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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): September 21, 2000
MANUGISTICS GROUP, INC.
(Exact name of issuer as specified in its charter)
Delaware 0-22154 52-1469385
(STATE OR OTHER JURISDICTION OF (COMMISSION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NUMBER)
2115 East Jefferson Street
Rockville, Maryland 20852
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(301) 984-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ITEM 5. OTHER EVENTS.
On September 21, 2000, Manugistics Group, Inc. (the "Company")
announced that it had signed an agreement to acquire Talus Solutions, Inc.
("Talus"), a leading supplier of pricing and revenue optimization products and
services. The Company is filing the following supplemental information relating
to the acquisition and other matters.
(a) Risk Factors
WE HAVE RECENTLY RESTRUCTURED OUR BUSINESS AND, AS A RESULT, YOU MAY HAVE
DIFFICULTY EVALUATING OUR PROSPECTS BASED ON OUR PAST OPERATING RESULTS.
We experienced operational difficulties in fiscal 1999 and the first half
of fiscal 2000. Problems with our direct sales operation and intense
competition, among other factors, contributed to net losses of $96.1 million in
fiscal 1999 and $8.9 million in fiscal 2000. We have also reported net losses of
$20.8 million for the first half of fiscal 2001. In response to our problems, we
hired a new executive management team, enhanced our supply chain optimization
and eBusiness products and services and improved our direct sales organization.
Our ability to continue to achieve operational improvements and improve our
financial performance will be subject to a number of risks and uncertainties,
including the following:
- slower growth in the market for supply chain and eBusiness software;
- our ability to introduce new software products and services to respond to
technological and client needs;
- our ability to manage our anticipated growth;
- our ability to hire, integrate and deploy our direct sales force
effectively;
- our ability to expand our distribution capability through indirect sales
channels;
- our ability to respond to competitive developments and pricing; and
- our dependence on our current executive officers and key employees.
If we fail to successfully address these risks and uncertainties, our business
could be harmed and we could continue to incur significant losses.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES. IF WE DO NOT ACHIEVE OR
MAINTAIN PROFITABILITY IN THE FUTURE, OUR STOCK PRICE MAY DECLINE.
We have recently incurred significant losses, including net losses of $20.8
million for the first half of fiscal 2001, $8.9 million in fiscal 2000 and $96.1
million in fiscal 1999. We cannot assure you that our revenues will grow or that
we will achieve or maintain profitability in the future. Our ability to increase
revenues and achieve profitability will be affected by the other risks and
uncertainties described in this section. Our failure to achieve profitability
could cause our stock price to decline, and our ability to finance our
operations could be impaired.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS IN ANY PERIOD, OUR STOCK PRICE COULD DECLINE
SIGNIFICANTLY.
Our revenues and operating results are difficult to predict, and we believe
that period-to-period comparisons of our operating results will not necessarily
be meaningful or indicative of future performance. The factors that may cause
fluctuations of our quarterly operating results include the following:
- the size, timing and contractual terms of sales of our products and
services;
- the potentially long and unpredictable sales cycle for our products;
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- technical difficulties in our software that could delay the introduction
of new products or increase their costs;
- introductions of new products or new versions of existing products by us
or our competitors;
- changes in prices or the pricing models for our products and services or
those of our competitors;
- changes in the mix of our software license revenues, consulting revenues
and solution support revenues; and
- changes in the mix of sales channels through which our products and
services are sold.
Due to fluctuations from quarter to quarter, our operating results may not
meet the expectations of securities analysts or investors. If this occurs, the
price of our common stock could decline significantly.
VARIATIONS IN THE TIME IT TAKES US TO SELL OUR SOLUTIONS MAY CAUSE FLUCTUATIONS
IN OUR OPERATING RESULTS.
The time it takes to sell our solutions to prospective clients varies
substantially, but typically ranges between six and twelve months. Variations in
the length of our sales cycles could cause our revenues to fluctuate widely from
period to period. Because we typically recognize a substantial portion of our
license revenues in the last month of a quarter, any delay in the sale of our
products could cause significant variations in our revenues from quarter to
quarter. Furthermore, because our operating expenses are relatively fixed over
the short term and we devote significant time and resources to prospective
clients, these fluctuations could cause our operating results to suffer in some
future periods. The length of our sales cycle depends on a number of factors,
including the following:
- the breadth of the solution required by the client, including the
technical, organizational and geographic scope of the license;
- the evaluation and approval process employed by the client;
- the sales channel through which the solution is sold; and
- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR CONTRACTS WITH CLIENTS ARE INCREASING, WHICH MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly
complex supply chain and eBusiness problems. Further, we are now focusing on
providing total solutions to our clients, as opposed to only licensing software.
As the size and scope of our contracts with clients increase, our operating
results could fluctuate due to the following factors:
- contractual terms may vary widely, which is likely to result in differing
methods of accounting for revenue from each contract;
- losses of, or delays in, larger contracts could have a proportionately
greater effect on our revenues for a particular period; and
- the sales cycle related to larger contracts is likely to be longer and
subject to greater delays.
Any of these factors could cause our revenues to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
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WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS IN THE PAST AND MAY
EXPERIENCE PROBLEMS WITH FUTURE ACQUISITIONS THAT COULD MATERIALLY HARM OUR
BUSINESS.
Acquisitions involve the integration of companies that have previously
operated independently. In connection with any acquisition, there can be no
assurance that we will:
- effectively integrate employees, operations, products and systems;
- realize the expected benefits of the transaction;
- retain key employees;
- retain and develop key technologies and proprietary know-how;
- avoid conflicts with our clients that are competitors or clients of the
acquired company;
- avoid unanticipated operational difficulties or expenditures; and
- effectively operate our existing business lines, given the significant
diversion of resources and management attention to acquisitions.
In 1998, we experienced difficulties with the integration of the products
and operations of ProMIRA Software, Inc. (ProMIRA), which we acquired in
February 1998, and TYECIN Systems, Inc. (TYECIN), which we acquired in June
1998. These difficulties included problems integrating the prior ProMIRA sales
forces and the delayed releases of the in-process technology acquired as part of
the transaction. In addition, as a result of the poor financial performance we
experienced in fiscal 1999, the technology acquired in conjunction with the
TYECIN acquisition was not integrated into our solutions and, therefore,
revenues generated from this technology have been nominal. Difficulties like
those experienced with ProMIRA and TYECIN and as outlined above could materially
and adversely affect our business, results of operations and financial
condition.
WE MAY ENCOUNTER PROBLEMS EFFECTIVELY INTEGRATING TALUS SOLUTIONS IF THE
ACQUISITION IS COMPLETED, OR WE MAY FAIL TO COMPLETE OUR ACQUISITION OF TALUS
SOLUTIONS.
On September 21, 2000, we signed an agreement to acquire Talus Solutions, a
privately-held company that provides pricing and revenue optimization products
and services. This acquisition is substantially larger than all of our prior
acquisitions, not all of which have been successful. In addition to the risks
described above in connection with acquisitions generally, the ultimate success
of our acquisition of Talus Solutions is dependent on the following factors:
- our ability to complete the commercial release of Talus Solutions'
custom-developed solutions;
- our ability to protect and maintain Talus Solutions' intellectual
property rights;
- our ability to successfully market the products Talus Solutions has
developed and is developing for commercial release;
- our ability to successfully integrate Talus Solutions' technologies;
- our ability to retain and incentivize Talus Solutions' employees;
- market acceptance of the products Talus Solutions has commercially
released to date;
- our ability to fulfill our strategic plan for the acquisition of Talus
Solutions by integrating our supply chain and eBusiness capabilities and
products with Talus Solutions' pricing and revenue optimization products
and services;
- market acceptance of our combined supply chain, eBusiness and pricing and
revenue optimization products;
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- our ability, together with Talus Solutions, to cross-sell products and
services into our respective markets; and
- the outcome of current disputes and litigation arising in the ordinary
course of business.
We have not yet completed our acquisition of Talus Solutions. The closing
of the transaction is subject to a number of conditions and the shares of our
common stock to be issued must be registered under the Securities Act of 1933.
If we do not close the transaction, we will:
- be required to pay a termination fee of approximately $9.2 million under
certain circumstances;
- lose the potential strategic and other benefits of the transaction,
including access to Talus Solutions' products and clients;
- suffer potential adverse publicity and negative perceptions by analysts
and investors;
- fail to realize any benefits from the significant allocation of resources
and management attention and significant expenses incurred in connection
with the acquisition; and
- suffer from diminished expectations of our ability to grow our business,
which could adversely affect our stock price.
A failure to complete the acquisition of Talus Solutions in a timely manner
or at all could therefore have a material adverse effect on our business,
results of operations and financial condition.
OUR ACQUISITION OF TALUS SOLUTIONS WILL ADVERSELY AFFECT OUR COMBINED FINANCIAL
RESULTS.
We will incur substantial dilution to our earnings per share in accordance
with generally accepted accounting principles for the foreseeable future as a
result of the Talus Solutions acquisition. In connection with the acquisition,
we will amortize approximately $23.8 million of deferred compensation over three
years. Further, we will incur an annual amortization charge of approximately
$91.5 million related to goodwill and intangible assets over the next four
years.
WE DEPEND ON SALES OF OUR SUPPLY CHAIN OPTIMIZATION AND EBUSINESS SOLUTIONS, AND
OUR BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF THE MARKET FOR THESE
PRODUCTS DOES NOT CONTINUE TO GROW.
Substantially all of our software license fees, consulting revenues and
solution support revenues have arisen from, or are related directly to, our
supply chain optimization and eBusiness solutions. We expect to continue to be
dependent upon these products in the future, and any factor adversely affecting
the products or the market for supply chain and eBusiness solutions, in general,
would materially and adversely affect our ability to generate revenues.
While we believe the market for supply chain and eBusiness solutions will
continue to expand, it may grow more slowly than in the past. If the market for
our products does not grow as rapidly as we expect, revenue growth, operating
margins or both could be adversely affected.
OUR MARKET IS EXTREMELY COMPETITIVE, AND WE MAY NOT BE ABLE TO EFFECTIVELY
COMPETE.
The market for our solutions is intensely competitive. The intensity of
competition in our market has significantly increased and is expected to
increase in the future, particularly in the eBusiness software applications
market. Our current and potential competitors may make acquisitions of other
competitors and may establish cooperative relationships among themselves or with
third parties. Further, our current or prospective clients and partners may
become competitors in the future. Increased competition is likely to result in
price reductions, lower
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gross margins, longer sales cycles and the loss of market share. Each of these
developments could materially and adversely affect our growth and operating
performance.
MANY OF OUR COMPETITORS HAVE SIGNIFICANTLY MORE RESOURCES THAN WE DO AND
THEREFORE WE MAY BE AT A DISADVANTAGE IN ATTEMPTING TO COMPETE WITH THEM.
We directly compete with other application software vendors including:
Adexa, Inc., Aspen Technology, Inc., The Descartes Systems Group Inc., i2
Technologies, Inc., Logility, Inc. and SynQuest, Inc. Some eBusiness software
companies that do not currently offer competitive products or solutions, such as
Ariba, Inc. and Commerce One, may begin to compete directly with us. In
addition, some enterprise resource planning (ERP) companies such as Invensys plc
(which acquired Baan Company N.V.), J.D. Edwards & Company, Oracle Corporation,
PeopleSoft, Inc., and SAP AG have acquired or developed supply chain planning
software products. Some of our current and potential competitors, particularly
the ERP vendors, have significantly greater financial, marketing, technical and
other competitive resources than us, as well as greater name recognition and a
larger installed base of clients. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in client requirements or to
devote greater resources to the development, promotion and sale of their
products than we can. Any of these factors could materially impair our ability
to compete and adversely affect our revenue growth and operating performance.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.
The market for supply chain optimization and eBusiness solutions is subject
to rapid technological change, changing client needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. Our growth and future operating results will depend, in
part, upon our ability to enhance existing applications and develop and
introduce new applications or components that:
- meet or exceed technological advances in the marketplace;
- meet changing client requirements;
- comply with changing industry standards;
- achieve market acceptance;
- integrate third-party software effectively; and
- respond to competitive products.
Our product development and testing efforts have required, and are expected
to continue to require, substantial investment. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities or develop
and bring new software to market in a timely and efficient manner. If we are
unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing clients and fail to
attract new clients, which would result in a decline in revenues.
SOFTWARE DEFECTS OR PROBLEMS IN THE IMPLEMENTATION OF SOFTWARE COULD LEAD TO
CLAIMS FOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUES OR DELAYS IN THE MARKET
ACCEPTANCE OF OUR PRODUCTS.
Our software products are complex and are frequently integrated with a wide
variety of third-party software. We may sell products that contain undetected
errors or failures when new
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products are first introduced or as new versions are released. We may also be
unable to meet client expectations in implementing our solutions. These problems
may result in claims for damages suffered by our clients or a loss of, or delays
in, the market acceptance of our products. In the past, we have discovered
software errors in our new releases and new products after their introduction.
In the event that we experience significant software errors in future releases,
we could experience claims for damages, delays in product releases, client
dissatisfaction and potentially lost revenues during the period required to
correct these errors. In the future, we may discover errors or limitations in
new releases or new products after the commencement of commercial shipments. Any
of these errors or defects could materially harm our business.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS AND
SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD PARTIES, ERRORS IN
THIRD-PARTY SOFTWARE OR INABILITY TO ENHANCE THE SOFTWARE OVER TIME COULD HARM
OUR BUSINESS.
We incorporate third-party software into our products and solutions. We are
likely to incorporate additional third-party software into our products and
solutions as we expand our product offerings. The operation of our products
would be impaired if errors occur in the third-party software that we license.
It may be more difficult for us to correct any errors in third-party software
because the software is not within our control. Accordingly, our business could
be adversely affected in the event of any errors in this software. There can be
no assurance that these third parties will continue to invest the appropriate
levels of resources in their products and services to maintain and enhance the
software capabilities.
Furthermore, it may be difficult for us to replace any third-party software
if a vendor seeks to terminate our license to the software. Any impairment in
our relationship with these third parties could adversely impact our business
and financial condition.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH
OTHER SOFTWARE PRODUCTS AND PLATFORMS.
We depend on companies such as Extricity, Inc. and Vignette Corporation to
integrate our software with software and platforms developed by third parties.
If these companies are unable to develop or maintain software that effectively
integrates our software and is free from errors, our ability to license our
products and provide solutions could be impaired. Further, we rely on these
companies to maintain relationships with the companies that provide the external
software that is vital to the functioning of our products and solutions. The
loss of any company that we use to integrate our software products could
adversely affect our business, results of operations and financial condition.
OUR EFFORTS TO DEVELOP RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARE COMPANIES,
CONSULTING FIRMS, RESELLERS AND OTHERS TO IMPLEMENT AND PROMOTE OUR SOFTWARE
PRODUCTS MAY FAIL.
We are developing and maintaining significant working relationships with
complementary vendors, such as software companies, consulting firms, resellers
and others that we believe can play an important role in marketing our products.
We are currently investing, and intend to continue to invest, significant
resources to develop these relationships, which could adversely affect our
operating margins. We may be unable to develop relationships with organizations
that will be able to market our products effectively.
Our arrangements with these organizations are not exclusive and, in many
cases, may be terminated by either party without cause. Many of the
organizations with whom we are developing or maintaining marketing relationships
are also involved with competing products. Therefore, there can be no assurance
that any organization will continue its involvement with us
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and our products. The loss of relationships with important organizations could
materially and adversely affect our results of operations.
WE HAVE LIMITED EXPERIENCE WITH GOVERNMENT CONTRACTS, WHICH OFTEN INVOLVE LONG
PURCHASE CYCLES AND COMPETITIVE PROCUREMENT PROCESSES.
We have recently begun providing our solutions to government agencies and
expect that a significant portion of our future revenues may be derived from
government agency clients. Obtaining government contracts may involve long
purchase cycles, competitive bidding, qualification requirements, performance
bond requirements, delays in funding, budgetary constraints and extensive
specification development and price negotiations. Each government agency
maintains its own rules and regulations with which we must comply and which can
vary significantly among agencies. Government agencies also often retain a
significant portion of fees payable upon completion of a project and collection
of such fees may be delayed for several months. Accordingly, our revenues could
decline as a result of these government procurement processes.
In addition, our government contracts are fixed price contracts which may
prevent us from recovering costs incurred in excess of our budgeted costs. Fixed
price contracts may require us to estimate the total project cost based on
preliminary projections of the project's requirements. The financial viability
of any given project depends in large part on our ability to estimate such costs
accurately and complete the project on a timely basis. In the event our actual
costs exceed the fixed contract cost, we will not be able to recover the excess
costs. If we fail to properly anticipate costs on fixed price contracts, our
profit margins will decrease. Some government contracts are also subject to
termination or renegotiation at the convenience of the government, which could
result in a large decline in revenue in any given quarter. Multi-year contracts
are contingent on overall budget approval by Congress and may be terminated due
to lack of funds.
INCREASED SALES THROUGH INDIRECT CHANNELS MAY ADVERSELY AFFECT OUR OPERATING
PERFORMANCE.
Even if our marketing efforts through indirect channels are successful and
result in increased sales, our average selling prices and operating margins
would be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
IF WE FAIL TO EFFECTIVELY EXPAND OUR SALES ORGANIZATION, OUR GROWTH WILL BE
LIMITED.
Our continuing efforts to expand our sales organization will require
significant resources. New sales personnel will require training and may take a
long time to achieve full productivity. Further, the competition for qualified
sales personnel is intense, and there is no assurance that we can attract and
retain sales people at levels sufficient to support our growth. Any failure to
adequately sell and support our products could limit our growth and adversely
affect our results of operations and financial condition.
THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures, contractual provisions, patent,
copyright, trademark and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult and, although we are unable to determine the
extent to which piracy of our software products exists, we expect software
piracy to be a problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the
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laws of the United States. Furthermore, our competitors may independently
develop technology similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
The number of intellectual property claims in our industry may increase as
the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a tendency
by software companies to file substantially increasing numbers of patent
applications. We have no way of knowing what patent applications third parties
have filed until a patent is issued. It can take as long as three years for a
patent to be granted after an application has been filed. Although we are not
aware that any of our products infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products. Any of these
claims, with or without merit, could be time-consuming to address, result in
costly litigation, cause product shipment delays or require us to enter into
royalty or license agreements. These royalty or license agreements might not be
available on terms acceptable to us or at all, which could materially and
adversely affect our business.
OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
We currently conduct operations in a number of countries around the world.
These operations require significant management attention and financial
resources and subject us to risks inherent in doing business internationally,
such as:
- regulatory requirements;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- different accounting practices;
- problems in collecting accounts receivable;
- legal uncertainty regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activities;
- potentially adverse tax consequences; and
- political instability.
Any of the above factors could adversely affect the success of our
international operations. One or more of these factors could have a material
adverse effect on our business and operating results.
FLUCTUATIONS IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Although the majority of our contracts are denominated in U.S. dollars,
most of the revenues from sales outside the United States have been denominated
in foreign currencies, typically the local currency of our selling business
unit. We anticipate that the proportion of our revenues denominated in foreign
currencies will increase. A decrease in the value of foreign currencies relative
to the U.S. dollar could result in losses from foreign currency fluctuations.
With respect to our international sales that are U.S. dollar-denominated, an
increase in the value of the U.S. dollar relative to the value of foreign
currencies could make our products and services less competitive with respect to
price.
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IF WE LOSE OUR KEY PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
Our success depends significantly on the continued service of our executive
officers. We do not have fixed-term employment agreements with any of our
executive officers, and we do not maintain key person life insurance on our
executive officers. The loss of services of any of our officers for any reason
could have a material adverse effect on our business, operating results,
financial condition and cash flows.
THE FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL WOULD HARM OUR BUSINESS.
We believe that our success also will depend significantly on our ability
to attract, integrate, motivate and retain additional highly skilled technical,
managerial, sales, marketing and services personnel. Competition for skilled
personnel is intense, and there can be no assurance that we will be successful
in attracting, motivating and retaining the personnel required to grow and
operate profitably. In addition, the cost of hiring and retaining skilled
employees is high, and this reduces our profitability. Failure to attract and
retain highly skilled personnel could materially and adversely affect our
business.
An important component of our employee compensation is stock options. A
decline in our stock price could adversely affect our ability to attract and
retain employees, as it has in the past.
WE RECENTLY HIRED OUR SENIOR MANAGEMENT TEAM AND THERE IS NO ASSURANCE THEY WILL
WORK TOGETHER EFFECTIVELY.
We significantly changed our senior management team during fiscal 2000. As
a result, our senior management team has worked together at Manugistics for less
than 18 months. Gregory J. Owens, our Chief Executive Officer, joined us in
April 1999. With one exception, all of our other present executive officers
joined us after Mr. Owens. Our success depends on the ability of our management
team to work together effectively. Our business, revenues and financial
condition will be materially and adversely affected if our senior management
team does not manage our company effectively or if we are unable to retain our
senior management.
EXPENSES ARISING FROM OUR STOCK OPTION REPRICING MAY HAVE A MATERIAL ADVERSE
IMPACT ON FUTURE FINANCIAL PERFORMANCE.
In response to the poor performance of our stock price between May 1998 and
January 1999, we offered to reprice employee stock options, other than those
held by our executive officers or directors, effective January 29, 1999, to
bolster employee retention. The effect of this repricing resulted in options to
acquire approximately 1,520,000 shares being repriced and the four-year vesting
period starting over. The recently adopted FASB Interpretation No. 44 of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," requires us to record compensation expense associated with the
change in the price of these options. In September 2000, we announced that the
increase in our common stock market price since the FASB-mandated measurement
date of July 1, 2000 resulted in a non-cash stock compensation expense of $20.7
million being recorded for the six months ended August 31, 2000. This non-cash
stock compensation expense caused what would otherwise have been reported as a
net loss for the six months of $124,000, or $0.00 per basic and diluted share,
to be reported as a net loss of $20.8 million, or $0.73 per basic and diluted
share. In each future quarter, we will record the additional expense or benefit
related to the repriced stock options still outstanding based on the change in
our common stock price as compared to the measurement date. As a result, the
repricing may continue to have a material adverse impact on reported financial
results and could therefore negatively affect our stock price.
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WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS, AND OUR COMPANY'S AND
PRODUCTS' REPUTATIONS MAY SUFFER.
Many of our implementations involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. Any failure in a client's system could result in a claim for
substantial damages against us, regardless of our responsibility for the
failure.
We have entered into and plan to continue to enter into agreements with
software vendors, consulting firms, resellers and others whereby they market our
solutions. If these vendors fail to meet their clients' expectations or cause
failures in their clients' systems, the reputation of our company and products
could be materially and adversely affected even if our software products perform
in accordance with their functional specifications.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE OR EBUSINESS COULD BE DETRIMENTAL TO
OUR FUTURE OPERATING RESULTS.
The growth of the Internet has increased demand for supply chain
optimization and eBusiness solutions, as well as created markets for new and
enhanced product offerings. Therefore, our future sales and profits are
substantially dependent upon the Internet as a viable commercial marketplace.
The Internet may not succeed in becoming a viable marketplace for a number of
reasons, including:
- potentially inadequate development of network infrastructure or delayed
development of enabling technologies and performance improvements;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- concerns that may develop among businesses and consumers about
accessibility, security, reliability, cost, ease of use and quality of
service;
- increased taxation and governmental regulation; or
- changes in, or insufficient availability of, communications services to
support the Internet, resulting in slower Internet user response times.
The occurrence of any of these factors could require us to modify our
technology and our business strategy. Any such modifications could require us to
expend significant amounts of resources. In the event that the Internet does not
become and remain a viable commercial marketplace, our business, financial
condition and results of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, EBUSINESS OR COMMERCE IN GENERAL
COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting the use of the Internet,
including laws relating to the use of the Internet for commerce and
distribution. The adoption or interpretation of laws regulating the Internet, or
of existing laws governing such things as consumer protection, libel, property
rights and personal privacy, could hamper the growth of the Internet and its use
as a communications and commercial medium. If this occurs, companies may decide
not to use our products or services, and our business and operating results
could suffer.
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THE VIABILITY OF ELECTRONIC EXCHANGES IS UNCERTAIN.
Electronic exchanges that allow collaboration over the Internet among
trading partners are relatively new and unproven. There can be no assurance that
trading partners will adopt exchanges as a method of doing business. Trading
partners may fail to participate in exchanges for a variety of reasons,
including:
- concerns about the confidentiality of information provided electronically
to exchanges;
- the inability of technological advances to keep pace with the volume of
information processed by exchanges; and
- regulatory issues, including antitrust issues, that may arise when
trading partners collaborate through exchanges.
Any of these factors could limit the growth of exchanges as an accepted
means of commerce. Slower growth or the abandonment of the exchange concept in
one or more industries could have a material adverse affect on our results of
operations and financial condition.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of us even if doing so would be beneficial to stockholders. For example, our
bylaws provide for a classified board of directors and allow our board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws require a two-thirds vote of stockholders to
remove a director from office. Furthermore, our board has the authority to issue
preferred stock and to designate the voting rights, dividend rate and privileges
of the preferred stock all of which may be greater than the rights of common
stockholders.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the supply chain and eBusiness software industry;
- changes in the economic performance and/or market valuations of other
supply chain and eBusiness companies and the software industry in
general;
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- adoption of industry standards and the inclusion of our technology in, or
compatibility of our technology with, such standards;
- adverse or unfavorable publicity regarding us or our products;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National Market and
the market for software companies in particular, have experienced extreme price
and volume volatility and a significant cumulative decline in recent months.
Such volatility and decline have affected many companies irrespective of or
disproportionately to the operating performance of these companies. These broad
market and industry factors may materially and adversely further affect the
market price of our common stock, regardless of our actual operating
performance.
(b) Financial Statements of Businesses Acquired.
Audited Consolidated Balance Sheets of Talus as of December 31, 1998
and 1999, and audited Consolidated Statements of Operations, Consolidated
Statements of Stockholders' Equity and Consolidated Statements of Cash Flows of
Talus for the fiscal years ended December 31, 1997, 1998 and 1999. Unaudited
Consolidated Balance Sheet of Talus as of June 30, 2000 and unaudited
Consolidated Statements of Operations, and Consolidated Statements of Cash
Flows of Talus for the six months ended June 30, 2000 and 1999.
12
<PAGE> 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TALUS SOLUTIONS, INC. AND SUBSIDIARY
Report of Independent Auditors............................ 14
Consolidated Balance Sheets............................... 15
Consolidated Statements of Operations..................... 16
Consolidated Statements of Stockholders' Equity........... 17
Consolidated Statements of Cash Flows..................... 18
Notes to Consolidated Financial Statements................ 19
</TABLE>
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Talus Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Talus
Solutions, Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Talus
Solutions, Inc. and subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
March 31, 2000, except for note 17,
for which the date is September 21, 2000
14
<PAGE> 15
TALUS SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 25,277 $ 11,826 $ 17,003
Short-term investments.................................... -- -- 274
Accounts receivable, net.................................. 7,552 6,031 5,241
Unbilled receivables...................................... 3,438 6,400 4,359
Prepaids and other current assets......................... 1,542 1,611 1,626
-------- -------- --------
37,809 25,868 28,503
Property and equipment, net................................. 3,815 4,803 3,994
Long-term investments....................................... -- -- 1,646
Other long-term assets...................................... 59 75 169
-------- -------- --------
$ 41,683 $ 30,746 $ 34,312
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,710 $ 927 $ 1,852
Accrued compensation...................................... 5,143 3,459 4,699
Other accrued liabilities................................. 4,919 3,366 4,826
Deferred revenue.......................................... 3,462 2,045 775
Current portion of restructuring accrual.................. 306 -- 903
Current portion of long-term debt and capital lease
obligations............................................. 1,250 2,079 1,144
-------- -------- --------
16,790 11,876 14,199
Long-term restructuring accrual............................. 3,266 -- 2,038
Long-term debt and capital lease obligations................ 2,155 3,348 1,590
Common stock put warrant ................................... 96 96 609
Convertible redeemable preferred stock, $0.0001 par value... 4,470 3,718 6,350
Authorized -- 2,000 shares; issued and outstanding -- 832
shares; liquidation preference $4,939, $4,470 and $3,718
at June 30, 2000(unaudited), December 31, 1999 and 1998,
respectively
ESOP Put obligation......................................... 3,094 4,812 2,166
Commitments and contingencies
Stockholders' equity :
Convertible Preferred stock, $0.0001 par
value -- Authorized -- 23,000 shares; issued and
outstanding -- 22,017 shares at June 30, 2000
(unaudited) and December 31, 1999 and 4,717 at December
31, 1998; liquidation preference $45,000 at June 30,
2000 (unaudited) and December 31, 1999 and $20,000 at
December 31, 1998....................................... 2 -- 2
Common stock:
Class A voting; $0.0001 par value. Authorized 100,000
shares at June 30, 2000 (unaudited), 50,000 shares at
December 31, 1999 and 1998; 16,065, 16,031 and 17,030
issued and 14,116, 14,342 and 16,210 outstanding at
June 30, 2000 (unaudited), December 31, 1999 and 1998,
respectively.......................................... 2 2 2
Class B nonvoting; $0.0001 par value. Authorized 5,000
shares; 398, 398 and 689 issued and 398, 398 and 397
outstanding at June 30, 2000 (unaudited), December 31,
1999 and 1998, respectively........................... -- -- --
Additional paid-in capital................................ 43,988 20,246 44,064
Treasury stock, 1,949, 1,689 and 820 shares at June 30,
2000 (unaudited), December 31, 1999 and 1998,
respectively of Class A and 292 shares of Class B at
December 31, 1998....................................... (1,739) (1,171) (2,005)
Accumulated deficit....................................... (30,441) (12,181) (34,703)
-------- -------- --------
Total stockholders' equity............................ 11,812 6,896 7,360
-------- -------- --------
$ 41,683 $ 30,746 $ 34,312
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE> 16
TALUS SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1999 1998 1997 2000 1999
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
License fees...................... $ 224 $ -- $ -- $ 1,500 $ --
Consulting, solution support and
custom software development
services........................ 37,626 43,923 41,070 21,664 18,146
-------- -------- -------- ------- -------
Total revenue................ 37,850 43,923 41,070 23,164 18,146
-------- -------- -------- ------- -------
OPERATING EXPENSES:
Cost of revenue................. 30,519 32,750 27,040 14,175 14,210
Sales and marketing............. 9,481 6,341 5,542 4,409 3,749
Product development............. 7,305 5,077 1,819 3,648 3,313
General and administrative...... 6,098 6,403 4,171 4,766 2,948
Acquisition-related expenses.... -- -- 1,005 -- --
ESOP expense.................... -- 3,284 778 -- --
Restructuring charge (income)... 3,956 -- -- (562) 481
-------- -------- -------- ------- -------
Total operating expenses..... 57,359 53,855 40,355 26,436 24,701
-------- -------- -------- ------- -------
Operating income (loss)........... (19,509) (9,932) 715 (3,272) (6,555)
Interest income................... 698 223 1 614 139
Interest expense.................. (414) (1,485) (513) (138) (211)
(Increase) Decrease in fair value
of common stock and put warrant... -- 360 -- (513) --
-------- -------- -------- ------- -------
Income (loss) before income
taxes........................... (19,225) (10,834) 203 (3,309) (6,627)
Provision for income taxes........ -- -- 370 -- --
-------- -------- -------- ------- -------
Net loss.......................... (19,225) (10,834) (167) (3,309) (6,627)
Dividends and accretion on
redeemable preferred stock...... (753) (627) (558) (1,880) (376)
-------- -------- -------- ------- -------
Net loss attributable to common
stockholders.................... $(19,978) $(11,461) $ (725) $(5,189) $(7,003)
======== ======== ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE> 17
TALUS SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------------- -----------------------------------
SERIES B, SERIES C,
CONVERTIBLE CONVERTIBLE CLASS A VOTING CLASS B NONVOTING ADDITIONAL
--------------- --------------- --------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... -- $-- -- $-- 17,299 $2 269 $-- $ --
Accrual of dividends and accretion of
redeemable preferred stock.......... -- -- -- -- -- -- -- -- --
(Increase) decrease in ESOP put
obligation.......................... -- -- -- -- -- -- -- -- --
Exercise of stock options............. -- -- -- -- 135 -- 365 -- 416
Compensation expense related to
release of shares in ESOP........... -- -- -- -- -- -- -- -- (7)
Income tax benefit from stock option
exercise............................ -- -- -- -- -- -- -- -- 25
Purchases and retirements of treasury
stock............................... -- -- -- -- -- -- (135) -- (225)
Conversion of Class A voting common
stock into Class B nonvoting common
stock............................... -- -- -- -- (534) -- 534 -- --
Net loss............................... -- -- -- -- -- -- -- -- --
----- -- ------ -- ------ -- ----- -- -------
Balance at December 31, 1997........... -- -- -- -- 16,900 2 1,033 -- 209
Accrual of dividends and accretion of
redeemable preferred stock.......... -- -- -- -- -- -- -- -- --
(Increase) decrease in ESOP put
obligation.......................... -- -- -- -- -- -- -- -- --
Sale of Series B convertible preferred
stock, less offering costs.......... 4,717 -- -- -- -- -- -- -- 19,948
Exercise of stock options............. -- -- -- -- 130 -- -- -- 143
Decrease in deferred compensation..... -- -- -- -- -- -- -- -- 658
Income tax benefits from stock option
exercises........................... -- -- -- -- -- -- -- -- 64
Compensation expense associated with
purchase of shares from ESOP........ -- -- -- -- -- -- -- -- 1,027
Reclassification of deferred
compensation associated with the
purchase of shares from ESOP........ -- -- -- -- -- -- -- -- (806)
Purchases of treasury stock........... -- -- -- -- -- -- -- -- --
Retirement of treasury stock.......... -- -- -- -- -- -- (344) -- (997)
Net loss............................... -- -- -- -- -- -- -- -- --
----- -- ------ -- ------ -- ----- -- -------
Balance at December 31, 1998........... 4,717 -- -- -- 17,030 2 689 -- 20,246
Accrual of dividends and accretion of
redeemable preferred stock.......... -- -- -- -- -- -- -- -- --
(Increase) decrease in ESOP put
obligation.......................... -- -- -- -- -- -- -- -- --
Sale of Series C convertible preferred
stock, less offering costs.......... -- -- 17,300 2 -- -- -- -- 24,765
Issuance of common stock.............. -- -- -- -- 10 -- 1 -- 12
Purchases of treasury stock........... -- -- -- -- -- -- -- -- --
Retirement of treasury stock.......... -- -- -- -- (1,009) -- (292) -- (1,628)
Issuance of warrants.................. -- -- -- -- -- -- -- -- 593
Net loss.............................. -- -- -- -- -- -- -- -- --
----- -- ------ -- ------ -- ----- -- -------
Balance at December 31, 1999........... 4,717 $-- 17,300 $2 16,031 $2 398 $-- $43,988
===== == ====== == ====== == ===== == =======
<CAPTION>
(ACCUMULATED
DEFICIT) TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996........... $ (4,606) $ -- $ (4,604)
Accrual of dividends and accretion of
redeemable preferred stock.......... (558) -- (558)
Increase (decrease) in ESOP put
obligation.......................... (4,248) -- (4,248)
Exercise of stock options............. -- -- 416
Compensation expense related to
release of shares in ESOP........... -- -- (7)
Income tax benefit from stock option
exercise............................ -- -- 25
Purchases and retirements of treasury
stock............................... -- -- (225)
Conversion of Class A voting common
stock into Class B nonvoting common
stock............................... -- -- --
Net loss............................... (167) -- (167)
-------- ------- --------
Balance at December 31, 1997........... (9,579) -- (9,368)
Accrual of dividends and accretion of
redeemable preferred stock.......... (627) -- (627)
Increase (decrease) in ESOP put
obligation.......................... 8,859 -- 8,859
Sale of Series B convertible preferred
stock, less offering costs.......... -- -- 19,948
Exercise of stock options............. -- -- 143
Decrease in deferred compensation..... -- -- 658
Income tax benefits from stock option
exercises........................... -- -- 64
Compensation expense associated with
purchase of shares from ESOP........ -- -- 1,027
Reclassification of deferred
compensation associated with the
purchase of shares from ESOP........ -- -- (806)
Purchases of treasury stock........... -- (2,168) (2,168)
Retirement of treasury stock.......... -- 997 --
Net loss............................... (10,834) -- (10,834)
-------- ------- --------
Balance at December 31, 1998........... (12,181) (1,171) 6,896
Accrual of dividends and accretion of
redeemable preferred stock.......... (753) -- 753
Increase (decrease) in ESOP put
obligation.......................... 1,718 -- 1,718
Sale of Series C convertible preferred
stock, less offering costs.......... -- -- 24,767
Issuance of common stock.............. -- -- 12
Purchases of treasury stock........... -- (2,196) (2,196)
Retirement of treasury stock.......... -- 1,628 --
Issuance of warrants.................. -- -- 593
Net loss.............................. (19,225) -- (19,225)
-------- ------- --------
Balance at December 31, 1999........... $(30,441) $(1,739) $ 11,812
======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements
17
<PAGE> 18
TALUS SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1999 1998 1997 2000 1999
-------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(19,225) $(10,834) $ (167) $ (3,309) $(6,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 2,081 1,525 1,230 1,078 950
Increase (decrease) in fair value of common
stock put warrant......................... -- (360) -- 513 --
Stock-based compensation.................... 593 2,982 400 -- 135
Restructuring provision..................... 3,956 -- -- (562) 481
Allowance for doubtful accounts............. 516 214 181 (354) 94
Changes in assets and liabilities:
Accounts receivable......................... (2,037) 3,972 (2,025) 2,665 562
Unbilled receivables........................ 2,962 (3,281) (1,356) (921) 2,897
Prepaids and other current assets........... 68 (952) (259) (84) (159)
Other non-current assets.................... 16 420 (195) (110) 11
Accounts payable and other accrued
liabilities............................... 2,336 2,849 (573) 49 (1,327)
Accrued compensation........................ 1,684 352 (349) (444) 860
Deferred revenue............................ 1,417 911 (770) (2,687) (734)
Restructuring accrual....................... (384) -- -- (69) (232)
-------- ------- ------- -------- -------
Net cash used in operating activities..... (6,017) (2,202) (3,883) (4,235) (3,089)
-------- ------- ------- -------- -------
Cash flows from investing activities:
Capital expenditures............................ (1,093) (2,674) (1,826) (1,257) (481)
Purchases of investments........................ -- -- -- (1,920) --
-------- ------- ------- -------- -------
Net cash used in investing activities..... (1,093) (2,674) (1,826) (3,177) (481)
-------- ------- ------- -------- -------
Cash flows from financing activities:
Change in revolving credit facility, net........ (868) (1,632) 1,847 -- 995
Proceeds from issuance of long-term debt........ -- 2,000 8,564 -- --
Principal payments on long-term debt and capital
lease obligations............................. (1,154) (5,692) (3,506) (671) (491)
Proceeds from issuance of Series B and C
convertible preferred stock, less
offering costs................................ 24,767 19,948 -- -- --
Proceeds from issuance of put warrants.......... -- -- 456 -- --
Proceeds from issuance of common stock and
exercise of stock options and warrants........ 12 143 416 75 --
Purchases of treasury stock..................... (2,196) (2,038) (187) (266) (278)
-------- ------- ------- -------- -------
Net cash provided by (used in) financing
activities.............................. 20,561 12,729 7,590 (862) 226
-------- ------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................. 13,451 7,853 1,881 (8,274) (3,344)
Cash and cash equivalents at beginning of year.... 11,826 3,973 2,092 25,277 11,826
-------- ------- ------- -------- -------
Cash and cash equivalents at end of year.......... $ 25,277 $11,826 $ 3,973 $ 17,003 $ 8,482
======== ======= ======= ======== =======
Supplemental disclosures of cash paid during the
year for:
Interest...................................... $ 425 $ 1,348 $ 564
======== ======= =======
Income taxes, net of refunds received......... $ (278) $ 276 $ 827
======== ======= =======
Supplemental disclosure of noncash financing
activity:
Capital leases................................ $ -- $ -- $ 187
======== ======= =======
Treasury stock purchases financed with a note
payable..................................... $ -- $ 130 $ --
======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE> 19
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company
Talus Solutions, Inc. and its wholly-owned subsidiary ("Talus" or the
"Company") is a leading provider of pricing and revenue management software
solutions. These solutions enable companies to achieve growth by winning new
customers and increasing revenue and profit from existing customers. Talus'
customers represent a number of industries, including, but not limited to,
airlines, hotels, rental car, freight and package delivery, media,
manufacturing, utilities, and e-Commerce. The Company's products and services
are offered on a worldwide basis.
Company Formation
Talus was formed on November 18, 1997 for the purpose of effecting the
mergers of Decision Focus Incorporated ("Decision Focus") and Aeronomics
Incorporated ("Aeronomics") (collectively, the "predecessor companies") into
Talus. These mergers were effected as stock-for-stock exchanges. These
transactions were accounted for using the pooling of interests method of
accounting with Decision Focus deemed to be the issuing company.
Basis of Presentation
The consolidated financial statements include the accounts of Talus and a
wholly-owned subsidiary. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Interim Financial Information
The unaudited consolidated financial statements of the Company as of June
30, 2000 and for the six months ended June 30, 2000 and 1999 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, certain information and footnotes required
by generally accepted accounting principles for complete financial statements
have been condensed or omitted. In the opinion of management, all adjustments,
consisting of normal recurring adjustments considered necessary for a fair
presentation, have been included. The results of operations for the six months
ended June 30, 2000 are not necessarily indicative of the expected results for
the year ending December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue based on the provisions of Statement of
Position, or SOP, No. 97-2, "Software Revenue Recognition," as amended by SOP
No. 98-9, and SOP No. 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." The Company generates revenue from two
primary sources: (a) License fee revenue and (b) Consulting, solution support
and custom software development services revenue.
(a) License fee revenue: License fee revenue is generated from licensing
the rights to the perpetual use of the Company's software products. The Company
believes that implementation
19
<PAGE> 20
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services typically provided to install its software products are essential to
the customer's use of Talus software products in arrangements where the Company
is responsible for implementation services. As such, the Company recognizes
revenue on the percentage-of-completion method, measured by the percentage of
contract costs incurred to date to estimated total contract costs for each
contract.
(b) Consulting, solution support and custom software development services
revenue: The Company performs consulting and custom software development
services under both time-and-materials and fixed-price contracts. These services
include the development, installation and often the maintenance, of customized
software applications. Revenue from fixed-price contracts is recognized on the
percentage-of-completion method, measured by the percentage of contract costs
incurred to date to estimated total contract costs for each contract. Contract
costs include all direct and certain indirect costs. Revenue derived from
contracts to provide services on a time-and-materials basis is recognized as the
related services are performed.
Solutions support revenue is based principally upon performance of
maintenance and support agreements. Support services are not considered
essential to the functionality of the Company's software products. The Company
recognizes support revenue ratably over the period of the contract, which is
generally twelve months.
The Company usually bills for license fees upon commencement of the
contract, however, in some situations the Company may delay billing based on the
terms of the contract. The Company bills for services on a monthly basis for
time-and-materials contracts and upon achieving contractual milestones on
fixed-price contracts.
Unbilled receivables represent amounts due to the Company for work
performed that had not been billed as of the period end. Deferred revenue is
recognized for amounts billed or collected by the Company before satisfying the
above revenue recognition criteria. Deferred revenue consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
<S> <C> <C>
License fees................................................ $ 676 $ --
Other....................................................... 2,786 2,045
------ ------
$3,462 $2,045
====== ======
</TABLE>
Cost of Revenue
Cost of revenue includes the cost of media, product packaging,
documentation, and other production costs for license fee revenue. These costs
have been insignificant to date. Cost of revenue for consulting, solutions
support and custom software development services consist primarily of salaries
and related benefits of delivery personnel, training and customer support
personnel, including cost of services provided by third-party consultants
engaged by the Company. When the current estimates of total contract revenue and
contract costs indicate a loss, a provision for the entire loss on the contract
is recorded and is included in cost of revenue.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company's
20
<PAGE> 21
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts receivable result primarily from operations and are receivable from a
broad customer base principally in the United States. The Company does not
require collateral for its receivables. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. The allowance for doubtful
accounts aggregated $980 and $464 at December 31, 1999 and 1998, respectively,
and $626 at June 30, 2000 (unaudited). Management believes the allowance for
doubtful accounts is adequate to provide for normal credit losses.
Cash and Cash Equivalents
Cash equivalents are highly liquid interest-bearing investments with
original maturities of three months or less when purchased. Cash equivalents are
carried at cost, which approximates fair value. Cash equivalents at December 31,
1999 and 1998 consist primarily of money market instruments, commercial paper
and certificates of deposit.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................... 5-9 years
Furniture and fixtures...................................... 3-7 years
Computer equipment.......................................... 3-5 years
Purchased computer software................................. 3-5 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the estimated useful life of the improvement or the lease term, whichever is
shorter. Amortization of assets held under capital lease arrangements is
included in depreciation expense.
Software Development
The Company expenses all software development costs associated with
establishing technological feasibility of software applications, which the
Company defines as completion of beta testing. Because of the insignificant
amount of costs incurred by the Company between completion of beta testing and
release, the Company has not capitalized any software development costs in the
accompanying consolidated financial statements.
Stock-Based Compensation
The Company applies the intrinsic value method to account for compensation
expense related to the award of stock options to employees and directors, and
furnishes pro forma disclosures in accordance with the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company accounts for options and warrants
granted to non-employees using the fair-value method prescribed by SFAS No. 123
and Emerging Issues Task Force, or EITF, No. 96-18, "Accounting for Equity
Instruments that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling, Goods, or Services."
21
<PAGE> 22
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income/(Loss)
The Company did not have any significant components of other comprehensive
income/(loss) for the three years ended December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No.
133 is not expected to have a material impact on the Company's consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the presentation adopted in 1999.
(3) MERGERS
On November 18, 1997, Talus was formed in connection with the mergers of
Decision Focus and Aeronomics into Talus Solutions, Inc., a newly formed
corporation. These mergers were effected as follows: (1) the merger between
Talus and Decision Focus was effected through the exchange of 8,821 shares of
the Company's Class A voting common stock for 84 shares of Decision Focus's
Class A voting common stock and 678 shares of the Company's Class B nonvoting
common stock for 6 shares of Decision Focus's Class B nonvoting common stock (at
exchange ratios of 105.1985 shares to one) and (2) the merger between Talus and
Aeronomics was effected through the exchange 8,077 shares of the Company's Class
A voting common stock for 4,391 shares of Aeronomics' Series B nonvoting common
stock, 1 share of the Company's Class A voting common stock for 1 share of
Aeronomics' Series A voting common stock, and 832 shares of the Company's
convertible preferred stock for 443 shares of Aeronomics' convertible preferred
stock (at exchange ratios of 1.8772 shares of the Company's Class A voting
common stock for each Aeronomics Series A common share, and 1.8397 shares of the
Company's Class A voting common stock for each Aeronomics Series B common share,
and 1.8772 shares of the Company's convertible preferred stock for each
Aeronomics convertible preferred share). Additionally, all previously
outstanding options to acquire common stock of Decision Focus and Aeronomics
were converted into options to acquire the Company's Class A voting common stock
and Class B nonvoting common stock using the exchange ratios defined above. The
transactions were accounted for using the pooling of interests method of
accounting with Decision Focus deemed to be the issuing company. As a result,
the historical financial position and results of operations of Decision Focus
and Aeronomics have been combined to become the historical financial position
and results of
22
<PAGE> 23
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations of the Company for all periods prior to the mergers to give
retroactive effect to these transactions. In connection with these mergers, the
Company incurred $1,005 in acquisition-related expenses, which have been
separately classified in the 1997 consolidated statement of operations.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Furniture, fixtures, and leasehold improvements............. $2,485 $2,452
Computer equipment.......................................... 8,346 7,956
Purchased computer software................................. 2,647 2,045
------ ------
13,478 12,453
Less accumulated depreciation............................... 9,663 7,650
------ ------
Property and equipment, net............................ $3,815 $4,803
====== ======
</TABLE>
(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Revolving Credit Facility
The Company maintains a revolving credit facility (the "Revolver") with a
commercial bank. The credit facility provides for up to $3.5 million in
borrowings. Available borrowings under the facility are limited to 80% of
eligible accounts receivable, as defined. The credit facility bears interest at
a rate of prime plus 1/4% payable monthly and expired on May 1, 2000. Borrowings
outstanding under the Revolver were $0 and $868 on December 31, 1999 and 1998,
respectively.
Note Payable - Commercial Bank
The Company maintains a long-term note payable with a commercial bank (the
"Bank Note"). The original principal amount of the Bank Note was $5.0 million,
with monthly installments of principal of $83 plus interest at a rate of 9.02%
through its expiration in December 2002. The outstanding principal of this note
was $3.0 million and $4.0 million at December 31, 1999 and 1998, respectively,
and $2.5 million at June 30, 2000 (unaudited). The current portion of this
obligation was $1.0 million at June 30, 2000 (unaudited), December 31, 1999 and
1998, respectively.
The Revolver and the Bank Note contain various operating and financial
covenants, and are secured by substantially all assets of the Company. At
December 31, 1999, the Company did not meet the financial covenants pertaining
to cash flows to fixed charges and minimum net worth. Subsequent to December 31,
1999, the Company obtained a waiver of its financial covenant violations.
Other Notes Payable and Capital Lease Obligations
The Company is obligated under various notes payable arrangements to
certain employees and former employees and various capital lease obligations,
principally for furniture and fixtures and computer equipment. The remaining
obligation under these notes payable and capital lease obligations aggregated
$405 and $559 at December 31, 1999 and 1998, respectively.
23
<PAGE> 24
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled annual maturities of long-term debt are as follows as of December
31, 1999:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------- ------
<S> <C>
2000........................................................ $1,250
2001........................................................ 1,071
2002........................................................ 1,042
2003........................................................ 42
------
$3,405
======
</TABLE>
(6) ACCRUED COMPENSATION
Accrued compensation consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998 JUNE 30, 2000
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Incentive compensation............................. $2,507 $ -- $2,097
Benefit plan contributions......................... 894 1,004 535
Vacation........................................... 944 919 1,173
Expatriate tax liabilities......................... 324 1,430 604
Other.............................................. 474 106 290
------ ------ ------
$5,143 $3,459 $4,699
====== ====== ======
</TABLE>
(7) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998 JUNE 30, 2000
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Loss contracts reserve............................. $3,234 $2,609 $2,850
Other.............................................. 1,685 757 1,976
------ ------ ------
$4,919 $3,366 $4,826
====== ====== ======
</TABLE>
(8) RESTRUCTURING CHARGE
During December 1999, the Company undertook a plan to relocate its
corporate offices to a more strategic location within the Atlanta, Georgia
metropolitan area. The Company has executed a lease agreement for new space and
moved into its new space during September 2000. In connection with this plan,
the Company recorded a charge of $3,572 associated with lease space that was
abandoned in fiscal 2000. The Company did not anticipate any future benefit from
the costs incurred. The Company is obligated under a non-cancelable lease
arrangement through August 2003 for the abandoned office location. Although the
Company was actively seeking a subleasee for the abandoned space to mitigate its
remaining cash obligation, it was not considered probable at December 31, 1999
that the Company would be able to obtain such a sublease.
24
<PAGE> 25
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining lease obligation from the lease abandonment date of October
1, 2000 is as follows:
<TABLE>
<S> <C>
Payable in:
2000...................................................... $ 306
2001...................................................... 1,217
2002...................................................... 1,234
2003...................................................... 815
------
$3,572
======
</TABLE>
During January 1999, the Company terminated 25 employees as part of an
internal reorganization and cost savings plan. The Company recorded a charge of
$481 for related severance costs, which had been paid as of December 31, 1999.
Unaudited
During June 2000, the Company executed a sublease for a portion of its
abandoned office location. Accordingly, the Company recorded income of $562
during the six months ended June 30, 2000 to reflect the reduction in its
remaining net lease obligation.
(9) STOCKHOLDERS' EQUITY
Common Stock
Class A common stock is voting common stock. Holders of Class B nonvoting
common stock generally have identical rights as the holders of Class A voting
common stock with the exception of voting rights. Holders of Class B nonvoting
common stock are not entitled to vote on any matter unless otherwise required by
law.
Preferred Stock
Preferred stock outstanding as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND ORIGINAL
AUTHORIZED OUTSTANDING VALUE
---------- ----------- ---------
<S> <C> <C> <C>
Series A.......................................... 2,000 832 $ 2,000
Series B.......................................... 5,000 4,717 20,000
Series C.......................................... 18,000 17,300 25,000
------ ------ -------
25,000 22,849 $47,000
====== ====== =======
</TABLE>
The rights, preferences and privileges of the holders of Series A, B and C
preferred stock are as follows:
Series A (Cumulative, Convertible, Redeemable and Nonvoting): Shares of the
Company's Series A preferred stock are entitled to quarterly dividends at the
annual rate of 8% ($0.1944 per share) when and if declared by the Company's
Board of Directors. Such dividends are cumulative, accrue from the original
issue date, and prohibit the Company from paying dividends on its common stock
until all accrued dividends in arrears have been paid on the Series A preferred
stock. The Company, at its option, may pay all accrued and unpaid dividends at
conversion or may issue Class B nonvoting common stock. Dividends in arrears on
the Series A preferred stock totaled $2,511 and $1,759 as of December 31, 1999
and 1998, respectively.
25
<PAGE> 26
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series A preferred stock also includes liquidation rights which
provide, upon liquidation of the Company, for the holder to be paid an amount
equal to the original amount invested plus a 20% compounded annual return less
any dividends paid under the dividend rights described above. The Series A
preferred stock is nonvoting, unless the Company attempts to create a senior
class or series of stock, amend the certificate of incorporation or bylaws in a
manner that would adversely affect the rights and preferences of the Series A
preferred stock, pay a dividend on the common stock, or otherwise fails to
comply with certain terms and conditions of the preferred stock purchase
agreement. The terms and conditions of the preferred stock purchase agreement
include, among others, requirements for the Company to report financial
information to the holder and visitation rights for the holder with respect to
meetings of the Company's Board of Directors.
Under the original terms of the Series A preferred stock purchase
agreement, the holder could convert each share of Series A preferred stock into
one share of Class B nonvoting common stock at any time, subject to adjustment
for dilutive issuances of equity or convertible securities as described in the
certificate of incorporation. Furthermore, the Series A preferred stock will
automatically convert into Class B nonvoting common stock at the then current
conversion rate in the event of an initial public offering meeting certain
criteria ("Qualified IPO"). In the event of a merger or sale of the Company, the
holder of the Series A preferred stock would receive the form of consideration
available for distribution to stockholders equal to the original invested amount
plus accrued and unpaid cumulative dividends or the liquidation value, whichever
is greater. Upon issuance of the Series C preferred stock in August 1999, the
conversion ratio of the Series A preferred stock into Class B nonvoting common
stock was adjusted in accordance with the certificate of incorporation.
Accordingly, each share of Series A preferred stock is now convertible into
1.185 shares of Class B nonvoting common stock, or 985 shares in aggregate.
The holder of Series A preferred stock was originally entitled to require
the Company to redeem the shares and all accrued and unpaid dividends thereon
for cash in July 2000. The redemption price is based on the appraised value of
the Company, as defined in the agreement, but in no event will the redemption
price be less than the original invested amount plus a 20% compounded annual
return on the invested amount less any preferred dividends declared and paid.
Upon issuance of the Series C preferred stock in August 1999, the Series A
preferred stock mandatory redemption date was changed from July 2000 to July
2002. The Company's future cash obligation for the redemption of Series A
preferred stock, assuming that the Series A preferred stock has not been
converted to common stock, at the minimum redemption amount is approximately
$7,150 which would be due in July 2002 and includes accrued dividends in
arrears. The Series A preferred stock is presented outside of stockholders'
equity since redemption is outside of the control of the company.
The holder of the Series A preferred stock also received certain other
rights including, but not limited to, registration rights with respect to the
shares. In the event of a distribution of assets and rights upon liquidation,
shares of the Series A preferred stock rank "senior" to the Series B preferred
stock, "junior" to the Series C preferred stock and "senior" to all classes of
common stock.
Unaudited
The Company determined that the fair value of the Series A preferred stock
on June 30, 2000 exceeded the minimum redemption value as of such date.
Accordingly, the Series A
26
<PAGE> 27
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock is presented at its estimated fair value at June 30, 2000, which
resulted in $1,411 additional accretion recorded during the six months ended
June 30, 2000.
Series B (Convertible and Voting): In September 1998, the Company issued
4,717 shares of Series B preferred stock, resulting in gross proceeds to the
Company of $19.9 million. As part of the original Series B preferred stock
purchase agreement, certain warrants were issued to the Series B preferred stock
investors. The warrants provide, upon a liquidity event as defined in the
agreement, the holders with the right to purchase at a nominal price additional
shares of Series B convertible preferred stock equal in value to the greater of
(1) an 8% annual dividend, compounded annually on the purchased shares or (2) a
20% return compounded annually on the original investment amount of $20.0
million less the appreciation of the Series B convertible preferred stock since
original issue date, grossed up to offset tax effects. Upon issuance of the
Series C preferred stock in August 1999, the warrant holders agreed to cancel
their warrants. A provision in the stock purchase agreement also provides for
additional warrants at an exercise price of $.01 if a particular customer
contract incurred a loss of greater than $2.5 million, or any other customer
contract considered "open" at the closing date incurred a loss greater than $2.0
million and the purchasers were not previously notified of such loss.
The Series B preferred stock includes dividend rights when and if declared
and paid by the Company on common stock as if the Series B preferred stock was
converted to Class A common stock immediately prior to the dividend declaration.
The Series B preferred stock also includes liquidation rights which provide,
upon liquidation of the Company, for the holders to be paid an amount no less
than the original investment amount plus declared but unpaid dividends. The
terms and conditions of the stock purchase agreement include, among others,
requirements for the Company to report financial information to the holders and
allows the holders to elect a member to the Company's Board of Directors.
Under the original terms of the Series B preferred stock, the holders could
convert each share of Series B preferred stock into one share of Class A voting
common stock at any time, subject to adjustment for dilutive issuances of equity
or convertible securities as described in the certificate of incorporation.
Furthermore, the terms of the Series B preferred stock require conversion to
Class A voting common stock at the then current conversion rate in the event of
a Qualified IPO, merger or sale of the Company meeting certain criteria. Upon
issuance of the Series C preferred stock in August 1999, the conversion ratio of
the Series B preferred stock into Class A voting common stock was adjusted in
accordance with the certificate of incorporation. Accordingly, each share of
Series B preferred stock is now convertible into 2.934 shares of Class A voting
common stock, or 13,840 shares in aggregate. Each share of Series B preferred
stock carries voting rights equal to the number of shares of Class A voting
common stock that would be issued upon conversion and votes together with the
Class A common stock and other voting stock on all matters on which the Class A
common stock is entitled to vote.
The holders of the Series B preferred stock also received certain other
rights including, but not limited to, registration rights with respect to the
shares. In the event of a distribution of assets and rights upon liquidation,
shares of Series B preferred stock rank "junior" to all other series of
preferred stock and "senior" to all classes of common stock.
Series C (Convertible and Voting): In August 1999, the Company issued
17,300 shares of Series C preferred stock, resulting in gross proceeds to the
Company of $24.7 million.
The Series C preferred stock includes dividend rights when and if declared
and paid by the Company on common stock as if the Series C preferred stock was
converted to Class A
27
<PAGE> 28
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock immediately prior to the dividend declaration. The Series C
preferred stock also includes liquidation rights, which provide, upon
liquidation of the company, for the holders to be paid an amount no less than
the original investment amount plus declared but unpaid dividends.
The holders of Series C preferred stock may convert each share of Series C
preferred stock into one share of Class A voting common stock at any time,
subject to adjustment as provided for in the agreement. Each share of Series C
preferred stock carries voting rights equivalent to the number of shares of
Class A voting common stock that would be issued upon conversion, subject to
certain exceptions. Furthermore, the terms of the Series C preferred stock
require conversion to Class A voting common stock in the event of a Qualified
IPO, merger or sale of the Company meeting certain criteria. The holders of
Series C preferred stock also received certain other rights including, but not
limited to, registration rights with respect to the shares.
In the event of a distribution of assets and rights upon liquidation,
shares of Series C preferred stock are "senior" to all other series of preferred
stock and "senior" to all classes of common stock.
Stockholders Agreement
In connection with the issuance of the Series B and Series C preferred
stock, the Company entered into a Stockholders Agreement with the Series A, B
and C preferred stock investors, and certain other major common shareholders.
The agreement restricts the parties from transferring their ownership subject to
exceptions, and grants rights of first refusal to the Company and the parties
under the agreement. Additionally, the agreement (i) provides the preferred
stockholders both with tag-along rights if the major common stockholders attempt
to sell any stock and with preemptive rights on Company issuances of equity or
convertible securities, and (ii) provides certain Series B and Series C
investors with representation on the Company's Board of Directors and gives
certain Series B and Series C investors certain veto rights, and (iii) obligates
a major common stockholder under noncompete provisions.
Stock Warrants
In connection with certain services rendered by outside consultants and the
issuance of certain notes payable, the Company issued warrants to purchase
shares of the Company's Class A voting common stock. The following warrants were
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
NATURE OF GRANT EXERCISE
TRANSACTION DATE GRANTED OUTSTANDING EXERCISABLE PRICE EXPIRATION
----------- --------- ------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Financing............ Dec-1997 95 95 95 $0.01 Jan-2003
Consulting
Services........... Oct-1998 21 21 21 2.38 Oct-2003
Consulting
Services........... Jun-1999 260 260 260 2.38 Jun-2004
Consulting
Services........... Jul-1999 42 42 42 2.38 Jul-2004
--- --- ---
418 418 418
=== === ===
</TABLE>
The Company calculated the fair value of all warrants on the date of grant
for services rendered using the Black-Scholes options model as prescribed by
SFAS No. 123. The fair value
28
<PAGE> 29
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the warrants issued in conjunction with consulting services was approximately
$593 and was recognized as expense in the period the services were performed.
The terms of the warrants issued in conjunction with certain notes payable
grant the holder the right and option to put the warrants back to the Company
for cash for a period of 30 days immediately prior to the expiration thereof at
a price equal to the fair market value of the shares of Class A voting common
stock issuable to the holder upon exercise, as defined.
In December 1997 the Company allocated $456 to these warrants using the
relative fair values of the notes payable and the warrants. As a result, the
note was recorded with an original issue discount of $456. The value of these
warrants is presented outside of stockholders' equity since redemption of the
warrants is outside of the control of the company. The fair value of such
warrants were $96 at December 31, 1999 and 1998 and $609 at June 30, 2000
(unaudited). The accretion to fair value recorded for these warrants was $0,
$(360) and $0 in 1999, 1998 and 1997, respectively, and $513 and $0 for the six
months ended June 30, 2000 and 1999 (unaudited), respectively.
In March 1998, the Company borrowed an additional $2.0 million under the
terms of the financing arrangement. In September 1998, the entire $5.0 million
subordinated note payable was repaid with the proceeds of the sale of the Series
B preferred stock and as a result, the remaining unaccreted discount of $334 was
charged to interest expense.
(10) STOCK-BASED INCENTIVE PLANS
Talus 1998 Stock Option Plan
In 1998, the Company adopted the Talus 1998 Stock Option Plan (the "1998
Plan"). The 1998 Plan, as amended, provided for shares of the Company's Class A
voting common stock to be reserved for incentive stock option and nonqualified
stock option grants to key employees. In November 1999, the Board approved the
Amended and Restated Stock Option Plan (the "1999 Plan"), which provides for
12,715 shares of the Company's Class A voting common stock to be reserved for
incentive stock option and nonqualified stock option grants to key employees and
other individuals performing services for the Company. Options available for
grant at December 31, 1999 were 5,867.
Other Stock Option Plans
Each of the predecessor companies maintained stock option plans (the
"predecessor plans") prior to the formation of the Company. All awards granted
under the predecessor plans were converted into options to acquire shares of the
Company's Class A voting common stock or Class B nonvoting common stock.
29
<PAGE> 30
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options Awards
The following table summarizes activity in the Company's stock option plans
for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
WEIGHTED AVG WEIGHTED AVG WEIGHTED AVG
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of
year............... 1,319 $2.25 1,069 $2.00 1,734 $1.53
Granted.............. 6,571 1.01 488 2.38 290 2.45
Canceled/expired..... (640) 2.12 (108) 1.76 (349) 1.57
Exercised............ -- -- (130) 1.10 (606) 1.11
----- ----- -----
Options outstanding
at end of year..... 7,250 $1.14 1,319 $2.25 1,069 $2.00
===== ===== =====
Options exercisable
at end of year..... 463 $2.26 787 $2.26 405 $2.13
===== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGES OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
---------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.01.. 6,513 9.60 $1.01 -- $ --
1.19-2.45.. 737 4.76 2.30 463 2.26
----- ---
1.01-2.45.. 7,250 9.11 1.14 463 2.26
===== ===
</TABLE>
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $0.27, $0.48 and $0.71, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 6.2%, 4.5% and 5.9% for 1999, 1998 and 1997,
respectively, and an expected life of five years for options granted in all
periods.
Had the Company determined compensation cost based on the fair value of the
option at the grant date, the Company's pro forma net loss would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
As reported...................................... $(19,225) $(10,834) $ (167)
======== ======== =======
Pro forma........................................ $(19,522) $(11,032) $ (423)
======== ======== =======
</TABLE>
(11) INCOME TAXES
The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statement
carrying amounts of existing
30
<PAGE> 31
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities and their respective tax bases and net operating loss and
tax credit carryforwards.
Provision for (benefit from) income taxes for the years ended December 31,
1999, 1998 and 1997 consist of:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---- ----
<S> <C> <C> <C>
Current provision for (benefit from) income taxes:
Federal................................................ $ -- $ -- $(34)
State.................................................. -- -- (26)
Foreign................................................ -- 46 200
-------- ---- ----
Total provision for (benefit from) current income
taxes.......................................... -- 46 140
-------- ---- ----
Deferred provision for (benefit from) income taxes:
Federal................................................ -- (37) 183
State.................................................. -- (9) 47
-------- ---- ----
Total deferred provision for (benefit from) income
taxes.......................................... -- (46) 230
-------- ---- ----
Total provision for (benefit from) income taxes... $ -- $ -- $370
======== ==== ====
</TABLE>
A reconciliation of the Company's provision for income taxes to that
computed by applying the statutory federal income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ----
<S> <C> <C> <C>
Provision for (benefit from) income taxes at federal
statutory income tax rate............................ $(6,537) $(3,684) $ 69
Increase in income tax expense resulting from:
Merger expenses...................................... -- -- 247
Other nondeductible expenses......................... 51 49 53
Increase in valuation allowance...................... 6,922 3,040 --
Compensation expense related to the ESOP............. -- 665 --
State income tax expense, net of Federal income tax
benefit........................................... -- 6 14
Other, net............................................. (436) (76) (13)
------- ------- ----
Actual provision for income taxes................. $ -- $ -- $370
======= ======= ====
</TABLE>
31
<PAGE> 32
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The primary components of net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Contract accounting................................. $ 443 $ 777
Depreciation........................................ 360 237
Other............................................... -- 237
------- -------
Total deferred tax liabilities................. 803 1,251
======= =======
Deferred tax assets:
Operating loss carryforwards........................ 6,070 2,486
Loss contracts reserve.............................. 1,229 991
Allowance for doubtful accounts..................... 372 252
Restructuring costs................................. 1,357 --
Accruals............................................ 1,142 389
Other............................................... 595 280
------- -------
Total deferred tax assets...................... 10,765 4,398
Valuation allowance............................ (9,962) (3,040)
------- -------
Deferred tax assets after valuation
allowance................................... 803 1,358
------- -------
Net deferred tax asset......................... $ -- $ 107
======= =======
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence, that some portion or all
of the deferred tax assets will not be realized.
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has recorded a valuation allowance
against its net deferred tax asset. The valuation allowance increased by $6,922
and $3,040 in 1999 and 1998, respectively.
As of December 31, 1999, the Company had net operating losses and foreign
tax credits available for carryforward of approximately $16,000 and $250 which
expire at various times beginning in the year 2011 and 2002, respectively. The
Tax Reform Act of 1986 (the "Act") contains provisions that may limit the amount
of net operating loss carryforwards that the Company may utilize in any one year
in the event of cumulative changes in ownership over a three-year period in
excess of 50%, as defined. The amount of net operating loss carryforwards
available to offset taxable income may be limited in future periods as a result
of an ownership change (as defined by the Act) that occurred in 1999 upon
issuance of the Series C preferred stock. Of the total net operating loss
carryforward at December 31, 1999, approximately $13,600 are subject to an
annual limitation of approximately $1,600.
(12) EMPLOYEE BENEFIT PLANS
(i) 401(k) Plan
The Company sponsors a defined contribution 401(k) benefit plan (the "Talus
401(k) Plan") for the benefit of its employees. Substantially all employees are
eligible for participation in the plan. Employees can elect to contribute from
1% to 15% of their annual compensation subject to certain limitations on highly
compensated individuals. The Company intends to make a discretionary matching
contribution of up to 5% of the participant's annual salary. The participant's
contributions vest 100% immediately, while any Company contributions vest 20%
32
<PAGE> 33
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annually. During 1998, the Company terminated its predecessor 401(k) plan and
established the Talus 401(k) plan. The Company's total charge for contributions
to the 401(k) plans for the years ended December 31, 1999, 1998 and 1997 were
approximately $850, $1,061 and $162, respectively.
(ii) Money Purchase Pension Plan
The Company maintained a defined contribution Money Purchase Pension Plan
(the "MPP Plan") for the benefit of all eligible employees. Prior to 1998, the
MPP Plan provided for the Company to make contributions in an amount equal to
10% of eligible employee compensation. In connection with the formation of the
Talus 401(k) plan in 1998, the Company amended the MPP Plan whereby
contributions were to cease subsequent to December 31, 1997. Employees vested
20% annually in the Company's contributions to the MPP Plan. The Company charged
approximately $779 to expense for contributions to the MPP Plan for the year
ended December 31, 1997.
(13) EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND TERMINATION
During December 1999, the Company terminated its ESOP Plan. Each
participant became 100% vested in their ESOP shares as a result of the ESOP Plan
termination and became entitled to (i) receive a distribution of their ESOP
shares or (ii) require the Company to purchase their ESOP shares at the December
31, 1998 appraised value of the Company's common stock.
A summary of the ESOP Plan Termination is as follows:
<TABLE>
<S> <C>
ESOP shares prior to termination............................ 4,704
Shares distributed to participants.......................... (2,495)
Shares purchased by the Company............................. (1,671)
------
ESOP shares remaining - December 31, 1999................... 538
======
</TABLE>
The shares distributed to participants in December 1999 plus the remaining
shares held by the ESOP (3,033) subject to two put rights at $1.02 and $0.82,
per share, which expire or are expected to expire in December 2000.
The Company maintained the ESOP Plan for the benefit of all eligible
employees through December 1999. The ESOP Plan was formed as a leveraged
employee stock ownership plan. The ESOP Plan had borrowed under notes payable to
the Company and from certain of the Company's shareholders to purchase the
Company's Class A voting common stock. Contributions to the ESOP Plan made by
the Company were used to fund principal and interest payments on the ESOP Plan
debt. As principal payments were made by the ESOP Plan, shares of the Company's
Class A voting common stock were released for allocation to the ESOP Plan
participants with the remaining unallocated shares serving as collateral for the
notes payable. Notwithstanding debt service requirements, contributions to the
ESOP Plan were determined at the discretion of the Company's Board of Directors
and shares were allocated to participants in the proportion that each
participant's eligible compensation bears to total eligible compensation for all
participants for the ESOP Plan year. Participants vested 20% annually in shares
allocated to participants.
During 1998, the Company has reflected the cost of the shares purchased
with the borrowings as unearned compensation related to employee stock ownership
plan in redeemable common stock with reductions at cost for shares allocated as
a result of debt repayments. The
33
<PAGE> 34
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded compensation expense for the ESOP Plan equal to discretionary
cash contributions plus the fair value of shares committed to be released during
each period. Any difference between the cost of the shares released and the fair
value recorded was charged or credited to additional paid-in capital.
During 1998, the independent fiduciary of the ESOP Plan agreed to sell
unallocated shares to the Company at a price of $3.50 per share. In November
1998, the Company purchased 634 shares of Class A voting common stock from the
ESOP Plan for cash at a total cost of $2,220. Of this amount, the Company
charged $1,027 to ESOP expense.
The ESOP Plan used the proceeds from the sale of Class A voting common
stock to the Company to retire its debt obligation to the Company. As a result
of eliminating its debt to the Company, 1,040 shares of Class A voting common
stock previously held as collateral for the debt were made available for
allocation to the participants. Accordingly, the Company charged $1,955 to ESOP
expense for the year ended December 31, 1998 reflecting the allocation of the
remaining shares. Additionally, the Company charged $302 to ESOP expense for the
year ended December 31, 1998 for ESOP Plan administrative expenses paid by the
Company. The Company charged $3,284, in aggregate, to expense for the ESOP Plan
for the year ended December 31, 1998.
During 1997, 324 shares of the Company's Class A voting common stock were
allocated to participants. At December 31, 1997, the Company had 1,674
unallocated shares of its Class A voting common stock. The Company charged $778
to expense for the ESOP Plan for the year ended December 31, 1997.
The value of shares held by the ESOP or held by individuals that contain
put rights are presented outside of stockholders' equity since redemption of
the shares is outside of the control of the Company. The maximum potential cash
obligation of the Company was $3,094, $4,812 and $2,166 at December 31, 1999
and 1998 and June 30, 2000 (unaudited), respectively. The increase (decrease)
in fair value of the ESOP put obligation for the years ended December 31,
1999, 1998, and 1997 and for the six months ended June 30, 2000 and 1999 was
(1,718), (8,860), 4,248, (928), and 0, respectively.
(14) OPERATING LEASE COMMITMENTS
The Company is obligated under noncancelable operating lease agreements for
office facilities, furniture and fixtures, and computer equipment for the next
five years and thereafter.
34
<PAGE> 35
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under all noncancelable operating lease
agreements with remaining terms in excess of one year in the aggregate and for
the next five years are shown as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000................................................... $ 3,447
2001................................................... 4,608
2002................................................... 3,385
2003................................................... 2,168
2004................................................... 1,357
Thereafter............................................. 4,629
-------
$19,594
=======
</TABLE>
Net rent expense for all cancelable and noncancelable operating leases was
$3,297, $3,129 and $2,421 for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company received approximately $236, $247 and $233 in rental
income from subleases during the years ended December 31, 1999, 1998 and 1997,
respectively.
(15) COMMITMENTS AND CONTINGENCIES
The markets for the Company's pricing and revenue management software
solutions and services are characterized by risk and uncertainty as a result of
competition and rapidly evolving technology. Furthermore, the Company's business
is subject to risk factors that may affect future results such as customer and
market concentrations, market development, long sales and delivery cycle,
ability to manage growth and customer projects, dependence on key personnel and
foreign operations. Negative developments related to these risks and
uncertainties or others could have a material adverse impact on the Company's
financial position and results of operations.
The Company is subject to certain other lawsuits, claims, and assessments
arising out of the ordinary conduct of business. Such claims usually include
assertions of breach of contract or non-performance by the Company. The Company
has recorded reserves of approximately $3.1 million as of December 31, 1999 for
litigation, claims and assessments ("LCA") that have been or may be asserted
against the Company and for which an unfavorable outcome is probable and
reasonably estimable. Approximately $2.7 million of LCA reserves are included in
the loss contracts reserve. While the ultimate results and outcomes from these
and other LCA matters cannot be determined precisely, management, based in part
upon the advice of legal counsel, believes that the resolution of all uninsured
LCA matters and insured LCA matters will not have a material adverse effect on
the Company's financial position or results of operations; however, there can be
no assurance in this regard.
(16) SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
Major Customers
For the year ended December 31, 1999, two customers accounted for 12% and
11% of revenues, respectively. For the years ended December 31, 1998 and 1997,
one customer accounted for 10% and 13% of revenues, respectively.
35
<PAGE> 36
TALUS SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
International Revenues
Revenues and percentages to total revenues derived from customers domiciled
in selected geographic regions throughout the world for the years ended December
31, 1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States..................... $32,921 87.0% $33,140 75.5% $28,812 70.1%
Europe............................ 3,803 10.0 6,727 15.2 8,534 20.8
Other............................. 1,126 3.0 4,056 9.3 3,724 9.1
------- ----- ------- ----- ------- -----
Total............................. $37,850 100.0% $43,923 100.0% $41,070 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
(17) SUBSEQUENT EVENT
On September 21, 2000 the Company signed an agreement to be acquired by
Manugistics Group, Inc. ("Manugistics") in a tax-free stock for stock merger.
Under the agreement, Manugistics will acquire all outstanding stock and
will assume all of the stock options and warrants of the Company. For the
transaction, Talus stockholders will receive between 4.2 and 5.0 million shares
of Manugistics common stock. The total value of the transaction is approximately
$365 million, based upon the closing price of Manugistics common stock on
September 21, 2000. The final value of the transaction and number of shares to
be issued will be based upon Manugistics average price for the fifteen-day
period 2 days prior to closing. The transaction is expected to close no later
than February 28, 2001.
36
<PAGE> 37
(c) Financial Statements of the Company.
Condensed Consolidated Balance Sheet of the Company as of February 29,
2000, unaudited Condensed Consolidated Balance Sheet of the Company as of
August 31, 2000, and unaudited Condensed Consolidated Statements of Income of
the Company and unaudited Condensed Consolidated Statements of Cash Flows of
the Company for the six month periods ended August 31, 1999 and 2000.
INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets............................... 38
Condensed Consolidated Statements of Operations..................... 39
Condensed Consolidated Statements of Cash Flows..................... 40
Notes to Condensed Consolidated Financial Statements................ 41
</TABLE>
37
<PAGE> 38
MANUGISTICS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
August 31, February 29,
2000 2000
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,758 $ 34,051
Marketable securities 11,091 17,496
Accounts receivable, net of allowance for doubtful
accounts of $2,486 and $1,875 at August 31, 2000 and
February 29, 2000, respectively 64,205 38,705
Other current assets 8,347 9,252
-------- --------
Total current assets 107,401 99,504
-------- --------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 14,382 14,157
NONCURRENT ASSETS:
Software development costs, net of accumulated amortization 16,484 16,514
Intangible assets, net of accumulated amortization 6,840 7,317
Deferred tax asset 17,669 12,776
Other non-current assets 3,736 2,160
-------- --------
Total non-current assets 44,729 38,767
-------- --------
TOTAL ASSETS $166,512 $152,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,932 $ 5,792
Accrued compensation 11,030 8,345
Other current liabilities 12,784 10,679
Deferred revenue 29,176 26,727
Current portion of restructuring accrual 2,381 5,130
Line of credit 6,000 6,000
-------- --------
Total current liabilities 67,303 62,673
-------- --------
LONG-TERM LIABILITIES 187 283
RESTRUCTURING ACCRUAL - LONG-TERM 2,415 2,754
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock, $0.002 par value per share; 100,000,000 shares
authorized; 29,556,070 and 29,047,162 shares issued, and
28,803,560 and 28,294,652 shares outstanding at August 31,
2000 and February 29, 2000, respectively 59 58
Additional paid-in capital 230,863 189,480
Accumulated deficit (123,038) (102,203)
Accumulated other comprehensive income 289 100
Treasury stock - 752,510 shares, at cost (717) (717)
Deferred Compensation - repriced stock options (10,849) -
-------- --------
Total stockholders' equity 96,607 86,718
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $166,512 $152,428
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
38
<PAGE> 39
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
August 31,
2000 1999
---------- ---------
<S> <C> <C>
REVENUES:
License fees $ 54,483 $ 23,852
Services 28,539 27,163
Solution support 25,647 21,973
---------- ----------
Total revenues 108,669 72,988
---------- ----------
OPERATING EXPENSES:
Cost of license fees 9,593 5,910
Cost of consulting, solution support and other services 25,292 21,914
(Excluding $6,237 of non-cash stock compensation)
Sales and marketing costs 48,134 28,138
(Excluding $7,349 of non-cash stock compensation)
Product development expenses 16,215 14,461
(Excluding $5,343 of non-cash stock compensation)
General and administrative costs 10,310 7,840
(Excluding $1,782 of non-cash stock compensation)
Restructuring costs - (682)
Non-cash stock compensation 20,711 -
---------- ----------
Total operating expenses 130,255 77,581
---------- ----------
LOSS FROM OPERATIONS (21,586) (4,593)
OTHER INCOME - NET 715 874
---------- ----------
NET LOSS BEFORE INCOME TAXES (20,871) (3,719)
BENEFIT FOR INCOME TAXES (36) (673)
---------- ----------
NET LOSS $(20,835) $ (3,046)
========== ==========
BASIC NET LOSS PER SHARE $ (0.73) $ (0.11)
========== ==========
DILUTED NET LOSS PER SHARE $(0.73) $ (0.11)
========== ==========
SHARES USED IN COMPUTATION:
BASIC 28,541 27,151
========== ==========
DILUTED 28,541 27,151
========== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
39
<PAGE> 40
MANUGISTICS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended August 31,
2000 1999
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,835) $ (3,046)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 9,166 10,520
Deferred tax asset (4,910) (449)
Tax benefit from stock options exercised 4,408 1,315
Non-cash stock compensation expense 20,711 -
Other 904 (93)
Changes in assets and liabilities:
Accounts receivable - net (25,500) 10,958
Other current assets 905 1,513
Other non-current assets (577) 15
Accounts payable and accrued expenses 4,930 (7,557)
Restructuring accrual (3,088) (8,110)
Deferred revenue 2,449 32
-------- --------
Net cash (used in) provided by operating activities (11,437) 5,098
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - net (3,582) (828)
Capitalization of software development costs (5,428) (2,553)
Purchase of software licenses (323) (204)
Investments and sales (purchases) of marketable securities - net 5,405 (1,248)
-------- --------
Net cash used in investing activities (3,928) (4,833)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations - net (96) 1
Proceeds from stock options and employee stock purchases 5,414 2,162
-------- --------
Net cash provided by financing activities 5,318 2,163
-------- --------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (246) (721)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,293) 1,707
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,051 20,725
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,758 $ 22,432
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
40
<PAGE> 41
MANUGISTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Manugistics Group, Inc. ("the Company") have been prepared
in accordance with generally accepted accounting principles for interim
reporting and in accordance with the instructions to the Quarterly
Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal,
recurring adjustments) which are necessary for a fair presentation of
the unaudited results for the interim periods presented have been
included. The results of operations for the period presented herein are
not necessarily indicative of the results of operations for the entire
fiscal year, which ends on February 28, 2001.
These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto for the
fiscal year ended February 29, 2000 included in the Annual Report on
Form 10-K of the Company for that year filed with the Securities and
Exchange Commission.
2. NET LOSS PER SHARE
Basic loss per share is computed using the weighted average
number of shares of common stock outstanding. Diluted loss per share is
computed using the weighted average number of shares of common stock
and, when dilutive, common equivalent shares from options to purchase
common stock using the treasury stock method. Common equivalent shares
from options were excluded from the calculation of diluted loss per
share for the six month periods ended August 31, 2000 and 1999, as
including them would have been anti-dilutive. The following table sets
forth the computation of basic and diluted (loss) income per share for
such periods (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six months ended
August 31,
2000 1999
----------- ------------
<S> <C> <C>
Weighted average common 28,541 27,151
shares
Dilutive potential common - -
shares
----------- ------------
Shares used in diluted 28,541 27,151
computation
=========== ============
Net loss $ (20,835) $ (3,046)
=========== ============
Basic loss per share $ (0.73) $ (0.11)
=========== ============
Diluted loss per share $ (0.73) $ (0.11)
=========== ============
</TABLE>
41
<PAGE> 42
3. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in disputes and
litigation in the ordinary course of business. The Company does not
believe that the outcome of any pending disputes or litigation will have
a material effect on the Company's business, operating results,
financial condition or cash flows. However, the ultimate outcome of
these proceedings, as with litigation generally, is inherently uncertain
and it is possible that these matters may be resolved adversely to the
Company. The adverse resolution of any one or more of these matters
could have a material effect on the Company's business, operating
results, financial condition or cash flows.
The Company has previously reported its legal proceedings with
Information Resources, Inc. ("IRI") arising from the acquisition of
certain assets. A dispute over revenue streams that IRI alleges it is
entitled to is being arbitrated. IRI seeks a total of $15,930,563 in
damages. The Company contends that the conditions to these amounts
becoming due have not been satisfied and that no amounts are due IRI,
because, among other reasons, of a failure of consideration in the
overall transaction. A related claim concerning the breach of a separate
Non-Competition and Non-Solicitation Agreement is proceeding in the
Circuit Court of Cook County, Illinois. There were no significant
developments in these matters during this quarter.
4. COMPREHENSIVE INCOME (LOSS)
In fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components in the
Company's financial statements. SFAS No. 130 requires unrealized gains
and losses on the Company's available-for-sale securities and foreign
currency translation adjustments to be included in other comprehensive
income (loss). The following table sets forth the comprehensive loss for
the six month periods ended August 31, 2000 and 1999 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Six months ended
August 31,
2000 1999
---------- ----------
<S> <C> <C>
Net loss $(20,835) $(3,046)
Other comprehensive income 189 (519)
(loss)
---------- ----------
Total comprehensive loss $ (20,646) $ (3,565)
========== ==========
</TABLE>
42
<PAGE> 43
5. RESTRUCTURING ACCRUAL
During the second half of fiscal 1999, the Company recorded
restructuring and unusual charges primarily associated with the
implementation of the Company's restructuring plan. This plan
reorganized the Company to focus on its core business of providing
supply chain solutions to companies with dynamic supply chains. The
table below presents the activity for the second quarter of fiscal 2001
relating to the restructuring charge reserves established in the second
half of fiscal 1999. The Company believes that the reserves as of August
31, 2000 are adequate and that no further revisions of estimates are
necessary at this time. The following table sets forth restructuring
activity for the six month period ended August 31, 2000 (dollar amounts
in thousands):
<TABLE>
<CAPTION>
Beginning Cash Ending
Balance utilization Balance
March 1, of accrual August 31,
2000 2000
------------- ----------- ----------------
<S> <C> <C> <C>
Severance costs $ 920 (819) $ 101
Lease obligations costs 6,964 (2,269) 4,695
------------- ----------- ----------------
Total $ 7,884 $(3,088) $ 4,796
============= =========== ================
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999 the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), which provides the
SEC staff's views in applying generally accepted accounting principles
to selected revenue recognition issues. The implementation date of SAB
101 is no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not believe the adoption of SAB
101 will have a material effect on the Company's consolidated financial
position or results of operations in fiscal 2001.
7. STOCK BASED COMPENSATION
FASB Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions
Involving Stock Compensation" is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after December
15, 1998. In January 1999, the Company repriced employee stock options,
other than those held by executive officers or directors. The effect of
this repricing resulted in approximately 1.52 million options being
repriced and the four year vesting period starting over. Under FIN 44,
the 1.52 million options are subject to variable plan accounting. Under
variable plan accounting, compensation cost is adjusted for increases or
decreases in the intrinsic value of the modified stock option awards
until the award is exercised, forfeited or expires.
Under FIN 44, no adjustments are to be made upon initial application of
FIN 44 for periods prior to July 1, 2000.
In connection with the initial application of FIN 44 in the quarter
ended August 31, 2000, the Company recorded compensation charges of
approximately $20.7 million and deferred compensation of approximately
$10.8 million at August 31, 2000. The remaining vesting period is
approximately 2.5 years.
43
<PAGE> 44
8. SUBSEQUENT EVENT
Acquisition - Subsequent to February 29, 2000, the Company reached
agreement to acquire the outstanding common and preferred stock of Talus
Solutions Inc. Manugistics will issue approximately 3.5 million shares
of its common stock in exchange for the outstanding Talus common and
preferred stock. In addition, the Company will exchange stock options
and warrants for the purchase of approximately 714,000 shares of
Manugistics common stock in exchange for outstanding Talus options and
warrants. The purchase price based on the estimated fair value of the
common stock, options and warrants to be exchanged is approximately $
378 million. The number of Manugistics shares of common stock and
options to be issued could be increased to approximately 4.2 million
shares and approximately 800,000 options based on certain provisions
in the purchase agreement. The acquisition is expected to be complete
during the third quarter or fourth quarter of fiscal year 2001.
Line of Credit - The Company has an unsecured revolving credit facility
with a commercial bank. As of August 31, 2000, $6.0 million was
outstanding on the revolving credit facility. This $6.0 million was
repaid in September 2000. Subsequent to August 31, 2000, the Company
renewed its revolving credit facility. The current agreement will
expire in September of 2001. Under its terms, the Company may request
cash advances, letters of credit or both in an aggregate amount of up
to $20 million. The Company may make borrowings under the facility for
short-term working capital purposes or for acquisitions
(acquisition-related borrowings are limited to $7.5 million per
acquisition).
44
<PAGE> 45
(d) Pro Forma Financial Information.
Unaudited Pro Forma Combined Condensed Balance Sheet of the Company
and Talus as of August 31, 2000 and Unaudited Pro Forma Combined Condensed
Statement of Operations of the Company and Talus for the six months ended
August 31, 2000 and the fiscal year ended February 29, 2000.
MANUGISTICS GROUP, INC.
INDEX TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Condensed Financial Information 46
Unaudited Pro Forma Combined Condensed Balance Sheet 47
Unaudited Pro Forma Combined Condensed Statements of Operations
Six Months Ended August 31, 2000 48
Unaudited Pro Forma Combined Condensed Statements of Operations
Year Ended February 29, 2000 49
Notes to Unaudited Pro Forma Combined Condensed Financial
Information 50
</TABLE>
45
<PAGE> 46
MANUGISTICS GROUP, INC.
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
Manugistics Group, Inc. ("Manugistics") is expecting to complete the
acquisition of Talus Solutions, Inc. ("Talus") during the third or fourth
quarter of fiscal year 2001. The acquisition will be accounted for as a
purchase.
The accompanying unaudited pro forma combined condensed balance sheet has
been prepared as if the acquisition had been consummated as of August 31, 2000.
The unaudited pro forma combined condensed statements of operations for six
months ended August 31, 2000 and the fiscal year ended February 29, 2000 have
been prepared as if the proposed acquisition had occurred on March 1, 1999, and
combines Manugistics and Talus' statements of operations.
Adjustments have been made to Talus' financial statements to conform to
Manugistics' presentation. Manugistics has a fiscal year end of February 28 or
29 and Talus has a fiscal year end of December 31. The twelve month period ended
December 31, 1999 for Talus was combined with the twelve month period ended
February 29, 2000 for Manugistics. The unaudited balance sheet for Talus as of
June 30, 2000 was combined with the unaudited balance sheet for Manugistics as
of August 31, 2000.
As noted above, the acquisition of Talus by Manugistics is expected to
close during the third or fourth quarter of fiscal 2001. The unaudited pro forma
combined condensed financial information has been prepared using the purchase
method of accounting whereby the assets and liabilities of Talus are adjusted to
estimated fair value, based upon preliminary estimates, which are subject to
change as additional information is obtained. The allocations of the purchase
costs are subject to final determination based upon estimates and other
evaluations of fair market value, identification and valuation of identifiable
intangible assets, and potentially based upon changes in Manugistics stock price
and the actual closing date. Therefore, the allocations reflected in the
following unaudited pro forma combined condensed financial information may
differ from the amounts ultimately determined.
The method of combining historical financial statements for the preparation
of the unaudited pro forma combined condensed financial statements is for
presentation only. Actual statements of operations of the companies will be
consolidated commencing on the date of acquisition. The unaudited pro forma
combined condensed financial information does not purport to represent what
Manugistics' operations or financial position actually would have been had the
acquisition occurred on the dates specified, or to project Manugistics' results
of operation or financial position for any future period or date.
In the opinion of management, all material adjustments necessary to reflect
the acquisition of Talus by Manugistics have been made. The accompanying
unaudited pro forma combined condensed financial statements should be read in
conjunction with the historical financial statements and related notes thereto
for both Manugistics and Talus.
46
<PAGE> 47
MANUGISTICS GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AUGUST 31, 2000
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
MANUGISTICS TALUS(a) ADJUSTMENTS MANUGISTICS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 23,758 $ 17,003 $ 40,761
Marketable securities.................. 11,091 274 11,365
Accounts receivable -- net............. 64,205 5,241 69,446
Unbilled receivables................... 4,359 4,359
Other current assets................... 8,347 1,626 9,973
--------- -------- ---------
Total current assets................. 107,401 28,503 135,904
Property and equipment -- net............ 14,382 3,994 18,376
Noncurrent Assets:
Software development costs -- net...... 16,484 16,484
Intangibles and other assets -- net.... 10,576 1,815 $365,925(c) 378,316
Deferred tax asset..................... 17,669 -- --(e) 17,669
--------- -------- -------- ---------
Total assets......................... $ 166,512 $ 34,312 $365,925 $ 566,749
========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................... $ 5,932 $ 1,852 $ 4,000(c) $ 11,784
Accrued compensation................... 11,030 4,699 15,729
Other current liabilities.............. 12,784 4,826 3,793(c) 22,306
903(h)
Restructuring accruals................. 2,381 903 (903)(h) 2,381
Line of credit......................... 6,000 6,000
Current portion of long-term
liabilities.......................... -- 1,144 1,144
Deferred revenue....................... 29,176 775 29,951
--------- -------- -------- ---------
Total current liabilities............ 67,303 14,199 7,793 89,295
Long-term liabilities.................... 187 1,590 2,038(h) 3,815
Long-term restructuring accrual.......... 2,415 2,038 (2,038)(h) 2,415
ESOP put obligation...................... -- 2,166 (2,166)(k) 0
Convertible redeemable preferred stock,
$0.0001 par value ..................... -- 6,350 (6,350)(c) 0
Common stock put warrant ................ -- 609 (609)(c) 0
Stockholders' equity:
Preferred stock........................ 2 (2)(b) 0
Common stock........................... 59 2 (2)(b) 66
7(c)
Additional paid-in-capital............. 230,863 44,064 337,400(c)
(44,064)(b) 629,303
61,040(c)
Accumulated deficit.................... (123,038) (34,703) 34,703(b) (123,038)
Treasury stock......................... (717) (2,005) 2,005(b) (717)
Deferred compensation.................. (10,849) (23,830)(c) (34,679)
Accumulated other comprehensive
income............................... 289 -- 289
--------- -------- -------- ---------
Total stockholders' equity........... 96,607 7,360 367,257 471,224
--------- -------- -------- ---------
Total liabilities and
stockholders' equity.......... $ 166,512 $ 34,312 $365,925 $ 566,749
========= ======== ======== =========
</TABLE>
See notes to the unaudited pro forma combined condensed financial information.
47
<PAGE> 48
MANUGISTICS GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
MANUGISTICS TALUS(a) ADJUSTMENTS MANUGISTICS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
License fees..................... $ 54,483 $ 1,500 $ 55,983
Consulting, solution support and
other services................. 54,186 21,664 75,850
-------- -------- --------
Total revenues.............. 108,669 23,164 131,833
-------- -------- --------
OPERATING EXPENSES:
Cost of license fees............. 9,593 -- 9,593
Cost of consulting, solution
support and other services..... 25,292 14,175 39,467
Sales and marketing.............. 48,134 4,409 52,543
Product development.............. 16,215 3,648 19,863
General and administrative....... 10,310 4,766 $ 45,740(d) 60,816
Restructuring expense............ -- (562) (562)
Non-cash stock compensation
expense(i)..................... 20,711 -- 3,972(g) 24,683
-------- -------- -------- --------
Total operating expenses.... 130,255 26,436 49,712 206,403
-------- -------- -------- --------
Loss from operations............. (21,586) (3,272) (49,712) (74,570)
Other income -- net.............. 715 476 1,191
Increase in common stock put
warrant ....................... -- (513) 513(j) --
-------- -------- -------- --------
Net loss before income taxes..... (20,871) (3,309) (49,199) (73,379)
Benefit for income taxes......... (36) (36)
-------- -------- -------- --------
Net loss......................... $(20,835) $ (3,309) $(49,199) $(73,343)
======== ======== ======== ========
Net loss per share -- basic and
diluted........................ $ (0.73) -- -- $ (2.29)
Shares used in share computation
basic and diluted.............. 28,541 -- 3,486(f) 32,027
</TABLE>
See notes to the unaudited pro forma combined condensed financial information.
48
<PAGE> 49
MANUGISTICS GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
MANUGISTICS TALUS(a) ADJUSTMENTS MANUGISTICS
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
License fees................... $ 60,421 $ 224 $ 60,645
Consulting, solution support
and other services........... 92,012 37,626 129,638
-------- -------- ---------
Total revenues............ 152,433 37,850 190,283
-------- -------- ---------
OPERATING EXPENSES:
Cost of license fees........... 13,685 150 13,835
Cost of consulting, solution
support and other services... 44,346 30,369 74,715
Sales and marketing............ 61,439 9,481 70,920
Product development............ 29,150 7,305 36,455
General and administrative..... 15,837 6,098 $ 91,480(d) 113,415
Restructuring expense.......... (1,506) 3,956 2,450
Non-cash stock compensation
expense(i)................... -- -- 7,945(g) 7,945
-------- -------- --------- ---------
Total operating
expenses................ 162,951 57,359 99,425 319,735
-------- -------- --------- ---------
Loss from operations........... (10,518) (19,509) (99,425) (129,452)
Other income -- net............ 1,389 284 1,673
-------- -------- --------- ---------
Net loss before income taxes... (9,129) (19,225) (99,425) (127,780)
Benefit for income taxes....... (184) (184)
-------- -------- --------- ---------
Net loss....................... $ (8,945) $(19,225) $ (99,425) $(127,595)
======== ======== ========= =========
Net loss per share -- basic and
diluted...................... $ (0.33) -- -- $ (4.12)
Shares used in share
computation
basic and diluted............ 27,486 -- 3,486(f) 30,972
</TABLE>
See notes to the unaudited pro forma combined condensed financial information.
49
<PAGE> 50
MANUGISTICS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The unaudited pro forma combined condensed financial information is based
upon the following:
(a) Talus' historical column for the six months ended June 30, 2000
includes Talus results of operations from January 1, 2000. Manugistics'
historical column for the six months ended August 31, 2000 includes Manugistics'
results of operations from March 1, 2000.
(b) In the proposed transaction, Manugistics will acquire all of the
outstanding shares of Talus common stock in exchange for shares of Manugistics
common stock. All series of Talus preferred stock are assumed converted to Talus
common stock using conversion ratios set forth in the respective preferred stock
agreements and acquired by Manugistics through the issuance of Manugistics
common stock in connection with the transaction. Talus had issued options to
purchase Talus common stock to its employees and directors. These options will
be exchanged for options to acquire Manugistics common stock with the same terms
as the original options (as adjusted for the exchange ratio set forth in the
merger agreement). In addition, Talus had issued warrants to purchase Talus
common stock to certain service providers and customers. These warrants will be
exchanged for Manugistics stock warrants with similar terms (as adjusted for the
exchange ratio set forth in the merger agreement).
Manugistics will issue approximately 3,500,000 shares of its common stock
for all outstanding classes of Talus common and preferred stock as discussed
above. Manugistics will also issue options and warrants for the purchase of
approximately 714,000 shares of Manugistics common stock in exchange for Talus
options and warrants. The number of Manugistics shares of common stock and
options to be issued could be increased to approximately 4,200,000 shares and
approximately 800,000 options based on certain provisions in the purchase
agreement.
In accordance with FASB Interpretation No. 44 (Fin 44) "Accounting for
Stock Transactions involving Stock Compensation," the estimated fair value of
Manugistics' stock options and warrants that are fully vested are included as
part of the purchase price. Unearned (deferred) compensation has been recorded
for unvested stock options to the extent that service is required subsequent to
the consummation date of the acquisition in order to vest in the Manugistics
stock option. The amount allocated to unearned (deferred) compensation has been
based on the estimated intrinsic value at the consummation date related to
future vesting (service) period. The intrinsic value of the Manugistics'
replacement awards allocated to unearned (deferred) compensation has been
deducted from the estimated fair value of stock options awards for purposes of
the allocation of the purchase price to the assets acquired.
(c) Below is a table of the estimated acquisition cost (dollar amounts in
thousands):
<TABLE>
<S> <C>
Manugistics stock to be issued (approximately 3,500,000
shares)................................................... $337,400
Manugistics stock options and warrants to be issued (options
for approximately 714,000 shares)......................... 61,040
Estimated intrinsic value of unvested options at
consummation date related to future service............... (23,830)
Estimated acquisition fees.................................. 4,000
--------
Total estimated acquisition cost to be allocated.......... $378,610
========
</TABLE>
50
<PAGE> 51
MANUGISTICS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
<TABLE>
<S> <C>
Acquisition cost to be allocated............................ $378,610
Less: Historical cost basis of the following at June 30,
2000
Net assets of Talus....................................... (7,360)
Preferred stock and ESOP put
obligation............................................. (9,125)
Adjustments to assets and liabilities
Employment severance...................................... 1,400
Facility closures and relocation.......................... 2,100
Other..................................................... 300
--------
Excess of purchase price over historical cost basis of net
liabilities acquired...................................... $365,925
========
</TABLE>
Manugistics is in the process of identifying the fair values of tangible
and intangible assets that will be acquired. It is expected that the intangible
assets will include the following: developed technology, assembled workforce,
trademarks, customer base and goodwill. The intangible assets are expected to
have estimated lives ranging from 2 to 5 years. The unaudited pro forma combined
condensed financial information has assumed a composite life of 4 years for
purposes of computing amortization expense.
(d) The amortization expense is estimated using a composite average life of
4 years. See note (c).
(e) Manugistics has not recorded an additional tax benefit in the unaudited
pro forma combined condensed financial information because of the uncertainty as
to the recoverability of the amounts. Any deferred tax liabilities that may
result from the final valuation and allocation of the excess purchase price have
not been recorded.
(f) This represents the weighted average number of Manugistics shares of
common stock expected to be issued in connection with the acquisition of Talus.
Manugistics stock options expected to be issued in the acquisition have been
excluded because the impact would be anti-dilutive.
(g) This amount represents the amortization of the deferred compensation
over the estimated remaining vesting period, which is approximately 3 years. See
notes (b) and (c).
(h) This amount represents a reclassification of the restructuring accrual
of Talus to the current and long-term liabilities of Manugistics.
(i) The non-cash stock compensation expense of $20.7 million is recorded as
a result of the July 1, 2000 effective date of FASB Interpretation No. 44. This
$20.7 million is aggregated on a single line in the operating expenses and
therefore is excluded from the individual operating expense lines to which the
charge relates.
The components of this expense are (dollar amounts in thousands):
<TABLE>
<S> <C>
Cost of consulting, solution support and other services..... $ 6,237
Sales and marketing......................................... 7,349
Product development......................................... 5,343
General and administrative.................................. 1,782
-------
Non-cash stock compensation expense....................... $20,711
=======
</TABLE>
51
<PAGE> 52
MANUGISTICS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
(j) An adjustment for the fair value of approximately 7,000 Manugistics
stock warrants will be recorded each quarter subsequent to the transaction. The
amount of this fair value adjustment has not been estimated for purposes of this
unaudited pro forma combined condensed financial information. See note (b).
(k) An ESOP put obligation is recorded for put rights on approximately
3,000,000 shares of Talus Solutions stock, which relates to the termination of
an employee stock ownership plan in 1999. This obligation is not expected to
exist after the acquisition is complete. This obligation can be satisfied in
either cash or stock. This pro forma financial information assumes that the ESOP
put obligation will be satisfied from Talus Solutions common stock, which will
then be exchanged for Manugistics common stock.
The following is filed as an Exhibit to this Report:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
23 Consent of KPMG LLP.
</TABLE>
52
<PAGE> 53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rockville, State of
Maryland, on the 10th day of October, 2000.
MANUGISTICS GROUP, INC.
By: /s/ Raghavan Rajaji
---------------------------------
Raghavan Rajaji
Executive Vice President and
Chief Financial Officer
53
