat))
and the issuance of the Parent Common Stock underlying the Parent ADSs to
be issued in the Merger shall have been duly approved in accordance with
applicable law and the articles of association (Satzung) of the Parent;
(b) Listing. The Parent ADSs issuable to the Company's stockholders
pursuant to this Agreement shall have been authorized for quotation on the
Nasdaq National Market, upon official notice of issuance.
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(c) HSR. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(d) Consents. All consents, approvals and action of any Governmental
Entity required to permit the consummation of the Merger, the Share Capital
Increase and the other transactions contemplated by this Agreement shall
have been obtained or made, free of any condition that could reasonably be
expected to result in a Material Adverse Effect on the Parent or a Material
Adverse Effect on the Company.
(e) Injunctions. No Governmental Entity of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any Law, orders,
injunction or decree (whether temporary, preliminary or permanent) that is
in effect and restrains, enjoins or otherwise prohibits consummation of the
Merger, the Share Capital Increase or the other transactions contemplated
by this Agreement.
(f) Registration Statement. The Registration Statement shall have become
effective under the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued, and no
proceedings for that purpose shall have been initiated or be threatened by
the SEC.
Section 6.2 Conditions to Obligations of the Parent. The obligations of the
Parent to consummate the transactions contemplated by this Agreement to be
consummated on the Closing Date are also subject to the satisfaction or waiver
by the Parent at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of the Company set forth in this Agreement that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and the Parent
shall have received a certificate (which certificate may be qualified by
knowledge to the same extent as the representations and warranties of the
Company contained in this Agreement are so qualified) signed on behalf of
the Company by an executive officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and the Parent
shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to such effect.
(c) Material Adverse Effect. Since the date of this Agreement, there
shall have been no Material Adverse Effect on the Company.
(d) Consents Under Agreements. The Company shall have obtained the
consent, approval or waiver of each person that is not a Governmental
Entity whose consent, approval or waiver shall be required in order to
consummate the transactions contemplated by this Agreement, except those
for which the failure to obtain such consent, approval or waiver,
individually or in the aggregate, would have no Material Adverse Effect on
the Company.
(e) Tax Opinion. The Parent shall have received the opinion of Paul,
Weiss, Rifkind, Wharton & Garrison, special counsel to the Parent, dated
the Closing Date, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that each of the Parent, Merger Sub and the Company
will be a party to that reorganization within the meaning of Section 368(b)
of the Code. Each of the parties hereto agree to make such reasonable
representations related to the requirements of Sections 367 and 368 of the
Code as may be requested by counsel in connection with such opinion.
(f) Auditors' Report. The Parent shall have received an unqualified
auditors' report from the Company's independent certified auditors on the
Company's consolidated balance sheet and consolidated statement of income
and of cash flows (including the related notes and schedules) provided by
the Company to the Parent prior to the signing of this Agreement.
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Section 6.3 Conditions to Obligation of the Company. The obligation of the
Company to effect the Merger and consummate the other transactions contemplated
by this Agreement to be consummated on the Closing Date is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The representations and warranties
of the Parent set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of the Parent set forth in this Agreement that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing Date, as though made
on and as of the Closing Date, except to the extent the representation or
warranty is expressly limited by its terms to another date, and the Company
shall have received a certificate (which certificate may be qualified by
knowledge to the same extent as the representations and warranties of each
of the Parent contained in this Agreement are so qualified) signed on
behalf of each of the Parent by an executive officer of the Parent to such
effect.
(b) Performance of Obligations of the Parent. The Parent shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and the Company
shall have received a certificate signed on behalf of the Parent by an
executive officer of the Parent to such effect.
(c) Material Adverse Effect. Since the date of this Agreement, there
shall have been no Material Adverse Effect on the Parent.
(d) Consents Under Agreements. The Parent shall have obtained the
consent, approval or waiver of each person that is not a Governmental
Entity whose consent, approval or waiver shall be required in order to
consummate the transactions contemplated by this Agreement, except those
for which failure to obtain such consents, approval or waiver, individually
or in the aggregate, would have no Material Adverse Effect on the Parent.
(e) Tax Opinion. The Company shall have received the opinion of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel to the
Company, dated the Closing Date, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and that each of the Parent, Merger
Sub and the Company will be a party to that reorganization within the
meaning of Section 368(b) of the Code. Each of the parties hereto agree to
make such reasonable representations related to the requirements of
Sections 367 and 368 of the Code as may be requested by counsel in
connection with such opinion.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement, as follows:
(a) by mutual written consent of the Parent and the Company duly
authorized by their board of directors of the Company and by the management
board of the Parent;
(b) by either the Parent or the Company, if the Effective Time shall not
have occurred on or before December 31, 2000; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to the party whose failure to fulfill any obligation under this
Agreement shall have been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date;
(c) by either the Parent or the Company, if any order, injunction or
decree preventing the consummation of the Merger shall have been entered by
any court of competent jurisdiction or Governmental Entity and shall have
become final and nonappealable;
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(d) by the Parent or the Company, if this Agreement shall fail to
receive the Requisite Company Vote at the Company Stockholders Meeting or
any adjournment or postponement thereof;
(e) by the Parent, upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set forth in
this Agreement, or if any representation or warranty of the Company shall
have become untrue, in either case such that the conditions set forth in
either of Section 6.2(a) or 6.2(c) would not be satisfied (a "Terminating
Company Breach"); provided, however, that, if such Terminating Company
Breach is curable by the Company through the exercise of commercially
reasonable efforts and for so long as the Company continues to exercise
such commercially reasonable efforts, the Parent may not terminate this
Agreement under this Section 7.1(e);
(f) by the Company, upon breach of any material representation,
warranty, covenant or agreement on the part of the Parent set forth in this
Agreement, or if any representation or warranty of the Parent shall have
become untrue, in either case such that the conditions set forth in either
of Section 6.3(a) or 6.3(c) would not be satisfied (a "Terminating Parent
Breach"); provided, however, that, if such Terminating Parent Breach is
curable by the Parent through commercially reasonable efforts and for so
long as the Parent continues to exercise such commercially reasonable
efforts, the Company may not terminate this Agreement under this Section
7.1(f);
(g) by the Parent, if (i) the Board of Directors of the Company
withdraws, modifies or changes its approval or recommendation of this
Agreement in a manner adverse to the Parent or shall have resolved to do
so, (ii) the Board of Directors of the Company shall have recommended to
the stockholders of the Company a Takeover Proposal or shall have resolved
to do so, or (iii) a tender offer or exchange offer for 10% or more of the
outstanding shares of capital stock of the Company is commenced by a person
other than the Parent and either (a) the Board of Directors of the Company
recommends acceptance of such tender offer or exchange offer by its
stockholders or (b) within ten (10) business days of such commencement the
Board of Directors of the Company shall have failed to recommend against
acceptance of such tender offer or exchange offer by its stockholders
(including by taking no position with respect to the acceptance of such
tender offer or exchange offer by its stockholders);
(h) by the Company, if the Board of Directors of the Company shall have
concluded in good faith (after consultation with the Company' counsel) that
failure to so terminate would be inconsistent with its fiduciary duties
under applicable Laws and, on or prior to such date, any person or group
(other than the Parent) shall have made a public announcement or otherwise
communicated to the Company and its stockholders with respect to a Superior
Proposal; provided, however, that the Company may not terminate this
Agreement pursuant to this Section 7.1(h) until three business days have
elapsed following delivery to the Parent of written notice of such
determination of the Company (which written notice will inform the Parent
of the material terms and conditions of the Superior Proposal); provided,
further, however, that such termination under this Section 7.1(h) shall not
be effective until the Company has made payment to the Parent of the
amounts required to be paid pursuant to Section 7.3(b).
(i) on or after July 8, 2000, by the Company, if both the management
board (Vorstand) and the supervisory board (Aufsichsrat) of the Parent
shall not have approved the Share Capital Increase.
Section 7.2 Effect of Termination. Except as provided in Section 8.2, in the
event of termination of this Agreement pursuant to Section 7.1, this Agreement
shall forthwith become void, there shall be no liability under this Agreement
on the part of the Parent or the Company or any of their respective
Representatives, and all rights and obligations of each party to this Agreement
shall cease, subject to the remedies of the parties as set forth in Sections
7.3(b) and (c); provided, however, that nothing in this Agreement shall relieve
any party from liability for the breach of any of its representations and
warranties or the breach of any of its covenants or agreements set forth in
this Agreement.
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Section 7.3 Expenses Following Certain Termination Events.
(a) Except as set forth in this Section 7.3, all Expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid in accordance with the provisions of Section 5.16.
For purposes of this Agreement, "Expenses" consist of all out-of-pocket
expenses (including, all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a party to this Agreement
and its affiliates) incurred by a party or on its behalf in connection with
or related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the preparation, printing, filing and
mailing of the Proxy Statement or the Proxy Materials, the solicitation of
stockholder approval and all other matters related to the closing of the
transactions contemplated by this Agreement.
(b) If this Agreement (i) is terminated by the Parent pursuant to
Section 7.1(g), (ii) is terminated by the Company pursuant to Section
7.1(h) or (iii) is terminated by the Company or the Parent pursuant to
Section 7.1(d), then, subject to the proviso below, the Company shall (x)
on the date specified in the penultimate sentence of this Section 7.3 in
the case of a termination pursuant to Section 7.1(d), or (y) simultaneously
with a termination of this Agreement in the case of a termination pursuant
to Section 7.1(g) or 7.1(h), pay to the Parent (by wire transfer of
immediately available funds to an account designated by the Parent) a
termination fee of U.S.$20,000,000 plus, subject to the last sentence of
this Section 7.3, the reimbursement of all of Parent's actual and
documented out-of-pocket expenses (including all investment banking, legal,
accounting and other similar expenses) up to a maximum reimbursable amount
of U.S.$2,000,000 (the "Parent Expenses"); provided, however, that the
Company shall not be obligated to pay such fee to the Parent if this
Agreement is terminated pursuant to Section 7.1(d) unless (i) at the time
of the Company Stockholders Meeting, the Company has received a bona fide
alternative Acquisition Proposal or a third party has made or publicly
announced its intention to make a bona fide Acquisition Proposal and (ii)
within 12 months after the termination of this Agreement, the Company
enters into a definitive agreement providing for an alternative Acquisition
Proposal with any third party or an alternative Acquisition Proposal is
consummated with any third party. If a termination fee becomes payable as a
result of a termination pursuant to Section 7.1(d), then such termination
fee shall be paid promptly (and in any event within two (2) days of receipt
by Company of a written notice from the Parent) following the earlier of
the execution of such definitive agreement providing for an alternative
Acquisition Proposal or the consummation of an alternative Acquisition
Proposal, as the case may be. In addition, in the event the Parent or the
Company terminates this Agreement pursuant to Section 7.1(d) and at the
time of the Company Stockholders Meeting the Company has received a bona
fide alternative Acquisition Proposal or a third party has made or publicly
announced its intention to make a bona fide Acquisition Proposal, the
Company shall promptly on demand reimburse all of the Parent Expenses and
thereafter be obligated to pay the termination fee referred to above only
in the event such fee becomes payable pursuant to this Section 7.3(b).
(c) Each of the Parent and the Company agrees that the payments provided
for in Section 7.3(b) shall be the sole and exclusive remedy of the parties
upon a termination of this Agreement pursuant to Section 7.1(d), (g) or
(h), as the case may be, and such remedy shall be limited to the payment
stipulated in Section 7.3(b).
(d) The Company acknowledges that the agreements contained in this
Section 7.3 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, the Parent would not enter
into this Agreement; accordingly, if the Company fails to pay promptly the
amounts due pursuant to Section 7.3(b), and, in order to obtain such
payment, the Parent commences a suit which results in a judgment against
the Company for all or a portion of such amounts, the Company shall pay to
the Parent's Expenses in connection with such suit, together with interest
on the amounts payable to the Parent at the prime rate of Deutsche Bank in
effect on the date such payment was required to be made.
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ARTICLE VIII
MISCELLANEOUS
Section 8.1 Certain Definitions. For purposes of this Agreement:
(a) The term "affiliate," as applied to any person, means any other
person directly or indirectly controlling, controlled by, or under common
control with, that person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that person, whether through
the ownership of voting securities, by contract or otherwise.
(b) The term "business day" means any day, other than Saturday, Sunday
or a federal holiday, and shall consist of the time period from 12:01 a.m.
through 12:00 midnight Eastern time. In computing any time period under
this Agreement, the date of the event which begins the running of such time
period shall be included except that if such event occurs on other than a
business day such period shall begin to run on and shall include the first
business day thereafter.
(c) The term "including" means, unless the context clearly requires
otherwise, including but not limited to the things or matters named or
listed after that term.
(d) The term "knowledge," as applied to the Company or the Parent, means
the knowledge of the officers of the Company or the Parent, as the case may
be.
(e) The term "person" shall include individuals, corporations, limited
and general partnerships, trusts, limited liability companies,
associations, joint ventures, Governmental Entities and other entities and
groups (which term shall include a "group" as such term is defined in
Section 13(d)(3) of the Exchange Act).
(f) The term "subsidiary" or "subsidiaries" means, with respect to the
Parent, the Company or any other person, any entity of which the Parent,
the Company or such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, stock or other equity interests constituting more than 50% of
the voting or economic interest in such entity.
Section 8.2 Survival. The representations, warranties and agreements in this
Agreement and in any certificate delivered under this Agreement shall terminate
at the Effective Time or upon the termination of this Agreement under Section
7.1, as the case may be, except that the agreements set forth in Articles I and
II and Sections 5.8, 5.9, 5.13 and 5.15 and this Article VIII shall survive the
Effective Time, those set forth in Sections 5.6(b), 5.16, 7.2 and 7.3 and this
Article VIII shall survive termination of this Agreement and those set forth in
Section 5.14 shall survive for a period of one year after termination of this
Agreement. Each party agrees that, except for the representations and
warranties contained in this Agreement, the Company Disclosure Letter and the
Parent Disclosure Letter, no party to this Agreement has made any other
representations and warranties, and each party disclaims any other
representations and warranties, made by itself or any of its officers,
directors, employees, agents, financial and legal advisors or other
Representatives with respect to the execution and delivery of this Agreement or
the transactions contemplated by this Agreement, notwithstanding the delivery
of disclosure to any other party or any party's representatives of any
documentation or other information with respect to any one or more of the
foregoing.
Section 8.3 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
Section 8.4 GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS
SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE
LAW OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH
PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (ii) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH PARTY MAKES THIS WAIVER
VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 8.4(b).
Section 8.5 Notices. Any notice, request, instruction or other document to
be given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to the Parent:
BROKAT AG
Industriestrasse 3
70565 Stuttgart, Germany
Attention: Hans-Peter Berger, Esq.
Fax: +49-711-788-44-784
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064, U.S.A.
Attention: Mark S. Bergman, Esq.
David K. Lakhdhir, Esq.
Fax: +1-212-757-3990
if to the Company:
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, California 95113, U.S.A.
Attention: Robert Michitarian, Esq.
Fax: +1-408-535-1760
with copies to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050, U.S.A.
Attention: Larry Sonsini, Esq.
Fax: +1-650-496-4084
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
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Section 8.6 Entire Agreement. This Agreement (including any exhibits and
annexes to this Agreement), the Company Disclosure Letter and the Parent
Disclosure Letter constitute the entire agreement and supersede all other prior
agreements, understandings, representations and warranties, both written and
oral, among the parties, with respect to the subject matter of this Agreement.
Section 8.7 No Third Party Beneficiaries. Except as provided in Section 5.9
of this Agreement is not intended to confer upon any person other than the
parties to this Agreement any rights or remedies under this Agreement.
Section 8.8 Amendment. This Agreement may be amended by the parties to this
Agreement by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided that, after the
approval of this Agreement by the stockholders of the Company, no amendment may
be made that would reduce the amount or change the type of consideration into
which each share of Company Common Stock shall be converted upon consummation
of the Merger or that is otherwise prohibited by applicable Law. This Agreement
may not be amended except by an instrument in writing signed by the parties to
this Agreement.
Section 8.9 Waiver. At any time prior to the Effective Time, any party to
this Agreement may (a) extend the time for the performance of any obligation or
other act of any other party to this Agreement, (b) waive any inaccuracy in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement, and (c) waive compliance with any
agreement or condition contained in this Agreement. Any waiver of a condition
set forth in Section 6.1, or any determination that such a condition has been
satisfied, will be effective only if made in writing by each of the Company and
the Parent and, unless otherwise specified in such writing, shall thereafter
operate as a waiver (or satisfaction) of such conditions for any and all
purposes of this Agreement. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
Section 8.10 Obligations of the Parent and of the Company. Whenever this
Agreement requires a Parent Subsidiary to take any action, that requirement
shall be deemed to include an undertaking on the part of the Parent to cause
that Parent Subsidiary to take that action. Whenever this Agreement requires a
Company Subsidiary to take any action, that requirement shall be deemed to
include an undertaking on the part of the Company to cause that Company
Subsidiary to take that action and, after the Effective Time, on the part of
the Surviving Corporation to cause that Company Subsidiary to take that action.
Section 8.11 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions of this
Agreement. If any provision of this Agreement, or the application of that
provision to any person or any circumstance, is invalid or unenforceable, (a) a
suitable and equitable provision shall be substituted for that provision in
order to carry out, so far as may be valid and enforceable, the intent and
purpose of the invalid or unenforceable provision and (b) the remainder of this
Agreement and the application of the provision to other persons or
circumstances shall not be affected by such invalidity or unenforceability, nor
shall such invalidity or unenforceability affect the validity or enforceability
of the provision, or the application of that provision, in any other
jurisdiction.
Section 8.12 Interpretation. The table of contents and headings in this
Agreement are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions of this Agreement. Where a reference in this Agreement is made to a
Section, exhibit or annex, that reference shall be to a Section of or exhibit
or annex to this Agreement unless otherwise indicated.
Section 8.13 Assignment. This Agreement shall not be assignable by operation
of law or otherwise, except that pursuant to Section 1.1(b) the Parent may
designate, by written notice to the Company, a Parent Subsidiary that is wholly
owned directly or indirectly by the Parent to be merged with and into the
Company in lieu of Merger Sub, in which event all references in this Agreement
to Merger Sub shall be deemed references to such Parent Subsidiary.
A-41
<PAGE>
Section 8.14 Specific Performance. The parties to this Agreement agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise reached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of
the United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
Section 8.15 Submission to Jurisdiction; Waivers; Consent to Service of
Process. Each of the Parent and the Company irrevocably agree that any legal
action or proceeding with respect to this Agreement or for recognition and
enforcement of any judgment in respect hereof brought by another party hereto
or its successors or assigns may be brought and determined in any Delaware
state court or Federal court sitting in the State of Delaware, and each of the
Parent and the Company thereby (x) irrevocably submits with regard to any such
action or proceeding for itself and in respect to its property, generally and
unconditionally, to the personal jurisdiction of the aforesaid court in the
event any dispute arises out of this Agreement or any transaction contemplated
hereby, (y) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (z)
agrees that it will not bring any action relating to this Agreement or any
transaction contemplated hereby in any court other than any Delaware state or
Federal court sitting in the State of Delaware. Any service of process to be
made in such action or proceeding may be made by delivery of process in
accordance with the notice provisions contained in Section 8.5. Each of the
Parent and the Company hereby irrevocably waives, and agrees not to assert, by
way of motion, as a defense, counterclaim or otherwise, in any action or
proceeding with respect to this Agreement, (a) the defense of sovereign
immunity, (b) any claim that it is not personally subject to the jurisdiction
of the above-named court for any reason other than the failure to serve process
in accordance with this Section 8.15 that it or its property is exempt or
immune from jurisdiction of any such court or from any legal process commenced
in such courts (whether through service of notice, attachment prior to
judgment, attachment in aid of execution of judgment, execution of judgment or
otherwise), and (d) to the fullest extent permitted by application law the (i)
the suit, action or proceeding i any such court is brought in an inconvenient
forum, (ii) the venue of such suit, action or proceeding is improper and (iii)
this Agreement, or the subject matter hereof, may not be enforced in or by such
courts.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties to this Agreement as of the date
first written above.
BLAZE SOFTWARE INC.
/s/ Thomas Kelly
By:__________________________________
Name: Thomas Kelly
Title: Chief Executive Officer
BROKAT AKTIENGESELLSCHAFT
/s/ Michael Janssen
By:__________________________________
Name: Michael Janssen
Title: Chief Financial Officer
/s/ Michael Schumacher
By:__________________________________
Name: Michael Schumacher
Title: Executive Vice President
A-42
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ANNEX B
OPINION OF CHASE H&Q
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
CHASE H&Q
A Division of Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Tel 415-371-3000
June 19, 2000
Confidential
The Board of Directors
Blaze Software, Inc.
150 Almaden Boulevard
San Jose, CA 95113
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of Blaze Software, Inc. ("Blaze" or the "Company") of the Exchange
Ratio as defined in the Agreement and Plan of Merger dated as of June 19, 2000,
among Brokat Aktiengesellschaft ("Brokat"), Merger Sub ("Merger Sub"), and
Blaze (the "Agreement"). The Agreement provides, among other things, the
proposed merger of Merger Sub, a wholly owned subsidiary of Brokat, with and
into Blaze (the "Proposed Transaction").
As set forth more fully in the Agreement, as a result of the Proposed
Transaction, each issued and outstanding share of Common Stock shall be
converted into the right to receive 0.3652 American Depository Shares of
Brokat, each representing 0.5 shares of Brokat common stock. For purposes of
this opinion, we have assumed that the Proposed Transaction will qualify as a
tax-free reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be accounted
for as a purchase.
Chase H&Q, a Division of Chase Securities Inc. ("Chase H&Q"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
strategic transactions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of Blaze in connection with the Proposed
Transaction, and we will receive a fee for our services, which include the
rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Blaze and have received fees for rendering these services.
In the ordinary course of business, Chase H&Q acts as a market maker and broker
in the publicly traded securities of Blaze and receives customary compensation
in connection therewith, and also provides research coverage for Blaze. In the
ordinary course of business, Chase H&Q actively trades in the equity and
derivative securities of Blaze for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Chase H&Q may in the future provide investment banking or
other financial advisory services to Brokat.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Brokat for recent years and interim periods to date and certain
other relevant financial and operating data of Brokat made available
to us from published sources;
(ii) discussed the business, financial condition and prospects of Brokat
with certain members of senior management;
[LOGO OF CHASE]
B-1
<PAGE>
(iii) reviewed the publicly available consolidated financial statements of
Blaze for recent years and interim periods to date and certain other
relevant financial and operating data of Blaze made available to us
from published sources;
(iv) discussed the business, financial condition and prospects of Blaze
with certain members of senior management;
(v) reviewed the publicly available consolidated financial statements of
Gemstone Systems, Inc. ("Gemstone") for recent years and interim
periods to date and certain other relevant financial and operating
data of Gemstone made available to us from published sources;
(vi) discussed the business, financial condition and prospects of
Gemstone with certain members of senior management;
(vii) reviewed the summary information regarding the financial terms of the
proposed acquisition of Gemstone provided to us by representatives of
Brokat;
(viii) reviewed the recent reported prices and trading activity for the
common stocks of Brokat and Blaze and compared such information and
certain financial information for Brokat and Blaze with similar
information for certain other companies engaged in businesses we
consider comparable;
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(x) reviewed the Agreement dated June 19, 2000;
(xi) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations
and financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Brokat or Blaze considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have
not prepared any independent valuation or appraisal of any of the assets or
liabilities of Brokat or Blaze, nor have we conducted a physical inspection of
the properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we
have assumed that they reflect the best currently available estimates and
judgments of the expected future financial performance of Brokat and Blaze. For
purposes of this opinion, we have assumed that neither Brokat nor Blaze is a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction, the proposed acquisition of Gemstone by Brokat and those
activities undertaken in the ordinary course of conducting their respective
businesses. Our opinion is necessarily based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of this
letter and any change in such conditions would require a reevaluation of this
opinion. We express no opinion as to the price at which Brokat common stock
will trade subsequent to the Effective Time (as defined in the Agreement). In
rendering this opinion, we have assumed that the proposed merger will be
consummated substantially on the terms discussed in the Agreement, without any
waiver of any material terms or conditions by any party thereto.
It is understood that this letter is for the information of the Board of
Directors only and may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced in full
in the Proxy Statement. This letter does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the Exchange Ratio in the Proposed Transaction is fair to the
B-2
<PAGE>
holders of the Common Stock of Blaze from a financial point of view. We express
no opinion, however, as to the adequacy of any consideration received in the
Proposed Transaction by Brokat, Gemstone or any of its affiliates.
Very truly yours,
Chase H&Q
A Division of Chase Securities Inc.
/s/ Paul B. Cleveland
By: _________________________________
Paul B. Cleveland
Managing Director
B-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
The laws of Germany make no provisions of indemnification of officers and
directors. Brokat does not, by charter or by-law provision, provide for the
indemnification of any controlling person, director or officer.
Brokat maintains liability insurance for members of its Management Board,
including insurance against liabilities under the Securities Act of 1933.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 19, 2000, by and between
Blaze Software, Inc. and Brokat Aktiengesellschaft (attached as
Annex A to the proxy statement/prospectus included in the
Registration Statement)
2.2 Agreement and Plan of Merger, dated June 19, 2000, by and between
GemStone Systems, Inc. and Brokat Aktiengesellschaft (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement on
Form F-4 filed by Brokat Aktiengesellschaft, Regis. No. 333-37780)
3.1 Articles of Association (Satzung) (English translation)
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form F-4 filed by Brokat Aktiengesellschaft, Regis. No.
333-37780)
3.2 Rules of Procedure (Geschaftsordnung) of the Management Board
(English translation)(incorporated herein by reference to Exhibit
3.2 to the Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
4.1 Form of Deposit Agreement (incorporated herein by reference to
Exhibit A to the Registration Statement on Form F-6 relating to the
Brokat American Depositary Shares)
5.1 Opinion of Gleiss Lutz Hootz Hirsch, counsel for Brokat regarding
the legality of the securities issued
8.1 Opinion of Paul, Weiss, Rifkind & Garrison, U.S. counsel for Brokat,
regarding certain U.S. tax matters
8.2 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, U.S. counsel for Blaze regarding certain U.S. tax
matters
8.3 Opinion of Gleiss Lutz Hootz Hirsch, German counsel for Brokat
regarding certain tax matters
10.1 Agreement Regarding the Sale and Transfer of Shares between Y.A.C.
Finance Holding S.A., Anja Fernbach, Gunther Fernbach and Brokat
Aktiengesellschaft, dated as of November 2, 1999, as amended and
supplemented as of February 11, 2000 and February 22, 2000
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
10.2 Stock Purchase Agreement by and among Registrant, Transaction
Software Technologies, Inc and the shareholders of Transaction
Software Technologies, Inc. dated as of May 7, 1999 (incorporated
herein by reference to Exhibit 10.2 to the Registration Statement on
Form F-4 filed by Brokat Aktiengesellschaft, Regis. No. 333-37780)
10.3 Agreement on Subscription and Contribution of Capital by and between
Brokat Aktiengesellschaft and ME Shareholders, dated as of May
20/21, 1999 (incorporated herein by reference to Exhibit 10.3 to the
Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.4 Stockholders Agreement, dated June 19, 2000, by and among Brokat
Aktiengesellschaft and certain stockholders of Blaze Software, Inc.
(incorporated herein by reference to Exhibit 10.6 to the
Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
10.5 Stockholders Agreement, dated June 19, 2000, by and among Brokat
Aktiengesellschaft and certain stockholders of GemStone Systems,
Inc. (incorporated herein by reference to Exhibit 10.7 to the
Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
21.1 List of Subsidiaries (incorporated herein by reference to Exhibit
21.1 to the Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
23.1 Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgellschaft mbH with respect to Brokat
Aktiengesellschaft and MeTechnology AG and its predecessor, ESD
Vermogensverwaltungsgesellschaft mbH
23.2 Consent of Arthur Andersen LLP with respect to Transaction Software
Technologies, Inc.
23.3 Consent of PricewaterhouseCoopers, LLP with respect to Blaze
Software, Inc.
23.4 Consent of Ernst & Young, LLP with respect to GemStone Systems, Inc.
23.5 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in the opinion filed as Exhibit 8.2 and
incorporated herein by reference)
23.6 Consent of Gleiss Lutz Hootz Hirsch (included in Exhibit 8.3 and
incorporated herein by reference)
23.7 Consent of Chase H&Q
23.8 Consent of Gleiss Lutz Hootz Hirsch (included in Exhibit 5.1 and
incorporated herein by reference)
23.9 Consent of Paul, Weiss Rifkind, Wharton & Garrison (included in
Exhibit 8.1 and incorporated herein by reference)
24.1 Power of Attorney (included in signature page of this registration
statement)
99.1 Form of proxy.
</TABLE>
(b) Financial statement schedules
None
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
II-2
<PAGE>
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering of such securities.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. To file a post-effective amendment to the registration statement to
include any financial statements required by Rule 3-19 of Regulation S-X at
the start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section 10(a)(3)
of the Securities Act need not be furnished, provided, that the registrant
includes in the prospectus, by means of a post-effective amendment,
financial statements required under this paragraph and other information
necessary to ensure that all other information in the prospectus is at
least as current as the date of those financial statements.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus under Item 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means, and to arrange or provide for a facility in the U.S. for
responding to such requests. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(e) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Stuttgart, Germany on the eighth day
of September, 2000.
Brokat Aktiengesellschaft
/s/ Stefan Roever
By: _________________________________
Stefan Roever
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on the eighth day of September, 2000. Each person whose
signature appears below authorizes each of Stefan Roever and Michael Janssen as
attorney-in-fact, with full power of substitution and resubstitution, to sign
and file on his behalf, individually and in each capacity stated below, all
amendments, including post-effective amendments and supplements, to this
registration statement.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stefan Roever Management Board Member and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
Stefan Roever
/s/ Michael Janssen Management Board Member and Chief Financial
___________________________________________ Officer (Principal financial and
Michael Janssen accounting officer)
/s/ Boris Anderer Management Board Member
___________________________________________
Dr. Boris Anderer
/s/ Achim Schlumpberger Management Board Member
___________________________________________
Achim Schlumpberger
/s/ Michael Schumacher Management Board Member
___________________________________________
Michael Schumacher
/s/ Angelo Maestrini Management Board Member
___________________________________________
Angelo Maestrini
/s/ Steve Aufderhar Authorized United States Representative
___________________________________________
Steve Aufderhar
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 19, 2000, by and between
Blaze Software, Inc. and Brokat Aktiengesellschaft (attached as Annex
A to the proxy statement/prospectus included in the Registration
Statement)
2.2 Agreement and Plan of Merger, dated June 19, 2000, by and between
GemStone Systems, Inc. and Brokat Aktiengesellschaft (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement on
Form F-4 filed by Brokat Aktiengesellschaft, Regis. No. 333-37780)
3.1 Articles of Association (Satzung) (English translation) (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement on
Form F-4 filed by Brokat Aktiengesellschaft, Regis. No. 333-37780)
3.2 Rules of Procedure (Geschaftsordnung) of the Management Board (English
translation)(incorporated herein by reference to Exhibit 3.2 to the
Registration Statement on Form F-4 filed by Brokat Aktiengesellschaft,
Regis. No. 333-37780)
4.1 Form of Deposit Agreement (incorporated herein by reference to Exhibit
A to the Registration Statement on Form F-6 relating to the Brokat
American Depositary Shares)
5.1 Opinion by Gleiss Lutz Hootz Hirsch, counsel for Brokat regarding the
legality of the securities issued
8.1 Opinion of Paul, Weiss, Rifkind & Garrison, U.S. counsel for Brokat,
regarding certain U.S. tax matters
8.2 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
U.S. counsel for Blaze regarding certain U.S. tax matters
8.3 Opinion of Gleiss Lutz Hootz Hirsch, German counsel for Brokat
regarding certain tax matters
10.1 Agreement Regarding the Sale and Transfer of Shares between Y.A.C.
Finance Holding S.A., Anja Fernbach, Gunther Fernbach and Brokat
Aktiengesellschaft, dated as of November 2, 1999, as amended and
supplemented as of February 11, 2000 and February 22, 2000
(incorporated herein by reference to Exhibit 10.1 to the Registration
Statement on Form F-4 filed by Brokat Aktiengesellschaft, Regis. No.
333-37780)
10.2 Stock Purchase Agreement by and among Registrant, Transaction Software
Technologies, Inc and the shareholders of Transaction Software
Technologies, Inc. dated as of May 7, 1999 (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement on Form F-4
filed by Brokat Aktiengesellschaft, Regis. No. 333-37780)
10.3 Agreement on Subscription and Contribution of Capital by and between
Brokat Aktiengesellschaft and ME Shareholders, dated as of May 20/21,
1999 (incorporated herein by reference to Exhibit 10.3 to the
Registration Statement on Form F-4 filed by Brokat Aktiengesellschaft,
Regis. No. 333-37780)
10.4 Stockholders Agreement, dated June 19, 2000, by and among Brokat
Aktiengesellschaft and certain stockholders of Blaze Software, Inc.
(incorporated herein by reference to Exhibit 10.6 to the Registration
Statement on Form F-4 filed by Brokat Aktiengesellschaft, Regis. No.
333-37780)
10.5 Stockholders Agreement, dated June 19, 2000, by and among Brokat
Aktiengesellschaft and certain stockholders of GemStone Systems, Inc.
(incorporated herein by reference to Exhibit 10.7 to the Registration
Statement on Form F-4 filed by Brokat Aktiengesellschaft, Regis. No.
333-37780)
21.1 List of Subsidiaries (incorporated herein by reference to Exhibit 21.1
to the Registration Statement on Form F-4 filed by Brokat
Aktiengesellschaft, Regis. No. 333-37780)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
23.1 Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgellschaft mbH with respect to Brokat
Aktiengesellschaft and MeTechnology AG and its predecessor, ESD
Vermogensverwaltungsgesellschaft mbH
23.2 Consent of Arthur Andersen LLP with respect to Transaction Software
Technologies, Inc.
23.3 Consent of PricewaterhouseCoopers, LLP with respect to Blaze Software,
Inc.
23.4 Consent of Ernst & Young, LLP with respect to GemStone Systems, Inc.
23.5 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in the opinion filed as Exhibit 8.2 and incorporated herein
by reference)
23.6 Consent of Gleiss Lutz Hootz Hirsch (included in Exhibit 8.3 and
incorporated herein by reference)
23.7 Consent of Chase H&Q
23.8 Consent of Gleiss Lutz Hootz Hirsch (included in Exhibit 5.1 and
incorporated herein by reference)
23.9 Consent of Paul, Weiss Rifkind, Wharton & Garrison (included in
Exhibit 8.1 and incorporated herein by reference)
24.1 Power of Attorney (included in signature page of this registration
statement)
99.1 Form of proxy.
</TABLE>
