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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25185
[MOMENTUM LOGO]
MOMENTUM BUSINESS APPLICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3313175
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4301 HACIENDA DRIVE, PLEASANTON, CA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 469-6621
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
NONE ON WHICH REGISTERED
NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of common
stock on July 3, 2000 as reported on the Nasdaq National Market, was
approximately $34 million. Shares of common stock held by each officer and
director and by each person who owns 5% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of July 3, 2000, Registrant had 4,694,826 outstanding shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders to be held September 7, 2000 are incorporated by reference in Part
III of this Form 10-K Report.
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References in this Report to the "Company" or "Momentum" refer to Momentum
Business Applications, Inc., which was incorporated in Delaware in 1998.
Momentum [and the Momentum logo] are registered trademarks of Momentum Business
Applications, Inc. All other company and product names may be trademarks of
their respective owners. References to beta versions of software products refer
to software products delivered to select customers for testing or evaluation
prior to the general commercial release of such software products.
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PART I
ITEM 1. BUSINESS
This Business section and other parts of this Form 10-K contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed below and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Forward-looking
statements contained throughout this Annual Report include, but are not limited
to, those identified with a footnote (1) symbol.
OVERVIEW OF MOMENTUM'S BUSINESS
Momentum was incorporated in Delaware on November 9, 1998 and commenced
operations on January 4, 1999. Momentum was established by PeopleSoft, Inc.
("PeopleSoft") to select and develop certain e-business products, analytic
applications and industry-specific application products, and to commercialize
such products, most likely through licensing to PeopleSoft.
On December 31, 1998, PeopleSoft transferred 4,693,826 shares, representing
all of the outstanding shares, of Momentum Class A Common Stock, to a custodian
who distributed the shares to the holders of PeopleSoft common stock in mid
January 1999 (the "Distribution"). In connection with the Distribution,
PeopleSoft initially contributed $250 million ("Available Funds") to Momentum so
that Momentum would have financial resources to pursue the development of these
products. In addition, at the time of distribution, PeopleSoft and Momentum
entered into a Development and License Agreement (the "Development Agreement"),
a Marketing and Distribution Agreement (the "Marketing Agreement"), and a
Services Agreement, collectively which relate to various matters including:
- the selection and development of software application products;
- the permitted uses of the Available Funds;
- Momentum's right to use PeopleSoft Technology;
- other services which may be performed by PeopleSoft; and
- PeopleSoft's rights with respect to the products to be developed by
Momentum.
Pursuant to the Development Agreement, Momentum may use the Available Funds
and any investment income or interest earned thereon, only to develop those
products which PeopleSoft proposes and which Momentum accepts for development.
PeopleSoft and Momentum will jointly agree on the work plans and cost estimates
for such products. PeopleSoft has granted to Momentum the right to use
PeopleSoft Technology to develop such products. Because Momentum has and is
expected to continue to have limited staff and facilities, Momentum anticipates
engaging PeopleSoft to perform substantially all of the research and development
activity related to such products. However, Momentum could engage third parties
to perform such efforts, perform them itself or acquire other technologies or
companies. To the extent Momentum engages PeopleSoft to perform research and
development efforts in areas PeopleSoft currently does not have expertise, it is
expected that PeopleSoft will hire individuals possessing the required
knowledge. Momentum currently has no plans to develop products other than those
pursuant to the Development Agreement.
At the end of Fiscal 2000, Momentum was collaborating with PeopleSoft on
fifteen different product development projects. These projects include a suite
of analytic applications which encompass several individual software modules and
workbenches, certain industry-specific applications targeted primarily at
services industries including professional services, staffing, and engineering,
and four end-to-end e-commerce applications that will be integrated with
PeopleSoft's e-business backbone. Momentum expects to approve and commence
development efforts on additional projects within the first six months of the
Fiscal 2001 year.
In the current year and for the first time since its inception in late
1998, Momentum realized royalty revenues on the initial shipment of certain
software products developed under the Development Agreement
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with PeopleSoft. Although not significant, these royalties demonstrate some
early product development successes with respect to the suite of analytical
applications software products. The Company also continued to record investment
income derived from the Available Funds. Despite these two sources of income,
Momentum has incurred, and expects that it will continue to incur, substantial
losses as it expends funds pursuant to the Development Agreement. In addition,
Momentum has made no forecasts as to when, if at all, it will be profitable or
when, if at all, significant revenues will be generated through its licensing
activity. 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.
PEOPLESOFT TECHNOLOGY OVERVIEW
PeopleSoft developed PeopleTools(R), its rapid application development
environment and architecture, specifically for developing enterprise resource
planning ("ERP") application products. ERP applications are applications that
collect, summarize and store transaction data for historical record keeping
purposes across many functional areas of a company. Software developers use
PeopleTools(R) to, among other things, build and modify data tables, design and
customize user interface windows and develop varying security level
functionality. Since the introduction of PeopleTools(R) in 1988, PeopleSoft has
invested and continues to invest considerable funds and resources in the ongoing
enhancement and updating of this development environment. Using this proprietary
development environment, PeopleSoft has developed a comprehensive suite of
cross-industry administrative on-line transaction processing ("OLTP")
applications. OLTP applications are a subset of ERP applications focused on
enhancing the efficiency of a company's administrative activities through the
automation of transaction processsing, and the capture and recording of related
data. PeopleSoft's suite of OLTP products includes applications in human
resource management, financials, distribution, manufacturing, and supply chain
optimization.
PeopleSoft has granted Momentum a license to use PeopleTools(R) and certain
other technology to develop products under the Development Agreement. Momentum
believes that to develop industry-specific applications, PeopleSoft or Momentum
may need to develop or acquire enhanced functionality for PeopleTools(R). In
addition, Momentum may need to develop, acquire or license additional
development technologies to develop its e-business and analytic applications.
The Development Agreement allows Momentum to obtain, either through development,
acquisition or licensing, the rights to development tools as deemed necessary to
complete the products selected. As part of the Analytic Applications development
project, Momentum has agreed to fund certain technology access fees which will
be paid by PeopleSoft to third parties that have licensed various data
warehousing and data extract and transformation technologies to PeopleSoft.
THE MOMENTUM PRODUCTS
"Momentum Products" are products recommended by PeopleSoft and accepted by
Momentum for research and development under the Development Agreement. Momentum
is currently developing the following types of Momentum Products.
e-business Products. Momentum is currently building eStore, a new
application for enabling business to business and business to consumer
e-commerce. This application allows organizations to deploy internet sites to
sell goods and services, and integrates sales, customer self service, product
marketing, order fulfillment and closed loop analytics with PeopleSoft's supply
chain management solutions. In addition, Momentum and PeopleSoft are
collaborating on other e-business applications that will be intuitive,
user-focused solutions that enable people to conduct a broad range of other
business processes and commercial transactions over the Internet or a customer's
intranet. E-business applications projects that were recently approved for
funding by Momentum include Travel and Expense Communities, Benefits
Communities, eProcurement, Stock Administration, Time and Labor, a CRM
application, and a set of role based internet extensions to PeopleSoft's CRM
suite. All of these e-business applications will include a new
extended-enterprise class of applications that integrate content from a
customer's intranet, third party information and service providers and
PeopleSoft's traditional cross-industry ERP applications.
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Analytic Application Products. PeopleSoft's OLTP products have
traditionally focused on helping companies improve the efficiency of business
processes. In contrast, analytic application products are focused on turning
stored data (created primarily by OLTP applications) into business intelligence
that can be used by companies to improve operating effectiveness. Momentum is
currently developing analytic application products that will deliver data
warehouse capabilities while allowing for integration and reconciliation to the
general ledger, billing, and time and labor systems. These analytic application
products are intended to enable rapid analysis and decision making while
lowering the risk of inconsistent data within an organization. Five analytical
applications that form a part of PeopleSoft's Enterprise Performance Management
("EPM") suite were released this year, and Momentum expects additional
analytical applications and workbenches to be released later in the calendar
year.
Industry-Specific Application Products. Momentum is developing a series of
products to address the software application needs of certain industries. The
initial target markets include professional services, financial services, and
retailing. The Momentum Products are being designed to provide information
processing capabilities for business functions critical to each specific
industry. Such industry-specific application products typically support the core
operating areas of a company. Projects include Integrated Resource Management,
Staffing, Professional Services Automation, and Revenue Contracts for the
Services industries. In addition, Deductions is being developed for the Consumer
Products Industry, and Grants Administration and Property Tax Management are
being developed for the Education and Government sectors.
Under the License Option, PeopleSoft has the right to obtain a perpetual,
exclusive license to market, distribute, sublicense, support and enhance any
product developed by Momentum pursuant to the Development Agreement. This right
expires 30 days after a product becomes Generally Available. The determination
of whether a product is Generally Available will be made by PeopleSoft based
upon the test procedures it uses for its own products. If PeopleSoft exercises
its rights under the License Option for a product, it will pay Momentum a
royalty on sales of that product in accordance with a formula contained in the
License Option. PeopleSoft will also then be responsible for all upgrades, bug
fixes and customer support related to the product. If PeopleSoft does not
exercise its rights under the License Option, Momentum may commercialize the
product itself or through arrangements with third parties that are not
designated competitors of PeopleSoft.
In the event Momentum successfully commercializes a product, any revenue it
receives from such commercialization will not be considered Available Funds.
Momentum will be free to use such revenue for any purpose, including any of the
following: i) additional product development potentially unrelated to PeopleSoft
or its technology, ii) expansion of business operations and infrastructure, or
iii) dividends or share repurchases. PeopleSoft will have no rights with respect
to any products Momentum develops using funds other than Available Funds.
DEVELOPMENT CYCLE
Scope and Definition: Based on input from product strategy and sales
personnel, customers, business partners and industry analysts, PeopleSoft
identifies and prioritizes product opportunities and presents an overall list of
the associated development project opportunities to Momentum. For each product
opportunity, high level business requirements are defined and documented. This
initial product scope is reviewed and discussed with internal and external
business process functional experts in an iterative review process to confirm a
product's conceptual framework. Once the initial product scope is defined, the
individual product features are identified and prioritized. In addition, new
technologies required to build and deploy the product are identified. For each
product feature or new technology, a written summary of its business
requirements is prepared and reviewed with appropriate development personnel.
Based on this review, product strategy and development personnel reach an
initial agreement on the product's content and priorities for the initial
release.
Proposal and Detailed Design: Upon completion of the Scope and Definition
phase, PeopleSoft prepares a detailed written business case proposal for
Momentum. The business case includes an overview of the product, the business
processes and technologies to be incorporated therein, the development team,
budget and project schedule, and an analysis of the market opportunity for the
product along with projections of sales
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and royalty income. PeopleSoft personnel including proposed project leaders
present the business case to Momentum in a review session. After subsequent
analysis and evaluation, Momentum may elect to proceed with the development
project as proposed, or with modifications to the general terms and conditions
of the Development Agreement. Functional and technical designs are then
developed for each planned feature. Design reviews are held with teams comprised
of product strategy, release testing, documentation, sample data and training
personnel. During the design review process, this group ensures not only that
the functional requirements are complete but also that the technical design
meets the business needs.
Develop and Port: In developing a new product, the development team codes
and unit tests every feature in the product to ensure that the product created
complies with the functional and technical requirements. These tasks are
conducted using a reference development platform, and the functionality is
designed to provide global capabilities based on requirements from a proxy set
of countries around the world. All development issues are identified and
addressed. At the same time, system test requirements and procedures are
developed. Test strategies, product test plans, feature test requirements and
test procedures are completed. During the development and port phase,
documentation and curriculum development personnel work closely with the
developers in designing documentation and training courses. Upon substantial
completion of development, the developed product is ported to support multiple
hardware, database and operating system platforms, and release platforms are
certified.
Test and Release: The product is initially delivered to a select group of
Pre-General Availability customers for limited use. Pre-General Availability
customers will provide feedback on the features and functions as well as ease of
use. At this stage, the product has reached Beta release and is considered to
have attained technological feasibility. Issues identified during this phase
generally will be resolved prior to the product being released as Generally
Available. In addition, the combined product features will then be system tested
on the primary development platform. These tests will validate that the product
and its features perform according to the specified business and functional
requirements. All test failures will be logged, reviewed and addressed. Release
test requirements, plans and processes will then be developed and finalized.
During this phase, the product will be tested to validate that it is operational
on all supported platforms. The product will be tested for (i) ease of use, (ii)
ease of installation, (iii) ease of upgrade, (iv) volume and (v) performance.
All incidents reported during release test will be logged, reviewed and
addressed. Once the product has met system and release test exit criteria, all
sample data and documentation will be finalized and incorporated into the master
production product. Final validation and acceptance tests will then be
performed. All development costs incurred during this phase are capitalized
until the time when the product is released as Generally Available.
POTENTIAL RESEARCH AND DEVELOPMENT EXPENDITURES
Momentum expects PeopleSoft to recommend additional products which could be
developed in each of the three areas described under the caption
"Business -- The Momentum Products" above. Momentum is currently collaborating
with PeopleSoft on fifteen different product development projects with an
aggregate budget of approximately $160 million. In addition to the initial
series of Momentum Products that commenced development in mid March 1999,
Momentum and PeopleSoft have recently agreed on the development of eight new
software applications focused on e-business and industry solutions. Both parties
have also agreed upon the allocation of the Available Funds to the specific
products. Consistent with estimates made at the formation of Momentum, current
estimates reflect that the Available funds will be significantly exhausted by
December 2001.(1) This estimate is based on PeopleSoft's experience in
developing software products of comparable scope, the number of projects that
are deemed manageable at any given time, the availability of engineers with the
requisite expertise, current expenditure run rates, and anticipated additional
project undertakings.
PeopleSoft has previously developed several industry specific application
products but has very limited experience in the development of e-business or
analytic applications. Development of each industry specific
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(1) Forward-Looking Statement.
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application is expected to require a team of at least ten fully dedicated
individuals for approximately 18 to 24 months to reach General Availability.
Development of each e-business application is expected to take approximately 12
to 24 months and may require larger teams than required for industry specific
applications. Development of analytic applications is expected to take
approximately 12 to 24 months utilizing a team of approximately ten individuals.
Momentum expects to undertake additional projects in the next six-month period.
As the initial set of projects is completed, additional projects will commence.
The time frame to begin development efforts will be primarily dependent on
identifying and obtaining the proper technical personnel once the projects are
selected for development. Momentum estimates that it will initiate substantially
all of the balance of development projects it expects to be involved with over
the course of its 2001 Fiscal Year.(1)
Momentum's total anticipated development efforts in all three business
areas are currently estimated to require an aggregate of $40 - $60 million for
scope and design, $150 - $175 million for develop and port and $30 - $50 million
for test and release. These estimates may change over time as PeopleSoft and
Momentum continue to select and develop products. Because of the rapidly
changing dynamics of the computer software industry, products currently
forecasted to be undertaken by Momentum may be reprioritized as the product
areas develop. In addition, factors outside of Momentum's control, such as
customer functionality demands, competitor product offerings, and technology
availability and compatibility, could alter the timing and amount of estimated
expenditures and the number of completed projects. During the Fiscal 2000 year,
PeopleSoft and Momentum agreed to discontinue two industry specific product
development efforts, and to credit funds previously expended under these
projects to other active development projects as designated by Momentum.
As noted above, Momentum may acquire third party products or technologies
to enhance the potential for the successful development of Momentum Products.
For example, during Fiscal 2000, Momentum acquired a source code license to
certain industry specific application software from Prairie Development.
Momentum and PeopleSoft are currently using this source code to develop an
integrated global staffing solution for the Services industry.
DEVELOPMENT AND LICENSE AGREEMENT
Momentum and PeopleSoft have entered into a Development and License
Agreement for the selection and development of software application products
including (i) e-business applications, (ii) analytic applications, and (iii)
industry-specific software application products.
Pursuant to the Development Agreement, the parties have agreed to the
following terms:
PeopleSoft has granted to Momentum a perpetual, worldwide,
non-exclusive license to use PeopleSoft Technology solely for internal use
purposes connected with the Development Agreement and solely in conjunction
with Momentum's development, support, demonstration, testing (and all other
related tasks) of the Momentum Products.
After significant analysis of a particular opportunity, PeopleSoft may
propose to Momentum that it develops certain selected software products and
related technologies. Such analysis includes a review of the market
opportunity, including the market size and projected growth rate, the
preparation by PeopleSoft of a five-year sales projection, a review of
competitor products or potential competitor products, and the development
of royalty income projections. PeopleSoft personnel to be involved in the
project prepare a formal written and oral proposal, which is presented to
Momentum. Subsequent analysis is undertaken by Momentum, and a
determination is made as to whether, and under what specific terms and
conditions, project funding will be provided. If Momentum agrees to develop
such products, a letter amendment to the Development Agreement is executed
by both parties. The letter amendment defines the specific project
deliverables and product specifications, project schedule and timetables,
project budget and any special terms and conditions tied to the project and
associated funding commitment. Products recommended by PeopleSoft and
approved by Momentum for development are called "Momentum Products."
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(1) Forward-Looking Statement.
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Momentum has agreed to use diligent efforts to research and develop
Momentum Products in accordance with agreed upon budgets and timetables.
Momentum expects that it will outsource all research and development it
undertakes, as it does not expect to have the staffing or facilities to do
such research and development itself. Momentum currently expects that
substantially all of the research and development relating to Momentum
Products will be performed by PeopleSoft. However, PeopleSoft is not
obligated to provide any such services to Momentum, and Momentum may choose
to hire other third party providers. If Momentum chooses to engage
PeopleSoft, it will pay PeopleSoft one hundred and ten percent (110%) of
PeopleSoft's fully burdened costs relating to the research and development
provided by PeopleSoft. If a third party is hired to conduct research and
development relating to Momentum Products, any agreement between Momentum
and such third party must include appropriate provisions for the protection
of PeopleSoft Technology and PeopleSoft's rights under the series of
agreements between Momentum and Peoplesoft, and as a holder of the Momentum
Class B Common Stock. Consequently, it is not likely that Momentum will
engage third party developers without the full prior involvement and
approval of PeopleSoft.
Momentum may develop or acquire (through licensing or otherwise) third
party software toolsets ("Developed Technology") for the purpose of
developing Momentum Products. To the extent Momentum has the right,
Momentum will grant PeopleSoft an irrevocable, worldwide, non-exclusive
license to use, market, manufacture, reproduce, copy, sublicense,
distribute (through PeopleSoft's then current worldwide channel
distribution system), create derivative works, enhance and modify the
Developed Technology. For a period of ten (10) years from the date the
Developed Technology is acquired or first identified as part of the work
plan related to the development of a Momentum Product, PeopleSoft will pay
a royalty of one percent (1%) of net revenue on products (other than
Momentum Products) developed by PeopleSoft using Developed Technology. In
order to develop certain products using Developed Technology, PeopleSoft
may need to acquire licenses or enter into other arrangements with third
parties. For purposes of calculating royalties due to Momentum for the use
of Developed Technology in these products, net revenue will be reduced by
the amount of license fees or similar payments due to third parties from
PeopleSoft with respect to such product.
PeopleSoft will own all rights with respect to any enhancements made
by Momentum to PeopleTools(R) or other software products contributed by
PeopleSoft. PeopleSoft will not be obligated to make any royalty or other
payments with respect to such technology or enhancements. Momentum will own
the Developed Technology and the Momentum Products subject to PeopleSoft's
license rights as described in the Development Agreement and the Marketing
Agreement.
Momentum may use the Available Funds only to develop or acquire
Momentum Products and related technologies and for related administrative
expenses. It is anticipated that the Available Funds will be substantially
exhausted by December 2001.(1) Prior to expenditure, Momentum will be
required to invest the Available Funds in high quality marketable
securities. Any such investment earnings shall become a part of the
Available Funds. Momentum may not encumber, pledge or otherwise take any
action with respect to Available Funds that could prevent the full
expenditure of such funds under the Development Agreement. Under certain
circumstances, PeopleSoft will have the right to require Momentum to make
an affirmative pledge of the Available Funds to performance under the
Development Agreement. Other than PeopleSoft's rights under the Purchase
Option, there are no restrictions on Momentum's use of funds it generates
or receives, that are not Available Funds, to conduct its business as it
determines.
The Development Agreement will automatically terminate upon the
expiration of the Purchase Option (see "Purchase Option" section on page
9); provided, however, PeopleSoft's obligation to pay royalties on
Developed Technology will continue until the expiration of the respective
royalty terms. Either party may terminate the Development Agreement if the
other party breaches a material obligation
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(1) Forward-Looking Statement.
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thereunder and such breach continues uncured for thirty (30) days after
written notice by the terminating party.
In the event the Development Agreement or the Marketing Agreement is
terminated by PeopleSoft in connection with Momentum's breach of a material
obligation under the Development Agreement or the Marketing Agreement,
PeopleSoft shall be entitled to receive, as liquidated damages, the
Available Funds. If PeopleSoft reasonably believes that such liquidated
damages are inadequate, then PeopleSoft will be entitled to specific
performance of Momentum's obligations under the Development Agreement or
the Marketing Agreement in connection with such breach.
In connection with the development of a product or products under a
letter amendment, either party may upon reasonable notice to the other,
discontinue its involvement in that development project for any reason, or
no reason at all. Should PeopleSoft elect to terminate a development
project it has provided development resources for, Momentum could
conceivably substitute another third party developer to complete the
project. Such a decision would be taken only if a competent development
team with the appropriate domain expertise could be retained under
reasonable cost, terms and conditions. Further, such decision would also be
predicated upon obtaining PeopleSoft's reasonable assurance that it would
be willing to market and sell such a product if completed.
MARKETING AND DISTRIBUTION AGREEMENT
Under the Marketing and Distribution Agreement (the "Marketing Agreement"),
Momentum has granted PeopleSoft the exclusive license to market and distribute
pre-General Availability versions of each Momentum Product (the "Pre-General
Availability License") and an option to obtain a perpetual, worldwide, exclusive
license to market, distribute, sublicense, support and enhance any post-General
Availability versions of each Momentum Product (the "License Option").
Under the Pre-General Availability License, PeopleSoft has an exclusive
license with respect to each Momentum Product to market and distribute the
Momentum Product for the period from which Momentum accepts the relevant product
proposal from PeopleSoft until the earlier of: (i) the exercise or expiration of
PeopleSoft's License Option with respect to the Momentum Product; or (ii) the
expiration of the Purchase Option. PeopleSoft shall pay Momentum royalties of
six percent (6%) of Net Revenues (as defined) from the license of each Momentum
Product. PeopleSoft has agreed to use commercially reasonable efforts to
promptly market each pre-General Availability Momentum Product to a limited
group of customers in accordance with PeopleSoft's standard practices.
Under the License Option, PeopleSoft may obtain a perpetual, worldwide,
exclusive license (with the right to sublicense through multiple tiers) to
market, distribute, support and enhance each Momentum Product. PeopleSoft may
exercise the License Option with respect to any Momentum Product at any time
from the date on which Momentum agrees to develop the product until the earlier
of: (i) thirty (30) days after the product becomes Generally Available; or (ii)
the expiration of the Purchase Option. A Momentum Product will be deemed to be
Generally Available upon successful completion of the release testing model
which PeopleSoft uses for its own products with the level of functionality
originally agreed to by PeopleSoft and Momentum. Upon exercise of the License
Option with respect to a Momentum Product (a "Licensed Product"), PeopleSoft
will assume full responsibility for any product development, support, training,
consulting, bug fixes, modifications and enhancements with respect to such
Licensed Product. If PeopleSoft does not exercise the License Option with
respect to a Momentum Product, PeopleSoft will retain the right and obligation
to support any customers to whom it licensed such Momentum Product pursuant to
its Pre-General Availability License. These rights and obligations will survive
the termination of the Marketing Agreement.
PeopleSoft will make Product Payments to Momentum with respect to each
Licensed Product equal to the sum of (i) one percent (1%) of Net Revenues plus
(ii) an additional one-tenth of one percent (0.1%) of Net Revenues for each one
million dollars ($1,000,000) of Development Costs (as defined) of the Licensed
Product that were incurred by Momentum, up to a maximum royalty rate of six
percent (6%) of Net Revenues. "Net Revenues" for a particular quarter are end
user license fees received by PeopleSoft for
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licensing or sub-licensing each Licensed Product less the value of bundled
services and development expenses incurred by PeopleSoft on such Licensed
Product for that quarter. Net Revenues will include all user license fees paid
with respect to each Licensed Product, regardless of whether PeopleSoft directly
licenses such Licensed Product, or indirectly licenses such Licensed Product
through a reseller, distributor, or other third party. Subject to PeopleSoft's
Product Payment Buy-Out Option described below, Product Payments will be payable
by PeopleSoft to Momentum for ten (10) years after General Availability of the
Licensed Product. PeopleSoft will retain all support services and maintenance
fees with no royalty-sharing or payment obligation to Momentum. PeopleSoft's
royalty obligations will survive the termination of the Marketing Agreement.
PeopleSoft has the option to buy out Momentum's right to receive Product
Payments for any Licensed Product. The Product Payment Buy-Out Option may be
exercised for any Licensed Product at any time beginning twelve (12) months
after the Licensed Product is declared Generally Available. The buy-out price
will be fifteen (15) times the payment made by or due from PeopleSoft to
Momentum with respect to licenses of such Licensed Product for the four (4)
quarters immediately preceding the quarter in which the Product Payment Buy-Out
Option is exercised (payment will be annualized for any such Licensed Product
that has not been a Licensed Product for all of each of such four (4) quarters).
If PeopleSoft does not exercise the License Option with respect to a
Momentum Product, Momentum will be free to commercialize that Momentum Product
itself or with the assistance of a third party. However, such commercialization
activities may not be funded out of the Available Funds. Consequently, Momentum
must earn some royalty income from is Licensing activities in order to obtain
funds to support such commercialization activities through third parties. To the
extent that any such Momentum Product contains PeopleSoft Technology, PeopleSoft
has granted Momentum a license with respect to PeopleSoft Technology allowing
Momentum to enhance, license, use and distribute the product provided that
Momentum may not contract with certain entities that PeopleSoft reasonably
believes and identifies as competitors of PeopleSoft. This license will survive
the termination of the Marketing Agreement.
During the term of the Marketing Agreement, PeopleSoft will provide
quarterly reports to Momentum detailing payments due for such period with
respect to the relevant Momentum Product or Licensed Product, as the case may
be. Such reports will be due thirty (30) days after the end of each calendar
quarter and will indicate the quantity and dollar amount of Net Revenues
relating to each Momentum Product or Licensed Product, as the case may be, or
other consideration in respect of Net Revenues, during the quarter covered by
such report. No more than once in each calendar year upon at least five (5)
business days notice and during regular business hours, at Momentum's expense,
PeopleSoft is required to make available for inspection by Momentum such records
of PeopleSoft as may be necessary to verify the accuracy of reports and payments
made under the Marketing Agreement. PeopleSoft must provide similar reports and
records with respect to all Developed Technology Products.
The Marketing Agreement terminates upon the earlier to occur of: (i) the
exercise of the Purchase Option by PeopleSoft; or (ii) the end of the thirtieth
(30th) day after the expiration of the Purchase Option. The Marketing Agreement
may be terminated by either party in the event that the other party (i) breaches
any material obligation under the Marketing Agreement (which breach continues
for a period of thirty (30) days after written notice to the defaulting party)
or (ii) enters into any proceeding, voluntary or involuntary, in bankruptcy,
reorganization or similar arrangement for the benefit of its creditors.
SERVICES AGREEMENT
Pursuant to the Services Agreement, PeopleSoft will provide Momentum with
certain services relating to administration, including accounting, finance,
human resources and legal services. Momentum has agreed to pay PeopleSoft a fee
of $100,000 per quarter for such services. Momentum will also incur direct costs
such as professional services, insurance, taxes and regulatory fees. The
Services Agreement remains in force until December 31, 2002 and thereafter is
automatically renewed for one-year terms.
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<PAGE> 11
DISTRIBUTION AGREEMENT
Under the Distribution Agreement, PeopleSoft contributed $250 million in
cash to Momentum in exchange for 4,693,826 shares of Momentum Class A Common
Stock. PeopleSoft effected the Distribution by delivering those shares to State
Street Bank & Trust Company of California, National Association, which held them
as custodian for the benefit of the PeopleSoft stockholders of record as of the
record date. This custody arrangement was irrevocable. In mid January 1999,
State Street Bank & Trust Company of California, National Association, delivered
the shares to Boston EquiServe L.P., Momentum's transfer agent, which began
mailing the shares to the PeopleSoft stockholders of record as of the record
date. PeopleSoft and Momentum have indemnified State Street Bank & Trust Company
of California, National Association, for actions it takes in connection with
acting as custodian. In addition, in the event PeopleSoft exercises the Purchase
Option, it has agreed to indemnify Momentum's officers and director to the same
extent as such persons are entitled to indemnification under Momentum's
Certificate of Incorporation.
PURCHASE OPTION
The Purchase Option is set forth in Momentum's Certificate of
Incorporation.
Pursuant to the Purchase Option, PeopleSoft has an exclusive, irrevocable
option to purchase all, but not less than all, of the issued and outstanding
Momentum Class A Common Stock. PeopleSoft may exercise the Purchase Option by
written notice to Momentum at any time during the period beginning immediately
after the Distribution 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 the Available Funds as of such date. In any event, the
Purchase Option will terminate on the sixtieth (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. All certificates
evidencing Momentum Class A Common Stock will bear a legend indicating that the
Momentum Class A Common Stock is subject to the Purchase Option.
Except in instances in which Momentum's liabilities exceed its assets (as
discussed below), if the Purchase Option is exercised, the exercise price (the
"Purchase Option Exercise Price") will be the greatest of:
(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).
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In the event that Momentum's liabilities (other than liabilities under the
Development Agreement, the Marketing Agreement and/or the Services Agreement)
exceed its assets, the Purchase Option Exercise Price described above will be
reduced (but not to less than the total par value of the outstanding Momentum
Class A Common Stock) by the amount that Momentum's liabilities at the time of
exercise (other than liabilities under the Development Agreement, the Marketing
Agreement and/or the Services Agreement) exceed Momentum's cash and cash
equivalents, and short-term and long-term investments (excluding the amount of
the Available Funds remaining at such time). For this purpose, liabilities will
include, in addition to liabilities required to be reflected on Momentum's
financial statements under generally accepted accounting principles, (i) any
guaranty of any indebtedness and (ii) any reimbursement or similar obligation
with respect to any letter of credit issued for the account of Momentum or as to
which Momentum is otherwise liable.
If PeopleSoft exercises the Purchase Option, PeopleSoft will pay the
Purchase Option Exercise Price in cash. For the purpose of determining the
Purchase Option Exercise Price, the fair market value of PeopleSoft Common Stock
shall be deemed to be the average of the closing sales price of PeopleSoft
Common Stock on the Nasdaq National Market (or such other securities exchange on
which PeopleSoft is then listed) for the twenty (20) trading days ending with
the trading day that is two trading days prior to the date of determination. The
per share purchase price of Momentum Class A Common Stock will be reduced if
Momentum issues additional shares after the Distribution.
The purpose of having the Purchase Option Exercise Price be determined by
reference to one of four formulas is to both provide alternatives for the most
favorable return to the holders of the Momentum Class A Common Stock based on
the achievement of certain performance criteria by Momentum, on one hand, and to
establish a minimum return of $75 million, on the other hand. The first formula
is intended to provide a favorable return to the holders of the Momentum Class A
Common Stock in the event that Momentum develops highly successful,
royalty-paying products. The second formula would benefit the holders of the
Momentum Class A Common Stock in the event that the trading price of
PeopleSoft's Common Stock were to rise significantly during the period that the
Purchase Option is exercisable, due to the performance of Momentum or otherwise.
(Based on the closing price of PeopleSoft's Common Stock on December 28, 1998,
the market value of 600,000 shares of PeopleSoft Common Stock was $11,662,500.)
The market value of 600,000 shares of PeopleSoft Common Stock based on the
closing price on April 30, 2000 was $8,362,800. The third formula was designed
to provide a favorable return to the holders of the Momentum Class A Common
Stock in the event that PeopleSoft elects to exercise the Purchase Option prior
to the time that Momentum successfully commercializes its products. The fourth
option represents a minimum return of $75 million to the holders of the Momentum
Class A Common Stock. These four alternatives were selected based on
PeopleSoft's analysis of the formulas used in comparable transactions by other
companies (all of which were in the pharmaceutical industry), as adjusted to
take into consideration the different development cycles and other factors
specific to the software products that Momentum proposes to develop. The
determination as to whether or not to exercise the Purchase Option is entirely
within the discretion of PeopleSoft and the results of the foregoing formulas
are not determinable unless and until PeopleSoft elects to exercise the Purchase
Option
The closing of the acquisition of the Momentum Class A Common Stock
pursuant to exercise of the Purchase Option will take place on a date selected
by PeopleSoft, but no later than sixty (60) days after the exercise of the
Purchase Option unless, in the judgment of PeopleSoft, a later date is required
to satisfy any applicable legal requirements or to obtain required consents.
Between the time of exercise of the Purchase Option and the time of closing of
the acquisition of the Momentum Class A Common Stock, Momentum may not, without
PeopleSoft's consent, incur additional debt, dispose of assets, pay or declare
any dividends or operate its business other than in the ordinary course.
At PeopleSoft's election, Momentum may redeem on such closing date the
Momentum Class A Common Stock for an aggregate redemption price equal to the
final Purchase Option Exercise Price. Any such redemption would be in lieu of
PeopleSoft paying the final Purchase Option Exercise price directly to holders
of Momentum Class A Common Stock, and would be subject to PeopleSoft providing
the final Purchase Option Exercise Price to Momentum to allow Momentum to pay
the redemption price.
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<PAGE> 13
In the event that prior to PeopleSoft's exercise of the Purchase Option,
the number of outstanding shares of PeopleSoft Common Stock is increased by
virtue of a stock split or a dividend payable in PeopleSoft Common Stock or the
number of such shares is decreased or changed by virtue of a combination or
reclassification of such shares, then the number of shares of PeopleSoft Common
Stock used to compute the Purchase Option Exercise Price (if the Purchase Option
Exercise Price is the fair market value of 600,000 shares of PeopleSoft Common
Stock) shall be increased or decreased, as the case may be, in proportion to
such increase or decrease in the number of outstanding shares of PeopleSoft
Common Stock.
Under Momentum's Certificate of Incorporation, Momentum will be prohibited
from taking or permitting any action inconsistent with, or which would in any
way alter, PeopleSoft's rights under the Purchase Option. Momentum may not,
without consent of PeopleSoft as the sole holder of the Momentum Class B Common
Stock, merge, liquidate, sell any substantial assets, or amend its Certificate
of Incorporation to (i) alter the Purchase Option, (ii) change Momentum's
authorized capitalization, or (iii) alter the provisions governing the Board of
Directors. To the extent Rule 13e-3 ("Rule 13e-3") under the Exchange Act
dealing with going private transactions by certain issuers or their affiliates
is applicable at the time of any exercise of the Purchase Option, PeopleSoft and
Momentum will comply with their respective obligations under Rule 13e-3, subject
to any available exemptions from such obligations.
The existence of this Purchase Option should not be construed as an
assurance that any purchase of Momentum by PeopleSoft would necessarily occur at
either the, or one of the possible, purchase option prices. It is conceivable
that an alternative lower purchase price could be negotiated between PeopleSoft
and Momentum at some future date, under certain circumstances. It is also
possible that a purchase or option exercise might include Momentum and
PeopleSoft reaching agreement on a form of consideration other than cash such as
shares of PeopleSoft common stock.
FACILITIES AND PERSONNEL
Momentum has not and is not expected to hire a significant number of
employees or to acquire significant property or assets. On April 30, 2000,
Momentum had one employee, Ronald E.F. Codd, its President and Chief Executive
Officer. However, in order to develop products under the Development Agreement,
Momentum will have to make decisions on how to obtain adequate resources for its
development efforts. Momentum currently contracts with PeopleSoft to provide
engineering personnel and facilities to perform the development work. Momentum
has the right to perform this work directly or seek other third party providers.
Momentum is expected to use a substantial portion of the Available Funds to
compensate PeopleSoft for the research and development of Momentum Products. In
addition, pursuant to the Services Agreement, PeopleSoft provides Momentum with
general administrative support services and office space for its corporate
headquarters under a sublease arrangement. If PeopleSoft does not exercise the
Purchase Option, Momentum expects that the Services Agreement will not be
renewed and that it will need to find alternate suppliers of administrative
services and office space.
COMPETITION
The market for business application software is intensely competitive.
Momentum believes it will face substantial competition from the large,
established providers of enterprise-wide application software as well as from
numerous smaller, more specialized software companies. Other than PeopleSoft,
SAP, Oracle, Baan and J.D. Edwards are the major providers of enterprise-wide
software. Momentum believes that each of these companies has either launched
initiatives or has the technical, financial, and marketing capability to launch
initiatives to develop products that directly compete with the products Momentum
intends to develop. In addition, numerous well-established companies specialize
in e-business products, analytic applications or particular industry-specific
applications. In the analytic applications space, Momentum faces competition
from a host of companies including Hyperion Software, E.Piphany, and others.
Almost all of Momentum's competitors have substantially greater financial,
technical and marketing resources than those of Momentum. Furthermore, although
Momentum believes PeopleSoft does not intend to compete with it, PeopleSoft is
free to do so.
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Demand for Momentum's products may be highly sensitive to time to market
and/or first mover advantages. Any material delays in a development schedule may
adversely affect demand for the product. This is particularly true of e-business
products, which face competition from numerous relatively new, but rapidly
growing companies such as Broadvision, Ariba and others.
Momentum expects that any products developed by it will be commercialized
by other parties, most likely through PeopleSoft. Although PeopleSoft has
substantial market share in the enterprise-wide application software market, it
does not have a significant presence in the markets for e-business or analytic
application products or in any of the markets for which Momentum intends to
develop industry-specific application products. As a result, PeopleSoft may not
be able to compete successfully with the other large providers of
enterprise-wide application software or with the established specialized
software companies in these markets. Additionally, if Momentum commercializes
its products through third parties, such third parties may not have the
financial, technical and marketing resources to compete successfully with
Momentum's competitors.
PATENTS; INTELLECTUAL PROPERTY
The products Momentum intends to develop will incorporate certain
technologies of PeopleSoft and other third parties. While Momentum intends to
obtain from third parties permission to use their technologies, Momentum's
activities could unintentionally infringe the patents, copyrights or other
intellectual property rights of others. Consequently, third parties may assert
infringement claims against Momentum with respect to its products. Any such
assertion could require Momentum to enter into royalty arrangements or could
result in costly litigation.
Momentum intends to rely on a combination of copyright, trade secret, and
patent laws and employee and third party non-disclosure agreements to protect
its intellectual property rights, including the features and design aspects of
its products. Such measures may not be sufficient to protect its rights, and
Momentum's competitors may independently develop technologies that are
substantially equivalent to or superior to Momentum's technology. Momentum may
from time to time be involved in litigation regarding the scope and validity of
its intellectual property rights. Any such litigation, whether or not
successful, could result in substantial costs to Momentum and diversion of
efforts by Momentum's management.
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MANAGEMENT
The following table sets forth information about Momentum's executive
officer and directors as of April 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald E. F. Codd.................. 44 President, Chief Executive Officer, Chief Financial Officer,
Secretary and Director
Carlton H. Baab.................... 42 Director
Robert K. Dahl..................... 59 Director
Stan A. Swete...................... 40 Director
Jeffrey A. Miller.................. 49 Director
</TABLE>
Ronald E. F. Codd has served as Momentum's President, Chief Executive
Officer, Chief Financial Officer, Secretary and director since December 1998.
Prior to becoming an officer and director of Momentum, Mr. Codd served in
various capacities with PeopleSoft. Mr. Codd joined PeopleSoft in September 1991
as Vice President of Finance and Chief Financial Officer. In November 1993, he
was appointed PeopleSoft's Senior Vice President of Finance and Administration
and Chief Financial Officer. He was appointed Secretary of PeopleSoft in March
1992. Prior to joining PeopleSoft, Mr. Codd was Corporate Controller of MIPS
Computer Systems, Inc., a microprocessor designer and computer manufacturer,
from March 1989 through September 1991. Mr. Codd also serves on the Boards of
Directors of Adept Technology, Intraware, Inc., Interwoven, Inc. and two private
companies. Mr. Codd is a Certified Public Accountant, a Certified Managerial
Accountant, and holds a Certified Production and Inventory Management
credential. He received a B.Sc. in Business Administration from the University
of California, Berkeley and an M.M. degree from the J.L. Kellogg Graduate School
of Management (Northwestern University).
Carlton H. Baab became a director of Momentum in February 1999 and is
currently the Vice President of Finance and Chief Financial Officer of Certive,
Inc., a small-business services firm. From January 1999 to January 2000, Mr.
Baab was the Chief Operating Officer and Chief Financial Officer of RemarQ
Communities, Inc., a web-based provider of discussion group services. Mr. Baab
served as Chief Financial Officer of the CKS Group, a marketing communications
company, from February 1994 through December 1998. In addition, Mr. Baab served
as an Executive Vice President and the Secretary of CKS from August 1995 through
December 1998 and as CKS's Chief Operating Officer from August 1995 through May
1996. Prior to joining CKS, Mr. Baab co-founded and served as President and
Chief Executive Officer of MobileSoft Corporation, a software application
developer for the Apple Newton. Mr. Baab was the Vice President & General
Manager of the Contract Division at the Levolor Corporation, a windows treatment
company, from August 1989 to August 1993. At Levolor, Mr. Baab was also Vice
President of Information Technology and Re-Engineering and a member of the
executive turnaround team. Mr. Baab holds a B.S. in Electrical Engineering from
the University of Southern California and an M.B.A. from the Harvard Graduate
School of Business Administration.
Robert K. Dahl became a director of Momentum in February 1999 and is a
General Partner at Riviera Ventures, LLC, a private equity investing firm since
January 1998. From January 1994 to January 1998, Mr. Dahl served as Vice
President of Finance, Chief Financial Officer and a member of the Board of
Directors of Ascend Communications, Inc., a network solutions provider. Prior to
joining Ascend, Mr. Dahl was a private investor and a principal in Dahl-De Vivo
Management Co., a private investment firm. Mr. Dahl also serves on the Boards of
Directors of the Bank of Alameda, NorthPoint Communications and five private
companies. Mr. Dahl received his B.Sc. in Finance and Accounting from the
University of California, Berkeley.
Stan A. Swete replaced Michael E. Gioja as the director of Momentum
representing the Class B Common Stock Holders in June 2000. Mr. Swete became the
Senior Vice President of Products and Technology at PeopleSoft in April 2000 and
has served in various capacities at PeopleSoft since October 1992. Prior to
joining PeopleSoft Mr. Swete was the Manager of the VAX application product line
at ASK
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Computer Systems. He worked at ASK Computer Systems from June 1982 to May 1992.
Mr. Swete received his BS and MS in Industrial Engineering from Stanford
University.
Jeffrey A. Miller became a director of Momentum in June 1999. Mr. Miller
has served as President, Chief Executive Officer and member of the Board of
Directors of Documentum, Inc., a developer of enterprise document management
software, since July 1993. From April 1991 to March 1993, Mr. Miller was a
division president at Cadence Design Systems, Inc., a supplier of electronic
design automation software ("Cadence"). From February 1983 to April 1991, Mr.
Miller was Vice President and General Manager and Vice President of Marketing of
Adaptec, Inc., a supplier of computer input/output controllers. From 1976 to
1983, Mr. Miller held various positions at Intel Corporation, a manufacturer of
semiconductor components. Mr. Miller received his M.B.A. and B.S. in Electrical
Engineering and Computer Science from the University of Santa Clara.
Following the Distribution, Mr. Codd served as one of the three directors
representing the Momentum Class A Common Stock, and two additional directors
were appointed in early March 1999. In mid March 1999, a special meeting of the
shareholders was called for the purpose of formally electing the directors
previously appointed, and by proxy vote, all Class A Common Stock directors were
elected to office. Because the representatives of the Momentum Class A Common
Stock serve staggered three-year terms, the holders of Momentum Class A Common
Stock will be able to vote on a maximum of two representatives (but in two out
of three years, only one representative) at each annual meeting of stockholders.
ITEM 2. PROPERTIES
FACILITIES
As of April 30, 2000, the Company had no and does not expect to secure any
significant facilities in the future. Momentum intends to outsource its entire
product development activities and thus, does not require any facilities other
than office space for the President.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under
the symbol MMTM. The following table lists the high and low closing prices for
the Momentum Common Stock as reported on since its formation.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Fourth quarter of 2000...................................... $ 8.62 $7.12
Third quarter of 2000....................................... $ 9.00 $7.19
Second quarter of 2000...................................... $ 9.69 $7.50
First quarter of 2000....................................... $ 8.56 $7.00
Period from January 19, 1999 to April 30, 1999.............. $18.00 $7.38
</TABLE>
The trading price of the Company's common stock fluctuated significantly
following its start of trading. The trading price is not expected to
significantly fluctuate in the near term due to the various contractual
arrangements, and more specifically the buy-out provision held by the Class B
shareholders. However, the stock price of software companies have historically
moved in response to quarterly variations in contracting activity and operating
results, announcements of technological innovations or new software products by
the
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<PAGE> 17
Company or its competitors, as well as other events or factors. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations that have particularly affected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's common stock.
As of July 3, 2000, the approximate number of common stockholders of record
was 2,300, representing approximately 104,000 shareholder accounts.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
payment of cash dividends from the Available Funds requires consent of the Class
B shareholder, which is unlikely.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD ENDED APRIL 30, YEAR ENDED APRIL 30,
1999(A) 2000
---------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from Peoplesoft:............................... $ -- $ 563
Costs and expenses primarily from Peoplesoft:
Cost of revenues...................................... -- 54
Product development................................... 2,569 54,099
General and administrative............................ 408 1,434
-------- --------
Total costs and expenses........................... 2,977 55,587
-------- --------
Operating loss.......................................... (2,977) (55,024)
Interest Income......................................... 3,908 12,778
-------- --------
Income (loss) before income taxes....................... 931 (42,246)
Provision for (benefit from) income taxes............... 428 (173)
-------- --------
Net income (loss)....................................... $ 503 $(42,073)
======== ========
Basic and diluted earnings (loss) per share............. $ 0.15 $ (8.96)
======== ========
Weighted average shares outstanding used in basic and
diluted per share computation......................... 3,312 4,695
======== ========
BALANCE SHEET DATA:
Working capital......................................... $250,475 $207,999
Total assets............................................ $253,931 $229,437
Long-term obligations................................... $ -- $ --
Stockholders' equity.................................... $250,504 $208,431
</TABLE>
---------------
(a) Incorporated on November 9, 1998, with operations beginning on January 4,
1999, the first business day following distribution of Momentum Shares by
Peoplesoft.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This 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 identified with a footnote(1) symbol. The Company undertakes no
obligation to update the information contained in this Item 7.
RESULTS OF OPERATIONS
REVENUES
Revenues, consisting of royalty revenues were approximately $0.6 million
for the year ended April 30, 2000. For the first time since its inception in
late 1998, in the third quarter of Fiscal 2000, the Company realized royalty
revenues on the initial shipment of certain software products developed under
the Development Agreement with PeopleSoft. Grants Administration and five
analytical applications that form a part of PeopleSoft's Enterprise Performance
Management ("EPM") suite were released this 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 sliding royalty rate
determined by the amount of development costs incurred. These royalty rates are
contractually determined. See -- "Business" -- "Marketing and Distribution
Agreements".
COSTS AND EXPENSES
Momentum's expenses are incurred primarily under the Development Agreement
and the Services Agreement. As Momentum engages PeopleSoft to perform research
and development work, PeopleSoft charges 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 Momentum Products. These costs include payments to other third
parties for development, royalties, or costs associated with acquiring or
investing in complementary companies, products or technology.
Under the Services Agreement, PeopleSoft provides Momentum certain
administrative services including accounting, finance, human resources and legal
services. Momentum pays PeopleSoft a fee of $100,000 per quarter for such
services. The amount of this fee was determined on PeopleSoft's internal
projections of its incremental costs it will incur to provide these services to
Momentum. Momentum will also incur direct costs such as professional services,
insurance, taxes, annual report and proxy related costs, director and officer
compensation, and regulatory fees.
As a result of its need to incur substantial development expenses prior to
receiving significant revenue, Momentum anticipates that it will incur
substantial losses which will likely be recurring.
Development expenses increased from $2.6 million for the period from
November 9, 1998 (inception) through April 30, 1999 to $54.1 million for the
year ended April 30, 2000. The significant increase was due to the ramp up of
development activities related to the initial projects that were started in
March 1999 and the commitment to additional development projects that commenced
during the Fiscal 2000 year. Development expenses are expected to continue to
increase as development of additional new Momentum Products commence. General
and administrative expenses increased from $0.4 million for the period from
November 9, 1998 (inception) through April 30, 1999 to $1.4 million for the year
ended April 30, 2000.
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INTEREST INCOME
Interest and investment income earned on invested funds increased from $3.9
million from Momentum's November 9, 1998, (inception) through April 30, 1999 to
$12.8 million for the year ended April 30, 2000. The significant increase in
interest and investment income was due to the longer length of the investment
period in the current year which was twelve months as compared with the prior
year's investment period of only four months. 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.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
The Company's income tax provision decreased from $0.4 million for the
period from November 9, 1998 (inception) to April 30, 1999 to a tax benefit of
$0.2 million for the year ended April 30, 2000. The Company's effective tax rate
was 45.9% for the period from November 9, 1998 (inception) to April 30, 1999 and
(0.4%) for the year ended April 30, 2000. The decrease in the effective tax rate
is a result of the Company having taxable profits from interest income in its
initial period from inception to April 30, 1999 prior to the commencement of its
development activities as compared to the period ended April 30, 2000 when the
Company incurred an overall loss as a result of its development activities. It
is expected that the Company will continue to incur overall losses requiring
virtually no tax provision in the near future. The tax benefit recorded in
Fiscal 2000 represents refundable Federal income taxes. The Company increased
its valuation allowance by $14.3 million in 2000 for the deferred tax asset
relating to the net operating loss due to uncertainty regarding its
realizablity.
EARNINGS (LOSS) PER SHARE
The Company's earnings (loss) per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings (Loss) Per
Share". This method requires calculation of both a basic earnings (loss) per
share and a diluted earnings (loss) per share. The basic earnings (loss) per
share excludes the dilutive effect of common stock equivalents such as stock
options and warrants, while the diluted earnings (loss) per share includes such
dilutive effects. Momentum has no such dilutive common stock equivalents and
thus diluted earnings (loss) per share equals basic earnings (loss) per share.
Earnings (loss) per share was $0.15 for the period from November 9, 1998
(inception) through April 30, 1999 and ($8.96) for the year ended April 30,
2000.
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 being used primarily to fund the development of Momentum Products under the
Development Agreement with PeopleSoft. Momentum engages PeopleSoft or other
third parties to perform the development activities on Momentum's behalf.
Momentum has not and is not expected to require significant facilities or
capital equipment of its own during the term of the Development Agreement. The
Available Funds, to the extent not immediately required for development
activities, are invested in money market funds. At April 30, 2000, Momentum had
cash and cash equivalents of approximately $228.2 million consisting primarily
of investments in money market funds with maturities of three months or less.
These funds are restricted for use under the 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. Momentum 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
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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. For
the first time since its inception, in the third quarter of Fiscal 2000,
Momentum realized royalty revenues of approximately $0.6 million on the initial
shipment of certain software products developed under the Development Agreement
with PeopleSoft. 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 products or financings are not considered Available Funds
and thus their use by Momentum is not restricted by PeopleSoft.
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 significant additional capital. Such additional
capital, 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 "Business -- Purchase Option."
During the quarter ended April 30, 2000, Momentum executed amendments to
the Development Agreement with PeopleSoft, whereby PeopleSoft will provide
development resources and project management oversight for eight new product
development projects. Including the eight recently approved projects, Momentum
is currently collaborating with PeopleSoft on a total of fifteen different
product development projects with an aggregate expenditure budget of
approximately $160 million. These include a suite of analytic applications which
encompass various individual software products, several industry-specific
applications targeted at the services industry which include consulting,
engineering and temporary help companies, and four end-to-end e-commerce
applications that will be integrated with PeopleSoft's e-business backbone.
Momentum expects to approve and commence development efforts on additional
product development projects within the first six months of the Fiscal 2001
year.
IMPACT OF YEAR 2000
Momentum's research and development and administrative activities have been
substantially performed by PeopleSoft utilizing PeopleSoft's internal systems.
PeopleSoft reported that it has not experienced a material adverse impact on its
business, products, results of operations, or financial condition as a result of
the Year 2000 issue. Consequently, Momentum did not experience any significant
disruptions in its business operations during and after the Year 2000 date
change, nor did it incur any material costs in connection with its Year 2000
compliance efforts.
FOREIGN EXCHANGE
Momentum conducts and expects to conduct all of its activities in US
dollars. Most of Momentum's operations are conducted under the various
agreements between the Company and PeopleSoft. All of these transactions are
contractually required to be conducted in US Dollars.
FACTORS THAT MAY AFFECT FUTURE RESULTS
If any of the following risks actually occur, the Company's business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of the Momentum Class A Common Stock
could decline significantly.
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this form 10-K with a footnote (1) symbol. These
statements include words such as "may," "will," "expect," "believe," "intend,"
"antici-
---------------
(1) Forward-Looking Statement.
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pate," "estimate" or similar words. These statements are based on the Company's
current beliefs, expectations and assumptions. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements due to certain factors, including the risks described below and
elsewhere in this form 10-K. The Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
MOMENTUM IS A NEW COMPANY AND EXPECTS TO INCUR SUBSTANTIAL LOSSES
Momentum is a recently formed company. It faces substantially all of the
risks associated with establishing a new business enterprise in the software
industry. Momentum will incur substantial losses for several years as it
develops its products. Momentum will be able to recover such losses only if its
development efforts are successful, and then only if it can successfully
commercialize such products most likely through third parties.
MOMENTUM MAY NOT SUCCESSFULLY SELECT OR DEVELOP CERTAIN PRODUCTS
Momentum has entered into the Development Agreement with PeopleSoft that
requires Momentum to use all the Available Funds in connection with the research
and development of products that PeopleSoft proposes and Momentum approves.
These products may not be the appropriate products for development. To date,
PeopleSoft has relied upon third parties to develop industry-specific software
and has obtained these products through licensing arrangements or acquisitions.
PeopleSoft, therefore, does not have substantial experience in developing
industry-specific products. In addition, neither PeopleSoft nor Momentum has
significant familiarity with the evolving markets of e-business and analytic
application products. Such inexperience and unfamiliarity may cause PeopleSoft
and Momentum to choose inappropriate products for development.
Even if PeopleSoft and Momentum choose appropriate products for
development, Momentum may not be able to successfully manage the development of
such products. Developing any of these products involves a number of risks and
uncertainties, including:
- it may be difficult for Momentum (and/or the parties with whom Momentum
contracts to perform development work) to assemble a workforce with
sufficient domain expertise;
- evolving customer demands for product functionality may require greater
resources than originally anticipated;
- Momentum may need to develop new technologies to address increased
product functionality requirements;
- development efforts may be complex and such complexities may create a
risk that these products will not be technologically feasible; and
- any products developed may rapidly become obsolete or require substantial
resources to stay current.
Any one or all of these factors may prevent Momentum from successfully
developing any of these software application products.
Despite testing by Momentum, primarily through third parties, software
programs as complex as those likely to be developed by Momentum are likely to
contain a number of undetected errors or "bugs" when they are first introduced.
This may result in reduced acceptance of these software products in the
marketplace. The effort and expense of developing, testing and maintaining
software product lines will increase with the increasing number of possible
combinations of: (i) vendor hardware platforms; (ii) operating systems and
updated versions; (iii) application software products and updated versions; and
(iv) RDBMS platforms and updated versions. Developing consistent software
product performance characteristics across all of these combinations could place
a significant strain on Momentum's development resources and software product
release schedules.
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Momentum believes it will benefit in the area of undetected errors in
choosing to utilize third parties for its development efforts. For example, by
contracting with PeopleSoft for its product development, Momentum gains access
to testing processes which have been developed and improved over numerous
product releases. Momentum does not believe all errors will be detected through
testing or other processes, and thus may incur costs to fix these errors after
products are released.
PeopleSoft has granted Momentum a license to use PeopleSoft Technology to
develop products under the Development Agreement. However, some or all of the
products Momentum may attempt to develop under the Development Agreement may
require new technologies, or enhancements or modifications to existing
PeopleSoft Technology. Momentum may not be able to acquire or develop the
technology necessary to successfully develop its products.
MOMENTUM'S ANALYTIC APPLICATIONS ARE DEPENDENT ON THIRD PARTY TECHNOLOGY UNDER
DEVELOPMENT
The family of Analytic Applications which Momentum is developing with
PeopleSoft is based on a combination of PeopleSoft Technology and essential
relational on-line analytical processing ("ROLAP") technology that was
originally licensed by a third party ("ROLAP Supplier") to PeopleSoft (for use
by Momentum and PeopleSoft). Certain key elements of the technology that was to
be provided by the ROLAP Supplier are still under development, and scheduled to
be delivered at a later but as of now, undetermined date. In August, 1999, the
ROLAP Supplier was acquired by another unrelated third party ("First Acquiror").
In early 2000, the First Acquiror was purchased by another third party software
company ("Successor Acquiror"). Although the Successor Acquiror has re-committed
to the delivery of the ROLAP technology, the two sequential acquisitions have
and will likely continue to cause some disruption in the workforce of the
original ROLAP Supplier. This disruption has already created delays in the
technology development schedule, and any further disruption could create
additional delays in the technology development schedule, or even result in the
ultimate failure of Sucessor Acquiror delivering such technology enhancements.
Further delays or the failure to deliver such technology may result in potential
or even significant delays in the delivery of the Analytic Applications by
Momentum, or subject the project to considerable additional costs. To date,
Momentum has earned virtually all of its royalty income from the Analytic
Applications, and consequently, unless and until these technology issues are
resolved, the continued receipt of this income is at risk.
MOMENTUM AND PEOPLESOFT MAY NOT BE ABLE TO MARKET CERTAIN MOMENTUM PRODUCTS
PeopleSoft or Momentum may not be able to successfully market certain
products developed by Momentum. PeopleSoft may need to develop or expand its
marketing capabilities in order to commercially exploit any products it chooses
to license from Momentum, and PeopleSoft may be unable or unwilling to undertake
such a development or expansion of its marketing capabilities. If PeopleSoft
does not choose to license a product developed under the Development Agreement,
Momentum will have to identify other ways of commercially exploiting that
product as Momentum currently has no marketing capabilities. If Momentum decides
to market a product itself or through a third party, PeopleSoft may not approve
Momentum's use of Available Funds for marketing the product. Additionally,
Momentum may not have sufficient resources to fund any such marketing effort.
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. Even if
acceptable marketing resources are available, the products developed by Momentum
may be unsuccessful in the market.
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 the timing of deliverables may adversely affect demand for the product,
even if the development project is otherwise successfully completed. Weakness in
demand for a 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.
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MOMENTUM WILL HAVE DIFFICULTY RAISING ADDITIONAL FUNDS
Prior to the Distribution, PeopleSoft contributed $250 million in cash to
Momentum. PeopleSoft does not currently intend to contribute additional funds to
Momentum, although it may do so in the future. Under the Development Agreement,
Momentum must use all the Available Funds in connection with the research and
development of Momentum Products and for related administrative expenses.
Momentum may not have sufficient funds to complete the development of any such
products.
Although Momentum is not prohibited from raising additional capital by any
of the arrangements between Momentum and PeopleSoft, PeopleSoft's Purchase
Option and its rights as the sole holder of the Momentum Class B Common Stock
may make it difficult for Momentum to raise additional capital. For example,
PeopleSoft's Purchase Option (and its ability to control certain matters as the
sole holder of the Momentum Class B Common Stock) may make it more difficult for
a third party to acquire Momentum even if a change of control could benefit
Momentum's stockholders by providing them with a premium over the then current
market price of their shares. As a result, the market value and liquidity of the
Momentum Class A Common Stock may be adversely affected.
If the Purchase Option expires unexercised, Momentum may have very little
cash, few assets and an undeterminable number of products under research and
development. Momentum may also have very little internal expertise in product
development or marketing. Under these circumstances, third parties might be
reluctant to lend money to or to invest in Momentum.
PEOPLESOFT MAY NOT EXERCISE ITS LICENSE OPTION OR PURCHASE OPTION
PeopleSoft is not obligated to exercise its License Option with respect to
any Momentum Product. If PeopleSoft elects not to exercise its License Option
with respect to a product, Momentum may be required to find alternative ways to
commercialize the product. Momentum may not be able to establish alternative
channels to commercialize its products. In addition, the Marketing Agreement
prevents Momentum from commercializing any products containing PeopleSoft
Technology through designated competitors of PeopleSoft.
PeopleSoft has sole discretion as to when, if ever, it exercises the
Purchase Option, and may choose to do so at a time when the purchase price is as
low as possible. If PeopleSoft does not exercise the Purchase Option, the
Development Agreement, the Marketing Agreement and the Services Agreement will
expire, and the holders of the Momentum Class A Common Stock will not receive
anything from PeopleSoft. In addition, Momentum may need to seek alternative
research and development facilities, either independently or with a third party
and to find other providers of the services it received from PeopleSoft pursuant
to the Services Agreement and Marketing Agreement. Momentum may not be able to
obtain access to adequate research and development facilities or alternate
service providers on a timely basis, on acceptable terms, or at all.
PeopleSoft's Purchase Option is a call option that is continuously
exercisable during its term. If at anytime, PeopleSoft believes the exercise
price of such option is out of the money, it may attempt to negotiate a purchase
of Momentum at a price above or equivalent to its estimate of Momentum's fair
market value. Such a price, if negotiated, may be below or substantially below
either the applicable option exercise price, or all of the four possible option
price formulas.
POTENTIAL CONFLICTS OF INTEREST EXIST WITH PEOPLESOFT
DEPENDENCE ON PEOPLESOFT FOR PERSONNEL AND FACILITIES. Momentum expects
that it will engage PeopleSoft to perform substantially all of the research and
development required under the Development Agreement. Momentum believes that
PeopleSoft's current and planned personnel and facilities will be adequate for
PeopleSoft to perform such work. However, PeopleSoft is not obligated to perform
any research and development for Momentum. In the event PeopleSoft agrees to
undertake any research and development projects for Momentum, PeopleSoft will be
able to allocate its personnel and facilities among its own or Momentum's
projects as it deems appropriate, subject only to its obligation to use diligent
efforts under the Development Agreement.
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DEPENDENCE ON PEOPLESOFT TECHNOLOGY. Momentum expects that all of the
products it develops will to some extent incorporate PeopleSoft Technology.
PeopleSoft has licensed such technology to Momentum. However, if Momentum wants
to engage a party other than PeopleSoft to conduct research and development on
its behalf, Momentum must obtain PeopleSoft's consent before that party may use
the PeopleSoft Technology. In addition, Momentum believes that enhanced
functionality will need to be added to PeopleTools(R) in order for Momentum to
develop certain of its products. If PeopleSoft chooses not to develop those
enhancements itself, Momentum would either have to develop them internally or
pay a third party to do so. Any enhancements to PeopleSoft Technology by
Momentum or any third party will be owned by PeopleSoft.
DEPENDENCE ON PEOPLESOFT FOR MARKETING AND DISTRIBUTION PRIOR TO GENERAL
AVAILABILITY. Prior to the commercial release of a product, software companies
typically allow selected users to use, test and comment upon the product. Such
pre-release marketing and distribution is often a critical element in the
development and refinement of a software product. Under the Development
Agreement, PeopleSoft will control the marketing and distribution of all
Momentum Products prior to such products becoming Generally Available. Though
the Development Agreement requires that PeopleSoft use commercially reasonable
efforts with respect to such marketing and distribution efforts, Momentum and
PeopleSoft may disagree about the timing, breadth and intensity of such efforts.
PEOPLESOFT'S CONTROL OVER DETERMINATION OF GENERAL AVAILABILITY. Under the
Marketing Agreement, PeopleSoft is responsible for determining when a Momentum
Product is Generally Available. Because PeopleSoft's right to exercise its
License Option with respect to a Momentum Product expires 30 days after the
product becomes Generally Available, PeopleSoft could delay its determination
that the product is Generally Available. In addition, upon exercising its
License Option with respect to a Momentum Product, PeopleSoft is required to
assume the ongoing and sustaining engineering costs associated with such
product. Such expenditures may be substantial, and could act to discourage
PeopleSoft from exercising such option.
PEOPLESOFT'S CONTROL OVER LICENSED PRODUCTS. If PeopleSoft exercises its
License Option with respect to a Momentum Product, PeopleSoft will receive a
perpetual, worldwide, exclusive license to, among other things, market and
distribute that product. The right to market and distribute the Momentum Product
allows PeopleSoft to control the pricing of the product. PeopleSoft has no
minimum royalty obligation or any express obligation with respect to its
marketing and distribution effort. As a result, PeopleSoft may have substantial
control over the Net Revenues it receives from licensing the Momentum Product,
which may impact the Product Payments made by PeopleSoft to Momentum.
THE PURCHASE OPTION EXERCISE PRICE. The price at which PeopleSoft can
exercise the Purchase Option was determined by PeopleSoft alone and not through
arm's-length negotiations. PeopleSoft considered the following factors in making
its determination of the purchase price:
- how the Momentum Class A Common Stock will be distributed;
- Momentum's planned business;
- the terms of the Development Agreement and the Marketing Agreement;
- the advice of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") based on its experience in prior similar transactions;
and
- other factors it deemed appropriate.
Until the Purchase Option expires, the market value of the Momentum Class A
Common Stock will be limited by the Purchase Option Exercise Price.
PRODUCT COMPETITION. PeopleSoft may develop and/or market for its own
benefit products that compete directly with products that Momentum develops.
LEGAL REPRESENTATION. Wilson Sonsini Goodrich & Rosati, Professional
Corporation, has acted as legal counsel to both PeopleSoft and Momentum in
connection with the initial transactions described above.
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Subsequent to the spin out, Momentum appointed its own legal counsel, Gunderson
Dettmer, a firm with no prior relationship with PeopleSoft.
PEOPLESOFT'S APPROVAL IS REQUIRED FOR CERTAIN MOMENTUM CORPORATE ACTIONS
PeopleSoft owns all of the authorized shares of the Momentum Class B Common
Stock. As a result, Momentum will need to obtain PeopleSoft's consent to:
- merge, liquidate, transfer or encumber any substantial portion of its
assets;
- alter the terms of PeopleSoft's Purchase Option;
- change the authorized capitalization of Momentum; or
- amend the portions of Momentum's Certificate of Incorporation governing
the Board of Directors.
In addition, Momentum's Certificate of Incorporation prohibits Momentum from
taking or allowing any action inconsistent with, or that would in any way
adversely affect PeopleSoft's Purchase Option.
PeopleSoft's ability to control the matters listed above could adversely
affect the trading price and liquidity of the Momentum Class A Common Stock.
Also, PeopleSoft may be able to delay or prevent a change of control of
Momentum, even if such a change of control would be beneficial to Momentum's
stockholders. This could limit the price that certain investors might be willing
to pay for the Momentum Class A Common Stock in the future. The special rights
given to the holder of the Momentum Class B Common Stock will expire on the same
date that the Purchase Option expires.
RELIANCE ON PEOPLESOFT FOR RESEARCH AND DEVELOPMENT
Momentum's research and development is substantially performed outside
contractors, primarily PeopleSoft. Though PeopleSoft is not obligated to provide
research and development services to Momentum, Momentum expects it will do so
for so long as the Purchase Option is in effect. However, Momentum believes that
if the Purchase Option expires without being exercised that it is unlikely that
PeopleSoft will continue to provide research and development services. In
addition, even if PeopleSoft commits under a letter amendment to provide
development resources for a particular project, they may terminate their
involvement in such project at any time, for any reason or no reason, and
without penalty.
In such an instance, Momentum would have to either develop its own research
and development expertise or identify and contract with other third party
developers. Either option is likely to involve substantial expense and to delay
Momentum's product development efforts.
MOMENTUM PRODUCTS BASED ON PEOPLESOFT TECHNOLOGY; NO ASSURANCE OF COMPATIBILITY
WITH OTHER TECHNOLOGIES OR PRODUCTS
Momentum expects that the Momentum Products will be designed and built to
interface and be compatible with PeopleSoft's technology and products. As a
result, Momentum's ability to market the Momentum Products is dependent on
market acceptance of PeopleSoft's technologies, products and installed base of
customers. If Momentum wishes to develop products based on technologies and/or
for products other than PeopleSoft's, Momentum may need to incur substantial
development costs to ensure compatibility with such other technologies and/or
products. Momentum anticipates that PeopleSoft will not approve the use of
Available Funds for this purpose. Even if Momentum is able to fund these
development efforts, Momentum may be unable to develop products that are
compatible with technologies other than PeopleSoft's technology.
MOMENTUM FACES INTENSE COMPETITION
The market for business application software is intensely competitive.
Momentum believes it will face substantial competition from the large,
established providers of enterprise-wide application software as well as from
numerous smaller, more specialized software companies. Other than PeopleSoft,
SAP AG ("SAP"), Oracle Corporation ("Oracle"), Baan Company N.V. ("Baan") and
J.D. Edwards & Company
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("J.D. Edwards") are the major providers of enterprise-wide software. Momentum
believes that each of these companies has either launched initiatives or has the
technical, financial, and marketing capability to launch initiatives to develop
products that directly compete with the products Momentum intends to develop. In
addition, numerous well-established companies specialize in e-business products,
analytic applications or particular industry-specific applications. Almost all
of Momentum's competitors have substantially greater financial, technical and
marketing resources than those of Momentum. Furthermore, although Momentum
believes PeopleSoft does not intend to compete with it, PeopleSoft is free to do
so.
Momentum expects that any products developed by it will be commercialized
by other parties, most likely through PeopleSoft. Although PeopleSoft has
substantial market share in the enterprise-wide application software market, it
does not have a significant presence in the markets for e-business or analytic
application products or in any of the markets for which Momentum intends to
develop industry-specific application products. As a result, PeopleSoft may not
be able to compete successfully with the other large providers of
enterprise-wide application software or with the established specialized
software companies in these markets. Additionally, if Momentum commercializes
its products through third parties, such third parties may not have the
financial, technical and marketing resources to compete successfully with
Momentum's competitors.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy to enhance or accelerate its product
development efforts, Momentum may acquire or invest in complementary companies,
products or technologies or enter into joint ventures or strategic alliances
with other companies. Risks commonly encountered in such transactions include
the difficulty of assimilating the operations and personnel of the combined
companies, the potential disruption of Momentum's ongoing business, the
inability to retain key technical and managerial personnel, the inability of
management to maximize the financial and strategic position of Momentum through
the successful integration of the acquired business, decreases in reported
earnings as a result of charges for in-process research and development and
amortization of acquired intangible assets, dilution of existing equity holders,
difficulty in maintaining controls, procedures and policies, and the impairment
of relationships with employees and customers as a result of any integration of
new personnel. There can be no assurances that Momentum would be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments or joint ventures, or that such transactions
will not have an adverse effect on Momentum's business, financial condition and
results of operations. Because of the rights of PeopleSoft set forth in
Momentum's Certificate of Incorporation, Momentum cannot effectively make any
acquisitions without the prior approval of PeopleSoft.
LIMITATION ON LICENSES TO THIRD PARTIES
Momentum has granted PeopleSoft an option to obtain a perpetual, exclusive
license to market, distribute, sublicense, support and enhance any products that
Momentum develops under the Development Agreement. PeopleSoft's option with
respect to a particular product expires 30 days after that product becomes
Generally Available. Until that time, Momentum may not license such products to
any other party. As a result, Momentum may miss opportunities to license the
products it develops to third parties for higher royalty rates than those
PeopleSoft is obligated to pay. In addition, in the event that PeopleSoft
declines to exercise its License Option, the delay in Momentum's ability to
identify and enter into a licensing arrangement with a third party may adversely
affect the terms Momentum is eventually able to obtain from that third party.
LIMITED INTERNATIONAL CAPABILITY
Products developed by Momentum may have difficulty achieving broad market
penetration outside of North America. In order to commercialize software
application products outside of North America, Momentum or its third party
licensees may need to create localized versions of these products. Neither
Momentum nor its third party licensees may have sufficient resources or funding
to create, market and license localized versions of any of the products
developed by Momentum.
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In addition to the uncertainties related to commercializing Momentum's
products outside of North America, there are certain risks inherent in doing
business internationally. These risks include:
- compliance with regulatory requirements and changes in these
requirements;
- tariffs and other trade barriers;
- unfavorable pricing and price competition;
- currency fluctuations;
- longer payment cycles in some countries;
- difficulties in collecting international accounts receivable;
- difficulties in enforcing contractual obligations and intellectual
property rights;
- potentially adverse tax consequences;
- increased costs associated with maintaining international marketing
efforts and offices; and
- political instability.
Any one or all of these factors may adversely affect the commercialization of
Momentum's products outside of North America.
POTENTIAL INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS; LIMITED
PROTECTION OF MOMENTUM'S INTELLECTUAL PROPERTY RIGHTS
The products Momentum intends to develop may incorporate certain
technologies of PeopleSoft and other third parties. While Momentum intends to
obtain from third parties permission to use their technologies, Momentum's
activities could unintentionally infringe the patents, copyrights or other
intellectual property rights of others. Consequently, third parties may assert
infringement claims against Momentum with respect to its products. Any such
assertion could require Momentum to enter into royalty arrangements or could
result in costly litigation.
Momentum intends to rely on a combination of copyright, trade secret, and
patent laws and employee and third party non-disclosure agreements to protect
its intellectual property rights, including the features and design aspects of
its products. Such measures may not be sufficient to protect its rights, and
Momentum's competitors may independently develop technologies that are
substantially equivalent to or superior to Momentum's technology. Momentum may
from time to time become involved in litigation regarding the scope and validity
of its intellectual property rights. Any such litigation, whether or not
successful, could result in substantial costs to Momentum and diversion of
efforts by Momentum's management.
MODERATE TRADING MARKET FOR MOMENTUM CLASS A COMMON STOCK; STOCK PRICE MAY BE
VOLATILE
Momentum Class A Common Stock is currently traded on the Nasdaq National
Market. Consistent with the trading patterns of other companies that became
publicly traded in similar transactions, Momentum's trading volume in Momentum
Class A Common Stock has been moderate as investors assess Momentum's progress
in its development projects. However, the current trading volume may never
significantly increase or may not be sustained.
A number of factors may affect the price and liquidity of the Momentum
Class A Common Stock, including:
- actual or anticipated fluctuations in Momentum's operating results;
- changes in expectations as to Momentum's future financial performance or
changes in securities analysts' financial estimates;
- the operating and stock price performance of PeopleSoft;
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- the operating and stock price performance of other comparable companies;
and
- changes in investors' estimates of the likelihood, price and timing of
the possible exercise by PeopleSoft of its Purchase Option.
In addition, the Momentum Class A Common Stock may be followed by few, if
any, market analysts and there may be few institutions acting as market makers
for the Momentum Class A Common Stock. Either of these factors could adversely
affect the liquidity and trading price of the Momentum Class A Common Stock.
Although the trading price of the Company's common stock is not expected to
significantly fluctuate in the near term due to various contractual
arrangements, the stock market in general has experienced extreme price and
volume volatility that has especially affected the market prices of securities
of many high technology companies. At times, this volatility has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of the Momentum
Class A Common Stock, regardless of Momentum's actual operating performance.
MOMENTUM IS SUBJECT TO ANTI-TAKEOVER PROVISIONS
Certain provisions of Momentum's Certificate of Incorporation and Bylaws
could make it more difficult for a third party (other than PeopleSoft) to gain
control of Momentum, even if a change in control might be beneficial to
Momentum's stockholders. This could adversely affect the market price of the
Momentum Class A Common Stock. These provisions include:
- the elimination of the right of stockholders to act by written consent;
- the elimination of the right of stockholders to call special meetings of
the stockholders;
- the creation of a staggered Board of Directors;
- the ability of the Board of Directors to designate and issue Preferred
Stock without stockholder consent; and
- the ability of PeopleSoft to purchase the Momentum Class A Common Stock
pursuant to the Purchase Option.
As a result of its ownership of all the Momentum Class B Common Stock and
its rights pursuant to the Purchase Option, PeopleSoft's ability to acquire
Momentum is not materially limited by these provisions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14(a)(1)
and (2).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report
because the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's officers required by this Item is
included in the section in Part I hereof entitled "Management." The information
concerning the Company's directors required by this Item is incorporated by
reference to the Company's Proxy Statement under the heading "Election of
Directors." Information concerning the Company's officers, directors and 10%
shareholders compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to the information
29
<PAGE> 30
contained in the Company's Proxy Statement under the heading "Compliance with
Section 16(a) of the Exchange Act."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements of Momentum
Business Applications, Inc. are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-1
Covered by Report of Independent Auditors:
Balance Sheet............................................... F-2
Statement of Operations..................................... F-3
Statement of Stockholders' Equity........................... F-4
Statement of Cash Flows..................................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
2. Financial Statements Schedules. None. Schedules omitted were not
required.
3. Exhibits.
23.1 Consent of Ernst and Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MOMENTUM BUSINESS APPLICATIONS, INC.
By: /s/ RONALD E. F. CODD
------------------------------------
Ronald E. F. Codd
President and CEO
Dated: July 26, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald E. F. Codd, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any and all amendments to this Annual Report (Form 10-K) and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RONALD E. F. CODD President, Chief Executive July 26, 2000
-------------------------------------------------------- Officer and Director
Ronald E. F. Codd (Principal Executive,
Financial and Accounting
Officer)
/s/ CARLTON H. BAAB Director July 26, 2000
--------------------------------------------------------
Carlton H. Baab
/s/ ROBERT K. DAHL Director July 26, 2000
--------------------------------------------------------
Robert K. Dahl
/s/ STAN A. SWETE Director July 26, 2000
--------------------------------------------------------
Stan A. Swete
/s/ JEFFREY A. MILLER Director July 26, 2000
--------------------------------------------------------
Jeffrey A. Miller
</TABLE>
31
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Momentum Business Applications, Inc.
We have audited the accompanying balance sheets of Momentum Business
Applications, Inc. as of April 30, 1999 and 2000, and the related statements of
operations, stockholders' equity, and cash flows for the period from November 9,
1998 (inception) to April 30, 1999 and for the year ended April 30, 2000. 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 audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Momentum Business
Applications, Inc. at April 30, 1999 and 2000, and the results of its operations
and its cash flows for the period from November 9, 1998 (inception) to April 30,
1999 and for the year ended April 30, 2000, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Walnut Creek, California
May 19, 2000
F-1
<PAGE> 33
MOMENTUM BUSINESS APPLICATIONS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)........................ $253,867 $228,218
Accounts receivable from PeopleSoft....................... -- 563
Income taxes receivable................................... -- 224
Deferred income taxes..................................... 35 --
-------- --------
Total current assets.............................. 253,902 229,005
Non-current deferred income taxes........................... 29 --
Capitalized software, less accumulated amortization......... -- 432
-------- --------
Total assets...................................... $253,931 $229,437
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to PeopleSoft..................................... $ 2,812 $ 20,677
Accounts payable.......................................... 18 36
Accrued liabilities....................................... 71 264
Accrued compensation and related expenses................. 34 29
Income taxes payable...................................... 492 --
-------- --------
Total current liabilities......................... 3,427 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 earnings (accumulated deficit)................... 503 (41,570)
-------- --------
Total stockholders' equity........................ 250,504 208,431
-------- --------
Total liabilities and stockholders' equity........ $253,931 $229,437
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 34
MOMENTUM BUSINESS APPLICATIONS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 9, 1998
(INCEPTION) YEAR ENDED
TO APRIL 30, 1999 APRIL 30, 2000
----------------- --------------
<S> <C> <C>
Revenues from PeopleSoft.................................... $ -- $ 563
Costs and expenses primarily from PeopleSoft:
Cost of revenues.......................................... -- 54
Product development....................................... 2,569 54,099
General and administrative................................ 408 1,434
------- --------
Total costs and expenses.......................... 2,977 55,587
------- --------
Operating loss.............................................. (2,977) (55,024)
Interest income............................................. 3,908 12,778
------- --------
Income (loss) before income taxes........................... 931 (42,246)
Provision for (benefit from) income taxes................... 428 (173)
------- --------
Net income (loss)........................................... $ 503 $(42,073)
======= ========
Basic and diluted earnings (loss) per share................. $ 0.15 $ (8.96)
======= ========
Weighted average shares outstanding used in basic and
diluted per share computation............................. 3,312 4,695
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 35
MOMENTUM BUSINESS APPLICATIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock (par value $.001 per
share) upon dividend distribution by
PeopleSoft to holders of PeopleSoft, Inc.
stock and capital contribution by
PeopleSoft................................... 4,695 $ 5 $249,996 $ -- $250,001
Conversion of Common Stock into 1,000 shares of
Class B Common Stock upon dividend
distribution by PeopleSoft................... -- -- -- -- --
Net income and comprehensive income.......... -- -- -- 503 503
----- --- -------- -------- --------
Balances at April 30, 1999..................... 4,695 5 249,996 503 250,504
----- --- -------- -------- --------
Net loss and comprehensive loss.............. -- -- -- (42,073) (42,073)
----- --- -------- -------- --------
Balances at April 30, 2000..................... 4,695 $ 5 $249,996 $(41,570) $208,431
===== === ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 36
MOMENTUM BUSINESS APPLICATIONS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 9,
1998
(INCEPTION) YEAR ENDED
TO APRIL 30, 1999 APRIL 30, 2000
----------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 503 $(42,073)
Amortization of capitalized software........................ -- 54
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for deferred income taxes....................... (64) 64
Changes in operating assets and liabilities:
Accounts receivable from Peoplesoft.................... -- (563)
Income taxes receivable................................ -- (224)
Payable to PeopleSoft.................................. 2,812 17,865
Accounts payable....................................... 18 18
Accrued liabilities.................................... 71 193
Accrued compensation and related expenses.............. 34 (5)
Income taxes payable................................... 492 (492)
-------- --------
Net cash provided (used) by operating activities............ 3,866 (25,163)
INVESTING ACTIVITIES
Capitalization of software development costs................ -- (486)
-------- --------
Net cash used by investing activities....................... -- (486)
FINANCING ACTIVITIES
Capital contribution by PeopleSoft.......................... 250,000 --
Issuance of common stock.................................... 1 --
-------- --------
Net cash provided by financing activities................... 250,001 --
-------- --------
Net increase in cash and cash equivalents................... 253,867 (25,649)
Cash and cash equivalents at beginning of period............ -- 253,867
-------- --------
Cash and cash equivalents at end of period.................. $253,867 $228,218
======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 37
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Momentum Business Applications, Inc., ("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, 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.
Momentum incurred research and development expenses of approximately $54.1
million for the year ended April 30, 2000 and $2.6 million for the period from
November 9, 1998 (inception) to April 30, 1999. Research and development
expenses have totaled approximately $56.7 million for the period from November
9, 1998 (inception) to April 30, 2000.
Accounting for Revenues and Expenses
At April 30, 2000, Momentum's revenue consisted primarily of royalty
revenue derived from PeopleSoft's initial sales and licensing of certain
software products developed under the Development and License Agreement between
Momentum and PeopleSoft. Royalty and other product revenue is recorded as earned
when it is 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 6 for a description of the agreements between Momentum and
PeopleSoft).
Investment Risk
Momentum invests excess cash in money market funds and financial
instruments with financial institutions with strong credit ratings. These funds
and investments typically bear minimal risk and Momentum 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 April 30, 2000, cash
equivalents ($228.2 million) consisted primarily of taxable investments in money
market funds at two financial institutions. All other cash is held in a bank
demand deposit. All of the Company's cash and cash equivalents at April 30, 2000
are restricted for use under the Development Agreement (see Note 6).
Accounts Receivable
Accounts receivable are comprised of billed receivables arising from
recognized license 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.
F-6
<PAGE> 38
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
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.
Capitalized software development costs and accumulated amortization at
April 30, 2000 were $0.5 million and $0.1 million respectively.
2. PER SHARE DATA
The Company's earnings (loss) per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
method requires calculation of both a basic earnings (loss) per share and a
diluted earnings (loss) per share. The basic earnings (loss) per share excludes
the dilutive effect of common stock equivalents such as stock options and
warrants, while the diluted earnings (loss) per share includes such dilutive
effects. Although Momentum has outstanding stock options, they are not currently
dilutive common stock equivalents and thus diluted earnings (loss) per share
equals basic earnings (loss) per share.
The earnings (loss) per share amount has been computed using the weighted
average number of common shares outstanding for the period. Substantially all of
Momentum's common stock was issued on December 31, 1998 and thus was outstanding
for only the last four months of the period from November 9, 1998 (inception) to
April 30, 1999. The $250 million contributed by PeopleSoft was only invested
during the last four months of the same period. Had the shares been outstanding
for the entire period or the cash invested for the entire period, the resulting
earnings (loss) per share would have been different from the actual results
achieved.
3. STOCKHOLDERS' EQUITY
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
F-7
<PAGE> 39
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
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.
On all other matters, holders of the Momentum Class A Common Stock and Momentum
Class B Common Stock 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.
1999 Stock Incentive Plan
Momentum has a stock incentive plan administered by the Compensation
Committee of the Board of Directors under which 225,000 shares of Momentum Class
A Common Stock have been reserved for issuance to employees, consultants and
directors. During the year ended April 30, 2000, options to purchase 100,000
shares were granted to Momentum's president and chief executive officer at an
exercise price of $12.00 per share. Three of the four remaining members of
Momentum's Board of Directors were each granted options to purchase 25,000
shares at an exercise price of $12.00 per share. All outstanding options have an
exercise price equal to no less than 100% of the fair market value of Momentum's
Class A Common Stock on the date of the grant and in no event may the exercise
price be less than $12.00 per share. The Compensation Committee determines the
number of options included in an award as well as the vesting and other
conditions. All or any part of the options are exercisable at any time after the
date of grant, subject to a right of repurchase at the original purchase price,
which lapses at a monthly rate of 2.78% of the shares subject to the option
beginning with the first month of the Director's first term, or the first month
of employment of any employee. The options expire seven years after the date of
grant. No stock options were exercised as of April 30, 2000.
Stock-based Compensation
As permitted under SFAS 123, the Company has elected to follow APB Opinion
No. 25 in accounting for stock-based awards to employees. Under APB Option No.
25, the Company generally recognizes no compensation expense with respect to
such awards, since the exercise price of the stock options granted are equal to
no less than 100% of the fair market value of the underlying security on the
grant date.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated as of the date of the grant using a Black-Scholes option
pricing model. Limitation on the effectiveness of the Black-Scholes option
valuation model are that it was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable
and that the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair market value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees. For the Fiscal 2000 year, fair value of the
Company's
F-8
<PAGE> 40
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
stock-based awards to employees was estimated assuming no expected dividends and
the following weighted-average assumptions:
OPTIONS
<TABLE>
<S> <C>
Expected life (in years).............................. 5.50
Expected volatility................................... 0.65
Risk-free interest rate............................... 5.93%
</TABLE>
The Company's pro forma information follows (in thousands except for income
per share information);
<TABLE>
<S> <C>
Net loss
As reported..................................... $(42,073)
Pro forma....................................... $(42,372)
Basic and diluted loss per share
As reported..................................... $ (8.96)
Pro forma....................................... $ (9.02)
</TABLE>
The weighted average fair value of all options granted during Fiscal 2000
was $5.19 per share.
Combined Option Activity
Option activity under the 1999 Stock Incentive Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE SHARES
---------------- -------
<S> <C> <C>
Balance at January 4, 1999......................... $ -- --
Granted.......................................... -- --
Exercised........................................ -- --
Cancelled........................................ -- --
------ -------
Balance at April 30, 1999.......................... $ -- --
Granted.......................................... 12.00 175,000
Exercised........................................ -- --
Cancelled........................................ -- --
------ -------
Balance at April 30, 2000.......................... $12.00 175,000
</TABLE>
At April 30, 2000, options to purchase 175,000 shares were exercisable and
options for 50,000 shares were available for grant under the 1999 Stock
Incentive Plan. The following table summarizes the significant ranges of
outstanding and exercisable options as of April 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING LIFE AVERAGE AVERAGE
PRICE RANGE SHARES (IN YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
----------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0 - 12.00 175,000 6.4 $12.00 175,000 $12.00
</TABLE>
4. RETIREMENT PLAN
On January 1, 2000, Momentum's Board of Directors approved a Simplified
Employee Pension Plan ("SEP") for its employees. All full-time employees of
Momentum are eligible to participate in the plan. An Individual Retirement
Account ("IRA") must be used in conjunction with the SEP. Under the terms of the
SEP, the Company will contribute to each participating employee's IRA account an
amount which is the
F-9
<PAGE> 41
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
lesser of the maximum allowable statutory contribution or 15% of their annual
salary. Company contributions to the SEP shall be made in semi-annual
installments on June 30 and December 31, directly into the participating
employee's IRA account. The Company's contribution shall be allocated to each
participating employee in accordance with the Proportionate Compensation Formula
as set forth by the terms of the SEP. Momentum has not made any contributions to
the SEP as of April 30, 2000.
5. INCOME TAXES
The provision (benefit) for the period from November 9, 1998 (inception) to
April 30, 1999 and the year ended April 30, 2000 consisted of the following
components (in thousands):
<TABLE>
<CAPTION>
1999 2000
---- -----
<S> <C> <C>
Current:
Federal................................................... $390 $(238)
State..................................................... 102 1
---- -----
492 (237)
---- -----
Deferred:
Federal................................................... (64) 64
State..................................................... 0 0
---- -----
(64) 64
---- -----
Total provision for (benefit from) income tax............... $428 $(173)
==== =====
</TABLE>
The provision for (benefit from) income taxes differs from the amount
computed by applying the federal statutory income tax rate to the Company's
income before taxes as follows for the period from November 9, 1998 (inception)
to April 30, 1999 and the year ended April 30, 2000 (in thousands):
<TABLE>
<CAPTION>
1999 2000
---- --------
<S> <C> <C>
Income tax provision (benefit) at federal statutory
rate.................................................... $317 $(14,510)
State income tax, net of federal tax effect............... 67 1
Change in valuation allowance............................. 44 14,336
---- --------
Provision for (benefit from) income taxes................. $428 $ (173)
==== ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes consisted of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1999 2000
---- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss....................................... $ -- $14,322
Capitalized start-up expenditures........................ 74 58
State Taxes.............................................. 34 --
---- -------
Total deferred tax assets........................ 108 14,380
Valuation allowance........................................ (44) (14,380)
---- -------
Net deferred tax asset..................................... $ 64 $ --
Recorded as:
Current deferred tax assets.............................. $ 35 $ --
Noncurrent deferred tax assets........................... 29 --
---- -------
Total net deferred tax asset..................... $ 64 $ --
==== =======
</TABLE>
F-10
<PAGE> 42
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
Deferred tax assets are classified in the balance sheet consistent with the
classification of the related asset. For the period from November 9, 1998
(inception) to April 30, 1999, a valuation allowance was established against a
portion of the deferred tax asset related to capitalized start-up expenditures
due to uncertainty regarding its realizability with realization being based upon
refundable taxes paid in the current year. For the tax year ended April 30,
2000, a full valuation allowance has been established as realization of the
deferred tax assets is not assured due to the uncertainty of future taxable
earnings.
6. 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. 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 and License Agreement (the "Development Agreement"),
Marketing and Distribution Agreement and Services Agreement, 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. For the year ended April 30, 2000, PeopleSoft performed development
activities on behalf of Momentum in the amount of $54,099,000.
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 equal to 1% of net
sales of the licensed product by PeopleSoft and its sublicensees, distributors
and marketing partners, plus an additional 0.1% of such net sales 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.
F-11
<PAGE> 43
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
Under the terms of the Services agreement, Momentum will pay PeopleSoft
$100,000 per quarter to perform accounting, finance, human resources,
information systems and legal services on its behalf. PeopleSoft began
performing these services in November 1998 and has charged Momentum $600,000
through April 30, 2000 for such services.
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:
(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.
F-12
<PAGE> 44
MOMENTUM BUSINESS APPLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
Summarized quarterly supplemental financial information for Fiscal 2000 and
the period from November 9, 1998 (inception) to April 30, 1999 are as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31 APRIL 30,
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
2000
Total revenues.................................. $ -- $ -- $ 249 $ 314
Operating loss.................................. (5,342) (9,982) (13,997) (25,703)
Net loss........................................ (2,177) (6,804) (10,721) (22,371)
Basic and diluted loss per share................ $ (0.46) $ (1.45) $ (2.28) $ (4.77)
Shares used in basic and diluted per share
computation................................... 4,695 4,695 4,695 4,695
1999
Total revenues.................................. -- -- $ -- $ --
Operating loss.................................. -- -- (116) (2,861)
Net income (loss)............................... -- -- 709 (206)
Basic and diluted earnings (loss) per share..... -- -- $ 0.43 $ (0.04)
Shares used in basic and diluted per share
computation................................... -- -- 1,634 4,695
</TABLE>
F-13
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
27.1 Financial Data Schedule.....................................
</TABLE>
