<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2000
BROKAT AKTIENGESELLSCHAFT
(Exact name of registrant as specified in its charter)
Industriestrasse 3
D-70565 Stuttgart
Federal Republic of Germany
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-_______.
<PAGE>
On June 19, 2000, Brokat AG entered into a definitive merger agreement pursuant
to which GemStone Systems, Inc. became a wholly-owned subsidiary of Brokat AG.
On September 29, 2000, Brokat AG announced that it had completed its acquisition
of Blaze Software, Inc. in a stock transaction.
This Form 6-K contains financial statements of Brokat AG and various businesses
acquired by Brokat AG as well as unaudited pro forma financial information.
-2-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<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
-----
<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
Unauditied pro forma financial information............................... F-116
</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
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 March 31, 1999................ 3,179 $ 20,882 2,273 $ -- -- $ -- -- $ -- 344 $ --
Issuance of Common Stock pursuant to
exercise of options..................... -- -- -- -- -- -- -- -- 1,486 --
Issuance of Common Stock pursuant to
conversion of warrants.................. -- -- -- -- -- -- -- -- 362 --
Accretion of Mandatorily Redeemable
Preferred Stock to redemption value..... -- 442 -- -- -- -- -- -- -- --
Beneficial Conversion Feature............ -- -- -- -- -- -- -- -- -- --
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
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 -- -- -- --
Issuance of Series BB Preferred Stock.... -- -- -- -- -- -- 1,953 -- -- --
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 --
Unearned compensation.................... -- -- -- -- -- -- -- -- -- --
Amortization of unearned compensation.... -- -- -- -- -- -- -- -- -- --
Repurchase of Common Stock............... -- -- -- -- -- -- -- -- (13) --
Net loss................................. -- -- -- -- -- -- -- -- -- --
Unrealized loss on investments........... -- -- -- -- -- -- -- -- -- --
Cumulative translation adjustment........ -- -- -- -- -- -- -- -- -- --
------ -------- ------ ---- ------ ---- ------ ---- ------ ----
Balances at March 31, 2000................ -- $ -- -- $-- -- $ -- -- $ -- 22,020 $ 2
====== ======== ====== ==== ====== ==== ====== ==== ====== ====
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Paid-In Comprehensive Unearned Accumulated Equity
Capital Income Compensation Deficit (Deficit)
---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1999................ $ (1,842) $290 $ -- $(22,651) $(24,203)
Issuance of Common Stock pursuant to
exercise of options..................... 755 -- -- -- 755
Issuance of Common Stock pursuant to
conversion of warrants.................. 67 -- -- -- 67
Accretion of Mandatorily Redeemable
Preferred Stock to redemption value...... (442) -- -- -- (442)
Beneficial Conversion Feature............ 11,739 -- -- (11,739) --
Adjustment of Mandatorily Redeemable
Preferred Stock Series C per
anti-dilution provision................. -- -- -- -- --
Conversion of Mandatorily Redeemable
Preferred Stock to Common Stock......... 21,323 -- -- -- 21,324
Conversion of Series B Stock to Common
Stock................................... -- -- -- -- --
Issuance of Series AA Preferred Stock,
net of issuance costs................... 4,403 -- -- -- 4,404
Issuance of Series BB Preferred Stock.... 13,943 -- -- -- 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 -- -- -- 57,090
Unearned compensation.................... 37,607 -- (37,607) -- --
Amortization of unearned compensation.... -- -- 16,400 -- 16,400
Repurchase of Common Stock............... (1) -- -- -- (1)
Net loss................................. -- -- -- (23,767) (23,767)
Unrealized loss on investments........... -- (20) -- -- (20)
Cumulative translation adjustment........ -- 219 -- -- 219
-------- ---- ------------ ----------- -------------
Balances at March 31, 2000................ $144,642 $489 $(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>
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
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 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. 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 Brokat's financial
data.
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 Brokat's historical financial
statements and related notes.
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.
F-116
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Total
Pro Forma Pro Forma Pro Forma Pro Forma
Brokat(1) Gemstone Adjustments Notes Combined Blaze Adjustments Notes Combined
--------- -------- ----------- ----- --------- -------- ----------- ----- ---------
(DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Currents Assets:
Cash and cash
equivalents............. 163,856 324 -- 164,180 92,408 -- 256,588
Short term investments.. -- -- -- -- 46,760 -- 46,760
Accounts receivable
(less pro forma
allowance for doubtful
accounts of DM 3,456 at
June 30, 2000).......... 63,419 9,456 -- 72,875 11,155 -- 84,030
Cost and estimated
earning in excess of
billings on uncompleted
contracts............... 2,965 -- -- 2,965 -- -- 2,965
Prepaid expenses and
other current assets.... 21,781 801 -- 22,582 4,043 -- 26,625
-------- -------- ------- --------- -------- --------- ---------
Total Current Assets.... 252,021 10,581 -- 262,602 154,366 -- 416,968
-------- -------- ------- --------- -------- --------- ---------
Property and equipment,
net..................... 14,382 1,914 -- 16,296 6,604 -- 22,900
-------- -------- ------- --------- -------- --------- ---------
Goodwill................ 245,267 -- 524,772 (6d) 770,039 -- 871,637 (6d) 1,641,676
Other intangible
assets.................. 10,130 -- -- 10,130 -- -- 10,130
Less accumulated
amortization............ (36,627) -- -- (36,627) -- -- (36,627)
-------- -------- ------- --------- -------- --------- ---------
218,770 -- 524,772 743,542 -- 871,637 1,615,179
-------- -------- ------- --------- -------- --------- ---------
Other long-term
investments............. 6,631 -- -- 6,631 -- -- 6,631
Deferred income taxes... 4,363 -- -- 4,363 -- -- 4,363
Restricted cash......... -- -- -- 1,467 -- 1,467
Deposits and other
assets.................. -- 535 -- 535 756 -- 1,291
-------- -------- ------- --------- -------- --------- ---------
Total assets............ 496,167 13,030 524,772 1,033,969 163,193 871,637 2,068,799
======== ======== ======= ========= ======== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt to
banks................... 174 -- -- 174 -- -- 174
Current portion of
capital lease
obligations............. -- 375 -- 375 354 -- 729
Notes payable to
affiliated companies.... -- 13,984 (13,984) (6b) -- -- -- --
Notes payable........... -- 2,197 -- 2,197 -- -- 2,197
Accounts payable,
trade................... 8,391 6,356 5,000 (6d) 19,747 1,873 5,000 (6d) 26,620
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 (8,984) 82,310 20,148 5,000 107,458
Long-term debt to
banks................... 2,000 -- -- 2,000 -- -- 2,000
Capital lease
obligations, net of
current portion......... -- 137 -- 137 432 -- 569
Other long-term debt.... 246,596 -- -- 246,596 70 -- 246,666
-------- -------- ------- --------- -------- --------- ---------
Total liabilities....... 301,750 38,277 (8,984) 331,043 20,650 5,000 356,693
-------- -------- ------- --------- -------- --------- ---------
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.
F-117
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE
30, 1999
(In thousands except share and per share data)
<TABLE>
<CAPTION>
Brokat MeTechnology TST Gemstone
---------- ------------ ------------ ----------
Year Ended July 1, 1998 July 1, 1998 Total Year Ended
June 30, thru May 21, thru May 9, Pro Forma Pro June 30, Pro Forma Pro Forma
1999 1999 1999 Adjustments Notes Forma 1999 Adjustments Notes Combined
---------- ------------ ------------ ----------- ----- -------- ---------- ----------- ----- ----------
(DM) (DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... 62,487 4,544 8,375 (3,753) (2) 71,653 41,942 -- 113,595
Cost of Sales... (31,325) (2,619) (2,989) -- (36,933) (12,515) -- (49,448)
---------- ------- ------ ------- -------- ------- --------- ----------
Gross profit.... 31,162 1,925 5,386 (3,753) 34,720 29,427 -- 64,147
---------- ------- ------ ------- -------- ------- --------- ----------
Selling
expenses........ (38,848) (4,960) (862) -- (44,670) (17,017) -- (61,687)
General and
administrative
expenses........ (10,639) (5,833) (1,450) -- (17,922) (10,145) -- (28,067)
Research and
development
expenses........ (8,733) (3,180) (3,206) -- (15,119) (10,144) -- (25,263)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (3,686) -- -- (27,802) (3) (31,488) -- (74,967) (3) (106,455)
Non-cash charges
associated with
stock option
grants.......... (16,340) -- -- -- (16,340) -- (8,368) (7) (24,708)
---------- ------- ------ ------- -------- ------- --------- ----------
Total operating
expenses........ (78,246) (13,973) (5,518) (27,802) (125,539) (37,306) (83,335) (246,180)
---------- ------- ------ ------- -------- ------- --------- ----------
Operating loss.. (47,084) (12,048) (132) (31,555) (90,819) (7,879) (83,335) (182,033)
Interest
expense......... 568 (390) (86) (28,579) (4) (28,487) -- -- (28,487)
Other income,
net............. 2,565 -- -- -- 2,565 (186) -- 2,379
---------- ------- ------ ------- -------- ------- --------- ----------
Loss before
income taxes and
minority
interests....... (43,951) (12,438) (218) (60,134) (116,741) (8,065) (83,335) (208,141)
Income tax
expense......... (113) (17) (80) -- (210) (235) -- (445)
Minority
interest........ 90 -- -- -- 90 -- -- 90
---------- ------- ------ ------- -------- ------- --------- ----------
Net loss before
extraordinary
item............ (43,974) (12,455) (298) (60,134) (116,861) (8,300) (83,335) (208,496)
Extraordinary
loss on early
extinguishment
of debt......... (64) -- -- -- (64) -- -- (64)
---------- ------- ------ ------- -------- ------- --------- ----------
Net loss from
continuing
operations...... (44,038) (12,455) (298) (60,134) (116,925) (8,300) (83,335) (208,560)
========== ======= ====== ======= ======== ======= ========= ==========
Basic and
diluted loss per
share:
Loss before
extraordinary
items........... (2.23) (9.51)
Extraordinary
loss............ (0.01) (0.00)
---------- ----------
Net loss from
continuing
operations...... (2.24) (9.51)
========== ==========
Weighted average
number of common
shares
outstanding..... 19,694,650 2,219,983 (6e) 21,914,633
========== ========= ==========
<CAPTION>
Blaze
----------
Year Ended Total
June 30, Pro Forma Pro Forma
1999 Adjustments Notes Combined
---------- ----------- ----- -----------
(DM) (DM) (DM)
<S> <C> <C> <C> <C>
Revenue......... 19,754 -- 133,349
Cost of Sales... (6,540) -- (55,988)
---------- ----------- -----------
Gross profit.... 13,214 -- 77,361
---------- ----------- -----------
Selling
expenses........ (10,950) -- (72,637)
General and
administrative
expenses........ (4,334) -- (32,401)
Research and
development
expenses........ (7,669) -- (32,932)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... -- (124,520) (3) (230,975)
Non-cash charges
associated with
stock option
grants.......... -- (25,442) (7) (50,150)
---------- ----------- -----------
Total operating
expenses........ (22,953) (149,962) (419,095)
---------- ----------- -----------
Operating loss.. (9,739) (149,962) (341,734)
Interest
expense......... (623) -- (29,110)
Other income,
net............. -- -- 2,379
---------- ----------- -----------
Loss before
income taxes and
minority
interests....... (10,362) (149,962) (368,465)
Income tax
expense......... (169) -- (614)
Minority
interest........ -- -- 90
---------- ----------- -----------
Net loss before
extraordinary
item............ (10,531) (149,962) (368,989)
Extraordinary
loss on early
extinguishment
of debt......... -- -- (64)
---------- ----------- -----------
Net loss from
continuing
operations...... (10,531) (149,962) (369,053)
========== =========== ===========
Basic and
diluted loss per
share:
Loss before
extraordinary
items........... (13.99)
Extraordinary
loss............ (0.00)
-----------
Net loss from
continuing
operations...... (13.99)
===========
Weighted average
number of common
shares
outstanding..... 4,463,246 (6e) 26,377,879
=========== ===========
</TABLE>
The notes to unaudited pro forma data are an integral part of this combined
pro forma statement of operations.
F-118
<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)
<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) (3.84)
========== ==========
Weighted average
number of common
shares
outstanding..... 26,848,773 2,219,985 (6e) 29,068,758 4,463,244 (6e)
========== ======== ========== =========
<CAPTION>
Total
Pro Forma
Combined
-----------
(DM)
<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.
F-119
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands except share and per share data)
<TABLE>
<CAPTION>
Pro Forma Total Pro Forma Pro Forma Pro Forma
Brokat Adjustments Notes Pro Forma Gemstone Adjustments Notes Combined Blaze Adjustments Notes
---------- ----------- ----- --------- -------- ----------- ----- ---------- ------- ----------- -----
(DM) (DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... 81,729 -- 81,729 24,639 -- 106,368 27,896 --
Cost of Sales... (32,870) -- (32,870) (9,110) -- (41,980) (11,614) --
---------- ------- -------- ------- --------- ---------- ------- ---------
Gross profit.... 48,859 -- 48,859 15,529 -- 64,388 16,282 --
---------- ------- -------- ------- --------- ---------- ------- ---------
Selling
expenses........ (36,283) -- (36,283) (13,062) -- (49,345) (23,750) --
General and
administrative
expenses........ (15,725) -- (15,725) (6,144) -- (21,869) (6,965) --
Research and
development
expenses ....... (21,437) -- (21,437) (7,612) -- (29,049) (7,122) --
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (15,184) -- (15,184) -- (37,504) (3) (52,688) -- (62,260) (3)
Non-cash charges
associated with
stock option
grants.......... (30,735) -- (30,735) -- (4,184) (7) (34,919) (17,699) (12,721) (7)
---------- ------- -------- ------- --------- ---------- ------- ---------
Total Operating
expenses........ (119,364) -- (119,364) (26,818) (41,688) (187,870) (55,536) (74,981)
---------- ------- -------- ------- --------- ---------- ------- ---------
Operating loss.. (70,505) -- (70,505) (11,289) (41,688) (123,482) (39,254) (74,981)
Interest
expense, net.... (6,410) (13,777) (5) (20,187) (646) -- (20,833) (253) --
Other income,
net............. 460 -- 460 -- -- 460 2,571 --
---------- ------- -------- ------- --------- ---------- ------- ---------
Loss before
income taxes and
minority
interests....... (76,455) (13,777) (90,232) (11,935) (41,688) (143,855) (36,936) (74,981)
Income tax
expense......... (330) -- (330) (259) -- (589) (104) --
Minority
interest........ 99 -- 99 -- -- 99 -- --
---------- ------- -------- ------- --------- ---------- ------- ---------
Net loss from
continuing
operations...... (76,686) (13,777) (90,463) (12,194) (41,688) (144,345) (37,040) (74,981)
========== ======= ======== ======= ========= ========== ======= =========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (2.84) (4.89)
========== ==========
Weighted average
number of common
shares
outstanding..... 26,966,236 2,219,983 (6e) 29,538,219 4,463,246 (6e)
========== ========= === ========== ========= ===
<CAPTION>
Total
Pro Forma
Combined
-----------
(DM)
<S> <C>
Revenue......... 134,264
Cost of Sales... (53,594)
-----------
Gross profit.... 80,670
-----------
Selling
expenses........ (73,095)
General and
administrative
expenses........ (28,834)
Research and
development
expenses ....... (36,171)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (114,948)
Non-cash charges
associated with
stock option
grants.......... (65,339)
-----------
Total Operating
expenses........ (318,387)
-----------
Operating loss.. (237,717)
Interest
expense, net.... (21,086)
Other income,
net............. 3,031
-----------
Loss before
income taxes and
minority
interests....... (255,772)
Income tax
expense......... (693)
Minority
interest........ 99
-----------
Net loss from
continuing
operations...... (256,366)
===========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (7.62)
===========
Weighted average
number of common
shares
outstanding..... 33,649,465
===========
</TABLE>
F-120
<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.
F-121
<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............. 115,488 230,972 3,683 227,289
======= ======= ===== =======
</TABLE>
F-122
<PAGE>
The allocations of purchase price related to the acquisitions of
MeTechnology and TST, and 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 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) (322,861)
Basic and diluted net loss per share........ (24.07) (10.35) (9.59)
</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 Brokat's 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.
F-123
<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 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 5,000 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 replaced outstanding Blaze stock
options held by employees and directors of Blaze with Brokat stock options,
using the exchange ratio 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 was 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 is also included as
component of the purchase price, except that a portion of this amount has been
classified as deferred compensation expense and amortized over the remaining
vesting periods of the options granted. The portion to be classified as
deferred compensation has been 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 has
been adjusted to recognize deferred compensation expense only to the extent of
the ratio of the remaining service period on the new awards as a percentage of
total service period under the original award.
F-124
<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.
F-125
<PAGE>
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 Form 6-K or the exhibit to this Form 6-K may
contain such "forward-looking statements."
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 future
transactions, identify forward-looking statements. All forward-looking
statements are based on Brokat 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. Stockholders are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date they are made.
Brokat is under no obligation, and 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 about factors that could affect Brokat's future
financial and operating results, see Brokat's other filings with the Securities
and Exchange Commission, including the Registration Statement on Form F-4 filed
with the Commission on September 8, 2000.
This Form 6-K Report of Foreign Issuer is incorporated by reference into the
Registration Statement on Form S-8 of Brokat (Registration No. 333-47866) and
into the Registration Statement on Form S-8 of Brokat (Registration No. 333-
45594).
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BROKAT AKTIENGESELLSCHAFT
By:
Name: /s/ Stefan Roever
Title: Chief Executive Officer
Date: November 16, 2000
-4-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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.
