<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 8-K/A
_____________
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 12, 2000
MAPICS, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Georgia 000-18674 04-2711580
(State or other jurisdiction (Commission File Number) (IRS Employer Identification No.)
of incorporation)
</TABLE>
1000 Windward Concourse Parkway, Suite 100
Alpharetta, Georgia 30005
(Address of Principal Executive Offices)
678-319-8000
(Registrant's telephone number, including area code)
Page 1 of 42
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<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
This Current Report on Form 8-K/A is filed to amend our Current Report
on Form 8-K dated January 12, 2000 pursuant to Item 7(a)(4) and Item 7(b)(2) of
Form 8-K.
(a) Financial Statements of Business Acquired
The following unaudited interim financial statements of Pivotpoint, Inc.
("Pivotpoint") are included in this Report:
Unaudited Consolidated Balance Sheet as of December 31, 1999
Unaudited Consolidated Statement of Operations for the year
ended December 31, 1999
Unaudited Consolidated Statement of Cash Flows for the year
ended December 31, 1999
Unaudited Consolidated Statement of Stockholders' Deficit for
the year ended December 31, 1999
Notes to Unaudited Consolidated Financial Statements
The following audited financial statements of Pivotpoint are included in
this Report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997
Consolidated Statements of Stockholders' Deficit for the years
ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma financial information of MAPICS, Inc.
("MAPICS") is included in this Report:
Basis of Presentation
Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999
Unaudited Pro Forma Condensed Combined Statement of Operations
for the three months ended December 31, 1999
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended September 30, 1999
Notes to Unaudited Pro Forma Condensed Combined Financial
Information
2
<PAGE>
(c) Exhibits
The following exhibits were filed with our Current Report on Form 8-K
dated January 12, 2000 or are filed with this Report:
2.1 Agreement and Plan of Merger dated as of December 15, 1999, by
and among MAPICS, Inc., MAPICS Merger Corp., and Pivotpoint, Inc.
(incorporated herein by reference to Exhibit 2.2 to MAPICS,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
September 30, 1999).
2.2 List of omitted schedules and exhibits to the Agreement and Plan
of Merger filed as Exhibit 2.1 to this Report. We agree to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.
3
<PAGE>
Pivotpoint, Inc.
Consolidated Financial Statements
For the Year Ended December 31, 1999
4
<PAGE>
Pivotpoint, Inc.
Consolidated Balance Sheet (Unaudited)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,447,689
Accounts receivable, net of allowance for doubtful accounts of $444,180 2,823,761
Other current assets 311,721
------------
Total current assets 5,583,171
Fixed assets, net 688,226
Goodwill, net 6,914,953
Other assets, net 127,818
------------
Total assets $ 13,314,168
------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 7,741,501
Current portion of amount due for purchases of Company 300,000
Accounts payable 1,692,607
Accrued compensation 1,239,420
Other accrued expenses 3,078,064
Interest payable 1,878,508
Deferred revenue 6,936,160
------------
Total current liabilities 22,866,260
Series B Redeemable Preferred Stock, $0.01 par value; 31,849 shares authorized;
31,849 shares issued and outstanding ($34,072,641 liquidation preference at
December 31, 1999) 35,641,377
Series A Convertible Participating Preferred Stock, $0.01 par value; 161,000
shares authorized, 161,000 shares issued and outstanding ($19,290,514
liquidation preference at December 31, 1999) 15,613,532
Series C Convertible Preferred Stock, $0.01 par value; 552,126 shares
authorized; 552,126 shares issued and outstanding ($2,837,928 liquidation
preference at December 31, 1999) 2,837,928
Stockholders' deficit:
Undesignated preferred stock, $0.01 par value; 255,025 authorized; none
issued and outstanding -
Common stock, $0.01 par value; 21,500,000 shares authorized, 3,250,404
shares issued and outstanding 32,504
Additional paid-in capital 1,093,209
Accumulated deficit (64,770,642)
-----------
Total stockholders' deficit (63,644,929)
------------
Total liabilities and stockholders' deficit $ 13,314,168
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Pivotpoint, Inc.
Consolidated Statement of Operations (Unaudited)
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues:
Software licenses $ 6,568,033
Services 16,527,458
Other 1,081,320
--------------
Total revenues 24,176,811
Costs of revenues:
Costs of software licenses 1,378,357
Costs of services 9,460,792
Costs of other 904,144
--------------
Total costs of revenues 11,743,293
--------------
Gross margin 12,433,518
Operating expenses:
Research and development 3,061,411
Selling and marketing 5,349,702
General and administrative 2,049,421
--------------
Total operating expenses 10,460,534
--------------
Income from operations 1,972,984
Interest income 184,771
Interest expense (4,292,380)
--------------
Loss before provision for income taxes (2,134,625)
Provision for income taxes -
--------------
Net loss (2,134,625)
Accretion on preferred stock 1,630,896
--------------
Net loss attributable to common shareholders $ (3,765,521)
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Pivotpoint, Inc.
Consolidated Statement of Cash Flows (Unaudited)
For the Year Ended December 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (2,134,625)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 674,630
Changes in operating assets and liabilities, net of acquired companies:
Decrease in accounts receivable 673,113
(Increase) in other current assets (186,278)
Increase in accounts payable 270,566
(Decrease) in accrued compensation (17,525)
(Decrease) in other accrued expenses (576,012)
Increase in interest payable 3,760,683
Increase in deferred revenue 129,024
-------------
Net cash provided by operating activities 2,593,576
-------------
Cash flows from investing activities:
Purchases of fixed assets (388,007)
Payments related to acquisitions (1,246,747)
-------------
Net cash used in investing activities (1,634,754)
-------------
Cash flows from financing activities:
Payments on debt (3,481,329)
Proceeds from the exercise of stock options 35,503
-------------
Net cash used in financing activities (3,445,826)
-------------
(Decrease) in cash and cash equivalents (2,487,004)
Cash and cash equivalents, beginning of year 4,934,693
-------------
Cash and cash equivalents, end of year $ 2,447,689
=============
Supplemental disclosures of cash flow information:
Income taxes paid $ -
Interest paid $ 395,879
Supplemental disclosure of noncash investing and financing activities:
Accretion to redemption value of Series A Convertible Participating
Preferred Stock $ 1,504,977
Issuance of Series B Redeemable Preferred Stock in exchange for debt,
interest and dividends $ 35,515,458
Accretion to redemption value of Series B Redeemable Preferred Stock $ 125,919
Issuance of Series C Convertible Preferred Stock for purchase of acquired
companies $ 2,837,928
Issuance of common stock for purchase of acquired companies $ 1,154,252
Issuance of a note for purchase of acquired companies $ 300,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Pivotpoint, Inc.
Consolidated Statement of Stockholders' Deficit (Unaudited)
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Additional
Number of Par paid-in Accumulated Stockholders'
shares value capital deficit deficit
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 2,060,212 $ 20,602 $ - $(61,153,006) $(61,132,404)
Exercise of common stock options 35,940 359 35,144 35,503
Acquisition of Sofwave, Inc. 50,000 500 49,500 50,000
Accretion to redemption value of
Series A Convertible Participating
Preferred Stock (84,644) (1,420,333) (1,504,977)
Compensation expense related to issuance of
stock options 63,241 63,241
Accretion to redemption value of
Series B Redeemable Preferred Stock (63,241) (62,678) (125,919)
Issuance of common stock in acquisition of Thru-Put
Technologies, Inc. 1,104,252 11,043 1,093,209 1,104,252
Net loss (2,134,625) (2,134,625)
--------- --------- ----------- ------------ ------------
Balance at December 31, 1999 3,250,404 $ 32,504 $ 1,093,209 $(64,770,642) $(63,644,929)
========= ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
A. Basis of Presentation
The accompanying unaudited consolidated financial statements of Pivotpoint,
Inc. and its subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles. They do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. For further
information, refer to the audited consolidated financial statements of the
Company for the year ended December 31, 1998.
B. Recapitalization and Debt
On December 2, 1999, the Company completed an Exchange Agreement with
certain holders of the Company's Subordinated Promissory Notes (the
"Notes") who are also holders of all of the Series A Convertible
Participating Preferred Stock (collectively the "Investors") and the
founders of the Company, who hold the remaining balance of the Notes (the
"Founders"). Under this agreement, the Investors agreed to exchange all of
their outstanding Notes, which aggregated $16,100,000, accrued interest on
the Notes and accreted dividends on the Series A Convertible Preferred
Stock for 28,920.118 shares of Series B Redeemable Preferred Stock. Also,
the Founders agreed to exchange all of their outstanding Notes, which
aggregated $2,000,000, and accrued interest on the Notes for 2,928.552
shares of Series B Redeemable Preferred Stock. No gain or loss was
recorded in connection with this exchange.
During 1999, the Company extended its forbearance agreement related to its
term loan with a bank. The latest agreement extended the forbearance
period to December 1, 2000. The interest rate on the outstanding debt was
modified to equal the LIBOR rate plus three percent. Principal payments
are required to be made quarterly in four equal payments beginning on March
1, 2000. Under this extension, the Company is subject to a late fee of
$170,000, which will be waived by the Lender upon satisfactory execution of
this agreement. This extension further provided consent for the
recapitalization of the Company and the acquisition of Thru-Put
Technologies, Inc. in 1999. The outstanding balance of the Term Loan at
December 31, 1999 of $2,720,000 has been classified as a current liability.
C. Acquisitions
In accordance with an Asset Purchase Agreement dated October 18, 1999, the
Company acquired certain assets and assumed certain liabilities of Sofwave,
Inc. ("Sofwave"), a North Carolina corporation specializing in software
packages providing maintenance, calibration, and facility management, in
exchange for $470,000 in cash, to be paid over one year, and 50,000 shares
of the Company's common stock. The Company determined the fair value of
the common stock to be $1.00 per share.
The Company accounted for the Sofwave transaction, which was completed on
November 1, 1999, under the purchase method of accounting. Accordingly,
the purchase price was allocated based on the estimated fair value of
assets purchased and liabilities assumed upon acquisition. The excess of
cost over the fair value of net assets acquired (goodwill) of $520,000 is
being amortized over the estimated useful life of three years on a
straight-line basis. The Company's results of operations include the
operating results of Sofwave from November 1, 1999 to December 31, 1999.
Pro forma results for this transaction are not required.
9
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
In accordance with a Purchase and Sale Agreement dated December 7, 1999,
the Company acquired certain assets and assumed certain liabilities of
Thru-Put Technologies, Inc. ("Thru-Put"), a California corporation which
designs, develops and markets software products for the manufacturing
industry, in exchange for 1,104,252 shares of the Company's common stock
and 552,126 shares of the Company's newly created Series C Convertible
Preferred Stock. The Company determined the fair value of the common stock
to be $1.00 per share and the fair value of the Series C Convertible
Preferred Stock to be $5.14 per share.
The Company accounted for the Thru-Put transaction, which was completed on
December 30, 1999, under the purchase method of accounting. Accordingly,
the purchase price was allocated on a preliminary basis based on the
estimated fair value of assets purchased and liabilities assumed upon
acquisition. The excess of cost over the fair value of assets acquired
(goodwill) is being amortized over the estimated useful life of three years
on a straight-line basis. As the acquisition was completed on December 30,
1999, the results of operations of the combined company do not materially
differ from the results of operations of the Company for the year ended
December 31, 1999.
A summary of the acquisition follows:
<TABLE>
<S> <C>
Common stock $ 1,104,252
Series C Convertible Preferred Stock 2,837,928
Transaction costs 316,983
------------
Total consideration paid 4,259,163
Estimated assets acquired 1,140,661
Estimated liabilities assumed (3,306,451)
------------
Estimated net liabilities assumed (2,165,790)
------------
Excess of purchase price over fair value of net liabilities assumed $ 6,424,953
============
</TABLE>
The following pro forma results of operations have been prepared as though
the acquisition of Thru-Put had occurred as of the beginning of the fiscal
year prior to the acquisitions. This pro forma financial information does
not purport to be indicative of the results of operations that would have
been attained had the acquisition been made as of that date or of results
of operations that may occur in the future:
Year Ended
December 31,
1999 1998
Revenues $ 29,527,364 $ 29,480,002
Net loss (8,009,584) (6,539,779)
10
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
D. Equity
Series B Redeemable Preferred Stock
In December 1999, as part of the recapitalization of the Company described
above, the Company authorized and issued 31,848.67 shares of Series B
Redeemable Preferred Stock (the "Redeemable Preferred Stock"). The
Redeemable Preferred Stockholders have the following rights and privileges:
Redemption
On January 1, 2001, the Company is obligated to redeem all of the then
outstanding shares of the Redeemable Preferred Stock. Further, the
Company will automatically be obligated to redeem each share of the
Redeemable Preferred Stock upon a Liquidation Event, as defined in the
terms to the Redeemable Preferred Stock, or upon the closing of an
initial public offering of the Company's common stock at a pre-
offering valuation of at least $120,000,000 and in which the proceeds
received by the Company equal or exceed $25,000,000. The redemption
price for each share shall be the per share redemption liquidation
preference amount calculated, as defined in the terms to the
Redeemable Preferred Stock.
Dividends
The holders of outstanding shares of Redeemable Preferred Stock shall
be entitled to receive cumulative dividends at a rate of 10% per year
based on $1,000 per share. Such dividends will accumulate and compound
quarterly as of each June 30, September 30, December 31 and March 31
of each year beginning June 30, 1999. Until the Redeemable Preferred
Stock dividends are paid in full, no dividend can be declared or paid
on common stock or other capital stock of the Company.
Voting Rights
None.
Liquidation Preferences
In the event of liquidation, dissolution, merger, sale or winding up
of the Company, the holders of the Redeemable Preferred Stock are
entitled to receive, prior to and in preference to the holders of
common stock and any other capital stock, an amount equal to $1,000
per share plus any accumulated but unpaid dividends. Series A
Convertible Participating Preferred Stock and Series C Convertible
Preferred Stock rank junior to shares of the Company's Series B
Redeemable Preferred Stock.
Series C Convertible Preferred Stock
As part of the acquisition of Thru-Put, Inc., the Company authorized and
issued 552,126 shares of preferred stock, all of which were designated as
Series C Convertible Preferred Stock (the "Series C Preferred Stock"). The
Series C Preferred Stockholders have the following rights and privileges:
Conversion
Each share of Series C Preferred Stock is convertible, at the option
of the holder, into two shares of common stock of the Company. Each
share of Series C Preferred Stock will automatically convert into two
shares of common stock upon the closing of an initial public offering
of the Company's common stock at a pre-offering valuation of at least
$120,000,000, and in which the proceeds received by the Company equal
or exceed $25,000,000.
11
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Dividends
None.
Voting Rights
None.
Liquidation Preferences
In the event of liquidation, dissolution, merger, sale or winding up
of the Company, the holders of the Series C Preferred Stock are
entitled to receive, prior to and in preference to the holders of
common stock, an amount equal to $5.14 per share. The Series C
Preferred Stock ranks junior to shares of the Company's Series B
Redeemable Preferred Stock and on a par with the Company's Series A
Convertible Participating Preferred Stock.
E. Deferred Payment Agreement
During the year ended December 31, 1999, the Company entered into a
Deferred Payment Agreement (the "Agreement") with the Company's Chief
Executive Officer ("CEO"), whereby upon an initial public offering, a sale
or disposition of all or substantially all of the Company's assets, a
merger, consolidation or reorganization of the Company or upon liquidation,
dissolution or winding up of the Company, the Company shall pay the CEO an
amount, the Deferred Payment Amount, equal to two percent of the sum of the
Liquidation Proceeds, as defined in the Agreement, and the Deferred Payment
Amount, subject to employment of the CEO by the Company.
F. Contingencies
The Internal Revenue Service is presently engaged in an audit of the
Company's 1995 and 1994 tax years. The results of these examinations are
not expected to have a material impact on the Company's financial
statements although they may result in some reduction of certain
carryforward items.
G. Comprehensive Income
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the year ended
December 31, 1999 does not differ from the reported net loss.
12
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
H. Segment Reporting
The Company considers that it has the following four reportable operating
segments based on differences in products and services. Operating segments
are defined as components of the enterprise about which separate financial
information is available that is reviewed regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate
resources and in assessing their performance.
<TABLE>
<CAPTION>
1999
Gross
Operating Segments Revenue Margin
<S> <C> <C>
Software licenses $ 6,568,033 $ 5,189,676
Professional services 6,696,123 769,650
Maintenance 9,831,335 6,297,016
Other 1,081,320 177,176
------------ ------------
$ 24,176,811 $ 12,433,518
============ ============
</TABLE>
I. Subsequent Event
On January 12, 2000, the Company was acquired by MAPICS, Inc. in a purchase
transaction for a total of $48.0 million in cash.
13
<PAGE>
Pivotpoint, Inc.
Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
14
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Pivotpoint, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Pivotpoint, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note M to the financial statements, the Company was acquired by
MAPICS, Inc. on January 12, 2000.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2000
15
<PAGE>
Pivotpoint, Inc.
Consolidated Balance Sheets
As of December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,934,693 $ 3,395,031
Accounts receivable, net of allowance for doubtful accounts of
$380,671 and $649,156 at December 31, 1998 and 1997,
respectively 2,627,013 2,819,575
Other current assets 125,443 123,416
------------ -------------
Total current assets 7,687,149 6,338,022
Fixed assets, net 474,990 1,038,583
Other assets, net 263,636 395,377
------------ -------------
Total assets $ 8,425,775 $ 7,771,982
============ =============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 6,771,301 $ 9,950,225
Current portion of amount due for purchases of sales affiliates 264,000 1,123,000
Accounts payable 1,128,918 1,444,393
Accrued compensation 863,469 1,788,917
Other accrued expenses 2,720,953 3,452,653
Interest payable 9,575,784 5,875,339
Deferred revenue 5,867,500 6,182,895
------------ -------------
Total current liabilities 27,191,925 29,817,422
Long-term debt 22,300,200 21,600,000
Commitments and contingencies (Notes E and G)
Series A Convertible Participating Preferred Stock, $0.01 par value;
1,000,000 shares authorized, 161,000 issued and outstanding
($20,552,522 liquidation preference at December 31, 1998) 20,066,054 18,543,645
Stockholders' deficit:
Common stock, $0.01 par value; 21,500,000 shares authorized,
2,060,212 and 2,012,699 shares issued and outstanding at
December 31, 1998 and 1997, respectively 20,602 20,127
Additional paid-in capital - -
Accumulated deficit (61,153,006) (62,209,212)
------------ -------------
Total stockholders' deficit (61,132,404) (62,189,085)
------------ -------------
Total liabilities and stockholders' deficit $ 8,425,775 $ 7,771,982
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
Pivotpoint, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues:
Software licenses $ 6,427,861 $ 5,920,697
Services 15,476,178 18,404,218
Other 615,963 591,715
-------------- ------------
Total revenues 22,520,002 24,916,630
Costs of revenues:
Costs of software licenses 1,112,976 738,266
Costs of services 7,720,087 9,674,429
Costs of other 248,494 282,579
-------------- ------------
Total costs of revenues 9,081,557 10,695,274
-------------- ------------
Gross margin 13,438,445 14,221,356
Operating expenses:
Research and development 2,559,735 4,003,397
Selling and marketing 3,090,202 6,968,498
General and administrative 1,312,722 2,947,654
Nonrecurring charges (Note K) - 1,492,772
-------------- ------------
Total operating expenses 6,962,659 15,412,321
-------------- ------------
Income (loss) from operations 6,475,786 (1,190,965)
Interest income 201,883 59,030
Interest expense (4,471,326) (4,156,474)
-------------- ------------
Income (loss) before provision for income taxes and
extraordinary gain 2,206,343 (5,288,409)
Provision for income taxes 22,888 3,222
-------------- ------------
Income (loss) before extraordinary gain 2,183,455 (5,291,631)
Extraordinary gain (Note H) 360,000 -
-------------- ------------
Net income (loss) 2,543,455 (5,291,631)
Accretion on preferred stock 1,522,409 1,409,638
-------------- ------------
Net income (loss) attributable to common stockholders $ 1,021,046 $ (6,701,269)
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Pivotpoint, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,543,455 $ (5,291,631)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 807,909 2,180,442
Other non-cash items (28,924) -
Extraordinary (gain) on forgiveness of debt (360,000) -
(Gain) on sale of fixed assets - (14,502)
Loss on disposal of fixed assets - 2,154
Changes in operating assets and liabilities:
Decrease in accounts receivable 192,562 4,192,506
(Increase) decrease in other current assets (2,027) 45,681
(Decrease) in accounts payable (346,725) (2,357,512)
(Decrease) in accrued compensation (200,248) (510,471)
(Decrease) in other accrued expenses (756,700) (153,047)
Increase in interest payable 3,700,445 2,917,859
(Decrease) in deferred revenue (315,395) (1,245,820)
------------ ------------
Net cash provided by (used in) operating activities 5,234,352 (234,341)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (112,575) (175,038)
Proceeds from sale of fixed assets - 65,000
Payments for acquired companies (467,750) (192,000)
------------ ------------
Net cash used in investing activities (580,325) (302,038)
------------ ------------
Cash flows from financing activities:
Payments on debt (3,150,000) (900,000)
Proceeds from issuance of long-term debt - 3,500,000
Debt issuance costs - (50,000)
Proceeds from the exercise of stock options 35,635 138,750
------------ ------------
Net cash provided by (used in) financing activities (3,114,365) 2,688,750
------------ ------------
Increase in cash and cash equivalents 1,539,662 2,152,371
Cash and cash equivalents, beginning of year 3,395,031 1,242,660
------------ ------------
Cash and cash equivalents, end of year $ 4,934,693 $ 3,395,031
============ ============
Supplemental disclosures of cash flow information:
Income taxes paid $ 22,888 $ 3,222
Interest paid $ 826,327 $ 1,103,627
Supplemental disclosure of noncash investing and financing activities:
Accretion to redemption value of Series A Convertible Participating
Preferred Stock $ 1,522,409 $ 1,409,638
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Pivotpoint, Inc.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note
Common stock Additional receivable
Number of Par paid-in from Accumulated Stockholders'
shares value capital stockholder deficit deficit
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,673,949 $ 26,740 $ - $ (800,000) $(54,853,306) $ (55,626,566)
Exercise of common stock options 138,750 1,387 137,363 138,750
Cancellation of restricted common stock (800,000) (8,000) (137,363) 800,000 (654,637) -
Accretion to redemption value of Series A
Convertible Participating Preferred Stock (1,409,638) (1,409,638)
Net loss (5,291,631) (5,291,631)
--------- --------- ---------- ----------- ------------ -------------
Balance at December 31, 1997 2,012,699 20,127 - - (62,209,212) (62,189,085)
Exercise of common stock options 47,513 475 35,160 35,635
Accretion to redemption value of Series A
Convertible Participating Preferred Stock (35,160) (1,487,249) (1,522,409)
Net income 2,543,455 2,543,455
--------- --------- ---------- ----------- ------------ -------------
Balance at December 31, 1998 2,060,212 $ 20,602 $ - $ - $(61,153,006) $ (61,132,404)
========= ========= ========== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A. Nature of Business
Pivotpoint, Inc. (the "Company") was incorporated in February 1988 and
designs, develops, markets and supports client/server manufacturing systems
software. The products are sold both domestically and internationally
through distributors and sales offices. No customer accounted for 10% or
more of total revenues in 1998 or 1997.
B. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue Recognition
Revenue for software licenses is recognized upon execution of a contract,
provided delivery of the software has occurred, fees are fixed or
determinable and collection of the related receivable is deemed probable by
management. Revenue from annual or multi-year maintenance agreements is
recognized ratably over the term of the agreements. Revenue from
consulting and training agreements is recognized as the services are
performed.
Deferred Revenue
Product and service revenue which is not yet earned and customer deposits
are included in deferred revenue.
Cash and Cash Equivalents
Cash equivalents consist of highly-liquid investments purchased with an
original maturity at acquisition of three months or less.
Fixed Assets
Fixed assets are recorded at cost and depreciated over their estimated
useful lives using the straight-line method. Repair and maintenance costs
are expensed as incurred. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the determination of
net income (loss).
Goodwill
Goodwill represents the excess of cost over the net assets of acquired
businesses and is amortized on a straight-line basis over the estimated
useful life of 3 years (see Note H). Amortization expense was $0 and
$216,667 in 1998 and 1997, respectively.
During 1997, the Company restructured its operations. As a result, the
Company reassessed the net realizability of the goodwill related to the
acquisition of the acquired businesses and concluded that the remaining
goodwill of $866,666 should be written off. This amount was included in
nonrecurring charges (see Note K).
20
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets are stated at cost and amortized over their estimated
lives using the straight-line method. The Company evaluates the net
realizable value of intangible assets on an ongoing basis, relying on a
number of factors including operating results, business plans, budgets and
economic projections, and cash flow analysis. In addition, the Company's
evaluation considers non-financial data such as market trends, product
development cycles and changes in management's market emphasis.
Capitalized Software Costs
Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense. Software costs incurred
subsequent to the establishment of technological feasibility are
capitalized until the product is available for general release to
customers. Capitalized software costs are amortized over the greater of
the amounts calculated based on the straight-line method over the estimated
economic lives of the related products of three years, or using the ratio
of current gross revenue for a product to the total of current and
anticipated future gross revenue for that product. No costs qualified for
capitalization during the years ended December 31, 1998 and 1997.
Amortization expense was $0 and $197,404 in 1998 and 1997, respectively.
Income Taxes
The Company accounts for income taxes with an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial statements and the tax bases of assets and liabilities using
current statutory rates. A valuation reserve against deferred tax assets
is required if based upon weighted available evidence, it is more likely
than not some or all of the deferred tax assets will not be realized.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of temporary cash investments and
trade receivables.
The Company invests its cash balances principally with one financial
institution. The Company's cash equivalents are comprised of demand
deposits and money market funds. The carrying amount of these cash
equivalents approximates their fair value.
The Company performs ongoing credit evaluations of its customers' financial
condition but does not require collateral or other security to support
customer receivables, and maintains allowances for potential credit losses.
The carrying amount of trade receivables approximates fair value.
Comprehensive Income
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net income (loss) for the years
ended December 31, 1998 and 1997 does not differ from the reported net
income (loss) for the respective years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
21
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
C. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful life
in years 1998 1997
<S> <C> <C> <C>
Computer and office equipment 3 $ 2,792,982 $ 2,686,639
Furniture and fixtures 5 326,364 324,895
Automobiles 4 - 48,424
Leasehold improvements varies 40,940 36,177
------------ -----------
3,160,286 3,096,135
Less accumulated depreciation and
amortization (2,685,296) (2,057,552)
------------ -----------
$ 474,990 $ 1,038,583
============ ===========
</TABLE>
Depreciation expense was $676,168 and $764,717 for the years ended
December 31, 1998 and 1997, respectively.
D. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful life
in years 1998 1997
<S> <C> <C> <C>
Deferred financing costs 5 $ 673,968 $ 673,968
Less accumulated amortization (410,332) (278,591)
---------- ---------
$ 263,636 $ 395,377
========== =========
</TABLE>
In connection with the recapitalization of the Company in October 1995
(Note J), the Company incurred debt issuance costs of approximately
$624,000, which are included in Other Assets and are being amortized over
the life of the related debt. During 1997, the Company capitalized $50,000
of costs incurred to extend the maturity of the debt.
Amortization of other assets was $131,741 and $134,988 for the years ended
December 31, 1998 and 1997, respectively, and is included in interest
expense.
22
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
E. Debt
In connection with the recapitalization in October 1995 (Note J), the
Company issued Subordinated Notes in the amount of $18,100,000, including
$2,000,000 to its stockholders (the "Founders"). The Subordinated Notes
bear an annual interest rate of 12%, which is generally due quarterly and
which increases to 18% upon any event of default as defined in the Note and
Stock Purchase Agreement. The entire principal amount of the Subordinated
Notes is due on the first to occur of: (a) January 1, 2001; (b) the
consummation of the first registered offering of the Company's common stock
under the Securities Act of 1933; (c) the sale, lease or other disposition
of all or substantially all of the Company's assets in one transaction or a
series of related transactions; (d) the merger or consolidation of the
Company with another entity where the beneficial owners of the Company's
outstanding capital stock immediately prior to such transaction hold less
than 51% of the voting power of the outstanding capital stock of the
combined entity immediately after such transaction; or (e) the liquidation,
dissolution or winding up of the Company. The Company may elect to prepay
the Subordinated Notes at any time. The provisions of the subordinated
debt restrict the payment of dividends.
As of December 31, 1998 and 1997, the Company has accrued, but not paid,
the interest on the related subordinated debt.
Additionally in October 1995, the Company obtained financing of $10,000,000
through a secured term loan (the "Term Loan") from a bank (the "Lender").
The Term Loan bears a London InterBank Offered Rate ("LIBOR") based
interest rate, subject to certain adjustments as defined in the loan
agreement. The interest rate as of December 31, 1998 and 1997 was 9.25%
and 10%, respectively. Interest is generally due monthly and the principal
of the Term Loan was due in fifteen quarterly installments, beginning
December 31, 1996, with the final payment of the outstanding balance due on
September 30, 2000. The Term Loan's covenants require the Company to
maintain certain financial ratios on a quarterly basis and also restricts
the payment of dividends.
In January 1997, certain provisions of the loan agreement were amended,
including the scheduled repayment dates and various financial covenants.
In connection with the amended loan agreement, the Lender also received a
warrant for 250,000 shares of common stock exercisable at $1.00 per share,
as defined in the warrant agreement. The warrant was exercisable January
1, 1997 and expires December 31, 2006. This warrant was determined to have
an immaterial fair value.
On July 21, 1997, the Lender notified the Company that the Company was in
default of its obligations under various loan and credit agreements. On
November 20, 1997, the Lender and the Company entered into a Forbearance
Agreement under which the Lender agreed to forbear from exercising its
rights and remedies under the term loan agreement until the earlier of (i)
December 31, 1997, or (ii) the occurrence of a Termination Event as defined
in the agreement. As part of the Forbearance Agreement the Company agreed
to make the following principal payments to the Lender on the Term Loan on
the indicated dates: (i) September 29, 1997 - $50,000, (ii) December 1,
1997 - $500,000 and (iii) December 31, 1997 - $50,000. Upon the
occurrence of any Termination Event, the obligations immediately become
due. Under this agreement, the Company agreed to make no payments or
distributions of any kind to any holders of subordinated indebtedness and
maintain certain financial covenants.
23
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On June 2, 1998, the above Forbearance Agreement was further extended until
the earlier of (i) December 31, 1998, or (ii) the occurrence of a
Termination Event. As part of this extension to the Forbearance Agreement,
the Company agreed to make the following principal payments to the Lender
on the Term Loan on the indicated dates: (i) June 30, 1998 - $650,000, (ii)
September 30, 1998 - $800,000 and (iii) December 1, 1998 - $800,000. Under
this amendment, the Lender restructured the outstanding principal amount so
that $2,000,000 would be outstanding as a Revolving Note and the balance as
a Term Note. The maximum borrowing under the Revolving Note is limited to
75% of eligible accounts receivable as defined in the agreement. Also,
under this agreement, the Company is subject to a late fee of $910,000,
which will be waived by the Lender upon (i) satisfactory execution of this
agreement, (ii) satisfaction of certain conditions by the Company, and
(iii) payment of a $10,000 fee. This and subsequent extensions also
required the Company to maintain certain financial covenants and comply
with other conditions.
On March 24, 1999, the above Forbearance Agreement was further extended to
June 30, 1999. Under this extension, the Lender requires the Company to
make payments of $875,000 on March 24, 1999 and June 1, 1999. Upon final
payment on June 1, 1999, the revolving note shall be canceled and no
further advances will be made available. The Lender further agreed to
waive all late fees existing to date.
This forbearance was further extended by agreements dated September 2, 1999
and December 14, 1999. The latest agreement extended the forbearance
period to December 1, 2000. The interest rate on the outstanding debt was
modified to equal the LIBOR rate plus three percent. Principal payments
are required to be made quarterly in four equal payments beginning on March
1, 2000. Under this extension, the company is subject to a late fee of
$170,000, which will be waived by the Lender upon satisfactory execution of
this agreement. This extension further provided consent for the
recapitalization of the Company and the acquisition of Thru-Put
Technologies, Inc. in 1999 (see Note M).
As a result of the events described above and the related forbearance
agreement, the outstanding balance of the Term Loan of $5,950,000 and
$9,100,000 at December 31, 1998 and 1997, respectively, has been classified
as a current liability.
In connection with the acquisition of Minx Software, Inc. ("Minx") in 1993,
the Company issued convertible subordinated promissory notes (the "Notes")
with principal of $2,500,000 and interest payable quarterly at the rate of
7.5% per annum. The Notes are subordinate to Senior Indebtedness. In
October 1995, holders of approximately $1,525,000 of the Notes elected to
convert their holdings into common stock, which was then repurchased by the
Company. These repurchased shares were restored to the status of authorized
but unissued shares and effectively retired. Under certain circumstances,
and subsequent to January 1, 1998, the Notes shall automatically convert
into shares of common stock. However, the debentures are also subject to
payment upon written request over a three-year period commencing April 1,
1998, as adjusted based upon a formula tied to 1997 gross revenues as
defined in the Investors' Rights Agreement. Holders of approximately
$144,042 of these notes have requested payment in lieu of the common stock
and as such, during the year ended December 31, 1998, the Company
recognized a gain of $28,924 due to the discounted adjustment under the
Investors' Rights Agreement. The remaining balance of the outstanding Notes
of $706,183 are convertible into approximately 217,000 shares of common
stock. As of December 31, 1998 and 1997, $821,301 and $850,225,
respectively, has been included in the current portion of long-term debt.
24
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In January 1997, the Company authorized the issuance of $5,000,000 of
Subordinated Convertible Notes. The Company issued $3,500,000 of
Subordinated Convertible Notes to its investors during 1997. The
Subordinated Convertible Notes bear an annual interest rate of 12%, which
is due annually at December 31, beginning in 1997. The principal amount of
the Subordinated Convertible Notes is due and payable on December 31, 2000.
The Notes are convertible in whole at the election of the holders of a
majority of the Notes into Common Stock upon the occurrence of a Conversion
Event: (a) consummation of the first registered public offering of the
Company's capital stock under the Securities Act of 1933; (b) the sale,
lease, or other disposition of all or substantially all of the Company's
assets or a sale of equity securities of the Company by the holders thereof
such that the beneficial owners of the Company's outstanding capital stock
immediately prior to such transaction hold less than 51% of the voting
power of the outstanding capital stock of the Company immediately after
such transaction; (c) the merger, consolidation or reorganization of the
Company with another entity where the beneficial owners of the Company's
outstanding capital stock immediately prior to such transaction hold less
than 51% of the voting power of the outstanding capital stock of the
surviving or combined entity immediately after such a transaction; (d) the
liquidation, dissolution or winding up of the Company; or (e) one day prior
to the maturity date, at an initial conversion price of $1.00 per share
subject to increase based on the Conversion Event's proceeds. The Notes
may not be prepaid, other than in connection with a Conversion Event,
without the written consent of a majority interest of the holders.
As of December 31, 1998 and 1997, the Company has accrued, but not paid,
the interest on the related Subordinated Convertible Notes.
At December 31, 1997, the Company had accrued compensation costs to the
Founders under their employment agreements dated October 31, 1995. In
March 1998, in connection with amendments to the Founders' employment
agreements, the Company and the Founders agreed to defer payment for the
total amount owed of $700,200 until December 31, 2000 or upon the payment
or conversion of all or substantially all of the outstanding Subordinated
Convertible Notes. Interest will accrue at a rate of 12%, compounded
annually from the effective date of this agreement. In connection with the
amended employment agreements, the Company issued 400,114 options to
purchase common stock at a price of $1.75. These options vest immediately
and expire on December 31, 2000 or upon the conversion or payment in full
of the outstanding Subordinated Convertible Notes. The Company also issued
to the Founders 1,686,432 options to purchase common stock, at a price of
$0.75, which vest through December 31, 1998 and expire on May 1, 2004.
F. Income Taxes
The provision for income taxes for the years ended December 31, 1998 and
1997 consists of the following:
1998 1997
Current:
Federal $ 19,666 $ -
State 3,222 3,222
Foreign - -
-------- --------
$ 22,888 $ 3,222
======== ========
25
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,269,817 $ 4,663,138
Tax credits 693,234 693,234
Allowance for doubtful accounts 249,092 524,006
Restructuring charges 354,955 448,235
Goodwill 444,889 479,556
Deferred revenue 104,354 242,433
Other 615,878 698,896
------------ ------------
Total 6,732,219 7,749,498
Valuation allowance (6,732,219) (7,749,498)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards and
research and development tax credits for federal income tax reporting
purposes of approximately $10,550,000 and $693,000, respectively, which
expire at various dates through 2018. Ownership changes under Section 382
of the Internal Revenue Code may result in future limitations on the
utilization of net operating loss and research and development tax credit
carryforwards.
The Company's deferred tax assets at December 31, 1998 and 1997 consist
principally of net operating loss carryforwards, research and development
credits, accruals and depreciation. The Company has recorded a full
valuation allowance against its deferred tax assets due to the uncertainty
surrounding the realization of these assets.
The Internal Revenue Service is presently engaged in an audit of the
Company's 1995 and 1994 tax years. The results of these examinations are
not expected to have a material impact on the Company's financial
statements although they may result in some reduction of certain
carryforward items.
G. Commitments and Contingencies
Lease Commitments
The Company leases office space and rents certain office equipment under
operating leases. Future minimum annual lease commitments at December 31,
1998 are approximately:
1999 $ 586,087
2000 495,003
2001 429,384
2002 176,758
2003 -
-----------
$ 1,687,232
===========
Rent expense totaled approximately $734,000 and $821,000 in 1998 and 1997,
respectively.
26
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Litigation
The Company is involved in various claims and legal proceedings principally
related to its software products. While the ultimate results of these
matters cannot be determined, management does not expect that they will
have a material adverse effect on the Company's financial position.
H. Acquisitions
On October 2, 1996, the Company acquired the assets of its sales affiliate,
Spectrum System Technologies, for $750,000. The purchase price allocation
was $100,000 to assets acquired and $650,000 to goodwill. As of December
31, 1998, $264,000 of payments past due were owed to the former owners of
Spectrum System Technologies. These amounts were paid in 1999.
On December 6, 1996, the Company acquired the assets of its sales
affiliate, Spectrum Network Solutions, Inc., for $775,000. The purchase
price allocation was $125,000 to assets acquired and $650,000 to goodwill.
During 1997, the Company restructured its operations. As a result, the
Company reassessed the net realizability of the goodwill related to these
acquisitions and concluded that the remaining amounts of $866,666 should be
written off in 1997.
In February 1998, the Company settled its outstanding liability of $595,000
with the former owners of Spectrum Network Solutions, Inc. due to a breach
of certain provisions of the purchase agreement by the former owners and
agreed to reduce the liability to $235,000. A resulting gain of $360,000
related to the forgiveness of debt was recorded as an extraordinary gain
during 1998.
I. 401(k) Plan
In 1993, the Board of Directors adopted the Company's 401(k) Plan (the
"401(k) Plan"), which is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The Company may, at its
discretion, make matching contributions on behalf of each participating
employee in an amount equal to some uniform percentage fixed from time to
time by the Board of Directors. Under the current terms of the 401(k) Plan,
employees would become vested in such Company contributions at the rate of
20% per year of service. Company contributions to the 401(k) Plan were
approximately $166,000 and $0 in 1998 and 1997, respectively.
J. Capital Stock
Recapitalization
In October 1995, the Company entered into a recapitalization agreement (the
"Agreement") with the Founders and several new investors (the "Investors").
Under the Agreement, the Founders retired 200 of the 400 shares of common
stock of the Company which were then outstanding, and the Company
repurchased approximately 192 of the 200 remaining outstanding shares,
which were restored to the status of authorized but unissued shares and
effectively retired. The aggregate purchase price included $2,000,000 of
Subordinated Notes to the Founders (see Note E).
Also in October 1995, after the repurchases of the stock described above,
the stockholders of the Company voted to effect a stock split in the form
of a stock dividend of 201,107.32 shares of $0.01 par value common stock
for each share of no par value common stock then outstanding.
27
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
To finance the repurchase of its shares, the Company issued to the
Investors 161,000 shares of its Series A Convertible Participating
Preferred Stock ("Series A Preferred Stock") for aggregate proceeds of
$16,100,000 and Subordinated Notes for aggregate proceeds of an additional
$16,100,000 and obtained bank financing of $10,000,000. The Series A
Preferred Stock has the following terms: cumulative dividends of 8%,
compounded annually; pro rata participation in dividends declared on common
stock; a liquidation preference of $100 per share plus accrued but unpaid
dividends; automatic conversion into common stock upon a public offering of
the Company's common stock at specified aggregate proceeds; and certain
other rights including conversion rights, with the conversion rate subject
to change based upon changes in the capital structure of the Company. The
Series A Preferred Stock is redeemable at the option of the holder on or
after January 1, 2000, or by the Company on or after January 1, 2002. The
redemption price is the greater of $100 per share of Series A Preferred
Stock plus accrued but unpaid dividends, or fair market value on an as
converted basis, as defined in the Note and Stock Purchase Agreement by and
among the Company, its founders, and the Investors. The 161,000 shares of
Series A Preferred Stock were initially convertible at a Conversion Price
of $2.2891 into a total of 7,033,333 shares of common stock of the Company.
In the event the Company shall issue, sell or exchange shares of common
stock, common stock options, warrants or rights, or any securities
convertible into common stock for a price less than the Conversion Price on
the Series A Preferred Stock, the Conversion Price shall be reduced to an
amount calculated by using a formula included in the terms of the Series A
Preferred Stock. The Company's preferred shareholders have agreed to waive
this provision for all such issuances to date, except for the issuance of
250,000 warrants, exercisable at $1.00 per share, and the Subordinated
Convertible Notes, convertible at $1.00 per share. These two issuances
have reduced the Conversion Price to $1.9775 and a total conversion into
8,141,561 shares of common stock. Accordingly, the Company has reserved
that amount of common shares for such conversion. Cumulative dividends on
the Series A Preferred Stock at December 31, 1998 and 1997 were $4,452,522
and $2,930,113 in aggregate, and $27.66 and $18.20 per share, respectively.
In connection with this transaction, the Company incurred debt issuance
costs of approximately $624,000, which have been included in Other Assets
and are being amortized over the life of the related debt, and Series A
Preferred Stock issuance costs of approximately $486,000 which have been
deducted from the carrying value of the stock.
The Founders, Investors, and remaining holders of the Notes entered into a
Stockholders' Agreement under which: the securities of the Company which
they hold are subject to certain transfer restrictions, the Company has the
right of first refusal to repurchase any shares being offered for sale,
each shareholder has certain co-sale rights in the event any shareholder
offers their shares for sale, each shareholder has certain best effort
registration rights, and each shareholder is subject to certain provisions,
all as defined in the Stockholders' Agreement.
Restricted Stock Purchase
In December 1995, the Chief Executive Officer ("CEO") of the Company
purchased 800,000 shares of restricted common stock in exchange for a
promissory note in the amount of $800,000. The restrictions on the common
stock relate to the ability of the CEO to sell the stock and the Company's
retention of certain repurchase rights. The restrictions lapse over time
or upon certain events.
Effective July 1997, the CEO's employment was terminated. As of July 1997,
200,000 shares had vested. Unvested shares of 600,000 shares were
repurchased by the Company for $1 per share, offsetting a portion of the
outstanding receivable balance. The CEO did not retain the 200,000 vested
shares and, in lieu of the remaining obligation under the note receivable,
the CEO transferred and assigned the vested shares to the Company.
28
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock Option Plan
The Company has several stock option plans which provide for the granting
of incentive and nonqualified stock options. During 1998, the Company's
Board of Directors approved the 1998 Stock Option and Grant Plan, which
authorized an additional 1,000,000 options to purchase common stock. This
plan was approved by shareholders subsequent to year-end, and all options
granted in fiscal year 1998 other than to the Founders, as described in
Note E, were granted under this plan. A maximum of 3,097,690 shares of
common stock may be issued under all the existing plans. The options
generally are vested over a four-year period, accumulating 25% each year
from the anniversary of the grant date period. Vesting may be accelerated
for options granted as determined by the Board of Directors. The option
price for each incentive stock option may not be less than the fair market
value per share of common stock on the date of grant. Options are
generally granted at fair market value as determined by the Company's Board
of Directors and generally expire ten years after the date granted.
A summary of all option activity is as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
options price
<S> <C> <C>
Balance at December 31, 1996 1,532,265 $1.08
Options issued 627,950 0.75
Options exercised (138,750) 1.00
Options canceled (699,200) 0.97
---------
Balance at December 31, 1997 1,322,265 0.75
Options issued 2,420,296 0.94
Options exercised (47,513) 0.75
Options canceled (471,816) 0.75
---------
Balance at December 31, 1998 3,223,232 0.89
=========
</TABLE>
As of December 31, 1998 and 1997, options to purchase 1,366,062 and 368,800
shares of common stock were available for future grant and options for
2,720,132 and 744,344 shares of common stock were exercisable,
respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," allows companies to either
account for stock-based compensation under the provisions of SFAS 123 or
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees," but if APB 25 is followed, requires pro forma
disclosure in the notes to the financial statements as if the measurement
provisions of SFAS 123 had been adopted. The Company has elected to
account for its stock-based compensation in accordance with APB 25.
The estimated weighted average fair value of options granted in 1998 and
1997 was approximately $0.20 and $0.32 per share, respectively, on the
grant dates determined using weighted average assumptions of a 6.39% and
6.41% interest rate, respectively, expected lives of 3 to 9 years, zero
volatility, and no dividends. Had compensation cost for the Company's
stock-based compensation plan been based on the fair value of the stock
options at the grant dates in accordance with SFAS 123, the Company's net
income and net loss for the years ended
29
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31, 1998 and 1997 would have been changed from the reported amount
to a pro forma amount of $2,133,800 and ($5,418,704), respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------- --------------------------------
Weighted Weighted Weighted
average average average
Exercise Number remaining exercise Number exercise
price outstanding contractual life price exercisable price
<S> <C> <C> <C> <C> <C>
$0.75-$1.75 3,223,232 5.85 years $0.89 2,720,132 $0.92
</TABLE>
K. Nonrecurring Charges
During 1997 the Company restructured its operations. As a result,
nonrecurring charges of $1,493,000 were recorded and included $412,000
related to severance for terminated employees, $867,000 in write-downs of
intangible assets related to the acquisition of sales affiliates (see Note
H), and $214,000 related to excess facility lease costs.
L. Segment Reporting
The Company considers that it has the following four reportable operating
segments based on differences in products and services. Operating segments
are defined as components of the enterprise about which separate financial
information is available that is reviewed regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate
resources and in assessing their performance.
<TABLE>
<CAPTION>
1998 1997
Gross Gross
Operating Segments Revenue Margin Revenue Margin
<S> <C> <C> <C> <C>
Software licenses $ 6,427,861 $ 5,314,885 $ 5,920,697 $ 5,182,431
Professional services 5,435,012 579,836 8,120,701 1,320,487
Maintenance 10,041,166 7,176,255 10,283,517 7,409,302
Other 615,963 367,469 591,715 309,136
------------- ------------ ------------- -------------
$ 22,520,002 $ 13,438,445 $ 24,916,630 $ 14,221,356
============= ============ ============= =============
</TABLE>
M. Subsequent Events
Acquisition of Company by MAPICS, Inc.
On January 12, 2000, the Company was acquired by MAPICS, Inc. in a purchase
transaction for a total of $48.0 million in cash.
30
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Recapitalization
On December 2, 1999, the Company completed an Exchange Agreement with
certain holders of the Company's Subordinated Promissory Notes (the
"Notes") who are also holders of all of the Series A Preferred Stock
(collectively the "Investors") and the Founders, who hold the remaining
balance of the Notes. Under this agreement, the Investors agreed to
exchange all of their outstanding Notes, which aggregated $16,100,000,
accrued interest on the Notes and accreted dividends on the Series A
Preferred Stock for 28,920.118 shares of Series B Redeemable Preferred
Stock. Also, the Founders agreed to exchange all of their outstanding
Notes, which aggregated $2,000,000, and accrued interest on the Notes for
2,928.552 shares of Series B Redeemable Preferred Stock. No gain or loss
was recorded in connection with this exchange.
Acquisitions
In accordance with an Asset Purchase Agreement dated October 18, 1999, the
Company acquired certain assets and assumed certain liabilities of Sofwave,
Inc. ("Sofwave"), a North Carolina corporation specializing in software
packages providing maintenance, calibration, and facility management, in
exchange for $470,000 in cash, to be paid over one year, and 50,000 shares
of the Company's common stock. The Company determined the fair value of the
common stock to be $1.00 per share.
The Company accounted for the Sofwave transaction, which was completed on
November 1, 1999, under the purchase method of accounting. Accordingly,
the purchase price was allocated based on the estimated fair value of
assets purchased and liabilities assumed upon acquisition. The excess of
cost over the fair value of net assets acquired (goodwill) of $520,000 is
being amortized over the estimated useful life of three years on a
straight-line basis.
In accordance with a Purchase and Sale Agreement dated December 7, 1999,
the Company acquired certain assets and assumed certain liabilities of
Thru-Put Technologies, Inc. ("Thru-Put"), a California corporation which
designs, develops and markets software products for the manufacturing
industry in exchange for 1,104,252 shares of the Company's common stock and
552,126 shares of the Company's newly created Series C Convertible
Preferred Stock. The Company determined the fair value of the common stock
to be $1.00 per share and the fair value of the Series C Convertible
Preferred Stock to be $5.14 per share.
The Company accounted for the Thru-Put transaction, which was completed on
December 30, 1999, under the purchase method of accounting. Accordingly,
the purchase price was allocated on a preliminary basis based on the
estimated fair value of assets purchased and liabilities assumed upon
acquisition. The excess of cost over the fair value of assets acquired
(goodwill) is being amortized over the estimated useful life of three years
on a straight-line basis.
31
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the acquisition follows:
<TABLE>
<S> <C>
Common stock $ 1,104,252
Series C Convertible Preferred Stock 2,837,928
Transaction costs 316,983
------------
Total consideration paid 4,259,163
Estimated assets acquired 1,140,661
Estimated liabilities assumed (3,306,451)
------------
Estimated net liabilities assumed (2,165,790)
------------
Excess of purchase price over fair value of net liabilities assumed $ 6,424,953
============
</TABLE>
Series B Redeemable Preferred Stock
In December 1999, as part of the recapitalization of the Company
described above, the Company authorized and issued 31,848.67 shares of
Series B Redeemable Preferred Stock (the "Redeemable Preferred Stock"). The
Redeemable Preferred Stockholders have the following rights and privileges:
Redemption
On January 1, 2001, the Company is obligated to redeem all of the then
outstanding shares of the Redeemable Preferred Stock. Further, the
Company will automatically be obligated to redeem each share of the
Redeemable Preferred Stock upon a Liquidation Event, as defined in the
terms to the Redeemable Preferred Stock, or upon the closing of an
initial public offering of the Company's common stock at a pre-
offering valuation of at least $120,000,000, and in which the proceeds
received by the Company equal or exceed $25,000,000. The redemption
price for each share shall be the per share redemption liquidation
preference amount calculated, as defined in the terms to the
Redeemable Preferred Stock.
Dividends
The holders of outstanding shares of Redeemable Preferred Stock shall
be entitled to receive cumulative dividends at a rate of 10% per year
based on $1,000 per share. Such dividends will accumulate and compound
quarterly as of each June 30, September 30, December 31 and March 31
of each year beginning June 30, 1999. Until the Redeemable Preferred
Stock dividends are paid in full, no dividend can be declared or paid
on common stock or other capital stock of the Company.
Voting Rights
None
Liquidation Preferences
In the event of liquidation, dissolution, merger, sale or winding up
of the Company, the holders of the Redeemable Preferred Stock are
entitled to receive, prior to and in preference to the holders of
common stock and any other capital stock, an amount equal to $1,000
per share plus any accumulated but unpaid dividends. The Series A
Preferred Stock and Series C Convertible Preferred Stock rank junior
to shares of the Company's Series B Redeemable Preferred Stock.
32
<PAGE>
Pivotpoint, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Series C Convertible Preferred Stock
As part of the acquisition of Thru-Put, Inc., the Company authorized and
issued 552,126 shares of preferred stock, all of which were designated as
Series C Convertible Preferred Stock (the "Series C Preferred Stock"). The
Series C Preferred Stockholders have the following rights and privileges:
Conversion
Each share of Series C Preferred Stock is convertible, at the option
of the holder, into two shares of common stock of the Company. Each
share of the Series C Preferred Stock will automatically convert into
two shares of common stock upon the closing of an initial public
offering of the Company's common stock at a pre-offering valuation of
at least $120,000,000, and in which the proceeds received by the
Company equal or exceed $25,000,000.
Dividends
None.
Voting Rights
None.
Liquidation Preference
In the event of liquidation, dissolution, merger, sale or winding up
of the Company, the holders of the Series C Preferred Stock are
entitled to receive, prior to and in preference to the holders of
common stock, an amount equal to $5.14 per share. The Series C
Preferred Stock ranks junior to shares of the Company's Series B
Redeemable Preferred Stock and on a par with the Company's Series A
Preferred Stock.
Deferred Payment Agreement
During the year ended December 31, 1999, the Company entered into a
Deferred Payment Agreement (the "Agreement") with the Company's Chief
Executive Officer ("CEO"), whereby upon an initial public offering, a sale
or disposition of all or substantially all of the Company's assets, a
merger, consolidation or reorganization of the Company or upon liquidation,
dissolution or winding up of the Company, the Company shall pay the CEO an
amount, the Deferred Payment Amount, equal to two percent of the sum of the
Liquidation Proceeds, as defined in the Agreement, and the Deferred Payment
Amount, subject to employment of the CEO by the Company.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by MAPICS, Inc. ("MAPICS") of Pivotpoint, Inc.
("Pivotpoint") in a transaction accounted for as a purchase business
combination.
The unaudited pro forma condensed combined financial information is based
on the historical consolidated financial statements of MAPICS and Pivotpoint
giving effect to the acquisition of Pivotpoint under the assumptions and
adjustments described in the accompanying notes to unaudited pro forma condensed
combined financial statements. We believe the accompanying unaudited pro forma
condensed combined financial statements include all necessary pro forma
adjustments to make them fairly stated. However, this pro forma financial
information is presented for illustrative purposes only and therefore is not
necessarily indicative of the operating results or financial position that might
have been achieved had the acquisition of Pivotpoint occurred as of an earlier
date, nor is it necessarily indicative of operating results or financial
position which may be achieved in the future.
On December 30, 1999, Pivotpoint acquired certain assets of Thru-Put
Technologies, Inc. ("Thru-Put") in a transaction accounted for as a purchase
business combination. The assets and liabilities of the acquired Thru-Put
business are included in the unaudited condensed consolidated balance sheet of
Pivotpoint as of December 31, 1999. However, the results of operations for the
acquired Thru-Put business are not included in the unaudited pro forma condensed
combined financial statements of operations included in this Report because the
acquired Thru-Put business does not meet the significant subsidiary test set
forth in Rule 1-02(w) of Regulation S-X.
34
<PAGE>
MAPICS, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MAPICS Pivotpoint Adjustments Notes Combined
-------- ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Current assets: $ 25,244 $ 2,447 $(48,000) ( a ) $ 13,684
Cash and cash equivalents (1,900) ( a )
40,000 ( b )
(1,371) ( b )
(2,736) ( d )
Accounts receivable, net 29,088 2,824 (200) ( i ) 31,712
Prepaid expenses and other current
assets 9,652 312 9,964
Deferred income taxes, net 1,342 - 1,342
-------- ---------- ----------- ---------
Total current assets 65,326 5,583 (14,207) 56,702
Property and equipment, net 6,296 688 6,984
Computer software costs, net 19,943 - 6,200 ( f ) 18,886
(1,400) ( g )
(5,857) ( i )
Other intangible assets, net 3,647 6,915 (6,915) ( f ) 48,908
45,261 ( f )
Deferred income taxes, net 1,888 - 6,000 ( h ) 7,888
Other assets, net 831 128 1,371 ( b ) 2,202
(128) ( e )
-------- ---------- ----------- ---------
Total assets $ 97,931 $ 13,314 $ 30,325 $141,570
-------- ---------- ----------- ---------
Current liabilities:
Current portion of long-term debt $ - $ 7,741 $ 9,500 ( b ) $ 9,500
(5,005) ( c )
(2,736) ( d )
Accounts payable 5,748 1,693 7,441
Accrued expenses and other current 20,403 6,496 (2,179) ( c ) 27,870
liabilities
50 ( i )
3,100 ( j )
Deferred revenue 30,018 6,936 (1,850) ( k ) 35,104
-------- ---------- ----------- ---------
Total current liabilities 56,169 22,866 880 79,915
Long term-debt - - 30,500 ( b ) 30,500
-------- ---------- ----------- ---------
Total liabilities 56,169 22,866 31,380 110,415
-------- ---------- ----------- ---------
Redeemable preferred stock - 54,093 (54,093) ( a ) -
Shareholders' equity (deficit):
Preferred stock 175 - 175
Common stock 204 33 (33) ( a ) 204
Additional paid-in-capital 61,943 1,093 (1,093) ( a ) 61,943
Retained earnings (accumulated deficit) 665 (64,771) 64,771 ( a ) (9,942)
(1,400) ( g )
(5,857) ( i )
(200) ( i )
(50) ( i )
(3,100) ( j )
Treasury stock (21,225) - (21,225)
-------- ---------- ----------- ---------
Total shareholders' equity (deficit) 41,762 (63,645) 53,038 31,155
-------- ---------- ----------- ---------
Total liabilities and shareholders' equity
(deficit) $ 97,931 $ 13,314 $ 30,325 $141,570
-------- ---------- ----------- ---------
</TABLE>
35
<PAGE>
MAPICS, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended December 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MAPICS Pivotpoint Adjustments Notes Combined
------ ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
License $ 14,480 $ 1,403 $ 15,883
Services 16,045 4,252 20,297
---------- --------- ----------- ---------
Total revenue 30,525 5,655 - 36,180
---------- --------- ----------- ---------
Operating expenses:
Cost of license revenue 3,206 277 3,483
Cost of services revenue 5,848 2,921 8,769
Selling and marketing 10,873 1,665 12,538
Product development 4,212 832 5,044
General and administrative 2,450 602 3,052
Amortization of intangible assets 129 30 $ (30) ( l ) 2,605
2,476 ( l )
---------- ---------- ----------- ---------
Total operating expenses 26,718 6,327 2,446 35,491
---------- --------- ----------- ---------
Income (loss) from operations 3,807 (672) (2,446) 689
Other:
Interest income 306 35 341
Interest expense (12) (918) 918 ( m ) (971)
(854) ( m )
(105) ( n )
---------- --------- ----------- ---------
Income (loss) before income tax expense 4,101 (1,555) (2,487) 59
Income tax expense 1,579 - (603) ( o ) 976
---------- --------- ----------- ---------
Net income (loss) $ 2,522 $ (1,555) $ (1,884) $ (917)
---------- --------- ----------- ---------
Net income (loss) per common
share (basic) $ 0.14 $ (0.05)
========== =========
Weighted average number of common
shares outstanding (basic) 17,602 ( p ) 17,602
========== =========
Net income (loss) per common
share (diluted) $ 0.13 $ (0.05)
========== =========
Weighted average number of common and
common equivalent shares outstanding
(diluted) 19,781 (2,179) ( p ) 17,602
========== =========== =========
</TABLE>
36
<PAGE>
MAPICS, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended September 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MAPICS Pivotpoint Adjustments Notes Combined
--------- ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
License $ 71,195 $ 6,823 $ 78,018
Services 63,523 17,475 80,998
---------- ---------- ----------- ---------
Total revenue 134,718 24,298 - 159,016
---------- ---------- ----------- ---------
Operating expenses:
Cost of license revenue 13,173 1,097 14,270
Cost of services revenue 19,012 9,363 28,375
Selling and marketing 51,601 4,622 56,223
Product development 18,083 2,847 20,930
General and administrative 12,673 1,532 14,205
Amortization of intangible assets 516 - $ 9,904 ( l ) 10,420
---------- ---------- ----------- ---------
Total operating expenses 115,058 19,461 9,904 144,423
---------- ---------- ----------- ---------
Income from operations 19,660 4,837 (9,904) 14,593
Other:
Interest income 1,887 203 2,090
Interest expense (86) (4,518) 4,518 ( m ) (4,297)
(3,793) ( m )
(418) ( n )
---------- ---------- ----------- ---------
Income before income tax expense 21,461 522 (9,597) 12,386
Income tax expense 8,262 - 320 ( o ) 8,582
---------- ---------- ----------- ---------
Net income $ 13,199 $ 522 $ (9,917) $ 3,804
---------- ---------- ----------- ---------
Net income per common share (basic) $ 0.70 $ 0.20
========== =========
Weighted average number of common
shares outstanding (basic) 18,943 ( p ) 18,943
========== =========
Net income per common share (diluted) $ 0.62 $ 0.18
========== =========
Weighted average number of common and
common equivalent shares outstanding
(diluted) 21,444 ( p ) 21,444
========== =========
</TABLE>
37
<PAGE>
MAPICS, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(in thousands, except share and per share amounts)
1. Basis of Presentation
We derived the MAPICS condensed financial information included in
these unaudited condensed combined pro forma financial statements from our
December 31, 1999 unaudited condensed consolidated financial statements and
our September 30, 1999 audited consolidated financial statements, neither
of which are included in this Report. We derived the Pivotpoint condensed
financial information included in these unaudited pro forma financial
statements from its historical financial statements, which are based on a
fiscal year ending December 31. Accordingly, the results of operations for
Pivotpoint included in the unaudited pro forma condensed combined
statements of operations for the three months ended December 31, 1999 and
the year ended September 30, 1999 were derived from its unaudited
consolidated statement of operations for the year ended December 31, 1999
and its audited consolidated statement of operations for the year ended
December 31, 1998, both of which are included in this Report.
The unaudited pro forma condensed combined statements of operations of
MAPICS for the three months ended December 31, 1999 and the year ended
September 30, 1999 reflect the reclassification of historical intangible
asset amortization, including amortization of goodwill, from cost of
licenses in the amounts of $129 and $516, respectively. The condensed
financial information of Pivotpoint reflects certain reclassifications of
its historical financial data to conform to the presentation of our
historical financial data.
You should read the historical financial statements of MAPICS and
Pivotpoint in conjunction with the accompanying unaudited pro forma
condensed combined financial information.
2. Pro Forma Adjustments
(a) To record the acquisition of Pivotpoint, including the elimination of
Pivotpoint's historical redeemable preferred stock and shareholders'
equity (deficit) accounts. The total purchase price was determined as
follows:
Consideration paid in cash $ 48,000
Direct transaction costs 1,900
----------
Total purchase price $ 49,900
==========
Direct transaction costs include fees paid for professional services
performed in connection with the acquisition of Pivotpoint.
(b) To record the proceeds from borrowings under a new bank credit
facility with a syndicate of banks. On January 12, 2000, we borrowed
$40,000 under the term loan portion of our new bank credit facility
to finance a portion of the total purchase price. This new borrowing
arrangement consists of a $40,000 term loan and a $20,000 revolving
credit facility. In connection with establishing this new bank credit
facility, we incurred debt issue costs of $1,371. These debt issue
costs, included in other assets, will be amortized over the terms of
the related loans. We have not borrowed any amount under the
revolving loan portion of the bank credit facility.
The term loan arrangement requires us to make eleven quarterly
installment payments in varying amounts of principal. At inception of
the term loan arrangement, $9,500 was payable within the following 12
months and is reported as current portion of long-term debt.
(c) To record the repayment of certain of Pivotpoint's obligations.
Pivotpoint used a portion of the proceeds from the sale of its
business to repay certain obligations prior to making any
distribution of the proceeds to its shareholders. Pivotpoint was
required under the terms of the Agreement and Plan of Merger to repay
these outstanding obligations prior to consummation of the
acquisition.
38
<PAGE>
(d) To record the repayment of assumed debt. We assumed Pivotpoint's
$2,720 note payable to a bank together with accrued interest of $16.
We repaid the debt and interest concurrent with the consummation of
the acquisition.
(e) To record the write-off of Pivotpoint's historical debt issue costs
associated with the repayment of debt as described in notes (c) and
(d) above.
(f) To record the excess of the total purchase price and liabilities
assumed over the tangible assets acquired, including elimination of
Pivotpoint's historical intangible assets.
We first allocated the total purchase price to the tangible assets
acquired and the liabilities assumed based on their estimated fair
market value. The excess of the total purchase price and liabilities
assumed over the fair market value of the tangible assets acquired
was allocated to the identifiable intangible assets, including in-
process research and development, based on their independently
appraised fair market values. The remainder of the purchase price was
allocated to goodwill. As of the date of this Report, the independent
appraisal was not final. Accordingly, the allocation of the purchase
price as reflected in the condensed combined pro-forma financial
statements is based on a preliminary assessment of the intangible
assets acquired and may be subject to change. However, we believe the
preliminary assessment is a reasonable representation of the final
allocation.
The allocation of the total purchase price and the estimated fair
values of the assets acquired and the liabilities assumed are
presented as follows:
<TABLE>
<S> <C> <C>
Cash and cash equivalents $ 2,447
Accounts receivable, net 2,824
Prepaid expenses and other current assets 312
Property and equipment, net 688
Acquired technology (1) 4,800
In-process research and development (1) 1,400
Customer base (2) 1,900
Assembled workforce (2) 400
Goodwill (2) 42,961
Deferred income taxes, net 6,000
Current portion of long term debt (2,736)
Accounts payable (1,693)
Accrued expenses and other current
liabilities (4,317)
Deferred revenue (5,086)
----------
Total purchase price $ 49,900
==========
</TABLE>
(1) Included in computer software costs. We wrote-off in-process
research and development costs immediately after
consummating the acquisition. See note (g) below.
(2) Included in other intangible assets.
The purchase price allocation presented in these unaudited pro forma
condensed combined financial statements is based on the historical
balance sheet of Pivotpoint as of December 31, 1999. The actual
purchase price allocation as of January 12, 2000, the date of the
acquisition, differs as a result of changes in the financial position
of Pivotpoint from December 31, 1999 to January 12, 2000.
(g) To reflect the immediate write-off of research and development
projects that were in-process at the date of acquisition as required
by Statement of Financial Accounting Standards No. 2, Accounting for
Research and Development Costs, and Financial Accounting Standards
Board Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method. We
allocated $1,400 to in-process research and development based on a
preliminary independent appraisal of its fair market value at the
date of acquisition. This amount, which may be adjusted in the final
appraisal, was written-off in our fiscal quarter ending March 31,
2000.
39
<PAGE>
(h) To record estimated deferred income tax assets of $6,000 associated
primarily with available net operating losses and income tax credits
of Pivotpoint.
(i) To record restructuring charges associated with the acquisition of
Pivotpoint. We wrote-off capitalized software costs of $5,857 related
to development projects that were discontinued upon consummation of
the acquisition. In addition, we established an allowance of $200 for
accounts receivable which may become uncollectible and we accrued an
estimate of $50 for additional future services owed to certain
customers.
(j) To establish reserves of $3,100 for certain potential contractual
liabilities under third party technology arrangements that we
terminated upon consummation of the acquisition.
(k) To write-down deferred revenue to the estimated cost of the
underlying obligations assumed in the transaction. Under certain
conditions, purchase accounting rules require partial or complete
elimination of profits included in acquired deferred revenue.
(l) To remove the historical goodwill amortization of Pivotpoint and to
record the amortization of intangible assets and goodwill acquired in
the acquisition of Pivotpoint. The intangible assets and goodwill are
being amortized over periods between ranging from five to seven
years.
(m) To remove the historical interest expense of Pivotpoint, to record
interest expense on the $40,000 term loan and to record commitment
fees on the unused portion of our revolving credit facility. The term
loan requires us to make quarterly payments of interest based on the
lender's base rate or LIBOR plus a predetermined margin. While
amounts are outstanding under the term loan portion of the bank
credit facility, we are required to hedge a portion of our interest
rate risk by entering into an interest rate protection arrangement.
Although we may be required or we may at our discretion, under
certain circumstances, prepay all or a portion of the term loan, we
calculated pro forma interest expense based on the initial scheduled
principal repayments. Furthermore, although our actual rate of
interest on the term loan may vary, we calculated pro forma interest
expense based on an assumed annual interest rate of 9.75%.
In addition, we must pay a quarterly commitment fee for the unused
portion of the revolving credit facility. For the purpose of these
unaudited pro forma condensed combined financial statements, we
calculated the pro forma commitment fee under the assumption that no
amount was borrowed under the revolving credit facility for the
periods presented.
(n) To record the amortization of debt issue costs. The portion of the
debt issue costs related to the term loan and revolving credit
facility will be amortized on a straight-line basis from the date of
inception through December 31, 2002 and January 12, 2004, the
respective dates of maturity.
(o) To record the effect of the pro forma adjustments on income taxes. A
majority of the amortization expense related to acquired intangible
assets and goodwill is not deductible for income tax purposes.
(p) In connection with the acquisition, we issued 631 stock options to
employees of Pivotpoint. The stock options were issued with grant
prices equal to the fair market value of our stock on the date of
grant and a graduated vesting period over four years. The weighted
average per share exercise price for these newly issued options was
$13.22. These options are considered common stock equivalents and may
have a dilutive effect on our earnings per share for reporting
periods after the acquisition. However, the pro forma condensed
combined statements of operations do not reflect any increase to the
reported weighted average shares outstanding for these stock options
because they would not have been dilutive for the periods presented.
Additionally, we assumed no conversion or exercise of common stock
equivalents in the computation of pro forma dilutive earnings per
share for the three months ended December 31, 1999 because such
conversion or exercise would have an antidilutive effect on earnings
per share. Accordingly, we reduced the weighted average number of
common and common equivalent shares outstanding by 2,179 equivalent
shares.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
MAPICS, Inc.
Date: March 27, 2000 By: /s/ William J. Gilmour
----------------------------
William J. Gilmour
Chief Financial Officer
41
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger dated as of December 15, 1999, by
and among MAPICS, Inc., MAPICS Merger Corp., and Pivotpoint, Inc.
(incorporated herein by reference to Exhibit 2.2 to MAPICS,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
September 30, 1999).
2.2 List of omitted schedules and exhibits to the Agreement and Plan
of Merger filed as Exhibit 2.1 into this Report. We agree to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request.
42
<PAGE>
Exhibit 2.2
List of Omitted Schedules and Exhibits to the Agreement and Plan of Merger
filed as Exhibit 2.1 to this Report
SCHEDULES
---------
3.1 Distribution Amounts, Percentages of Merger Consideration
5.2(a) Organizational Documents
5.2(b) Foreign Qualifications
5.3(a) Company Obligations to Issue Additional Capital Stock
5.3(b) Subsidiary Capitalization and Obligations to Issue
Additional Capital Stock
5.5 Conflicts Arising from Merger Agreement
5.6 Subsidiaries of the Company
5.7 Financial Statements
5.10 Material Changes
5.11 Taxes
5.12 Title to Assets
5.13 Real Property
5.14 Personal Property
5.15(a) Patents
5.15(b) Royalties
5.15(c) Officer, Director, Independent Contractor, Employee Rights
in Intellectual Property
5.15(e) Copyright, Patent, Trademark Applications and Registrations
5.15(g) Affect of Merger on Intellectual Property Rights
5.16(a) Computer Programs, Materials, Tapes, Source and Object Codes
5.16(e) Grants of License, Option or Right to Computer Software and
Databases
5.16(g) Warranties to Third Parties Regarding Intellectual Property
5.17(a) Nonconforming Warranties
5.17(b) Nonconforming Products and Services
5.17(c) Product Liability and Warranty Claims
5.19 Accounts Receivable
5.20 Insurance
5.20(a) Insurance Claims Pending
5.22 Licenses and Orders
5.23 Employee Benefit Plans
5.24(a)(i) Purchase Orders - Non Capital Assets
5.24(a)(ii) Purchase Orders - Capital Assets
5.24(a)(iii) Employment or Other Affiliate Contracts
5.24(a)(iv) Sales Representatives
5.24(a)(v) Powers of Attorney
5.24(a)(vi) Intellectual Property Contracts
5.24(a)(vii) Other Critical Contracts
5.24(a)(viii) Warranty Contracts and Maintenance Contracts
5.24(a)(ix) Other Contracts
5.24(c) Limits to Enforceability
5.25 Suppliers and Customers
5.26(a) Employees and Independent Contractors
5.26(b)(i) Employment Contracts Not Terminable at Will
5.26(b)(ii) Obligations to Employees and Independent Contractors
5.26(c) Union and Collective Bargaining Agreements
5.26(d) Employment Losses
5.27 Brokers and Finders
5.29 Litigation
5.30 Interested Transactions
5.31 Environmental Litigation
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5.32 Year 2000 Compliance
5.33 Accounts Payable
6.4 Brokers and Finders
7.1(g) Mergers with Other Entities
7.7 Vacation, Holiday Pay, Etc.
EXHIBITS
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3.3(b) Escrow Agreement
10.11 Indemnification Agreement
10.12 Release
