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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-25185
MOMENTUM BUSINESS APPLICATIONS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3313175
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
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4301 Hacienda Drive, Suite 410, Pleasanton, CA 94588
(Address of principal executive officers) (Zip Code)
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Registrant's telephone number, including area code:
(925) 469-6621
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
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CLASS OUTSTANDING AT AUGUST 31, 2000
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Class A Common Stock, par value $.001 4,693,826
Class B Common Stock, par value $.001 1,000
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MOMENTUM BUSINESS APPLICATIONS, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1-- Financial Statements (unaudited)
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
ITEM 1-- Legal Proceedings 12
ITEM 2-- Changes in Securities and Use of Proceeds 12
ITEM 3-- Defaults upon Senior Securities 12
ITEM 4-- Submission of Matters to a Vote of Security Holders 12
ITEM 5-- Other Information 12
ITEM 6-- Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
MOMENTUM BUSINESS APPLICATIONS, INC.
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CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
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JULY 31, APRIL 30,
2000 2000
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents (Note 1).......................... $195,183 $228,218
Accounts receivable from PeopleSoft......................... 286 563
Income taxes receivable..................................... 224 224
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Total current assets................................ 195,693 229,005
Capitalized software, less accumulated amortization........... 1,250 432
Purchased technology from PeopleSoft.......................... 8,592 --
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$205,535 $229,437
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to PeopleSoft....................................... $ 23,931 $ 20,677
Accounts payable............................................ -- 36
Accrued liabilities......................................... 298 264
Accrued compensation and related expenses................... 27 29
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Total current liabilities........................... 24,256 21,006
Stockholders' equity:
Class A Common stock, $0.001 par value, 10,000,000
shares authorized, 4,693,826 issued and outstanding 5 5
Class B Common stock, $0.001 par value, 1,000 shares
authorized, issued and outstanding....................... -- --
Additional paid-in capital.................................. 249,996 249,996
Retained deficit............................................ (68,722) (41,570)
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181,279 208,431
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$205,535 $229,437
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See notes to condensed unaudited financial statements.
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MOMENTUM BUSINESS APPLICATIONS, INC.
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CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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THREE MONTHS ENDED
JULY 31,
2000 1999
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Revenues from PeopleSoft:......................... $ 286 $ --
Costs and expenses primarily from PeopleSoft:
Cost of revenues................................ 62 --
Product development............................. 30,509 4,999
General and administrative...................... 236 343
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Total costs and expenses................ 30,807 5,342
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Operating loss.................................... (30,521) (5,342)
Interest income................................... 3,369 2,992
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Net loss before income taxes...................... (27,152) (2,350)
Benefit from income taxes......................... -- (173)
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Net loss.......................................... $(27,152) $(2,177)
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Basic and diluted loss per share.................. $ (5.78) $ (0.46)
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Shares used in basic and diluted
loss per share computation...................... 4,695 4,695
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See notes to condensed unaudited financial statements.
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MOMENTUM BUSINESS APPLICATIONS, INC.
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CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED
JULY 31,
2000 1999
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OPERATING ACTIVITIES
Net loss.......................................... $(27,152) $ (2,177)
Amortization of capitalized software.............. 61 --
Adjustments to reconcile net loss to net cash
used by operating activities:
Provision for deferred income taxes............. -- 64
Changes in operating assets and liabilities:
Accounts receivable from PeopleSoft.......... 277 --
Payable to PeopleSoft........................ 3,254 2,847
Accounts payable............................. (36) 37
Accrued liabilities.......................... 34 139
Accrued compensation and related expenses.... (2) (7)
Income taxes payable......................... -- (492)
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Net cash used by operating activities............. (23,564) 411
INVESTING ACTIVITIES
Capitalization of software development costs...... (879) --
Purchase of technology assets..................... (8,592) --
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Net cash used by investing activities............. (9,471) --
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Net (decrease) increase in cash and cash equivalents (33,035) 411
Cash and cash equivalents at beginning of period 228,218 253,867
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Cash and cash equivalents at end of period........ $195,183 $254,278
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See notes to condensed unaudited financial statements.
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MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
JULY 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Momentum Business Applications, Inc., (the "Company" or "Momentum") was
incorporated in Delaware on November 9, 1998 and commenced operations on January
4, 1999. Momentum was formed and has organized its business in one operating
segment for the purpose of selecting and developing software application
products and commercializing such products (the "Momentum Products"), most
likely through licensing to PeopleSoft, Inc., ("PeopleSoft"). Since its
formation, Momentum's principal activity has been conducting product development
under its agreements with PeopleSoft.
The information at July 31, 2000 and for the three months ended July 31,
2000 and 1999, is unaudited, and includes all adjustments (consisting only of
normal recurring adjustments) that the management of Momentum believes necessary
for fair presentation of the results for the periods presented. Interim results
are not necessarily indicative of results to be expected for the full year. The
balance sheet for April 30, 2000 was derived from the audited balance sheet. The
condensed financial statements should be read in conjunction with the audited
financial statements and accompanying notes for the fiscal year ended April 30,
2000 included in Momentum's 2000 Annual Report on Form 10-K.
Accounting for Revenues and Expenses
At July 31, 2000, Momentum's revenue consisted primarily of royalty revenue
derived from PeopleSoft's sales and licensing of certain software products
developed under the Development and License Agreement (the "Development
Agreement") between Momentum and PeopleSoft. Royalty and other product revenue
is recorded as earned and reported by PeopleSoft to Momentum on a monthly lag.
Development costs paid to PeopleSoft under a software development agreement are
recorded as research and development expenses when incurred. Amounts paid to
PeopleSoft under a services agreement are recorded as administrative expenses
when incurred. (See Note 3 for a description of the agreements between Momentum
and PeopleSoft).
Investment Risk
Momentum invests excess cash in money markets funds and financial
instruments with financial institutions with strong credit ratings. These funds
and investments typically bear minimal risk. The Company has not experienced any
losses on its investments due to institutional failure or bankruptcy.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents
Momentum considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. At July 31, 2000, cash
equivalents were approximately $195.2 million of which approximately $194.6
million are restricted for use under the Development Agreement (See Note 3 --
"Development Agreement"). The Company's cash and cash equivalents consist
primarily of taxable investments in money market funds at two financial
institutions. All other cash is held in a bank demand deposit.
Accounts Receivable
Accounts receivable are comprised of billed receivables arising from
recognized royalty revenue, entirely from PeopleSoft. The Company does not
maintain an allowance for uncollectible accounts receivable since it does not
expect to experience losses that could have a material impact on the Company's
future results of operations. Upon collection of the receivables, these funds
will not be restricted.
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Capitalized Software
Momentum accounts for costs of computer software to be sold, leased or
otherwise marketed under Statement of Financial Accounting Standard No. 86
("SFAS 86"). SFAS 86, "Accounting for Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed" establishes standards of financial accounting and
reporting for the costs of computer software to be sold, leased, or otherwise
marketed as a separate product or as part of a product or process, whether
internally developed and produced or purchased. It identifies the costs incurred
in the process of creating a software product that are research and development
costs and those that are production costs to be capitalized, and it specifies
amortization, disclosure, and other requirements.
The Company capitalizes development costs of software developed for sale
when it has reached technological feasibility. Technological feasibility is
attained when software products reach Beta release. Costs incurred prior to the
establishment of technological feasibility are charged to product development
expense. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgement by management with respect to certain external factors,
including, but not limited to, anticipated future revenues, estimated economic
life and changes in software and hardware technologies. Upon the general release
of the software product to customers, capitalization ceases and such costs are
amortized (using the straight-line method) on a product-by-product basis over
the estimated life, which is generally three years. All product development
expenditures are charged to product development expense in the period incurred.
Purchased Technology from PeopleSoft
In June 2000, Momentum purchased from PeopleSoft all of the intangible
assets and intellectual property (the "Assets") acquired by PeopleSoft from a
recent acquisition. The Assets were purchased by the Company to be utilized in
advancing the development of at least two Momentum Products. The total purchase
price is comprised of an initial base price payment of approximately $8.6
million plus a contingent amount of not less than zero and not more than
approximately $1.4 million. Payment of the contingent amount is subject to the
full satisfaction of certain conditions set forth in the purchase agreement
between Momentum and PeopleSoft. The Assets acquired are considered Developed
Technology as defined in the Development Agreement, and as such, PeopleSoft
shall pay to Momentum a royalty of 1% of net revenues on any product other than
Momentum Products that incorporate all or any part of the Assets.
Income Taxes
Momentum accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement provides for a liability approach under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable. The Company expects to have a net loss for
fiscal year 2001, and thus no taxes were provided for in the period ended July
31, 2000.
Common Stock
Momentum provides for two classes of common stock, Class A Common Stock and
Class B Common Stock. In December 1998, PeopleSoft declared a stock dividend of
one share of Momentum's Class A Common Stock for every fifty shares of
PeopleSoft stock held as of December 31, 1998, resulting in 4.7 million shares
distributed. The shares of Momentum Common Stock held by PeopleSoft on the
record date were converted into 1,000 shares of Momentum Class B Common Stock.
The holder or holders of the Momentum Class B Common Stock are entitled to vote
separately as a class with respect to any merger or liquidation of Momentum, the
sale, lease, exchange, transfer or other disposition of any substantial asset of
Momentum, and any amendments to the Certificate of Incorporation of Momentum
that would alter the Purchase Option, Momentum's authorized capitalization, or
the provisions of the Certificate of Incorporation governing Momentum's Board of
Directors. Accordingly, PeopleSoft could preclude the holders of the Momentum
Class A Common Stock from taking any of the foregoing actions during such
period. Prior to the exercise of the Purchase Option, the holders of the
Momentum Common B Stock, voting as a separate class, are entitled to elect one
director, and the holder or holders of the Momentum Class A Common Stock are
entitled to elect up to three directors. Upon exercise of the Purchase Option,
PeopleSoft, as the sole holder of the Momentum Class B Common Stock, has the
right to elect all of the Momentum directors and to remove incumbent directors
with or without cause. (See Note 3 -- "Purchase Option"). On all other matters,
holders of the Momentum Class A Common Stock and Momentum Class B Common Stock
are entitled to vote together as a single class. Holders of Momentum Common
Stock are allowed one vote for each share of Momentum Common Stock held by them.
Subject to compliance with securities laws, the Momentum Class B Common Stock is
freely transferable.
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2. LOSS PER SHARE DATA
The Company's loss per share amounts are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
method requires calculation of both a basic loss per share and a diluted loss
per share. The basic loss per share excludes the dilutive effect of common stock
equivalents such as stock options and warrants, while the diluted loss per share
includes such dilutive effects. Although Momentum has 175,000 outstanding stock
options, they are not currently dilutive common stock equivalents and thus
diluted loss per share equals basic loss per share.
3. ARRANGEMENTS WITH PEOPLESOFT
In late December 1998, PeopleSoft contributed $250 million in cash to
Momentum. On December 31, 1998, PeopleSoft transferred 4,693,826 shares,
representing all of the outstanding shares, of Momentum Class A Common Stock
(the "Momentum Shares"), to a custodian who distributed the shares to the
holders of PeopleSoft common stock in mid January 1999 (the "Distribution").
Momentum Shares are traded on the Nasdaq National Market under the symbol
"MMTM". PeopleSoft continues to hold all 1,000 shares of the Momentum Class B
Common Stock. In connection with PeopleSoft's contribution to Momentum and the
distribution of Momentum Shares, Momentum and PeopleSoft entered into a number
of agreements, including a Development Agreement, Marketing and Distribution
Agreement and a Services Agreement, all of which are discussed below.
Momentum and PeopleSoft have entered into a Development Agreement pursuant
to which PeopleSoft will conduct product development and related activities on
behalf of Momentum under work plans and cost estimates which have been proposed
by PeopleSoft and approved by Momentum. Momentum is required to utilize the cash
initially contributed to Momentum by PeopleSoft plus interest earned thereon,
less administrative expenses and reserves of up to $2 million (the "Available
Funds") to conduct activities under the Development Agreement. It is expected
that the products to be developed under the Development Agreement will include
electronic business applications ("e-commerce"), analytic applications, and
industry specific applications. PeopleSoft has granted to Momentum a perpetual,
worldwide, non-exclusive license to use certain of PeopleSoft's proprietary
technology solely for internal use in conjunction with the Development
Agreement.
Under the terms of the Marketing and Distribution Agreement entered into by
Momentum and PeopleSoft, Momentum has granted PeopleSoft an option to acquire a
license to each product developed under the Development Agreement. The license
option for any such Momentum product is exercisable on a world-wide, exclusive
basis at any time from the date Momentum agrees to develop the product until the
earlier of a) thirty days after the product becomes Generally Available (as
defined in the agreements); or b) the expiration of the purchase option. The
license option will expire, to the extent not previously exercised, 30 days
after the expiration of PeopleSoft's option to purchase all of the outstanding
Momentum Shares as described below. If and to the extent the license option is
exercised as to any Momentum product, PeopleSoft will acquire a perpetual,
exclusive license (with the right to sublicense) to develop, make, have made and
use the licensed product, and to sell and have sold the licensed product. Upon
exercising the license option, PeopleSoft will assume responsibility for all
ongoing development and sustaining engineering expenses for the related product.
Under the License Agreement for each licensed product, PeopleSoft will make
payments to Momentum with respect to the licensed product by multiplying a
formula derived royalty rate by the quarterly net sales of the licensed product
achieved by PeopleSoft and its sublicensees, distributors and marketing
partners. The royalty rate is determined for each licensed product by taking the
sum of 0.1 percent plus an additional 0.1 percent for each full $1 million of
development costs of the licensed product that have been paid by Momentum, up to
a maximum 6 percent royalty. PeopleSoft has the right to buyout Momentum's right
to receive payments for licensed products in accordance with a formula set forth
in the Marketing and Distribution Agreement.
Under the terms of the Services Agreement, Momentum will pay PeopleSoft
$100,000 per quarter to provide office facilities, and to perform accounting,
finance, human resources, information systems and legal services on its behalf.
Pursuant to Momentum's Restated Certificate of Incorporation, PeopleSoft
has the right to purchase all (but not less than all) of the Momentum Shares
(the "Purchase Option"). The Purchase Option will be exercisable by written
notice to Momentum at any time until December 31, 2002, provided that such date
will be extended for successive six month periods if, as of any June 30 or
December 31 beginning with June 30, 2002, Momentum has not paid (or accrued
expenses) for all but $15 million of Available Funds as of such date. In any
event, the Purchase Option will terminate on the 60th day after Momentum
provides PeopleSoft with a statement that, as of the end of any calendar month,
there are less than $2.5 million of Available Funds remaining.
Except in instances in which Momentum's liabilities exceed its assets, if
the purchase option is exercised, the exercise price will be the greatest of:
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(1) 15 times the sum of (i) the actual worldwide payments made by or due from
PeopleSoft to Momentum with respect to all Licensed Products and Developed
Technology for the four calendar quarters immediately preceding the quarter
in which the Purchase Option is exercised (the "Base Period"); plus (ii)
such payments as would have been made during the Base Period by, or due
from, PeopleSoft to Momentum if PeopleSoft had not previously exercised its
Product Payment Buy-Out Option with respect to any Momentum Product (for
purposes of the calculations in (i) and (ii), payments will be annualized
for any product that has not been a Licensed Product for all of each of the
four calendar quarters in the Base Period);
minus any amounts previously paid to exercise any Product Payment Buy-Out Option
for such Momentum Product;
(2) the fair market value of six hundred thousand (600,000) shares of
PeopleSoft Common Stock, adjusted in the event of a stock split or
dividend, as of the date PeopleSoft exercises its Purchase Option;
(3) three hundred million dollars ($300,000,000) plus any additional funds
contributed to Momentum by PeopleSoft, less the aggregate of all amounts
paid or incurred to develop the Momentum Products or pursuant to the
Services Agreement as of the date the Purchase Option is exercised; or
(4) seventy-five million dollars ($75,000,000).
In the event Momentum's liabilities (other than liabilities under the
Development Agreement, the Marketing Agreement and the Services Agreement)
exceed Momentum's assets, the Purchase Option Exercise Price described above
will be reduced by the amount such liabilities at the time of exercise are in
excess of Momentum's cash and cash equivalents, and short term and long term
investments. If PeopleSoft exercises the Purchase Option, PeopleSoft will pay
the exercise price in cash.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward-looking statements. Forward-looking statements include, but are not
limited to, those items identified with a footnote (1) symbol. The Company
undertakes no obligation to update the information contained herein.
Results of Operations
Revenues, consisting entirely of royalty revenue from PeopleSoft was
approximately $0.3 million for the three months ended July 31, 2000. Momentum
has realized royalty revenues for the past three consecutive quarters as a
result of the shipment of certain software products developed under the
Development Agreement. Specifically, five analytical applications that form a
part of PeopleSoft's Enterprise Performance Management ("EPM") suite and Grants
Administration were released during the last fiscal year. Under the terms of
PeopleSoft's Marketing Agreement with Momentum for pre-release products, the
applicable royalty rate was 6% of net sales. Following PeopleSoft's exercise of
its license option for a product, Momentum will earn a royalty for each product
licensed by PeopleSoft, or another distributor, based on a contractually
determined royalty rate which is a function of the amount of development costs
incurred on each developed product. (See Note 3 -- "Marketing and Distribution
Agreement"). It is not presently determinable when, if at all, Momentum will
realize significant royalty revenues from its development efforts.(1)
The Company incurred development expenses of approximately $30.5 million
and $5.0 million for the three months ended July 31, 2000 and July 31, 1999,
respectively. These expenses were incurred primarily under the Development
Agreement. Under this agreement, Momentum can engage PeopleSoft to perform
research and development work, and PeopleSoft will charge Momentum 110% of its
fully burdened cost of performing such activities. Fully burdened costs include
salary, benefits and overhead allocations, but do not include certain other
costs, such as the human resources costs associated with recruiting development
personnel and other indirect costs and expenses of establishing and maintaining
a development environment. Momentum also incurs certain direct costs associated
with developing its
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(1) Forward-Looking Statement.
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products that may include payments to other third parties for development,
royalties, or costs associated with acquiring or investing in complementary
companies, products or technology. The substantial increase in development
expenditures was driven by three factors i) the continuing addition of new
projects to Momentum's development project portfolio, ii) the funding of
retroactive project costs on certain of the projects recently undertaken by
Momentum, and iii) the continued increases in project staffing and the
associated expense run rates on several previously committed projects.
Development expenses are expected to significantly increase in the current
fiscal year as development efforts are stepped up on current projects and as
development of new Momentum products commence.(1)
General and administrative expenses were approximately $0.2 million for the
quarter ended July 31, 2000 as compared with approximately $0.3 million for the
quarter ended July 31, 1999. Under the Services Agreement, PeopleSoft provides
Momentum certain administrative services including accounting, finance, human
resources and legal services, and maintains office facilities for Momentum.
Momentum pays PeopleSoft a fee of $100,000 per quarter for such services. The
amount of this fee was determined using PeopleSoft's internal projections of the
incremental costs that it would incur to provide these services to Momentum.
Momentum is required to separately pay for direct costs such as professional
services, insurance, taxes, director and officer compensation, and regulatory
fees. It is anticipated that general and administrative expenses will remain at
approximately current levels during Fiscal 2001.(1)
Because of the restrictions on the use of Available Funds under the
Development Agreement, Momentum is not expected, for the indefinite future, to
spend any funds on sales, marketing, or distribution activities. As such, it
will not be able to effectively establish a brand, corporate image or identity
in the overall marketplace. Such anonymity may make it more difficult for
Momentum to pursue alternate exit strategies, should PeopleSoft not exercise its
purchase option in the future.
Interest and investment income earned on invested funds were approximately
$3.4 million for the quarter ended July 31, 2000 as compared with approximately
$3.0 million for the quarter ended July 31, 1999. As Momentum's Available Funds
are used under the Development Agreement and the Services Agreement, lower cash
balances will be available for investment and therefore interest and investment
income is expected to decrease.(1)
The results of operations of Momentum currently reflect primarily
development expenses related to development of Momentum products and interest
and investment income earned on the funds contributed by PeopleSoft. Momentum's
net loss was approximately ($27.2) million or ($5.78) per share for the quarter
ended July 31, 2000 as compared with a net loss of approximately ($2.2) million
or ($0.46) per share for the quarter ended July 31, 1999. The Company is
expected to record significant net losses in future periods, as product
development expenses under its agreements with PeopleSoft are expected to
continue to exceed income.(1)
Liquidity and Capital Resources
Momentum was formed on November 9, 1998. PeopleSoft contributed a total of
$250 million in cash to Momentum in late December 1998 prior to the
Distribution. PeopleSoft's contribution (together with interest earned thereon)
is expected to fund research and development activities for approximately three
to four years.(1) Momentum's funds are expected to be used primarily to fund
activities to be conducted under the Development Agreement with PeopleSoft.
Momentum expects to engage PeopleSoft or other third parties to perform the
development activities on Momentum's behalf. Momentum is not expected to require
significant facilities or capital equipment of its own during the term of the
Development Agreement. At July 31, 2000, cash and cash equivalents were
approximately $195.2 million of which approximately $194.6 million are
restricted for use under the Development Agreement and consist primarily of
investments in money market funds with maturities of three months or less (See
Note 3 -- "Development Agreement").
Momentum's development activities are focused on e-business products,
analytic application products, and industry-specific applications. PeopleSoft
has and will continue to propose various products to Momentum from which
Momentum will select certain products to develop. The Company believes there are
numerous possible products which could be developed in each of the three areas.
Based on PeopleSoft's experience in developing software products of comparable
scope, the number of projects that are believed to be manageable at any given
time, the availability of engineers with the requisite expertise, current
expenditure run rates, and anticipated additional project undertakings, the
Available Funds are expected to be substantially exhausted by December 2001.(1)
In addition to the Available Funds, Momentum generates additional funds
through successfully licensing its products to PeopleSoft or other parties.
Momentum also has the option to obtain additional financing through either debt
or equity financing, as long as the terms of such financings do not alter
PeopleSoft's rights as a Class B Common Stock holder. Funds raised through
licensing of
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(1) Forward-Looking Statement.
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products or financings are not considered Available Funds and thus their use by
Momentum is not restricted by PeopleSoft. During the quarter ended July 31,
2000, the Company earned approximately $0.3 million in royalties from the
licensing of products developed under the Development Agreement, however, the
actual payment for such royalties was not due until after the quarter end. Such
funds, upon their receipt, shall be without restriction as to their use.
There can be no assurances, particularly given the existence of the
Development Agreement, the Marketing Agreement and the Services Agreement, that
Momentum will be able to raise any additional capital. Such additional capital,
if raised, would most likely reduce the per share proceeds available to holders
of the Momentum Class A Common Stock if the Purchase Option were to be exercised
by PeopleSoft. (See Note 3 -- "Purchase Option").
During the quarter ended July 31, 2000, Momentum executed amendments to the
Development Agreement with PeopleSoft, whereby PeopleSoft will provide
development resources and project management oversight on four new product
development projects. Including the four recently approved projects, Momentum is
currently collaborating with PeopleSoft on a total of nineteen different product
development projects with an aggregate expenditure budget of approximately $215
million. These include i) a suite of analytic applications which encompass
numerous individual software application products and workbenches, ii) several
industry-specific applications including four projects targeted at the services
industry which includes professional service staffing, consulting, and
engineering companies and three targeted at the Education and Public Sector
industries, and iii) ten e-business applications including e-procurement,
e-store, a suite of application portals and others that will be integrated with
PeopleSoft's e-business backbone.
In addition, Momentum executed two technology agreements with PeopleSoft
during the quarter. Under one such agreement, Momentum will spend approximately
$5.0 million to fund the development of certain technologies that will be
utilized in hand held application software products for the enterprise. Under
the other agreement, Momentum purchased certain technology from PeopleSoft that
had been recently acquired by PeopleSoft by virtue of a recent acquisition. The
purchase arrangement between Momentum and PeopleSoft involves the initial
payment of $8.6 million with an additional payment of up to $1.4 million
contingent on future additional deliverables. It is anticipated that the
technology acquired herein will be directly utilized by at least two active
Momentum projects.
Momentum expects to approve and commence development efforts on additional
new product development projects during the Fiscal 2001 year.(1)
Risks and Uncertainties
Momentum's actual results could differ materially from those anticipated in
these forward-looking statements due to certain factors. Such risks and
uncertainties include, but are not limited to the following:
o Momentum may not successfully select or develop a significant number of
products. The development projects referenced herein are characterized by
many inherent risks, including but not limited to 1) it may be difficult to
staff such projects with qualified development personnel who have
sufficient domain expertise, 2) existing PeopleSoft technology may not be
suitable as a foundation for the application software functionality, 3)
development efforts in general are complex, and such complexities create a
risk that the products may not be technologically feasible, and 4)
constantly changing and evolving customer demands for products and product
functionality may cause products to meet with limited market acceptance.
Consequently, such development efforts may not be successful or result in a
product that is accepted by the market.
o Demand for Momentum's products may be highly sensitive to time to market
and/or first mover advantages. Any material delays in the development
project schedule may adversely affect demand for the product, even if the
development project is otherwise successfully completed. Furthermore,
competitors of PeopleSoft, and even PeopleSoft, may offer products that
compete directly with Momentum's products. Weakness in demand for product
will translate into limited royalty income to Momentum, associated limited
product payment buy out proceeds, if any, and may ultimately reduce
PeopleSoft's interest in exercising its purchase option.
o Momentum and PeopleSoft are parties to various agreements which limit
Momentum's ability to take certain actions, establish alternate channels of
distribution for its products, and use funds for purposes other than
designated product development and administrative activities. Consequently,
Momentum has few degrees of freedom with which to generate revenues or
otherwise commercialize developed technology or products should PeopleSoft
elect not to utilize some or all of the developed products.
------------
(1) Forward-Looking Statements.
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o Momentum or PeopleSoft may cancel a development project at anytime and for
any reason or no reason at all. Accordingly, it is possible that Momentum
could incur significant expenditures toward the development of a particular
product, only to have the project cancelled in the later stages of the
schedule. There is no recourse to PeopleSoft in the event of this
occurrence.
o If Momentum were not successful with a number of development projects,
PeopleSoft would be unlikely to exercise its option to purchase the stock
of Momentum. Even if Momentum is successful in developing certain products,
PeopleSoft may not exercise its option to purchase the Common Stock of
Momentum. For example, PeopleSoft has the right to buy out the ownership of
selected products under its product royalty buy out rights. Consequently,
it could purchase the rights to certain products, thereby obviating any
need to exercise the purchase option on the Company's Common Stock.
o Royalty results for the first quarter are not necessarily indicative of
results to be expected going forward. The royalty rate applicable to the
licensing activity through the first fiscal quarter was six percent, which
is the contractual rate for products licensed to customers prior to
PeopleSoft's exercise of its license option on a product. Subsequent to any
exercise of a license option, the royalty rate for the subject product will
revert to a formula based rate, which may be substantially less than six
percent, and which in no case can exceed six percent. The recent successful
release of products which have generated these royalties should not be
construed to provide any assurance that additional products will be
successfully developed, or that development successes will result in
additional royalties, or that PeopleSoft will exercise any license options.
Other risks which are detailed in the Company's filings with the Securities
and Exchange Commission, including, but not limited to, the December 31, 1998
Second Amendment to the Information Statement (Form 10) and the 2000 Annual
Report to Shareholders (Form 10-K) filed July 28, 2000.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Momentum held it's Annual Meeting of Stockholders on September 7, 2000 at
the Carr America Visitor's Center located at 4400 Rosewood Drive, Pleasanton,
California. The following matters were voted on by the stockholders of record at
the close of business on July 14, 2000:
1. One (1) Class A Common Class II director was elected to serve a three-year
term.
2. The appointment of Ernst & Young LLP as independent auditors of the Company
for the fiscal year ending April 30, 2001 was ratified.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule -- For the quarter ending July 31, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period from November 9, 1998
(inception) to July 31, 2000.
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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.
Dated: September 13, 2000
MOMENTUM BUSINESS APPLICATIONS, INC.
By: /s/ Ronald E. F. Codd
-------------------------------------
Ronald E. F. Codd
President and Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)
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MOMENTUM BUSINESS APPLICATIONS, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE
--------- -------------
<S> <C>
27.1 Financial Data Schedule - For the quarter ending July 31, 2000
</TABLE>
14
