10-Q 1 f78731e10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------------------------------------- FORM 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-31011 TALARIAN CORPORATION -------------------- (Exact Name of Registrant as specified in its charter) DELAWARE 33-0323810 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 333 DISTEL CIRCLE LOS ALTOS, CALIFORNIA 94022 --------------------------- (Address of principal executive offices) (650) 965-8050 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of the registrant's common stock, par value $.001 per share, as of December 31, 2001, was 19,303,203. TALARIAN CORPORATION QUARTERLY REPORT ON FORM 10-Q QUARTER ENDED DECEMBER 31, 2001 TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TALARIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. 3 TALARIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. 4 TALARIAN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. 5 TALARIAN CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance, not only with accounting principles generally accepted in the United States of America for interim financial information but also with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position as of December 31, 2001, and the results of its operations and cash flows for the interim periods ended December 31, 2001 and 2000. These financial statements should be read in conjunction with the Company's audited financial statements as of September 30, 2001 and 2000 and for each of the years in the three-year period ended September 30, 2001, including notes thereto, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2001. The condensed consolidated balance sheet at September 30, 2001 has been derived from the audited financial statements as of that date. The results of operations for the interim periods ended December 31, 2001 and 2000 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending September 30, 2002. NOTE 2 COMPREHENSIVE INCOME (LOSS) Total comprehensive loss includes, in addition to net loss, unrealized gains and losses excluded from the consolidated and combined statements of operations that are recorded directly into a separate section of stockholders' equity (deficit) on the consolidated balance sheets. These unrealized gains and losses are referred to as other comprehensive income (loss). The Company's accumulated other comprehensive income shown on the consolidated balance sheets consists of unrealized investment holding gains and losses which are not adjusted for income taxes. For the quarters ended December 31, 2001 and 2000, the Company had $69,000 and $149,000 of other comprehensive income (loss) which was recorded as a component of stockholders' equity. NOTE 3 CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of less than 90 days at the date of purchase. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent of the amounts recorded on the balance sheet in excess of amounts that are insured by the Federal Deposit Insurance Corporation. As of December 31, 2001 and September 30, 2001, cash equivalents consisted primarily of money market accounts and auction rate instruments. The Company classifies its investments in debt securities as available-for-sale and as such these investments are classified as short-term investments. Any unrealized gains or losses are recorded as a component of other comprehensive income/loss as a component of stockholders' equity. 6 NOTE 4 NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS Basic net loss per share attributable to common stockholders is computed using the weighted-average number of outstanding shares of common stock excluding shares of restricted stock subject to repurchase. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of shares of common stock outstanding plus, when dilutive, potential shares of restricted common stock subject to repurchase and common stock from exercise of options and warrants, using the treasury stock method, and from convertible securities on an "as if converted" basis. The following potential shares of common stock have been excluded from the computation of diluted net loss per share attributable to common stockholders for all periods presented because the effect would have been antidilutive:

The weighted-average exercise price of stock options outstanding was $3.07 and $3.95 as of December 31, 2001 and 2000, respectively. The weighted-average purchase price of restricted stock subject to repurchase was $0.37 and $0.41 as of December 31, 2001 and 2000, respectively. The weighted-average exercise price of outstanding warrants to purchase common stock was $0.90 and $0.67 as of December 31, 2001 and 2000, respectively. NOTE 5 RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the accounting for and reporting of business combinations. SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting for acquisitions, and eliminates the use of the pooling-of-interests method. SFAS 141 is effective for all business combinations initiated after June 30, 2001. The Company believes SFAS No. 141 will not have a material effect on its consolidated financial statements. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of the SFAS 142. SFAS 142 is effective for all fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired after June 30, 2001, will be subject to immediate adoption of SFAS 142. As of December 31, 2001, the Company had recorded goodwill and intangibles of $1.8 million. The Company believes SFAS No. 142 will not have a material effect on its consolidated financial statements. On August 16, 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting requirements for retirement obligations associated with retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 requires a company to record the fair value of an asset retirement obligation in the period in which it is incurred. When the retirement obligation is initially recorded, the Company also records a corresponding increase to the carrying amount of the related tangible long-lived asset and depreciates that cost over the useful life of the tangible long-lived asset. The retirement obligation is increased at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. Upon settlement of the retirement obligation, the Company either settles the retirement obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years beginning after June 15, 2002 with 7 earlier application encouraged. Accordingly, SFAS 143 will be effective for the Company beginning October 1, 2002. The Company is currently in the process of evaluating the impact, if any, SFAS 143 will have on its financial position or results of operations. On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, ("SFAS 144") Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of", and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for impairment or disposal by sale of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Accordingly, SFAS 144 will be effective for the Company beginning October 1, 2002. The Company is currently evaluating the potential impact, if any, the adoption of SFAS 144 will have on its financial position and results of operations. NOTE 6 IMPAIRMENT OF LONG LIVED ASSETS The Company evaluates its long-lived assets, including goodwill and certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If 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. NOTE 7 BALANCE SHEET COMPONENTS Intangible Assets On March 13, 2000, the Company acquired WhiteBarn, Inc. for total consideration of approximately $4.9 million. Approximately $4.4 million of the purchase price was allocated to intangible assets including goodwill. The goodwill and intangible assets acquired in connection with the acquisition of WhiteBarn are being amortized on a straight-line basis over their estimated useful lives of between two and three years. NOTE 8 SEGMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes segments within the Company for making operating decisions and assessments of financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The consolidated financial information reviewed by the CEO is identical to the information presented in the accompanying condensed consolidated statements of operations. The Company has determined that it operates in a single operating segment: real-time infrastructure software. The Company maintains significant operations in the United States, with direct sales and marketing offices located in the United Kingdom, Germany and Japan. The Company does not measure revenue by geographical area, and, accordingly, no analysis has been provided. There were no significant assets maintained by the Company outside the United States as of December 31, 2001 or 2000. Revenue from sales made to customers outside the United States aggregated 12% and 20% of our total revenue for the three months ended December 31, 2001 and 2000, respectively. Customers were primarily concentrated in the United Kingdom, Germany, Australia and Japan. 8 Significant customer information is as follows:

NOTE 9 LEGAL ACTIONS On January 8, 2002, an action, Robert Mathiason v. Talarian Corporation, et al. was filed in the Superior Court of the State of California for the County of Santa Clara. In this action, the plaintiff named as defendants the Company and the Company's directors. The complaint purports to assert claims on behalf of all of the Company's public stockholders who are similarly situated with the plaintiff. The complaint alleges, among other things, that the Company and the members of the Company's board of directors have breached their fiduciary duties to the Company's stockholders in approving the merger with TIBCO, that the directors engaged in self-dealing in connection with their approval of the merger and that the directors failed to take steps to maximize the value of the Company to the Company's stockholders. The complaint seeks class certification and certain forms of equitable relief, including enjoining the consummation of the merger. The Company believes that the allegations are without merit and intends to vigorously contest the action. There can, however, be no assurance that the Company or the other defendants will be successful in the defense of the action. On August 10, 2001 a stockholder class action complaint was filed in the United States District Court for the Southern District of New York against the Company, certain of the Company's officers and directors, and three underwriters of the Company's initial public offering. The complaint was brought on behalf of purchasers of the Company's common stock between July 20, 2000 and December 6, 2000. The complaint has been brought as a purported stockholder class action under Sections 11 and 15 of the Securities Act and Section 10(b) of the Securities Exchange Act. The complaint alleges, among other things, that the Company and the individual defendants named in the complaint violated the federal securities laws by issuing and selling the Company's common stock in the Company's initial public offering without disclosing to investors that certain of the underwriters in the offering allegedly solicited and received excessive and undisclosed commissions from certain investors. The Company is also aware that a similar lawsuit has been filed on September 25, 2001 in the United States District Court for the Southern District of New York against the Company. Similar complaints have been filed against a number of other companies that had initial public offerings in 1999 and 2000. The Company have not yet responded to these lawsuits, and no discovery has been conducted. The Company believes that the allegations in this action are without merit, and the Company intends to defend against these actions vigorously, but the Company cannot give any assurance that it will not have a material adverse effect on the Company. NOTE 10 SUBSEQUENT EVENTS As of January 4, 2002, the Company entered into an Agreement and Plan of Merger with TIBCO Software Inc. and Panther Acquisition Corp., a wholly owned subsidiary of TIBCO. Pursuant to the merger agreement, the Company and Panther Acquisition will merge, and the surviving corporation will become a wholly owned subsidiary of TIBCO, subject to customary closing conditions, including the approval of the Company's stockholders. In connection with the merger, each share of the Company's outstanding common stock will be converted into the right to receive $2.65 in cash and a fraction of a share of TIBCO common stock equal to the exchange ratio. The exchange ratio will be determined by dividing $2.65 by the average of the closing sale prices for one share of TIBCO common stock as reported on the Nasdaq National Market for the 10 consecutive trading days ending with and including one day prior to the closing date of the merger, provided that if this average trading price is greater than $16.21, or less than $12.16, then for purposes of calculating the exchange ratio the average trading price will be deemed to be $16.21 if it is greater than $16.21, or $12.16 if it is less than $12.16. The merger is subject to various terms, conditions and covenants, and this summary is necessarily incomplete. A copy of the Agreement and Plan of Merger has been filed with the Securities and Exchange Commission through a filing on Form 8-K that the Company made on January 8, 2002. The Company has expensed approximately $480,000 of direct costs (professional service fees) incurred in connection with this transaction in the three months ended December 31, 2001. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified by the use of words such as "may," "might," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," the negative of these terms, and other comparable terminology. These forward-looking statements may include, among other things, our contemplated acquisition by TIBCO Software Inc., anticipated trends in our revenue (including maintenance) and expenditures, expectations regarding our products and customers, our anticipated growth strategies, and anticipated trends in our business. These forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed under "Factors That May Affect Operating Results," below, and other risks discussed in our filings with the Securities and Exchange Commission. We do not assume any obligation to update any of these forward-looking statements. As of January 4, 2002, we entered into an Agreement and Plan of Merger with TIBCO Software Inc. and Panther Acquisition Corp., a wholly owned subsidiary of TIBCO. Pursuant to the merger agreement, we and Panther Acquisition will merge, and the surviving corporation will become a wholly owned subsidiary of TIBCO, subject to customary closing conditions, including the approval of our stockholders. In connection with the merger, each share of our outstanding common stock will be converted into the right to receive $2.65 in cash and a fraction of a share of TIBCO common stock equal to the exchange ratio. The exchange ratio will be determined by dividing $2.65 by the average of the closing sale prices for one share of TIBCO common stock as reported on the Nasdaq National Market for the 10 consecutive trading days ending with and including one day prior to the closing date of the merger, provided that if this average trading price is greater than $16.21, or less than $12.16, then for purposes of calculating the exchange ratio the average trading price will be deemed to be $16.21 if it is greater than $16.21, or $12.16 if it is less than $12.16. The merger is subject to various terms, conditions and covenants, and this summary is necessarily incomplete. A copy of the Agreement and Plan of Merger has been filed with the Securities and Exchange Commission through a filing on Form 8-K that we made on January 8, 2002. GENERAL OVERVIEW We develop and market infrastructure software products that allow our customers to distribute and share information in real time within and across organizations. Our products enable distributed computer applications to communicate quickly, reliably and securely across virtually any type of network, including the Internet. We were incorporated in November 1988. From inception through 1996, we derived a substantial portion of our revenue from a suite of software products used primarily in connection with mission-critical command and control operations in industries such as aerospace. In 1997, leveraging our technology developed for mission-critical command and control operations, we refocused our business strategy to provide infrastructure software for applications relying heavily upon the use of real-time, distributed systems. Our operating activities during 1997 and 1998 related primarily to developing our SmartSockets messaging infrastructure product line and directing our sales and marketing efforts to increase market awareness of our SmartSockets product in industries such as finance, telecommunications and computer hardware and services. In 1999, we launched SmartMQ, a message queuing product that provides complementary storage, backup and audit capabilities to SmartSockets. We also added Internet-related applications and industries, such as business-to-business e-commerce, to our sales and marketing focus and began a concerted effort to market our product to third-party partners such as original equipment manufacturers and value-added resellers. Additionally in 1999, we began incorporating reliable multicast capabilities into our SmartSockets product line. As part of our overall multicast initiative, we acquired substantially all of the assets of GlobalCast Communications, Inc. in September 1999, and acquired WhiteBarn, Inc. in March 2000. Later in 2000, we launched our SmartPGM IP multicast product suite based on our implementation of reliable multicast protocol known as Pragmatic General Multicast, or PGM, that was originally specified by Cisco Systems. Our multicast product suite launched in 2000 included SmartPGM and SmartPGM FX, which simplifies the setup and management of file transfers from a single sender to multiple receivers over an IP multicast and PGM-capable network. In 2000, we also launched two products as add-on products to SmartSockets, SmartSocket SSL, which provides private, secure connections between SmartSockets processes, and SmartSockets Gateway, which extends the message functionality of SmartSockets. 10 In 2001, we introduced two new SmartSockets add-on products, SmartSockets Multicast and SmartSockets LiveDB, and we extended our SmartPGM product line with SmartPGM Propagator for Oracle. Additionally in 2001, in part as a response to overall adverse economic conditions, we made a concerted effort to optimize our organizational structure and applied more aggressive cost containment programs. As a result, we closed remote offices in areas that were not providing adequate returns on our investments. Additionally, we began to focus our sales, marketing, and engineering resources primarily on the finance and aerospace industries, which we believed had the potential for the greatest, and most immediate, returns. We also continued our efforts toward third-party partners such as original equipment manufacturers and value-added resellers, primarily in the computer hardware and software services markets. Our revenue consists principally of license fees generated from our SmartSockets product line and, to a lesser extent, revenue from maintenance, support, and professional services related to our SmartSockets and SmartPGM product lines. We license our products to end users to deploy in their networks and, to a lesser extent, to software application providers to embed in their products. For end users, we typically ship products with a shrink-wrap license agreement and recognize revenue from software license fees upon delivery of the software to the customer, provided that the fees are fixed and determinable and that collection is probable. For software application providers and increasingly with our end-users, we enter into signed license agreements. All of our original equipment manufacturer and value-added reseller customers enter into signed agreements with us. For customers using a signed license agreement, revenue is recognized after all conditions above have been met and we have received the signed agreement. We recognize software license revenue ratably over the term of the license if the license requires us to deliver unspecified additional software products during its term. Maintenance and support revenue consists of fees for providing software updates and technical support for software products. We recognize revenue from maintenance and support fees ratably over the period of the maintenance and support agreement, typically twelve months. Payments for maintenance and support are typically paid in advance and are nonrefundable. Professional services revenue consists of fees for services, including product and application development, implementation and installation of software products, integration of software, on-site support, consulting and training. We generally recognize revenue from professional services as the services are performed. Payments received in advance of revenue recognition are recorded as deferred revenue. As of December 31, 2001, we had $5.1 million of deferred revenue. Of this amount, $760,000 was classified as long-term deferred revenue, relating primarily to software licenses that require us to deliver software over an extended period and, to a lesser extent, to maintenance and support agreements that have a term in excess of one year. We market our products primarily through our direct sales force and, to a lesser extent, through indirect channels. We also derive revenue from indirect channel relationships with distributors, original equipment manufacturers, value-added resellers and systems integrators. Our third-party relationships have typically been with companies that embed our product within their product, for which we receive a license fee and, in some cases, future royalties based on our reseller's product revenue. We expanded our international presence by opening a sales and support office in London, England in 1998, and added sales offices in Tokyo, Japan and Frankfurt, Germany in 2000. Due to the overall economic slowdown that began in 2001, we have focused our direct international efforts solely in our London offices, augmented through international distributors. We plan to prudently increase our current sales force, focusing our efforts on industry verticals and geographies that provide us the highest return on investment, and continue current campaigns for the market awareness of our company and our products. As a result, we expect to incur only moderate increases in expenditures related to programs designed to achieve those goals. In September 1999, we acquired substantially all of the assets of GlobalCast, a provider of reliable multicast technology, for our common stock with an aggregate value of $3.6 million. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, and $300,000 of the purchase price was allocated to in-process research and development and expensed at the time of the acquisition. Also, in connection with the GlobalCast acquisition, we recorded intangible assets of $2.9 million. During the quarter ended June 30, 2001, we recorded a charge of $1.2 million, representing the balance of the GlobalCast intangible assets, to reflect the impairment of intangibles and other assets, primarily related to our goodwill associated with our acquisition of GlobalCast. 11 In March 2000, we acquired WhiteBarn, a professional services and software development company focused on reliable multicast and network protocols with cash, stock and options to purchase our common stock that had an aggregate value of $4.9 million. The transaction was accounted for as a purchase. In this acquisition, the acquired technology included existing technology, but not in-process research and development. In connection with the WhiteBarn acquisition, we recorded intangible assets of $4.4 million and are amortizing them over a two to three year period. We have incurred significant losses recently as we have spent substantial amounts to develop and enhance our products and have invested heavily in our sales and marketing organizations. Recent economic conditions have also served to slow customers' spending decisions. We believe our success is dependent upon our ability to continue to expand our customer base and enhance our technology. In connection with the granting of stock options to our employees through July 20, 2000, we recorded deferred stock compensation totaling approximately $22.6 million. This amount represents the difference between the exercise price and the deemed fair value of our common stock for accounting purposes on the date these stock options were granted. This amount is included as a component of stockholders' equity and is being amortized on an accelerated basis by charges to operations over the vesting period of the options consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. The stock options, or restricted stock purchased pursuant to these options, generally vest at a rate of 12.5% upon the six-month anniversary of the option grant date and 2.083% each month thereafter for the next 42 months. Amortization of the December 31, 2001 balance of deferred stock compensation will result in charges to operations of $1.62 million, $886,000, and $72,000 for the fiscal years 2002, 2003 and for the nine months ended June 30, 2004, respectively. We have recorded a $50,000 provision for state and foreign franchise taxes for the period ending September 30, 2001. We have not recorded a provision for federal income taxes for any period since our inception as we have incurred losses in each period. As of September 30, 2001, we had net operating loss carryforwards for federal income tax purposes of approximately $21.1 million and for California income tax purposes of approximately $1.6 million, available to offset income in future years. The federal net operating loss carryforwards expire from 2007 through 2021. The California net operating loss carryforwards expire from 2001 through 2006. RESULTS OF OPERATIONS The following table sets forth the results of operations for the three months ended December 31, 2001 and 2000 expressed as a percentage of total revenue.

12 Research and development 48 82 General and administrative 20 28 Amortization of deferred stock compensation: Sales and marketing 3 24 Research and development 7 21 General and administrative 5 14 Acquisition cost 10 0 Amortization and impairment of goodwill and intangible assets 8 18 ---- ---- Total operating expenses 160 288 ---- ---- Loss from operations (76) (215) Interest income and other, net 9 33 ---- ---- Net loss (67)% (182)% ==== ====

REVENUE Total revenue increased by $1.2 million, or 36%, to $4.6 million in the three months ended December 31, 2001, from $3.4 million in the three months ended December 31, 2000. Licenses and associated maintenance revenue represented 94% and 84% of total revenue for the three months ended December 31, 2001 and 2000, respectively. The increase in total revenue for the three month period was due equally to increases in software licenses and associated maintenance revenue, offset in part by a decrease in professional services revenue. During the twelve months ended September 30, 2001, we saw a significant decrease in the overall demand for our products and services that resulted in lower than anticipated license revenue and greater than anticipated net loss. We believe that this decrease in demand was primarily due to general and industry economic conditions. The revenue for the quarter ended December 31, 2001 was affected by this decrease in demand. While we continue to be adversely impacted by the decline in overall economic conditions, our focus on the financial services and aerospace industries and the resulting increase in revenue from those sectors, has helped mitigate the impact of such conditions relative to the year-ago period. One customer accounted for more than 10% of our total revenue in the three months ended December 31, 2001. No customers accounted for more than 10% of our total revenue in the three months ended December 31, 2000. International revenue decreased by $63,000, or 10%, to $552,000 for the three months ended December 31, 2001, from $615,000 in the three months ended December 31, 2000. International revenue was 12% and 18% of our total revenue in the three months ended December 31, 2001 and 2000, respectively. Licenses. License revenue increased by $738,000, or 37%, to $2.8 million in the three months ended December 31, 2001, from $2.0 million in the three months ended December 31, 2000. The increase in license revenue was equally due to an increase in the number of SmartSockets software licenses and new product software licenses that were not offered in the year ago quarter such as SmartCache and SmartSockets JMS. As a percentage of total revenue, license revenue represented 59% in each of the three months ended December 31, 2001 and 2000. Maintenance. Maintenance revenue increased by $760,000, or 91%, to $1.6 million in the three months ended December 31, 2001, from $839,000 for the three months ended December 31, 2000. Approximately $701,000 of the increase in maintenance is due to customers whose maintenance periods had previously expired and had re-initiated their maintenance programs and agreed to pay for lapsed maintenance during the quarter. The increase in maintenance revenues was due in part to an aggressive campaign to re-initiate maintenance programs for our customers whose maintenance had expired. The balance of the increase in maintenance revenue was due to a larger installed base of customers receiving ongoing maintenance. We believe that the majority of our customers requiring maintenance are now on a current maintenance program and thus future maintenance revenue will reflect ongoing maintenance renewals that are recognized over their maintenance period, typically one year. Accordingly, we expect maintenance revenue to be $1.0 million to $1.2 million for the quarter ending March 31, 2002. As a percentage of total revenue, maintenance revenue represented 35% and 25% in the three months ended December 31, 2001 and 2000, respectively. Professional services. Professional services revenue decreased by $267,000, or 48%, to $289,000 in the three months ended December 31, 2001, from $556,000 in the three months ended December 31, 2000. The decrease in professional services revenue during the three months ended December 31, 2001 was primarily a result of services delivered during the quarter under a fixed price contract that requires customer acceptance, which is expected next 13 quarter. As a result, revenue associated with such services has been deferred until final acceptance is received from the customer. In addition, the decline in professional services revenue reflected both a stronger focus on higher margin software sales and the continuing effects of the previously announced reallocation of much of the professional services staff to internal product development and to pre-sales support activities. As a percentage of total revenue, professional services revenue represented 6% and 16% in the three months ended December 31, 2001 and 2000, respectively. COST OF REVENUE In the three months ended December 31, 2001, cost of revenue decreased by $139,000, or 15%, to $773,000, from $912,000 in the three months ended December 31, 2000. The decrease in cost of revenue for the three months ended December 31, 2001, was primarily a result of a $178,000 decrease in amortization of deferred stock compensation associated with terminated employees, offset in part by an increase in cost of licenses and maintenance revenue commensurate with the increase in revenue from those elements. As a percentage of total revenue, cost of revenue represented 16% and 27% in the three months ended December 31, 2001 and 2000, respectively. Not including amortization of deferred stock compensation, as a percentage of total revenue, cost of revenue was 14% and 18% in the three months ended December 31, 2001 and 2000, respectively. Licenses. Cost of license revenue includes royalties due for technology licensed from third parties, product packaging, manuals and documentation, and software media. In the three months ended December 31, 2001, cost of license revenue increased by $59,000, or 328%, to $77,000 from $18,000 in the three months ended December 31, 2000. The increase in cost of license revenue was attributable to an increase in overall license revenue, particularly license revenue from royalty-bearing products. We anticipate the cost of license revenue to fluctuate in absolute dollar amount and as a percentage of total license revenue as the related license revenue, and the mix of license revenue among various products, fluctuates. As a percentage of license revenue, cost of license revenue represented 3% and 1% in the three months ended December 31, 2001 and 2000, respectively. Maintenance. Cost of maintenance revenue consists of compensation and related expenses for our technical support organization. Cost of maintenance revenue decreased by $28,000, or 8%, to $342,000 in the three months ended December 31, 2001, from $370,000 in the three months ended December 31, 2000. The decrease in cost of maintenance revenue was due to cost containment efforts implemented during the second half of our fiscal year ended September 30, 2001. As a percentage of maintenance revenue, cost of maintenance revenue represented 21% and 44% in the three months ended December 31, 2001 and 2000, respectively. The decrease in percentage is due to the one-time increase in maintenance revenue of $701,000 for customers that caught up on lapsed maintenance. Professional services. Cost of professional services revenue consists of compensation and related overhead expense for personnel and third-party contractors we use in performing consulting, implementation and training services for our customers. Cost of professional services revenue increased by $8,000, or 3%, to $244,000 in the three months ended December 31, 2001, from $236,000 in the three months ended December 31, 2000. The increase in cost of professional services revenue for the three months ended December 31, 2001 was a result of an increase in professional services management, personnel and supporting infrastructure. As a percentage of professional services revenue, cost of professional services revenue represented 84% and 42% in the three months ended December 31, 2001 and 2000, respectively. The increase in the cost of professional services revenue as a percentage of professional services revenue was a result of increasing the management, personnel and other supporting infrastructure associated with delivering our professional services. Amortization of deferred stock compensation. Amortization of deferred stock compensation in cost of revenue decreased by $178,000, to $110,000 in the three months ended December 31, 2001 from $288,000 in the three months ended December 31, 2000 due to cancelled options of terminated employees. OPERATING EXPENSES Sales and marketing. Sales and marketing expenses include costs of sales and marketing personnel and related overhead, commissions, field office expenses, advertising and promotion expenses, travel and entertainment expenses and other selling and marketing costs. Sales and marketing expenses decreased by $734,000, or 21%, to $2.7 million in the three months ended December 31, 2001, from $3.5 million in the three months ended December 31, 2000. The decrease in sales and marketing expenses was due to the continued application of cost containment efforts originally implemented during the second half of our fiscal year ended September 30, 2001, including a 14 reduction in marketing programs and overall headcount associated with sales and marketing. As a percentage of total revenue, sales and marketing expenses represented 59% and 101% in the three months ended December 31, 2001 and 2000, respectively. Research and development. Research and development expenses consist of costs of research and development personnel and associated overhead, and costs of short-term independent contractors required in connection with development of new products, enhancements to existing products, technical documentation, and quality assurance. Costs incurred, under our current engineering processes, the establishment of technological feasibility and general release substantially coincide. As a result, no software development costs have been capitalized to date. Research and development expenses decreased by $570,000, or 20%, to $2.2 million in the three months ended December 31, 2001, from $2.8 million in the three months ended December 31, 2000. The decrease in research and development expenses was due to the continued application of cost containment efforts originally implemented during the second half of our fiscal year ended September 30, 2001, including a reduction in overall headcount. As a percentage of total revenue, research and development expenses represented 48% and 82% in the three months ended December 31, 2001 and 2000, respectively. General and administrative. General and administrative expenses include personnel costs for finance, administration, information systems and general management, as well as professional fees, legal expenses, bad debt expense and other general corporate expenses. General and administrative expenses decreased by $46,000, or 5%, to $925,000 in the three months ended December 31, 2001, from $971,000 in the three months ended December 31, 2000. The decrease is due to the continued application of cost containment efforts originally implemented during the second half of our fiscal year ended September 30, 2001, including a reduction in overall headcount associated with general and administrative functions. As a percentage of total revenue, general and administrative expenses represented 20% and 28% in the three months ended December 31, 2001 and 2000, respectively. Amortization of deferred stock compensation. During the three months ended December 31, 2001, we recorded $675,000 of amortization of deferred stock compensation in operating expenses, representing $131,000 of additional sales and marketing expenses, $334,000 of additional research and development expenses and $210,000 of additional general and administrative expenses. During the three months ended December 31, 2000, we recorded $2.0 million of amortization of deferred stock compensation. Direct costs relating to acquisition. During the three months ended December 31, 2001, we recorded $480,000 of legal and professional fees related to the pending acquisition by TIBCO Software. Amortization of goodwill and intangible assets. Amortization of goodwill and intangible assets was $379,000 and $608,000 in the three months ended December 31, 2001 and 2000, respectively. This amount represents the amortization of goodwill and other intangible assets acquired in connection with our acquisition of WhiteBarn in March 2000. INTEREST INCOME AND OTHER, NET Interest income and other, net consists of interest income, net of interest expense, income taxes and losses on foreign currency transactions. Interest income and other, net resulted in income of $404,000 and $1.1 million for the three months ended December 31, 2001 and 2000, respectively. The decrease is attributable to lower interest income related to lower cash balances versus the year-ago period. LIQUIDITY AND CAPITAL RESOURCES Prior to our initial public offering, we funded our operations through private sales of redeemable convertible preferred stock, internal operations, and, to a lesser extent, through our credit facilities. In February 2000, we raised $9.9 million through a private sale of redeemable convertible preferred stock. On July 20, 2000, we completed an initial public offering of 4.2 million shares of our common stock at $16.00 per share. Net proceeds from this offering were $60 million, net of underwriters' commissions and offering expenses. Net cash used in operating activities was $1.7 million and $3.6 million for the three months ended December 31, 2001 and 2000, respectively. For the three months ended December 31, 2001, substantially all of net cash used in operating activities was attributable to our net loss of $3.1 million, and an increase in accounts receivable of $2.0 million offset in part by $1.5 million in non-cash charges, and an increase in deferred revenue. For the three months 15 ended December 31, 2000, substantially all of net cash used in operating activities was attributable to our net loss of $6.2 million, offset in party by $2.9 million in non-cash charges. Net cash provided by investing activities was $9.3 million for the three months ended December 31, 2001 and net cash used in investing activities was $1.9 million for the three months ended December 31, 2000. For the three months ended December 31, 2001, net cash provided by investing activities was primarily related to the sale and purchase of short-term investments. For the three months ended December 31, 2000, net cash used in investing activities was primarily related to the purchase of short-term investments, and, to a lesser extent, the purchase of property and equipment. Net cash used in financing activities was $10,000 and $4,000 for the three months ended December 31, 2001 and 2000, respectively. Net cash used in financing activities was primarily attributable to the repurchase of common stock. As of December 31, 2001, we had approximately $50.7 million in cash, cash equivalents, and short term investments, and working capital of $49 million. As of that date, we also had a line of credit under which we could borrow up to $2.0 million with a revolving maturity date of February 22, 2002, at an interest rate of prime plus 0.25%. Any borrowing will be collateralized by accounts receivable and other assets. We have no borrowings under this line of credit and are in compliance with all required financial ratios, net loss levels, and other financial covenants. Our commitments consist primarily of amounts due under our operating leases. We have no material commitments for capital expenditures. For the next twelve months, we expect our capital expenditures to be approximately $500,000. We may use cash resources to fund acquisitions or investments in complementary businesses or technologies. We believe that our current cash, cash equivalents, and short-term investments will be sufficient to meet our working capital and operating resource requirements for at least the next 12 months. FACTORS THAT MAY AFFECT OPERATING RESULTS The Company's future operating results may differ materially from the results discussed in, or implied by, forward-looking statements made by the Company. Factors that may cause such differences include, but are not limited to, those discussed below and elsewhere in this Report. RISKS RELATED TO THE PROPOSED MERGER WITH TIBCO SOFTWARE INC. FAILURE TO COMPLETE THE PROPOSED MERGER WITH TIBCO COULD ADVERSELY AFFECT OUR STOCK PRICE AND FUTURE BUSINESS AND OPERATIONS. The merger is subject to the satisfaction of a number of closing conditions, including the approval by our stockholders and regulatory agencies, and we cannot assure you that the merger will be successfully completed. In the event that the merger is not completed, we may be subject to a number of material risks, including the following: - We may be required to pay TIBCO a termination fee of $3,850,000; - The price of our common stock may decline to the extent that the current market price for our common stock reflects a market assumption that the merger will be completed; - Costs related to the proposed merger, such as legal, accounting, and some advisory fees, must be paid, even if the merger is not completed; and - Restoring our business to our pre-announcement of merger value could take a substantial amount of time and resources, and may not occur. Further, if the merger is not completed and our board of directors determines to seek another business combination, we may not be able to find a partner willing to pay an equivalent or more attractive price than that which would have been paid in the merger with TIBCO. 16 OUR BUSINESS COULD SUFFER IN RESPONSE TO THE ANNOUNCEMENT OF THE MERGER WITH TIBCO. The announcement of the merger may have a negative impact on our ability to sell our products and services, attract and retain key management, development or other personnel, maintain and attract new customers, and maintain strategic relationships with third parties. For example, we may experience cancellations or a decline in the rate of orders for our products or services or a deterioration in our customer relationships. In addition, our employees may experience uncertainty about their future role with TIBCO. If the merger is not completed, we could be harmed by these adverse changes in our business or the expectation of these changes, and restoring our business to its pre-announcement value could take a long time and be costly, and may not occur. SINCE THE CLOSING TRADING PRICE OF THE COMMON STOCK OF TIBCO USED FOR DETERMINING THE EXCHANGE RATIO IS SUBJECT TO CONTRACTUAL PRICE LIMITATIONS, THE EXCHANGE RATIO MAY NOT FULLY REFLECT CHANGES IN THE MARKET VALUE OF TALARIAN COMMON STOCK OR TIBCO COMMON STOCK BEFORE THE CLOSING OF THE MERGER AND ACCORDINGLY, THE VALUE TO BE RECEIVED BY OUR STOCKHOLDERS WILL DECREASE IF THE MARKET VALUE OF TIBCO COMMON STOCK FALLS BELOW $12.16. The exchange ratio to be used for calculating the consideration to be received by our stockholders in the merger with TIBCO will be determined based on the average closing trading price of TIBCO common stock during the 10 consecutive trading days ending the day prior to the closing date, provided that if such average trading price is greater than $16.21 or less than $12.16, then the average trading price for calculating the exchange ratio will be deemed to be $16.21 or $12.16, respectively. Accordingly, the parties will not adjust the exchange ratio if the market price of TIBCO common stock fluctuates above or below these limits, or if the market price of our common stock appreciates in value. As a result, the value of TIBCO common stock that our stockholders will receive upon completion of the merger will depend on the closing trading price of TIBCO common stock, and may be below $2.65 per share of our common stock. The share prices of both our common stock and TIBCO common stock are subject to price fluctuations in the market for publicly traded equity securities and have each experienced significant volatility. We cannot predict the market prices for either our common stock or TIBCO common stock at any time before the completion of the merger or the market price for TIBCO common stock after the merger. THE MARKET PRICE OF TIBCO COMMON STOCK IS HIGHLY VOLATILE AND MAY DECLINE AFTER THE MERGER. In the past, TIBCO common stock has experienced substantial price volatility. This volatility might occur in the future, which could cause the TIBCO common stock to be worth less after the merger than before the merger. Volatility can arise particularly in response to quarter-to-quarter variations in the actual or anticipated financial results of TIBCO, its customers or competitors, and announcements by TIBCO or its competitors regarding new product and service introductions. The market price of TIBCO common stock can also fluctuate in response to price and volume fluctuations in the stock market, particularly those that affect the market prices of technology stocks. In addition, the market price of TIBCO common stock may decline as a result of the merger if: - the integration of TIBCO and our company is unsuccessful; - TIBCO does not achieve the perceived benefits of the merger as rapidly as, or to the extent, anticipated by financial or industry analysts; or - the effect of the merger on TIBCO's financial results is not consistent with the expectations of financial or industry analysts. A PENDING CLASS-ACTION LAWSUIT, IF SUCCESSFUL, COULD PREVENT THE MERGER WITH TIBCO. On January 8, 2002, a purported class action complaint was filed in the Superior Court of the State of California for the County of Santa Clara against our company and our directors. The complaint generally alleges that our company and our board of directors have breached their fiduciary duties to our stockholders in approving the merger with TIBCO, that the directors engaged in self-dealing in connection with their approval of the merger and that the directors failed to take steps to maximize the value of our company to our stockholders. The complaint seeks class certification and certain forms of equitable relief, including enjoining the consummation of the merger. We believe that the allegations are without merit and intend to defend against the complaint vigorously. We, however, cannot provide any assurance that we or the other defendants will be successful. The defense of this lawsuit could result in 17 the diversion of the time and attention of our management away from the business operations of our company and the completion of the merger, and could prevent the consummation of the merger, which could harm our business. Negative developments with respect to the lawsuit could cause our stock price to decline. If we were required to pay amounts in connection with the resolution of the lawsuit by settlement or otherwise, such a payment may reduce its cash reserves. RISKS RELATED TO TALARIAN'S BUSINESS IF TALARIAN WERE TO REMAIN AN INDEPENDENT COMPANY WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. We have a history of losses, we expect future losses, and we do not expect to achieve profitability in the near future. We incurred net losses of $3.5 million in fiscal 1999, $15.0 million in fiscal 2000, and $23.4 million in fiscal 2001, and $3.1 million in the three months ended December 31, 2001. As of December 31, 2001, we had an accumulated deficit of approximately $51 million. We cannot assure you that our revenue will grow or that we will achieve or maintain profitability in the future. While we intend to maintain controls on expenses at approximately current levels, it may be necessary to increase our future product development, sales and marketing, and administrative expenses. In any event, we will need to increase our revenue substantially to achieve and maintain profitability, which we may not be able to do. ECONOMIC CONDITIONS MAY REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES. Our revenue, and our ability to achieve and sustain profitability, depend on the overall demand for the software products and services we offer. The general economic slowdown in the world economy has caused many companies to defer purchases of products and services and otherwise altered their purchasing patterns. Capital spending in the information technology sector generally has decreased over the past twelve to eighteen months, and many of our customers and potential customers have experienced declines in their revenue and operations. The terrorist acts of September 11, 2001 have increased the uncertainty in the economic environment, and we cannot predict the impact of these events or possible similar or related future events on our customers or our business. If U.S. or global economic conditions worsen, it will likely have a material adverse impact on our business, operating results, and financial conditions. OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE SIGNIFICANTLY, AND A FAILURE TO MEET THE REVENUE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS MIGHT RESULT IN A DECLINE IN OUR STOCK PRICE. Our future operating results may vary significantly. If our operating results are below the expectations of securities analysts or investors, our stock price is likely to decline. Our revenue and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, we have had little backlog and our revenue in any quarter has been substantially dependent upon orders booked in that quarter. In addition, more than 50% of our license revenue in a given quarter has often been recorded in the third month of that quarter, with a concentration of this revenue in the last two weeks of the third month. Furthermore, more than 50% of our license revenue for a given quarter has often been derived from fewer than 10 customers. For example, in the quarter ended December 31, 2001, seven customers represented more than 50% of total revenue. We expect these trends to continue and, therefore, any failure or delay in the closing of orders could have a material adverse effect on our quarterly operating results. Additionally, since our operating expenses are based on anticipated revenue and because a high percentage of these expenses are relatively fixed, a shortfall in anticipated revenue could have a significant negative impact on our operating results. Other factors that may cause our revenue or operating results to fall short of expectations include: - the uncertainty of current economic conditions and their effect on customer purchase decisions; - the amount and timing of sales and marketing expenses and other operating costs and capital expenditures relating to our business; 18 - changes in prices of, and the adoption of different pricing strategies for, our products and those of our competitors; - changes in the demand for our products due to the announcement or introduction of new or enhanced products or services by us or our competitors; - changes in the demand for our products due to the fact that many of our future customers are expected to be concentrated in early-stage industries, such as the Internet industry, and these customers are often capital constrained and have rapidly changing needs; and - the capital and expense budgeting decisions of our customers; - the impact of possible acquisitions both on our operations and on our reported operating results due to associated accounting charges. VARIATIONS IN THE TIME IT TAKES US TO SELL OUR PRODUCTS MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS. Variations in the length of our sales cycles could cause our revenue to fluctuate widely from period to period. The period between our initial contact with a customer and the time when we recognize revenue from that customer varies widely in length. Our sales cycles typically range from three to nine months. For larger opportunities with new customers, these cycles can be longer. Additionally, due to the mission-critical nature of many deployments of our products, our customers may take a long time to evaluate our products, and many individuals may be involved in the evaluation process. In addition, many of our customers purchase our real-time infrastructure software as part of a large-scale information technology project, which includes the purchase of many products from a number of vendors. Changes in the scheduling of these projects, or delays or problems caused by other vendors or their products, may cause unexpected delays in our sales cycles. COMPETITION IN THE MARKET FOR TALARIAN'S PRODUCTS IS INTENSE; MANY OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN WE ARE AND HAVE SIGNIFICANTLY GREATER RESOURCES; WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. The market for our products is intensely competitive, relatively new, rapidly evolving, and subject to rapid technological change. We believe that competition will become more intense in the future and may cause price reductions, reduced gross margins, and loss of market share, any one of which could significantly reduce our future revenue. Current and potential competitors include: - enterprise application integration vendors such as TIBCO, webMethods, Sybase (Neon), Level 8, IONA, Mercatur, seeBeyond and Vitria Technology; - infrastructure software and application server providers such as IBM, Microsoft, Oracle, Sun and BEA; - vendors of widely used operating system software, including Microsoft and Sun Microsystems, which may integrate real-time integration functionality into future versions of their operating system software or introduce directly competing integration functionality; and - information technology departments of potential customers which have developed or may develop systems that provide some or all of the functionality of Talarian's SmartSockets software and related products. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Many of our competitors also have well-established relationships with our existing and prospective customers as well as companies that have significant influence in the industry. Negotiating and maintaining favorable customer and strategic relationships is critical to 19 our business, and our competitors may be able to negotiate strategic relationships on more favorable terms than we are able to negotiate. Furthermore, a number of these competitors may merge or form strategic relationships that would enable them to offer, or bring to market earlier, products or services that are superior to our own in terms of features, quality, pricing or other factors. We expect additional competition from other established and emerging companies. The industry in which we compete is rapidly evolving. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources. SOME OF OUR COMPETITORS HAVE SIGNIFICANTLY BROADER PRODUCT OFFERINGS, AND WE MAY NEED TO PARTNER WITH THIRD PARTIES TO PROVIDE A BROADER RANGE OF PRODUCTS AND SERVICES. Our customers often purchase our real-time infrastructure software as part of a large-scale information technology project requiring many products from many vendors. Many of our competitors offer extended product lines, and some customers may prefer to purchase products from vendors that are able to offer broader functionality than can be provided by our products alone as part of the customers' overall information technology project. For example, some of our competitors offer a larger number of "adaptors" that facilitate connecting their products with third-party applications, and some competitors have products that contain a software feature, known as "business logic," that facilitates the routing and delivery of information in a different manner than is used by our products. In order to compete more effectively, we may need to expand the breadth of our product offerings by partnering with companies offering complementary products. We may not be able to enter into relationships of this type, on reasonable terms or at all, and our failure to do so could adversely affect our ability to sell our products and services. THE REAL-TIME INFRASTRUCTURE SOFTWARE PRODUCTS MARKET IS IN AN EARLY STAGE OF DEVELOPMENT, AND THESE PRODUCTS, INCLUDING OUR SMARTSOCKETS AND SMARTMULTICAST SOFTWARE AND RELATED PRODUCTS, MAY NOT ACHIEVE MARKET ACCEPTANCE. The market for real-time infrastructure software products is relatively new and rapidly evolving, and there are a variety of infrastructure methods available. We do not know if customers in our target markets will widely adopt and deploy real-time infrastructure software products such as our SmartSockets software and related products. If real-time infrastructure software products are not widely adopted by customers in our target markets, our revenue will not increase substantially, if at all. THE SUBSTANTIAL EXPENDITURES REQUIRED TO EDUCATE PROSPECTIVE CUSTOMERS AND DEVELOP MARKET ACCEPTANCE FOR OUR PRODUCTS MAY NEVER BE OFFSET BY FUTURE REVENUE. Due to the evolving nature of our market, we may have to devote substantial resources to educate prospective customers about the benefits of infrastructure software in general and our SmartSockets software and related products in particular. Our efforts to educate potential customers may not result in our products achieving market acceptance. In addition, many of these prospective customers have made significant investments in internally developed or custom systems and may incur significant costs in switching to third-party products such as ours. Our target customers may not choose our products for technical, cost, support, or other reasons. If the market for our products fails to grow or grows more slowly than we anticipate, these substantial expenditures may not be offset by incremental revenue. WE DERIVE MORE THAN 85% OF OUR TOTAL REVENUE FROM OUR SMARTSOCKETS PRODUCT LINE, AND IF DEMAND FOR SMARTSOCKETS DECREASES OR DOES NOT INCREASE, OUR TOTAL REVENUE WILL NOT INCREASE AND MAY DECREASE. We currently derive more than 85% of our total revenue from licensing our SmartSockets software product line and providing related consulting and maintenance services. We expect to continue to derive a substantial portion of our revenue from these sources for the foreseeable future. Accordingly, our future operating results will depend on the demand for SmartSockets by future customers. If our competitors release products that are superior to SmartSockets in performance or price, if SmartSockets is not widely accepted by the market, or if we fail to enhance SmartSockets and introduce new versions in a timely manner, demand for this product may decrease or fail to increase. A decline in demand for SmartSockets or a failure of demand to increase, as a result of competition, technological change or other factors, would significantly and adversely affect our business, financial condition and operating results. 20 IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE OR INDUSTRY STANDARDS, OUR PRODUCTS MAY NOT BE COMPETITIVE AND OUR REVENUE AND OPERATING RESULTS MAY SUFFER. Our industry is characterized by rapid technological change, frequent new product introductions and enhancements, and evolving customer demands and industry standards. Our products may not be competitive if we fail to introduce new products or product enhancements that meet new customer demands, support new standards, or integrate with new or upgraded versions of packaged applications. The development of new products is complex, and there can be no assurance that we will be able to complete development in a timely manner, or at all. There are currently no widely accepted standards in various technical areas of importance to us, including the areas of reliable multicast and business-quality messaging. There can be no assurance that the proposed standards we support will prevail or be widely adopted. We believe that we will need to continue to enhance our products and develop new products to keep pace with competitive and technological developments and evolving industry standards, and our failure to do so on a timely basis, or to achieve market acceptance for our products, would harm our revenue and operating results. FAILURE TO DEVELOP AND MAINTAIN KEY STRATEGIC RELATIONSHIPS COULD CAUSE US TO LOSE MARKET OPPORTUNITIES AND LIMIT OUR GROWTH. We believe that our success in penetrating our target markets depends in part upon our ability to develop and maintain strategic relationships with key original equipment manufacturers, systems integrators, distributors, and independent software vendors. Relationships with these parties are also important because they often influence a customer's decision on which infrastructure software will be used for a project. We believe these relationships will introduce our products to potential customers and provide us with insights into new technologies to which we may not otherwise have access. For example, a system integrator that is responsible for reengineering a network may be heavily involved in analyzing and ultimately selecting the infrastructure software to be used in the network. To date, we have informal working relationships with several system integrators, and formal agreements with only a limited number of system integrators. Some of our competitors have developed more strategic relationships than we have. We cannot be certain that we will be able to establish relationships with additional companies on a timely basis, or at all, or that these companies will devote adequate resources to embedding, promoting or selling our products. Potential conflicts between our direct sales force and third-party reselling efforts could also limit our ability to develop additional key strategic relationships. If we fail to develop these strategic relationships, or if any of our current relationships with these types of organizations is terminated, we might lose important revenue opportunities and our growth might be limited. IF WE FAIL TO CONTINUE TO PENETRATE KEY TARGET MARKETS, SUCH AS THE FINANCIAL SERVICES MARKET, OR IF THESE MARKETS FAIL TO GROW AS ANTICIPATED, OUR REVENUE GROWTH WILL BE IMPAIRED. We have recently begun to focus our engineering and sales and marketing resources to penetrating the financial services, aerospace, and high technology manufacturing (hardware and software original equipment manufacturers (OEMs) and independent software vendors markets. If we fail to address the needs of these key markets, our revenue growth will be impaired. In recent years, we have directed our sales and marketing efforts toward companies in such diverse industries as financial services, business-to-business e-commerce, telecommunications, high technology manufacturers (hardware and software companies), embedded operating systems, cable television, transportation, and aerospace industries. In fiscal 2001, less than 20% of our revenue was derived from customers in markets outside the financial services, aerospace, and high technology manufacturing markets. While we will be focusing on the markets in which we expect to derive a majority of our revenue, we will be more vulnerable to economic downturns or other adverse conditions affecting these key markets. Additionally, these markets are rapidly changing. Customers in these markets may require us to change our product design or features, sales methods, support capabilities or pricing policies. The costs of addressing these requirements, as well as the failure to do so, could be substantial and could adversely affect our operating results. DOING BUSINESS OUTSIDE THE UNITED STATES INVOLVES NUMEROUS RISKS THAT COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS. Approximately 12% of our revenue was derived from international sources in the quarter ended December 31, 2001 and 18% of our revenue was derived from international sources in fiscal 2001. To service the needs of these customers, we must provide worldwide product support and services. International operations require significant management attention and financial resources that could adversely affect our operating margins and earnings. We may not be able to maintain or increase international market demand for our products. If we do not, our 21 international sales will be limited, and our business, operating results and financial condition could be materially and adversely affected. In attempting to conduct and expand business internationally, we are exposed to various risks that could adversely affect our international operations and, consequently, our operating results, including: - difficulties and costs of staffing and managing international operations; - fluctuations in currency exchange rates; - unexpected changes in regulatory requirements, including imposition of currency exchange controls, applicable to our business or to the Internet; - difficulties and additional costs of tailoring our products to meet the demands of foreign markets; - political and economic instability; and - potentially reduced protection for intellectual property rights. WE HAVE MADE AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN ON OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS, AND ADVERSELY AFFECT OUR FINANCIAL RESULTS. We have made and may continue to make acquisitions of other companies in order to expand our business and services. For example, in September 1999 we acquired the assets of GlobalCast, a provider of reliable multicast products and services. In addition, in March 2000, we acquired WhiteBarn, a provider of reliable multicast-related consulting services and developer of multicast technology. Integrating newly acquired organizations and technologies into our company could be expensive and time-consuming and may strain our resources. The integration of WhiteBarn into our company is complete, however, we continue to encounter challenges because its headquarters, near Chicago, Illinois, is geographically distant from our own. We may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect our balance sheet or operating results. For example, in connection with the acquisition of substantially all of the assets of GlobalCast, we recorded approximately $2.7 million in goodwill and other intangibles, which we have written off in 2001 and, in connection with the acquisition of WhiteBarn, we recorded approximately $4.4 million in goodwill and other intangibles, which are being amortized over a period of two to three years. Moreover, we cannot make any assurances that we will be able to identify future suitable acquisition candidates or, if we are able to identify suitable candidates, that we will be able to make these acquisitions on commercially reasonable terms or at all. Additionally, even if we identify suitable acquisition candidates, we may not be able to consummate such acquisitions if our stock price is low. OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE REVENUE. Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. Our business has evolved significantly in recent years, placing a strain on our management systems and resources. To manage future growth, we expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. We will also need to train, and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with various customers and other third parties. If we do not manage our growth efficiently and effectively, it could adversely affect our business, operating results and financial condition. THE LOSS OF KEY MANAGEMENT PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP, AND TECHNICAL EXPERTISE WE RELY, WOULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE OUR BUSINESS PLAN. Our success depends heavily upon the continued contributions of our key management personnel, whose knowledge, leadership, and technical expertise would be difficult to replace. In particular, we rely upon the leadership of Paul A. Larson, our President and Chief Executive Officer, and Thomas J. Laffey, our Chief Technical Officer. If we were to lose the services of any of our key personnel, the ability to execute our business plan would be adversely affected. All of our executive officers and key personnel are employees at-will. We have no 22 employment contracts and maintain no key person insurance other than a very limited amount on Thomas J. Laffey and Paul A. Larson. IF WE ARE UNABLE TO HIRE, TRAIN, AND RETAIN SALES, MARKETING, ENGINEERING AND FINANCE PERSONNEL, OUR GROWTH WILL BE IMPAIRED. In order to grow our business successfully and maintain a high level of quality and service, we will need to recruit, retain, and motivate additional highly skilled sales, marketing, engineering and finance personnel. If we are not able to hire, train, and retain a sufficient number of qualified employees, our growth will be impaired. In particular, we will need to expand our sales organization in order to generate increased revenue. In addition, as a company focused on the development of complex software products, we will need to retain and hire software developers and engineers, systems architects and project managers of various experience levels in order to keep pace with technological change and develop products that meet the needs of rapidly evolving markets. Competition for skilled employees, particularly in the San Francisco Bay Area, is intense. Furthermore, new employees require training, take time to achieve full productivity and, in light of the high rate of turnover for these employees, may be difficult to retain. OUR SOFTWARE PRODUCTS MAY HAVE UNKNOWN DEFECTS, WHICH COULD HARM OUR REPUTATION, DECREASE MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE, AND RESULT IN LIABILITY TO US. Our products were created using highly complex software, both internally developed and licensed from third parties. Highly complex software may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. We may not discover software defects that affect our current or future products or enhancements until after they are sold. Any interruptions caused by unknown defects in our products could cause substantial damage to our customers' businesses and could damage our reputation, cause our customers to initiate product liability suits against us, increase our product development costs, divert our product development resources, cause us to lose revenue or delay market acceptance of our products. WE COULD RECEIVE NEGATIVE PUBLICITY AND SUFFER INJURY TO OUR REPUTATION IF WELL-KNOWN CUSTOMERS SUFFER SERVICE INTERRUPTIONS. Many of our customers, including financial exchanges, telecommunications companies and large-scale independent software vendors, rely upon our infrastructure software to provide widely used and highly publicized services. If any of these customers were to suffer a service interruption, we could receive negative publicity and suffer injury to our reputation even if these interruptions were wholly unrelated to the performance of our products. The degree of this injury could be grossly disproportionate to the actual contribution of our products to the service interruption. OUR CUSTOMERS WILL NOT BE ABLE TO REALIZE THE FULL EFFICIENCY BENEFITS OF OUR INFRASTRUCTURE SOFTWARE UNLESS THE INTERNET IS ENHANCED TO ALLOW MULTICAST. As the volume of data transmitted across networks, particularly the Internet, increases, it may be increasingly important for infrastructure software to make efficient use of available network bandwidth. One of the potential competitive advantages of our infrastructure software is that it enables more efficient use of available network bandwidth. Our software achieves this benefit through an efficient implementation of publish-subscribe architecture and is capable of even greater efficiency using multicast technology. However, our customers will not be able to realize the full efficiency benefits of our multicast capabilities over the Internet unless the Internet is enhanced to allow multicast. There can be no assurance that it will be. OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO BECOME SUBJECT TO EXPENSIVE LITIGATION, CAUSE US TO INCUR SUBSTANTIAL DAMAGES OR LICENSE FEES, OR PREVENT US FROM SELLING OUR PRODUCTS. We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States have not been publicly disclosed until the patent is issued, and we may not be aware of filed patent applications that relate to our products or technology. If patents later issue on these applications, we may be liable for infringement. We may also be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the 23 patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming, and could divert our management's attention away from operating our business. If we discovered that our products infringe the intellectual property rights of others, we would need to obtain licenses from these parties or substantially reengineer our products in order to avoid infringement. We might not be able to obtain the necessary licenses on acceptable terms or at all, or to reengineer our products successfully. Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages or enjoined from licensing or using the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products. OUR INTELLECTUAL PROPERTY COULD BE USED BY OTHERS WITHOUT OUR CONSENT. We rely primarily on a combination of copyrights, trademarks, trade secret laws, and contractual obligations with employees and third parties to protect our proprietary rights. We do not currently own any issued patents, and other protection of our intellectual property will not prevent third parties from independently developing technology that is similar to or competes with our own. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts into which we have entered, and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future, and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. OUR STOCK PRICE AND THOSE OF OTHER TECHNOLOGY COMPANIES HAVE EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS, AND ACCORDINGLY OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT. The trading price of our common stock has fluctuated significantly since our initial public offering in July 2000 and is significantly below the original offering price of $16 per share. An active public market for our common stock may not be sustained in the future. Many factors could cause the market price of our common stock to rise and fall, including: - variations in our quarterly results; - announcements of technological innovations by us or by our competitors; - introductions of new products or new pricing policies by us or by our competitors; - acquisitions or strategic alliances by us or by our competitors; - recruitment or departure of key personnel; - the gain or loss of significant orders or customers; - changes in the estimates of our operating performance or changes in recommendations by securities analysts; and - market conditions in the industry and the economy as a whole. In addition, stocks of technology and Internet-related companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies' operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these companies. These fluctuations could lower the market price of our common stock regardless of our actual operating performance. In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We have been, and may in the future be, the target of similar litigation. On August 10, 2001 a stockholder class action complaint was filed in the United States District Court for the Southern District of New York against us, certain of our officers and directors, and three underwriters of our initial public offering. The complaint alleges, among other things, that Talarian and the individual defendants named in the complaint violated the federal securities laws by issuing and selling our common stock in our initial public offering without disclosing to investors that certain of the underwriters in the offering allegedly solicited and 24 received excessive and undisclosed commissions from certain investors. We are also aware that a similar lawsuit has been filed on September 25, 2001 in the United States District Court for the Southern District of New York against us. We believe that the allegations in these actions are without merit, and we intend to defend against these actions vigorously, but we cannot give any assurance that it will not have a material adverse effect on the Company. Securities litigation such as this could result in substantial costs and divert management's attention and resources, which could harm our operating results and our business. OUR OFFICERS, DIRECTORS, AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS IN WAYS THAT COULD ADVERSELY IMPACT OUR STOCK PRICE. As of December 31, 2001, our executive officers, directors, entities affiliated with them and other five percent stockholders, in the aggregate, beneficially owned approximately 39% of our outstanding common stock. These stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors. These actions might be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company, which could have a material adverse effect on our stock price. OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions of our Amended and Restated Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: - establishing a classified board of directors requiring that not all members of the board may be elected at one time; - providing that directors may only be removed "for cause" and only with the approval of 66 2/3% of our stockholders; - authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; - limiting the ability of our stockholders to call special meetings of stockholders; - prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; - eliminating cumulative voting in the election of directors; and - establishing advance notice requirements for nominations, election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay, or prevent a change in control. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the section entitled "Factors That May Affect Operating Results". FOREIGN CURRENCY EXCHANGE RATE RISK To date, all of our recognized revenue has been denominated in U.S. dollars and primarily from customers in the United States, and our exposure to foreign currency exchange rate changes has been immaterial. We expect, however, that future product license and services revenue may increasingly be derived from international markets and may be denominated in the currency of the applicable market. As a result, our operating results may become subject to fluctuations based upon changes in the exchange rates of various currencies in relation to the U.S. dollar. Furthermore, to the extent that we engage in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. Although we will continue to monitor our exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, we cannot assure you that exchange rate fluctuations will not adversely affect our financial results in the future. INTEREST RATE RISK As of December 31, 2001, we had cash and highly liquid short-term investments totaling $50.7 million. Declines of interest rates will reduce our interest income from our investments. Based upon our balance of cash and investments at December 31, 2001, a decrease in interest rates of 0.5% would cause a corresponding decrease in our annual interest income of $253,000. To date, the Company has not entered into any derivative or hedging activities and as of December 31, 2001, we did not have any short-term or long-term debt outstanding. 26 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 8, 2002, an action, Robert Mathiason v. Talarian Corporation, et al. was filed in the Superior Court of the State of California for the County of Santa Clara. In this action, the plaintiff named as defendants Talarian and our directors. The complaint purports to assert claims on behalf of all of our public stockholders who are similarly situated with the plaintiff. The complaint alleges, among other things, that our company and the members of our board of directors have breached their fiduciary duties to our stockholders in approving the merger with TIBCO, that the directors engaged in self-dealing in connection with their approval of the merger and that the directors failed to take steps to maximize the value of our company to our stockholders. The complaint seeks class certification and certain forms of equitable relief, including enjoining the consummation of the merger. We believe that the allegations are without merit and intend to vigorously contest the action. There can, however, be no assurance that we or the other defendants will be successful in the defense of the action. On August 10, 2001 a stockholder class action complaint was filed in the United States District Court for the Southern District of New York against us, certain of our officers and directors, and three underwriters of our initial public offering. The complaint was brought on behalf of purchasers of our common stock between July 20, 2000 and December 6, 2000. The complaint has been brought as a purported stockholder class action under Sections 11 and 15 of the Securities Act and Section 10(b) of the Securities Exchange Act. The complaint alleges, among other things, that Talarian and the individual defendants named in the complaint violated the federal securities laws by issuing and selling our common stock in our initial public offering without disclosing to investors that certain of the underwriters in the offering allegedly solicited and received excessive and undisclosed commissions from certain investors. We are also aware that a similar lawsuit has been filed on September 25, 2001 in the United States District Court for the Southern District of New York against us. Similar complaints have been filed against a number of other companies that had initial public offerings in 1999 and 2000. We have not yet responded to these lawsuits, and no discovery has been conducted. We believe that the allegations in these actions are without merit, and we intend to defend against these actions vigorously, but we cannot give any assurance that it will not have a material adverse effect on the Company. In addition, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this quarterly report on Form 10-Q, except as described herein, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition, operating results or cash flow. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Our Registration Statement on Form S-1 (File No. 333-34694) related to our initial public offering was declared effective by the SEC on July 20, 2000. A total of 4,200,000 shares of our common stock was registered with the SEC with an aggregate registered offering price of $67.2 million, all of which shares were registered on our behalf. The offering commenced on July 21, 2000 and all shares of common stock being offered were sold for the aggregate registered offering price through a syndicate of underwriters managed by Lehman Brothers, Inc., SG Cowen Securities Corporation, Wit SoundView Corporation and Fidelity Capital Markets, a division of National Financial Services Corporation. We paid to the underwriters underwriting discounts and commissions totaling $4.7 million in connection with the offering. In addition, we incurred additional expenses of approximately $2.5 million in connection with the offering, which when added to the underwriting discounts and commissions paid by us amounted to total estimated expenses of $7.2 million. Thus, the net offering proceeds to us (after deducting underwriting discounts and commissions and offering expenses) were approximately $60 million. From the effective date of the registration statement through December 31, 2001, the proceeds from the offering have been used to fund $16.7 million of working capital and general corporate needs. In addition, we applied $47 million of the proceeds towards short-term investments, and $2 million of the proceeds towards purchase and installation of machinery and equipment. The remaining proceeds are held in cash and cash equivalents. No offering expenses were paid directly or indirectly to 27 any of our directors or officers (or their associates), or persons owning ten percent (10%) or more of any class of our equity securities or to any other affiliates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION As of January 4, 2002, we entered into an Agreement and Plan of Merger with TIBCO Software Inc. and Panther Acquisition Corp., a wholly owned subsidiary of TIBCO. Pursuant to the merger agreement, we and Panther Acquisition will merge, and the surviving corporation will become a wholly owned subsidiary of TIBCO, subject to customary closing conditions, including the approval of our stockholders. In connection with the merger, each share of our outstanding common stock will be converted into the right to receive $2.65 in cash and a fraction of a share of TIBCO common stock equal to the exchange ratio. The exchange ratio will be determined by dividing $2.65 by the average of the closing sale prices for one share of TIBCO common stock as reported on the Nasdaq National Market for the 10 consecutive trading days ending with and including one day prior to the closing date of the merger, provided that if this average trading price is greater than $16.21, or less than $12.16, then for purposes of calculating the exchange ratio the average trading price will be deemed to be $16.21 if it is greater than $16.21, or $12.16 if it is less than $12.16. The merger is subject to various terms, conditions and covenants, and this summary is necessarily incomplete. A copy of the Agreement and Plan of Merger has been filed with the Securities and Exchange Commission through a filing on Form 8-K that we made on January 8, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits None. B. Reports on Form 8-K On January 8, 2002, we filed a report on Form 8-K under Item 5 announcing the execution of an Agreement and Plan of Merger dated as of January 4, 2002 among TIBCO Software Inc., Panther Acquisition Corp., a wholly owned subsidiary of TIBCO, and Talarian Corporation in which TIBCO agreed to acquire Talarian in a stock and cash transaction subject to customary closing conditions, including the approval of the stockholders of Talarian. A copy of the Agreement and Plan of Merger, the form of Voting Agreement executed by certain Talarian stockholders who have agreed to vote in favor of the transaction with TIBCO and the press release dated January 5, 2002 announcing the transaction were attached as exhibits to the Form 8-K. On January 16, 2002, we filed a report on Form 8-K under Item 5 stating that Talarian Corporation was served with a complaint on January 11, 2002 naming Talarian and its current directors as defendants in a lawsuit filed in the Superior Court of the State of California, County of Santa Clara (Case No. CV804355). The complaint alleges, among other things, that Talarian and its directors breached their fiduciary duties to Talarian's stockholders in approving the merger with TIBCO Software Inc. and that the individual defendants engaged in self-dealing in connection with their approval of the merger. The complaint seeks class certification and certain forms of equitable relief, including enjoining the consummation of the merger with TIBCO. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TALARIAN CORPORATION DATE: January 31, 2002 SIGNATURE: /s/ Paul A. Larson ------------------ ------------------------------------- Paul A. Larson President and Chief Executive Officer (Duly Authorized Officer) DATE: January 31, 2002 SIGNATURE: /s/ Michael A. Morgan ------------------ ------------------------------------- Michael A. Morgan Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 29

TALARIAN CORP 10-Q