Exhibit 13
TSI INTERNATIONAL SOFTWARE LTD
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
Independent Auditors' Report F-2
Balance Sheets as of December 31, 1999 and 1998 F-3
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Statements of Stockholders' Equity (Deficit) as
of December 31, 1999, 1998 and 1997 F-5
Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Independent Auditors' Report
The Board of Directors
TSI International Software Ltd.:
We have audited the accompanying consolidated balance sheets of TSI
International Software Ltd. and subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) 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 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 TSI International
Software Ltd. and subsidiaries 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.
/KPMG/
New York, New York
February 2, 2000
F-2
TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1999 1998
------------- ------------
ASSETS:
Current assets:
Cash $ 9,237,100 $15,132,700
Investments in marketable securities 5,648,400 32,812,100
Accounts receivable, less allowances of
$1,766,400 and $1,897,900 38,270,500 17,965,500
Current portion of investment in licensing
contracts receivable, net of unearned
finance income of $49,600 and $68,100 341,600 522,000
Prepaid expenses and other current assets 2,642,900 729,400
Deferred tax assets 10,378,700 2,695,100
------------ -----------
Total current assets 66,519,200 69,856,800
Furniture, fixtures and equipment, net 6,516,700 2,699,400
Intangible assets, net 153,227,700 5,155,400
Investment in licensing contracts receivable, net of
unearned finance income of $39,000 and $51,100 187,500 271,300
Other assets 364,300 204,400
------------ -----------
Total assets $226,815,400 $78,187,300
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,936,700 $ 1,546,700
Accrued expenses 8,175,800 6,479,900
Current portion of deferred revenue 14,737,700 8,088,000
------------ -----------
Total current liabilities 26,850,200 16,114,600
Other long-term liabilities -- 17,500
Long-term deferred tax liability 12,253,500 --
Deferred revenue, less current portion 58,600 156,400
------------ -----------
Total liabilities 39,162,300 16,288,500
------------ -----------
Stockholders' equity:
Convertible preferred stock: $.01 par value;
authorized 5,000,000 shares, no shares
issued and outstanding -- --
Common Stock: $.01 par value; authorized
70,000,000 shares; issued 27,834,350 shares and
22,283,138 shares 278,200 222,800
Additional paid-in capital 205,420,900 63,845,000
Deferred compensation (883,200) (1,430,500)
Accumulated deficit (16,667,800) (400,200)
Cumulative translation adjustment (495,000) (338,300)
------------ -----------
Total stockholders' equity 187,653,100 61,898,800
------------ -----------
Total liabilities and stockholders' equity $226,815,400 $78,187,300
============ ===========
See accompanying notes to consolidated financial statements.
F-3
TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------ ------------
Revenues:
Software Licensing $ 56,819,500 $ 29,104,700 $ 14,602,400
Service, maintenance and other 41,805,100 16,211,400 12,067,300
------------- ------------ ------------
Total revenues 98,624,600 45,316,100 26,669,700
Cost of revenues
Software Licensing 1,285,700 1,481,900 778,100
Service, maintenance and other 21,370,800 5,407,200 2,490,000
------------- ------------ ------------
Total cost of revenues 22,656,500 6,889,100 3,268,100
------------- ------------ ------------
Gross Profit 75,968,100 38,427,000 23,401,600
------------- ------------ ------------
Operating expenses:
Product development 15,275,500 5,699,000 4,461,800
Selling and marketing 41,187,200 22,032,500 13,095,100
General and administration 9,299,500 5,928,800 3,791,600
Amortization of intangibles 27,689,200 303,300 --
------------- ------------ ------------
Total operating expenses 93,451,400 33,963,600 21,348,500
------------- ------------ ------------
Operating income (17,483,300) 4,463,400 2,053,100
Borrowing expenses -- (10,900) (185,800)
Investment income 987,900 2,025,400 688,300
------------- ------------ ------------
Income before income taxes (16,495,400) 6,477,900 2,555,600
Provision for (benefit from) income taxes (227,800) (678,900) 76,000
------------- ------------ ------------
Net income (loss) $ (16,267,600) $ 7,156,800 $ 2,479,600
============= ============ ============
Net income (loss) per share
Basic $ (.64) $ .35 $ .21
============= ============ ============
Diluted $ (.64) $ .30 $ .14
============= ============ ============
Average shares outstanding
Basic 25,376,443 20,299,006 11,833,986
============= ============ ============
Diluted 25,376,443 23,815,608 17,133,522
============= ============ ============
See accompanying notes to consolidated financial statements.
(Continued)
F-4
TSI INTERNATIONAL SOFTWARE, LTD.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Covertibible Preferred Additional
---------------------- Paid in Deferred
Stock Common Stock Capital Compensation
----- ------------ ------- ------------
Par Par
Shares Value Shares Value
------ ----- ------ -----
Balance at December 31, 1996 860,969 8,600 6,000,000 60,000 7,858,800 --
Net income -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of Series E preferred stock, net 50,000 500 -- -- 992,900 --
Net proceeds from initial
Public offering -- -- 6,000,000 60,000 24,212,300 --
Conversion of preferred stock (910,969) (9,100) 5,519,430 55,100 (46,000) --
Exercise of warrants -- -- 593,654 6,000 (6,000) --
Stock option exercises -- -- -- -- (4,200) --
Options issued under incentive plans -- -- -- -- 261,000 (261,000)
Amortization of deferred compensation -- -- -- -- -- 35,900
-----------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 18,113,084 181,100 33,268,800 (225,100)
Net income -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Stock option exercises -- -- 183,460 1,800 91,200 --
Purchases under employee stock plan -- -- 198,688 2,000 971,800 --
Net proceeds from secondary offering -- -- 2,853,300 28,600 25,349,600 --
Exercise of warrants -- -- 866,762 8,600 756,000 --
Shares issued in connection
with SCP acquisition -- -- 67,844 700 1,199,300 --
Options issued under Incentive plans -- -- -- -- 1,270,600 (1,270,600)
Amortization of deferred compensation -- -- -- -- -- 65,200
Tax benefit of options exercised -- -- -- -- 937,700 --
-----------------------------------------------------------------------------
Other
Retained Comprehensive
Earnings Income Treasury Stock Total
-------- ------ -------------- -----
Shares Value
------ -----
Balance at December 31, 1996 (10,036,600) (119,500) (226,956) (65,000) (2,293,700)
Net income 2,479,600 -- -- -- 2,479,600
Currency translation adjustment -- (79,800) -- -- (79,800)
---------
Total comprehensive income -- -- -- -- 2,399,800
---------
Issuance of Series E preferred stock, net -- -- -- -- 993,400
Net proceeds from initial
Public offering -- -- -- -- 24,272,300
Conversion of preferred stock -- -- -- -- --
Exercise of warrants -- -- -- -- --
Stock option exercises -- -- 22,000 12,900 8,700
Options issued under incentive plans -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 35,900
------------------------------------------------------------------------
Balance at December 31, 1997 (7,557,000) (199,300) (204,956) (52,100) 25,416,400
Net income 7,156,800 -- -- -- 7,156,800
Currency translation adjustment -- (139,000) -- -- (139,000)
---------
Total comprehensive income -- -- -- -- 7,017,800
Stock option exercises -- -- 146,952 37,300 130,300
Purchases under employee stock plan -- -- 58,004 14,800 988,600
Net proceeds from secondary offering -- -- -- -- 25,378,200
Exercise of warrants -- -- -- -- 764,600
Shares issued in connection
with SCP acquisition -- -- -- -- 1,200,000
Options issued under Incentive plans -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 65,200
Tax benefit of options exercised -- -- -- -- 937,700
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
Convertible Preferred Additional
--------------------- Paid in Deferred
Stock Common Stock Capital Compensation
----- ------------ ------- ------------
Par Par
Shares Value Shares Value
------ ----- ------ -----
Balance at December 31, 1998 -- -- 22,283,138 222,800 63,845,000 (1,430,500)
Net loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Stock option exercises -- -- 980,767 9,700 2,807,200 --
Purchases under employee stock plan -- -- 117,859 1,200 1,267,400 --
Exercise of warrants on a net basis -- -- 455,412 4,500 (4,500) --
Shares and options issued in
connection with Braid acquisition -- -- 2,207,258 22,100 75,685,400 --
Shares issued in connection with Novera
acquisition -- -- 1,789,916 17,900 56,134,900 --
Amortization of deferred compensation -- -- -- -- -- 547,300
Tax benefit of options exercised -- -- -- -- 5,685,500 --
---------------------------------------------------------------------------------
Balance at December 31, 1999 -- -- 27,834,350 278,200 205,420,900 (883,200)
========== ======= =========== =========
Other
Retained Comprehensive
Earnings Income Treasury Stock Total
-------- ------ -------------- -----
Share Value
----- -----
Balance at December 31, 1998 (400,200) (338,300) -- -- 61,898,800
Net loss (16,267,600) -- -- -- (16,267,600)
Currency translation adjustment -- (156,700) -- -- (156,700)
----------
Total comprehensive income -- -- -- -- (16,424,300)
----------
Stock option exercises -- -- -- -- 2,816,900
Purchases under employee stock plan -- -- -- -- 1,268,600
Exercise of warrants on a net basis -- -- -- -- --
Shares and options issued in
connection with Braid acquisition -- -- -- -- 75,707,500
Shares issued in connection with Novera
acquisition -- -- -- -- 56,152,800
Amortization of deferred compensation -- -- -- -- 547,300
Tax benefit of options exercised -- -- -- -- 5,685,500
-----------------------------------------------------------------------
Balance at December 31, 1999 (16,667,800) (495,000) 187,653,100
========== ======= ===========
See accompanying notes to consolidated financial statements.
F-6
TSI International Software Ltd.
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (16,267,600) 7,156,800 2,479,600
Adjustments to reconcile net income (loss) to
Net cash provided by operating activities:
Depreciation and amortization 30,020,900 1,129,500 623,300
Amortization of deferred compensation 547,300 65,200 35,900
Provision for losses on accounts receivable (604,400) 837,800 281,400
Deferred taxes (3,857,800) (1,417,600) --
Changes in operating assets and liabilities:
Accounts receivable (15,783,200) (10,734,000) (3,848,600)
Investment in licensing contracts receivable 264,300 306,600 193,700
Prepaid expenses and other current assets (21,500) 15,600 (357,000)
Other assets (160,700) 48,100 (129,300)
Accounts payable (105,300) 946,500 (94,600)
Accrued expenses (4,856,800) 3,837,700 736,900
Deferred revenue 2,419,200 3,545,000 (116,800)
---------------- ---------------- ----------------
Net cash provided (used) by
operating activities (8,405,600) 5,737,200 (195,500)
---------------- ---------------- ----------------
Cash used by investing activities:
Purchase of furniture, fixtures and equipment (4,563,100) (1,802,200) (876,200)
Acquisitions, net of cash acquired (22,836,100) (4,653,300) --
Net sales (purchases) of marketable securities 27,163,700 (22,316,200) (10,490,500)
Other (473,800) -- --
---------------- ---------------- ----------------
Net cash used by investing activities (709,300) (28,771,700) (11,366,700)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net proceeds from public offerings -- 25,378,200 24,272,300
Issuance of Preferred Stock -- -- 993,400
Net borrowings (repayments) under revolving
line of credit -- -- (2,790,100)
Repayment of long-term debt (73,700) -- --
Exercise of warrants -- 764,600 --
Payments under capital leases (5,100) (10,500) (55,100)
Proceeds from exercise of stock options 2,816,900 130,300 8,700
Proceeds from employee stock plan 1,268,600 988,600 --
---------------- ---------------- ----------------
Net cash provided by financing activities 4,006,700 27,251,200 22,429,200
---------------- ---------------- ----------------
Effect of exchange rate changes on cash (787,400) 3,500 4,200
---------------- ---------------- ----------------
Net change in cash (5,895,600) 4,220,200 10,871,200
Cash at beginning of period 15,132,700 10,912,500 41,300
---------------- ---------------- ----------------
Cash at end of period $ 9,237,100 $ 15,132,700 $ 10,912,500
================ ================ ================
Supplemental information:
Cash paid for:
Interest $ -- $ -- $ 171,500
Income taxes 2,360,023 615,517 42,200
F-7
Non-cash investing and financing activities:
Acquisition of equipment under capital leases $ -- $ -- $ 30,000
Conversion of preferred stock to common stock -- -- 9,100
Net exercise of warrants 4,500 500 3,000
Issuance of stock and stock options in connection
with acquisitions 131,848,135 1,200,000 --
See accompanying notes to consolidated financial statements
F-8
TSI INTERNATIONAL SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The Company
TSI International Software Ltd. and its consolidated subsidiaries (collectively
referred to herein as "TSI" or the "Company") develops, markets, licenses, and
supports computer software and related services which allow organizations to
integrate their business applications within the enterprise and with outside
business partners. The Company's customers are located primarily throughout the
United States and Western Europe and represent a broad range of industries.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of TSI International
Software Ltd. and all subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 97-2 (SOP 97-2),"Software Revenue Recognition"
which superseded SOP 91-1 and provides guidance on generally accepted accounting
principles for recognizing revenue on software transactions. SOP 97-2 requires
that revenue recognized from software arrangements be allocated to each element
of the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation, or training. Under SOP 97-2, the determination of fair value is
based on objective evidence, which is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.
SOP 97-2 was amended in February 1998 by SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2" and was amended again in December 1998 by SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions." Those amendments deferred and then clarified,
respectively, the specification of what was considered vendor specific objective
evidence of fair value for the various elements in a multiple element
arrangement. The Company adopted the provisions of SOP 97-2 and SOP 98-4 as of
January 1, 1998. The adoption has not had a material impact on the Company's
results of operations, financial position or cash flows for the years ended
December 31, 1999 or 1998. SOP 98-9 is effective beginning January 1, 2000.
The adoption of the provisions of this statement is not expected to have a
material impact on the Company's operating results, financial position or
cashflows.
Software licensing revenues are recognized based upon the following four
criteria: persuasive evidence of an agreement exists, delivery has occurred, the
fee is fixed and determinable, and the fee is collectible. License revenues
arising from agreements involving the sale of licenses and
F-9
services that are essential to the functionality of the software being delivered
are accounted for under the percentage of completion method and are recognized
in direct proportion to the services delivered and to be delivered under the
agreements.
For multiple element arrangements, SOP 97-2 specifies that the license fee
should be allocated to the separate elements based on vendor-specific objective
evidence of fair values. The Company maintains multiple-element software
arrangements which include explicit rights to post contract customer support
("PCS"). In these arrangements, the total fees are allocated among the elements
based on vendor-specific objective evidence of fair value. The fair value of
PCS is determined by reference to the price the customer would be required to
pay when it is sold separately. The portion of the fee allocated to PCS is
recognized as revenue on a straight-line basis over the term of the PCS
arrangement. Additionally, the Company maintains certain arrangements which
include both software and service elements, other than PCS-related services.
These services may include training, installation, or consulting. Consulting
services often include implementation support or the customization or
modification of licensed software. In multiple element arrangements in which
significant modifications or additions to off-the-shelf software are necessary
to meet the customer's purpose, the entire arrangement (software and services)
is accounted for on a percentage of completion basis in direct proportion to the
services provided.
Maintenance contract revenues are recognized ratably over the terms of the
contracts, which are generally for one year. The unrecognized portion of
maintenance revenue is classified as deferred maintenance revenue in the
accompanying consolidated balance sheets. Consulting and training revenues are
recognized as services are performed. Revenues arising from time and material
service agreements are recognized as the services are provided. Revenues from
fixed price service agreements are recognized on a percentage of completion
basis in direct proportion to the services provided.
The Company licenses selected software, including its KEY/MASTER product, on a
term-use basis for 15 to 60 month periods. The contracts provide for maintenance
and generally do not have renewal or purchase options. At contract inception,
the present value of the payments to be received under the contract is
apportioned between software licensing revenue and maintenance revenue and
recognized as described above. The present value of the payments to be received
is recorded as an investment in licensing contracts receivable. License interest
revenue is recognized over the term of the contract at a constant rate of
return.
(c) Product Development Costs
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," requires
that software development costs: (i) be expensed as incurred until technological
feasibility (as defined therein) is achieved; and (ii) capitalized subsequent to
achieving technological feasibility and prior to the product being available to
customers. The establishment of technological feasibility of the Company's
products has essentially coincided with the products' general release to
customers. Accordingly, the Company has expensed all software development costs
as incurred.
F-10
(d) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Furniture, fixtures and
equipment under capital leases are stated at the present value of minimum lease
payments.
Depreciation on furniture, fixtures and equipment is calculated on the straight-
line method over the estimated useful lives of the assets. Furniture, fixtures
and equipment held under capital leases and leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or the estimated
useful life of the asset.
(e) Intangible Assets
Intangible assets are comprised of the excess of the purchase price and related
acquisition costs over the value assigned to the net tangible assets of the
business acquired. The purchase price of businesses acquired, accounted for as
purchase business combinations, is allocated to the tangible and identifiable
intangible assets acquired based on their estimated fair values with any amount
in excess of such allocations designated as goodwill. Intangible assets,
including goodwill, are amortized over their estimated useful lives, which range
from three to five years. As of December 31, 1998 and 1999, the Company had
$5.2 million and $153.2 million of intangible assets, net of accumulated
amortization of $0.3 million and $28.0, respectively, as a result of these
acquisitions.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are provided for any portion of the deferred tax assets
which are not more likely than not to be realized.
(g) Earnings per Share
In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS
No. 128 replaced the calculation of primary and fully diluted net income (loss)
per share with basic and diluted net income per share. Basic earnings per share
is computed based upon the weighted average number of common shares outstanding.
Diluted earnings per share is computed based upon the weighted average number of
common shares outstanding increased for any dilutive effects of options,
warrants, and convertible securities.
Diluted net loss per common share has not been presented separately for the year
ended December 31, 1999, as the outstanding stock options and warrants,
representing 2,983,502 shares of common stock equivalents accounted for under
the treasury stock method, are anti-dilutive.
F-11
(h) Cash Equivalents
The Company considers securities with maturities of three months or less, when
purchased, to be cash equivalents.
(i) Marketable Securities
Marketable securities at December 31, 1999 consist of fixed income securities,
government securities, and corporate bonds. Since all marketable securities are
bought and held principally for the purpose of selling them in the near term,
they are all classified as trading securities under the provision of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
Trading securities are recorded at fair value and any unrealized holding gains
and losses are reflected in earnings.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
(k) Stock Options
The Company accounts for stock-based transactions in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123,
the Company has elected to measure stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees," and comply with the
disclosure provisions of SFAS No. 123. Under the provisions of APB 25, no
compensation cost for stock options is recognized for fixed stock option awards
granted with an exercise price at or above the fair value of the underlying
common stock on the date of the grant. For options granted with an exercise
price less than fair value of the underlying common stock on the date of the
grant, the related compensation expense is amortized over the vesting period.
(l) Per Share Data
Share amounts for all periods presented reflect restatement for a three-for-one
stock split on July 1, 1997 and a two-for-one stock split that occurred on April
5, 1999.
(m) Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
F-12
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
(n) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments. Cash, investments in marketable
securities, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued expenses and current portion of deferred maintenance
revenue: The carrying amounts approximate fair value because of the short
maturity of these instruments.
(o) Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" during 1998. SFAS No. 130 requires the company to report in its
financial statements, in addition to its net income, comprehensive income, which
includes all changes in equity during a period from non-owner sources. The
Company's comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Statement of Stockholders'
Equity (Deficit). The adoption of SFAS No. 130 had no impact on total
shareholders' equity (deficit). Prior year financial statements have been
reclassified to conform to the SFAS No. 130 requirements.
(p) Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their local
currency. Assets and liabilities of international subsidiaries are translated
to U.S. dollars at the exchange rates as of the balance sheet date and income
statement items are translated at weighted average exchange rates for the year.
Exchange gains or losses arising from translation of such foreign entity
financial statements are included as a component of other comprehensive income
(loss).
(q) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which 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 137, (Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the effective date of SFAS No. 133 -- an Amendment of
SFAS No. 133) is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. This statement is not expected to effect the Company as the
Company currently does not have any significant derivative instruments or
hedging activities.
(r) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 presentation.
F-13
(2) Acquisitions
All acquisitions have been accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.
(a) Braid Group Limited
In March 1999, the Company acquired all of the outstanding share capital of
Braid Group Limited, ("Braid") a privately held Bermuda corporation, pursuant to
a Stock Purchase Agreement by and among the Company and each of the stockholders
of Braid.
Braid was a provider of EAI software products for end-to-end processing of
financial transactions in the international banking and securities' markets.
The Company purchased all of the outstanding share capital of Braid for
approximately $110.2 million excluding approximately $20 million of contingent
consideration to be paid upon the achievement of certain performance criteria.
The purchase price included (1) $30 million in cash, (2) 2,207,258 shares of the
Company's common stock valued at approximately $63.7 million, (3) the issuance
of 434,622 Company stock options, with a fair value of approximately $12
million, in exchange for all outstanding Braid stock options, and (4)
approximately $4.5 million in fees and acquisition related expenses. The excess
of purchase price, excluding the contingent consideration, over the fair value
of the net assets acquired is approximately $125.2 million including the effect
of recording $14.8 million of deferred tax liability related to nondeductible
identifiable intangible assets. Of this amount, $39.0 million was allocated to
identifiable intangible assets which are amortized on a straight-line basis over
periods of 3 to 5 years, with the remainder allocated to goodwill which is
amortized on a straight-line basis over 5 years.
(b) Novera Software, Inc.
In September 1999, the Company completed the acquisition of all of the
outstanding shares of Novera Software, Inc., ("Novera") a Delaware corporation,
pursuant to the Agreement and Plan of Reorganization (the "Merger Agreement") by
and among the Company and each shareholder of Novera
Novera developed, marketed, and supported Web application integration solutions,
which enabled organizations to integrate Web-based applications such as customer
self-service, customer relationship management and online retailing with back-
end legacy data.
Pursuant to the terms of the Merger Agreement, the Company purchased all of the
outstanding share capital of Novera for approximately $58.2 million. The
purchase price included (1) 1,789,916 shares of the Company's common stock
valued at approximately $46.6 million, (2) the issuance of options to purchase
369,142 shares of the Company's common stock, with a fair value of approximately
$9.6 million, in exchange for all outstanding Novera stock options, and (3)
approximately $2.0 million in fees and acquisition related expenses. The excess
of the
F-14
purchase price over the fair value of the net assets acquired is estimated at
$49.4 million including the effect of recording $3.7 million of deferred tax
asset related to acquired net operating losses. The excess purchase price will
be amortized on a straight-line basis over a 3 year period.
(c) Software Consulting Partners
In November 1998, the Company acquired certain assets of Software Consulting
Partners (SCP) for 67,844 shares of the Company's common stock with a total fair
value of $1.2 million and the assumption of certain liabilities totaling $4.7
million. The purchase price was allocated to the net assets based on their fair
values. The excess of the purchase price over the fair value of the net assets
acquired was approximately $5.5 million and is being amortized on a straight-
line basis over 3 years.
The Company issued 67,844 shares of common stock based upon the total value of
$1.2 million as prescribed by the agreement and the market price of the stock on
the acquisition date with 50% of such shares subject to an escrow to secure
certain indemnification obligations of SCP and the SCP stockholder.
(d) Pro forma results of operations
The following unaudited pro form consolidated results of operations are
presented as if the Braid, Novera, and SCP acquisitions had been made at the
beginning of the periods presented as well as the results that are already
included in the historical financial statements from the date of acquisition:
Unaudited
--------------------------
1999 1998
- -------------------------------------------------------------------
Revenues $ 104,529 $ 75,715
Net loss $ (37,249) $ (40,246)
Net loss per share:
Basic $ (1.37) $ (1.65)
Diluted $ (1.37) $ (1.65)
Weighted average shares outstanding:
Basic 27,166,359 24,327,890
Diluted 27,166,359 24,327,890
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization of
goodwill arising from the allocation of the purchase price and a decrease in
interest income due to the use of cash to satisfy liabilities. The pro forma
information does not necessarily present what the results of operations would
have been for these periods and is not intended to be indicative of future
results.
F-15
(3) Investment in Licensing Contracts
The net investment in licensing contracts at December 31, 1999, is comprised of
future minimum contract payments receivable, net of unearned interest income.
The interest rate implicit in term-use licensing contracts was 9.5% for
contracts entered into during the years 1998 and 1999. Total minimum contract
payments receivable at December 31, 1999 are as follows:
2000 ................................. $ 391,100
2001 ................................. 157,800
2002 ................................. 63,500
2003 ................................. 5,300
---------
617,700
Less unearned interest income (88,600)
---------
529,100
Less current portion (341,600)
---------
Non current portion $ 187,500
=========
(4) Furniture, Fixtures, and Equipment
Furniture, fixtures and equipment consist of the following:
December 31, Useful Life
------------------------
1999 1998 Range
----------- ----------- -----------
Computer systems ............................................ $ 9,012,600 $ 4,552,500 3-4 years
Furniture and fixtures ...................................... 1,716,400 728,900 5-10 years
Office equipment ............................................ 995,400 757,100 5 years
Leasehold improvements ...................................... 606,000 476,400 5 years
Automobiles ................................................. 412,500 51,000 4 years
----------- -----------
12,742,900 6,565,900
Less accumulated depreciation
and amortization (6,226,200) (3,866,500)
----------- -----------
$ 6,516,700 $ 2,699,400
=========== ===========
Depreciation expense was $2,331,700, $826,200, and $623,300 for the years ended
December 31, 1999, 1998, and 1997 respectively. Computer systems and equipment
under capital leases included in the above totals, net of accumulated
depreciation, was $0 and $22,800 as of December 31, 1999 and 1998, respectively.
(5) Long-Term Debt
The Company had a line of credit facility with The Bank of New York, which
provided for Company borrowings equal to the lesser of $4,000,000 or the sum of
80% of eligible accounts receivable, and a lesser percentage of certain other
receivables. Borrowings could take the form of prime rate loans (which bear
interest on borrowings at either the bank's prime rate plus 1.0%) or LIBOR rate
loans (which bear interest at the LIBOR rate plus 3.0%). The Company's
F-16
obligations under this credit line were secured by substantially all of the
Company's assets. This line of credit expired in November, 1998. All amounts
outstanding under this line of credit were paid off in July 1997 with proceeds
from the Company's initial public offering. See also note (15)(a). The Company
had no borrowings outstanding at December 31, 1999 or 1998. Borrowing costs and
effective interest rates under this agreement were as follows:
Years ended December 31,
---------------------------
1999 1998 1997
------- ------- --------
Interest expense.............................. $ 0 $ 0 $171,500
Guarantee fees ............................... 0 0 1,400
Commitment fees .............................. 0 10,900 12,900
------- ------- --------
$ 0 $10,900 $185,800
======= ======= ========
Effective interest rate -- -- 13.26%
======= ======= ========
(6) Stockholders' Equity
(a) Preferred Stock
The Company has authorized 5,000,000 shares of Preferred Stock which may be
issued by the Board of Directors on such terms and with such rights,
preferences, and designations as the Board may determine without any vote of the
stockholders. There were no shares outstanding at December 31, 1998 or 1999.
(b) Common Stock
In July 1997, the Company sold 6,000,000 shares of common stock in an initial
public offering (IPO) which resulted in proceeds of approximately $24,272,300,
net of offering expenses of $837,700. In connection with the completion of the
IPO, the following transactions were completed: (i) The Company increased the
number of authorized shares of common stock and preferred stock to 20,000,000
shares and 5,000,000 shares, respectively; (ii) the Company completed a three-
for-one common stock split; (iii) all outstanding preferred shares were
converted into 5,519,430 shares of common stock; and, (iv) certain shareholders
of the Company registered and sold 3,200,000 of common stock with net proceeds
to these shareholders of $13,392,000. The accompanying consolidated financial
statements notes have been retroactively adjusted to reflect the common stock
split.
In addition, in May 1997, three new investors acquired a total of 50,000 shares
of Series E convertible preferred stock at $20 per share, which at closing of
the IPO converted into 300,000 shares of common stock.
In June 1998, the Company sold 2,400,000 shares of common stock in a second
public offering which resulted in proceeds of approximately $21,287,200 net of
offering expenses of $392,800. Existing shareholders sold 4,622,000 shares of
stock in connection with this offering.
F-17
In July 1998, the underwriters exercised their option to purchase 1,053,300
additional shares of the Company's stock of which 453,300 were purchased from
the Company for additional proceeds of approximately $4,091,000.
In January 1999, the Company increased the number of authorized shares of common
stock from 20 million to 70 million.
In April 1999, the Company completed a two-for-one common stock split in the
form of a stock dividend. The accompanying consolidated financial statements
notes have been retroactively adjusted to reflect this common stock split.
(c) Stock Purchase Warrants
At December 31, 1996, certain owners of preferred and common stock held an
aggregate of nine warrants to purchase 1,979,638 shares of common stock at $1.00
per share, and are exercisable at the holders' discretion. During 1997 and
1998, warrants were exercised into an aggregate of 593,654 and 102,200 shares,
respectively. As these warrants were exercised on a net exercise basis, no
proceeds were received by the Company. Also, in connection with the secondary
public offering in 1998, one of the remaining warrants was sold to the
underwriters and subsequently exercised into 764,562 shares with total proceeds
of approximately $764,600. During 1999, one warrant was exercised into 455,412
shares. As this warrant was exercised on a net exercise basis, no proceeds were
received by the Company. At December 31, 1999, there are four warrants
remaining which are exercisable into 63,810 shares, and expire in June 2002.
(d) Stock Option Plans
The Company established the Equity Incentive Stock Option Plan ("Equity Plan")
in May 1997 which replaced the 1993 Stock Option Plan. The Equity Plan, as
amended, provides that the Company may grant options to employees to purchase up
to 4,750,000 shares of the Company's common stock. The Company granted 1,473,400
and 1,212,000 options under the Plan in 1999 and 1998, respectively, at exercise
prices from $11.53 to $58.75 and $5.96 to $22.29 per share, respectively. No
options may be granted for a term greater than 10 years. All options granted in
1999 and 1998 were granted with exercise prices equal to fair value on the grant
date.
In addition, the Company established a Directors Stock Option Plan ("Directors
Plan") in May 1997 which authorizes the issuance of options to directors to
purchase 450,000 shares of the Company's stock. During 1998, 60,000 shares were
granted at exercise prices from $11.38 to $13.38 per share. In 1999, 60,000
shares were granted at exercise prices from $17.38 to $24.75 per share.
In connection with the Braid acquisition in March 1999, all outstanding Braid
options were converted to TSI options based on a conversion factor. The Company
granted 434,600 options; 85,700 exercisable at $2.05 per share and 348,900
exercisable at $3.72 per share. These options vest quarterly, as they maintain
the same terms as under the Braid option plan. Any new grants issued to Braid
employees will be authorized through the Equity Plan.
F-18
As a result of the Novera acquisition in September 1999, all outstanding Novera
options were converted to TSI options based on a conversion factor. The Company
granted 369,100 options; 50,400, 12,500, 241,900, and 64,300 exercisable at
$0.49, $1.71, $1.95, and $2.44, respectively. Due to a clause in the Novera
stock option plan, the acquisition triggered an eighteen month acceleration of
the vesting schedule for all acquired options. These options continue to vest
quarterly, as all other terms are the same as under the Novera option plan. Any
new grants issued to Novera employees will be authorized through the Equity
Plan.
(e) Stock Option Activity
In 1998 and 1997 the Company recorded deferred compensation expense in
connection with the grant of certain options to employees representing the
difference between the quoted market price of the stock at the grant date and
the exercise price of the options. This amount is presented as a reduction of
stockholders equity and is amortized over the vesting period of the applicable
options. Transactions under the Equity Plan and the Directors Plan are
summarized below:
Weighted
Number Average
of Exercise
shares Price
---------------------------
Shares under option at December 31, 1996 2,127,714 $ 0.24
Exercised (22,000) $ 0.41
Granted 621,200 $ 3.12
Cancelled - $ -
--------------
Shares under option at December 31, 1997 2,726,914 $ 0.92
Exercised (330,412) $ 0.41
Granted 1,272,000 $10.97
Cancelled (19,000) $ 5.97
--------------
Shares under option at December 31, 1998 3,649,502 $ 4.42
Exercised (980,767) $ 2.87
Granted 1,533,445 $19.62
Issued in connection with acquisitions 803,760 $ 2.67
Cancelled (203,015) $15.81
--------------
Shares under option at December 31, 1999 4,802,925 $10.31
Options exercisable were as follows:
December 31, 1999 1,848,583 $ 1.93
December 31, 1998 1,615,202 $ 0.46
December 31, 1997 1,543,814 $ 0.21
Options outstanding at December 31, 1999 have a weighted average remaining
contractual life of 7.8 years.
Options were granted during 1999 at exercise prices between $0.49 and $58.75 per
share, during 1998 at exercise prices between $5.96 and $22.29 per share, and
during 1997 at exercise prices between $0.41 and $7.17 per share. Substantially
all options vest ratably over a four year period
F-19
from the date of grant. There were 2,466,980 shares available for grant under
the option plans at December 31, 1999.
As discussed in note 1, the Company applies Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
fair value of the underlying common stock on the date of grant, no compensation
expense has been recognized for its stock option grants to employees and
directors. Had compensation expense for the Company's stock option grants been
determined based on the fair value at the grant date for awards consistent with
the method of SFAS No. 123, the Company's net income or loss would have resulted
in the pro forma amounts for each year indicated below:
1999 1998 1997
------------- ---------- ----------
Net income - as reported $(16,267,600) $7,156,800 $2,479,600
Net income - pro forma (35,353,300) 5,012,900 2,023,600
Earnings per share - as reported:
Basic ($.64) $ .35 $ .21
Diluted ($.64) $ .30 $ .14
Earnings per share - pro forma
Basic ($1.39) $ .25 $ .17
Diluted ($1.39) $ .21 $ .12
The weighted average fair value of each option granted in 1999, 1998, and 1997
was $16.85 and $10.97, and $3.12, respectively. These values are based on
estimates on the date of grant using the modified Black-Scholes option pricing
model using the following weighted average assumptions:
1999 1998 1997
-------------- -------------- --------------
Risk-free interest rate 6.82% to 6.85% 4.49% to 5.77% 5.37% to 7.07%
Expected life in years 6 6 6
Expected volatility 79.7% 65% 59.8%
Expected dividend yield 0% 0% 0%
(f) Stockholders' Rights Plan
In September 1998, the Company adopted the Stockholder Rights Plan ("Rights
Plan") designed to protect the long-term value of the company for its
stockholders during any future unsolicited acquisition attempt. In connection
with the plan, the Board declared a dividend of one preferred share purchase
right for each share of the Company's common stock. Each right will entitle the
holder to purchase one-hundredth of a share of Series A Junior Participating
Preferred Stock at an exercise price of $140.00. Initially, the rights are
neither exercisable nor traded separately from the common stock. If a person or
a group (an "Acquiring Person") acquires or announces an intention to make a
tender offer to acquire 15 percent (20 percent if a 5 percent or more
shareholder at August 27, 1998) or more of the Company's common stock, the
rights will
F-20
become exercisable and thereafter trade separately from the common stock. The
Company's Board of Directors may exchange the outstanding rights for common
stock of the Company at an exchange ratio of one share of common stock per
right. The Board may also redeem outstanding rights at any time prior to a
person becoming an Acquiring Person at a price of $0.001 per right. Prior to
such time, the terms of the rights may be amended by the Board. The rights will
expire on September 2, 2008.
(g) Employee Stock Purchase Plan
The Company established an Employee Stock Purchase Plan which reserves a total
of 1,500,000 shares of the Company's common stock for issuance thereunder. The
plan permits eligible employees to acquire shares of the Company's common stock
through payroll deductions subject to certain limitations. The shares are
acquired at 85% of the fair market value. As of December 31, 1999, 374,571
shares had been purchased under the plan and 1,125,429 were remaining and
available for grant.
(7) Earnings per Share
Following are the components of common stock used to calculate Basic and Diluted
earnings per share:
Years ended December 31,
---------------------------------
1999 1998 1997
---------- ---------- ---------
Weighted average common shares
outstanding (basic shares).................... 25,376,443 20,299,006 11,833,986
Common shares issuable upon conversion
of preferred stock (see note 6)............... -- -- 2,609,264
Dilutive effect of stock options and warrants.. -- 3,516,602 2,690,272
---------- ---------- ----------
Total diluted shares........................... 25,376,443 23,815,608 17,133,522
========== ========== ==========
(8) Employee Savings and Bonus Plans
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code which provides for voluntary employee salary deferrals but does not
require Company matching funds. The defined contribution plan covers
substantially all employees. Employees are eligible to contribute to the defined
contribution plan upon completion of three months of service with the Company.
Contributions are subject to established limitations as determined by the
Internal Revenue Service. As of January 1, 1998, the Company amended the plan to
include an employer match of 50% of participants' contributions up to 4%. The
Company has made contributions to the plan of $397,800 and $210,000 for the
years ended December 31, 1999 and 1998, respectively.
The Company maintains a bonus plan for all non-executive officer employees. The
bonus plan is reviewed annually by the Board of Directors and provides for
payments based upon a percentage of pretax income, as defined. Bonus payments
were $421,600, $251,000, and $200,000 in 1999, 1998, and 1997, respectively.
F-21
(9) Income Taxes
Domestic and foreign pretax income (loss) are as follows:
Years Ended December 31,
1999 1998 1997
---- ---- ----
Domestic $ 2,320,500 $3,459,900 $1,405,100
Foreign (18,815,900) 3,018,000 1,150,500
---------------------------------------
Total $(16,495,400) $6,477,900 $2,555,600
=======================================
The provision for (benefit from) income taxes is comprised of the following for
the years ended December 31, 1999, 1998 and 1997:
Current Deferred Total
------- -------- -----
Year ended December 31, 1999
U.S. Federal $ 2,813,900 (1,315,400) 1,498,500
State 648,800 11,500 660,300
Foreign 167,300 (2,553,900) (2,386,600)
-------------------------------------
3,630,000 (3,857,800) (227,800)
=====================================
Year ended December 31, 1998
U.S. Federal $ 256,400 (1,199,700) (943,300)
State 302,400 (217,900) 84,500
Foreign 179,900 -- 179,900
-------------------------------------
738,700 (1,417,600) (678,900)
=====================================
Year ended December 31, 1997
U.S. Federal $ 46,000 -- 46,000
State 30,000 -- 30,000
Foreign -- -- --
-------------------------------------
76,000 -- 76,000
=====================================
Provision has not been made for U.S. tax on cumulative undistributed earnings of
foreign subsidiaries as those earnings are intended to be permanently
reinvested. It is not practicable to estimate the additional tax that would be
incurred, if any, if these amounts were repatriated.
At December 31, 1999, the Company had federal tax net operating loss
carryforwards of $18,201,700, of which $1,900,000 expires between the years 2000
and 2009 and $16,301,700 expires in 2019. At December 31, 1999 and 1998, the
components of net deferred taxes were:
F-22
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 6,970,800 $1,011,900
Federal tax credits 1,683,100 1,372,400
Deferred revenues 467,200 934,300
Allowance for doubtful accounts 501,600 736,400
Accrued expenses 609,800 44,100
Other 351,500 7,700
------------ ----------
Total gross deferred tax assets 10,584,000 4,106,800
Less valuation allowance -- 1,054,500
------------ ----------
Total deferred tax assets 10,584,000 3,052,300
============ ==========
Deferred tax liabilities:
Acquired intangible assets,
other than goodwill (12,253,500) --
Licensing contracts receivable (205,300) (307,800)
Difference between book and tax depreciation -- (49,400)
------------ ----------
Total deferred tax liability (12,458,800) (357,200)
------------ ----------
Net deferred tax asset (liability) $ (1,874,800) $2,695,100
============ ==========
The valuation allowance for deferred tax assets decreased by $1,054,500 and
$3,387,000 during 1999 and 1998, respectively. The decrease in the valuation
allowance in 1999 is the result of the reversal of the valuation allowance
relating to federal tax credits. The decrease in the valuation allowance in 1998
is the result of the utilization of net operating loss carryforwards and the
reversal of the remaining net operating loss carryforward valuation allowance
relating to federal tax credits.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
F-23
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company?s effective tax rate for financial
statement purposes.
1999 1998 1997
---- ---- ----
U.S. Federal Statutory Rate (34.0%) 34.0% 34.0%
Goodwill amortization
and other non-deductible expenses 43.8% 3.7% 1.6%
State income taxes, net of U.S.
federal tax benefit 2.6% 4.8% 0.8%
Tax credits (1.9%) (7.2%) --
Other (5.5%) 2.2% --
Change in valuation allowance (6.4%) (48.0%) (33.4%)
----- ------ -----
Effective tax rate (1.4%) (10.5%) 3.0%
------ ====== =====
Included in prepaid assets and other current assets are prepaid taxes of
$1,094,800 at December 31, 1999. Included in accrued expenses are current tax
liabilities of $108,800 at December 31, 1998.
(10) Valuation Accounts
The Company estimates an allowance for doubtful accounts receivable, considering
its customers' financial solvency, payment history and other factors. The
movements in this account are summarized below:
1999 1998 1997
---- ---- ----
Balance at beginning of period $1,897,900 $ 471,300 $ 319,900
Charged to costs and expenses 200,300 837,800 431,600
Charged to other accounts (244,400) 800,000 100,000
Deductions (87,400) (211,200) (380,200)
---------- ---------- ---------
Balance at end of period $1,766,400 $1,897,900 $ 471,300
========== ========== =========
Charged to costs and expenses represents the Company's annual charges to bad
debt expense. Charges to other accounts includes acquired allowances and
subsequent utilization or reversal thereof. Deductions represent uncollectible
accounts written-off, net of recoveries.
(11) Accrued Expenses
Included in accrued expenses as of December 31, 1999 and 1998, are compensation
costs (regular payroll, commissions, bonus, profit sharing, and other
withholdings) of $5,698,500 and $3,718,900, respectively.
F-24
(12) Commitments and Contingencies
The Company rents premises and furniture, fixtures, and equipment under
operating leases which expire at various dates through 2011. Future minimum
payments, by year and in the aggregate, under operating leases at December 31,
1999 are:
Year
- ----
2000........................................... $2,236,400
2001........................................... 1,630,400
2002........................................... 1,480,000
2003........................................... 1,375,100
2004........................................... 679,300
----------
Total....................................... $7,401,200
Certain of the aforementioned leases provide for additional payments relating to
taxes and other operating expenses. Rental expense for the years ended December
31, 1999, 1998, and 1997 under all operating leases aggregated approximately
$1,995,400, $1,385,000, and $840,400, respectively.
Certain litigation of a nature considered normal to its business is pending
against the Company. Management believes the outcome of this litigation will not
have a material adverse effect on the financial position or overall trends in
the results of operations of the Company.
(13) Segment Information
In the fourth quarter of 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments. It also establishes standards for related
disclosures about products and services. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance.
As a result of recent international acquisition and expansion, the Company has
changed its internal structure resulting in the classification of its business
activities into two reportable segments: Domestic and International. These
segments are organized, managed and analyzed geographically. Information
regarding the Company's operations in these two operating segments are set forth
below. For consolidated results, the accounting policies of the operating
segments are the same as those described in Note 1. There are no significant
corporate overhead allocations or intersegment sales or transfers between the
segments for the periods presented.
F-25
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Revenue:
Domestic $ 69,609,900 $39,955,100 $24,164,500
International 29,014,700 5,361,000 2,505,200
------------ ----------- -----------
Total 98,624,600 45,316,100 26,669,700
============ =========== ===========
Operating income before
amortization of
intangibles:
Domestic 8,292,100 1,756,300 906,300
International 1,913,800 3,010,400 1,146,800
------------ ------------ ------------
Total 10,205,900 4,766,700 2,053,100
Amortization of intangibles (27,689,200) (303,300) --
Other income, net 987,900 2,014,500 502,500
Provision for (benefit from) income taxes (227,800) (678,900) 76,000
------------ ----------- -----------
Net income (loss) (16,267,600) 7,156,800 2,479,600
============ =========== ===========
Capital expenditures:
Domestic 3,766,300 1,725,400 686,700
International 796,800 76,800 189,500
Depreciation expense:
Domestic 604,600 757,800 540,500
International 1,727,100 68,400 82,800
Revenues primarily relate to sales of the Mercator product line and are recorded
in the country in which the sales office is located. The Company had no sales
to any one customer in excess of 10% of total net revenues for fiscal years
ended December 31, 1999, 1998 and 1997.
(14) Condensed Quarterly Information (Unaudited)
The following condensed quarterly information has been prepared by management on
a basis consistent with the Company's audited financial statements. Such
quarterly information may not be indicative of future results. Amounts are in
thousands, except per share data.
F-26
1999
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- -------
Total revenues.......................... $17,236 $23,644 $26,731 $31,013
Gross profit............................ 12,569 18,027 21,052 24,321
Net loss................................ (220) (4,536) (3,468) (8,045)
Net loss per share
Basic.................................. (.01) (.18) (.14) (.29)
Diluted................................ (.01) (.18) (.14) (.29)
Weighted average number of common and
common equivalent shares outstanding:
Basic.................................. 22,839 25,374 25,625 27,668
Diluted................................ 22,839 25,374 25,625 27,668
1998
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenues.......................... $ 8,187 $10,133 $12,124 $14,872
Gross profit............................ 7,193 8,676 10,840 11,718
Net income.............................. 871 1,226 1,871 3,189
Net income per share:
Basic.................................. .05 .06 .09 .14
Diluted................................ .04 .05 .07 .13
Weighted average number of common and
common equivalent shares outstanding:
Basic.................................. 18,088 19,082 21,924 22,098
Diluted................................ 21,654 22,868 25,254 25,486
The sum of the quarterly per share amounts does not agree to the respective
annual amounts due to rounding.
(15) Subsequent Event (Unaudited)
(a) Line of Credit Facility.
On March 1, 2000 the Company established a three-year $20,000,000 line of credit
facility with Fleet Bank.
(b) Proxy.
On March 3, 2000 a proxy was issued to amend the Company's Certificate of
Incorporation in order to change the name of the Company to Mercator Software,
Inc. The name change will be subject to a vote of the stockholders to be held
at a special meeting on March 30, 2000. Only holders of record of the Company's
common stock at the close of business on February 23, 2000 (the "Record Date")
will be entitled to vote at the meeting. If the proposal is approved, the
effective date for the name change will be April 3, 2000.
F-27