<PAGE> 1
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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________ .
COMMISSION FILE NUMBER: 000-29059
ELOQUENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3221868
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
2000 ALAMEDA DE LAS PULGAS, SUITE 100
SAN MATEO, CALIFORNIA 94403
(650) 294-6500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 17,063,284 at July 31, 2000.
<PAGE> 2
ELOQUENT, INC.
INDEX
<TABLE>
<S> <C>
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2000 and December 31, 1999.............................. 3
Condensed Statements of Operations for the three and six months ended June 30, 2000 and 1999... 4
Condensed Statements of Cash Flows for the six months ended June 30, 2000 and 1999............. 5
Notes to Condensed Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 24
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................ 25
Signature
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELOQUENT, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 28,614 $ 17,174
Short-term investments ................................................... 27,772 --
Accounts receivable, net of allowances for doubtful accounts
of $343 and $334....................................................... 5,938 3,439
Deferred production costs................................................. 120 37
Prepaid expenses.......................................................... 501 377
-------- --------
Total current assets................................................ 62,945 21,027
Property and equipment, net................................................... 2,812 1,915
Deferred charges.............................................................. 179 1,783
Long-term investments......................................................... 3,000 --
Other assets.................................................................. 460 540
-------- --------
Total assets ...................................................... $ 69,396 $ 25,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ...................................................... $ -- 3,000
Accounts payable and other liabilities.................................... 3,792 3,917
Capital lease obligation - current portion................................ 802 618
Deferred revenue.......................................................... 1,541 787
-------- --------
Total current liabilities........................................... 6,135 8,322
-------- --------
Capital lease obligation, net of current portion.............................. 491 777
Long-term notes payable....................................................... -- 8,477
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 9,938,844 shares............... -- 7
authorized; 7,159,009 shares outstanding in 1999
Preferred stock, $0.001 par value; 10,000,000 shares authorized;.............. -- --
no shares outstanding in 2000
Common stock, $0.001 par value; 40,000,000 and 30,000,000 shares
authorized; 17,063,284 and 3,572,871 shares outstanding................... 17 4
Unearned stock-based compensation............................................. (8,078) (9,564)
Additional paid-in capital.................................................... 126,140 52,089
Accumulated deficit........................................................... (55,309) (34,847)
-------- --------
Total stockholders' equity.......................................... 62,770 7,689
-------- --------
Total liabilities and stockholders' equity ......................... $ 69,396 $ 25,265
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ELOQUENT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Software licenses and maintenance ...... $ 2,113 $ 540 $ 3,617 $ 880
Content production services ............ 2,664 2,042 5,260 3,644
Professional services .................. 430 218 956 223
-------- -------- -------- --------
Total revenue .................. 5,207 2,800 9,833 4,747
Cost of revenue:
Software licenses and maintenance ...... 277 135 704 231
Content production services ............ 1,575 1,245 2,716 2,399
Professional services .................. 595 355 1,238 464
-------- -------- -------- --------
Total cost of revenue .......... 2,447 1,735 4,658 3,094
-------- -------- -------- --------
Gross margin ........................... 2,760 1,065 5,175 1,653
-------- -------- -------- --------
Operating expenses:
Research and development ............... 1,267 484 2,157 950
Sales and marketing .................... 5,473 1,862 9,503 3,668
General and administrative ............. 1,257 816 2,201 1,671
Stock-based compensation ............... 2,026 913 4,508 2,042
-------- -------- -------- --------
Total operating expenses ....... 10,023 4,075 18,369 8,331
-------- -------- -------- --------
Loss from operations ........................ (7,263) (3,010) (13,194) (6,678)
-------- -------- -------- --------
Interest expense and other charges .......... (190) (103) (1,239) (197)
Interest and other income.................... 948 38 1,424 88
-------- -------- -------- --------
Net loss before extraordinary expense ....... (6,505) (3,075) (13,009) (6,787)
Extraordinary loss on extinguishment of
debt ...................................... -- -- (7,453) --
-------- -------- -------- --------
Net loss .................................... $ (6,505) $ (3,075) $(20,462) $ (6,787)
======== ======== ======== ========
Basic and diluted net loss per share:
Net loss before extraordinary item .......... $ (0.39) $ (0.95) $ (0.98) $ (2.15)
Extraordinary loss........................... -- -- (0.56) --
-------- -------- -------- --------
Net loss .................................... $ (0.39) $ (0.95) $ (1.54) $ (2.15)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share .......................... 16,831 3,222 13,265 3,153
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ELOQUENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $(20,462) $ (6,787)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 715 418
Extraordinary loss on extinguishment of debt.............................. 7,453 --
Amortization of discount on long-term notes payable....................... 478 --
Amortization of deferred charges.......................................... 196 --
Amortization of stock-based compensation.................................. 4,508 2,042
Changes in operating assets and liabilities
Accounts receivable................................................... (2,499) (312)
Deferred production cost.............................................. (83) 27
Prepaid expenses...................................................... (124) (64)
Other assets.......................................................... 80 (38)
Accounts payable and other liabilities................................ (125) 151
Deferred revenue...................................................... 754 (102)
------- -------
Net cash used in operating activities............................. (9,109) (4,665)
------- -------
Cash flows from investing activities:
Purchases of short-term investments.......................................... (27,772) --
Purchase of long-term investment............................................. (3,000) --
Acquisition of property and equipment........................................ (1,612) (190)
------- -------
Net cash used in investment activities............................. (32,384) (190)
------- -------
Cash flows from financing activities:
Proceeds from borrowings under bank line of credit........................... -- 1,500
Repayment of borrowings under bank line of credit............................ (3,000) --
Repayment of subordinated notes.............................................. (20,000) --
Proceeds from issuance of common stock, net of repurchases and offering
costs...................................................................... 76,035 (91)
Proceeds from capital lease financing........................................ 277 --
Payment of principal on capital lease financing.............................. (379) (346)
------- -------
Net cash provided by financing activities.......................... 52,933 1,063
------- -------
Net increase (reduction) in cash and cash equivalents............................ 11,440 (3,792)
Cash and cash equivalents, beginning of period................................... 17,174 6,661
------- -------
Cash and cash equivalents, end of period ........................................ $ 28,614 $ 2,869
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.............................................................. $ 545 $ 198
Non-cash transactions:
Stock-based compensation ............................................. $ 3,022 $ 7,632
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ELOQUENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - The Company and Basis of Presentation
Eloquent, Inc. ("Eloquent" or the "Company") produces rich media solutions for
business communications. These rich media solutions are used to communicate to
target audiences through the combination of video, audio, graphics and text in a
synchronized, searchable and navigable format. These rich media presentations
can be delivered via the Web, intranets, extranets and CD-ROMs.
In the opinion of management, the accompanying unaudited condensed financial
statements include all adjustments, consisting only of normal recurring items,
necessary for their fair presentation in conformity with accounting principles
generally accepted in the United States. The results of operations for the
interim periods presented are not necessarily indicative of the results for any
future interim period or for the entire year. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in our Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission (SEC File No 333-89537).
The preparation of condensed financial statements requires management to make
estimates and assumptions that affect the recorded amounts reported in the
unaudited condensed financial statements and accompanying notes. A change in the
facts and circumstances surrounding these estimates could result in a change to
the estimates and impact future operating results.
Note 2 - Equity Transactions
Common Stock and Conversion of Preferred Stock:
In February 2000, the Company completed its initial public offering and issued
5,175,000 shares of its Common Stock at a price of $16.00 per share. The Company
received approximately $75.7 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of the
initial public offering, each outstanding share of Convertible Preferred Stock
was automatically converted into one share of Common Stock.
Stock-Based Compensation:
Eloquent accounts for stock-based compensation issued to employees in accordance
with the provisions of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, expense is based on
the difference, if any, on the date of grant, between the fair value of common
stock and the exercise price. Stock issued to non-employees has been accounted
for in accordance with SFAS No. 123 and valued using the Black-Scholes
option-pricing model.
6
<PAGE> 7
Note 3 - Net Loss per Share
Eloquent computes net loss per share in accordance with SFAS No. 128 "Earnings
Per Share." Under the provisions of SFAS No. 128 basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of vested common shares outstanding during the period. Diluted net loss per
share is computed by dividing the net loss for the period by the weighted
average number of common and common stock equivalent shares outstanding during
the period. Common equivalent shares are composed of common shares issuable upon
conversion of convertible preferred stock (using the if-converted method) and
shares issuable upon the exercise of stock options and warrants and are included
in the diluted net loss per share to the extent that they are dilutive.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------------------ -----------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss before extraordinary expense ........................ $ (6,505) $ (3,075) $(13,009) $ (6,787)
Extraordinary loss on extinguishment of debt ................. -- -- (7,453) --
-------- -------- -------- --------
Net loss ..................................................... $ (6,505) $ (3,075) $(20,462) $ (6,787)
-------- -------- -------- --------
Denominator:
Weighted average common stock outstanding .................... 16,998 3,327 13,445 3,278
Weighted average common stock subject to repurchase .......... (167) (105) (180) (125)
-------- -------- -------- --------
Denominator for basic and diluted calculation .................... 16,831 3,222 13,265 3,153
-------- -------- -------- --------
Basic and diluted net loss per share ............................. $ (0.39) $ (0.95) $ (1.54) $ (2.15)
-------- -------- -------- --------
Antidilutive securities:
Convertible preferred stock................................... -- 7,159 -- 7,159
Options to purchase common stock ............................. 4,393 2,940 4,393 2,940
Warrants...................................................... 721 138 721 138
-------- -------- -------- --------
5,114 10,237 5,114 10,237
======== ======== ======== ========
</TABLE>
Note 4 - Strategic Investments
In March 2000, Eloquent and TradeMD.com, a provider of an electronic marketplace
for the purchase and liquidation of medical equipment and supplies, entered into
a strategic relationship. As part of this relationship, Eloquent purchased
approximately 461,538 shares of TradeMD.com Preferred Stock for $3.0 million.
This investment is being accounted for using the cost method.
Note 5 - Long-term Notes Payable and Extraordinary Loss on Extinguishment of
Debt
In October 1999, Eloquent sold convertible notes and detachable warrants to
purchase 1,500,000 shares of common stock for aggregate gross consideration of
$20.0 million. The notes provided
7
<PAGE> 8
that they were to mature on October 20, 2004 and bear interest at 12% per annum.
The warrants expire the earlier of 5 years after the repayment of the notes or
October 20, 2006. In conjunction with the sale of the notes Eloquent incurred
approximately $1.5 million in debt issuance costs. In accordance with the terms
of the notes, all amounts outstanding under the notes were repaid upon
consummation of Eloquent's initial public offering on February 23, 2000.
The gross consideration received from the notes was allocated between the notes
and the warrants in accordance with Accounting Principles Board Opinion No. 14
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants"
as follows (in thousands):
<TABLE>
<S> <C>
Long-term notes payable $12,500
Warrants 7,500
-------
Gross consideration $20,000
-------
</TABLE>
The notes provided that after December 31, 2000, the investors, at their option,
could convert the notes to Series E preferred stock at an initial conversion
rate of $8 per share, subject to certain anti-dilutive provisions. This gave
rise to a beneficial conversion feature of $5.0 million, based on the fair value
of common stock at the date of the sale of the notes and detachable warrants.
This beneficial conversion feature was recorded as a further discount on the
sale of the notes.
The debt issuance costs and the discount resulting from the issuance of the
warrants were being amortized to interest expense over the life of the notes.
The beneficial conversion feature was being amortized over the one-year period
up to the earliest conversion date. Upon repayment of the notes, the unamortized
portion of the discount resulting from the issuance of the warrants and the debt
issuance costs were recorded as an extraordinary loss on the extinguishment of
debt.
Note 6 - Recent Accounting Pronouncements
In June 1998, the FASB Issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-- Deferral
of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement
No. 133. SFAS No. 137 defers the application of SFAS No. 133 to be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000; however,
early application is encouraged. Eloquent will adopt SFAS No. 133 for the 2001
fiscal year but does not expect such adoption to materially affect the financial
statement presentation.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 or SAB 101, Revenue Recognition in Financial Statements, which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the Commission. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We believe that we
currently comply with SAB 101.
8
<PAGE> 9
In March 2000, the FASB issued Interpretation No. 44, (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB 25.
This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
Eloquent has not yet determined the impact, if any, of adopting this
Interpretation.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to the "safe harbor" created by those
sections. These forward-looking statements involve risks and uncertainties and
relate to our future plans, objectives, beliefs, expectations and intentions.
These statements include, but are not limited to: statements related to industry
trends and future growth in the markets for rich media solutions for
business-to-business communications; our strategies for reducing the cost of our
products; our product development efforts; our future research and development;
the timing of our introduction of new products; the timing and extent of
deployment of our products by our customers; and future profitability. These
statements may be identified by the use of words such as "expects,"
"anticipates," "believes," "intends," "plans" and similar expressions. Our
actual results may differ significantly from those projected in the
forward-looking statements. Factors that may cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
report.
The following should be read in conjunction with the audited financial
statements and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission (SEC File No 333-89537).
OVERVIEW
We incorporated in Delaware in March 1995. In February 1996, we launched Version
1.0 of our solutions platform, which included the essential elements of content
production and navigation, including synchronized video, audio, graphics and
text as well as searchable transcripts, for delivery on CD-ROM only. In July
1996, we launched Version 2.0, which expanded delivery from CD-ROM to intranets,
included searchable slides and added variable speed playback. In November 1997
we launched Version 3.0. It further expanded delivery options to include
Web-based transmissions at 28.8 Kbps and added tracking and reporting and
software demonstrations. In April 1998, we introduced our content hosting
service and software. In January 1999, we launched our professional services
organization to provide integration services and professional media development
services. In April 1999, we launched Version 4.0 of our solutions platform,
which includes our publishing tools and added support for high-resolution video
and the ability for application developers to customize certain aspects of our
software. In December 1999, we launched Version 5.0, which offers advanced
integration, search navigation and analysis features.
We generate revenue through content production services, software licenses and
maintenance and professional services. For each content production transaction,
we charge our customers a fixed fee for each hour of finished content. Our
software license revenue consists of one-time fees charged for the use of our
desktop player and applications server software and monthly fees for content
hosting. Our maintenance revenue consists of prepaid contracts related to
software, which are recognized over the contract term, usually one year. Our
professional services revenue is from contracted services to customize the
content and software for our customers. Most of our revenue to date has been
from our content production services. We expect content production services to
produce the largest portion of our revenue for the foreseeable future, but we
intend to increase sales of our applications server software and content hosting
so that software license revenue constitutes an increasing percentage of our
revenue. The gross margin attributable to
10
<PAGE> 11
software license revenue is significantly higher than that of our content
production services. We cannot assure you that we will be able to increase the
proportion of software license revenue and, therefore, we cannot assure you that
we will be able to proportionally improve our gross margin.
We generally recognize content production services revenue upon shipment of the
rich media event to the customer and software license revenue upon delivery of
software to the customer. Content production services revenue includes revenue
for CD-ROM duplication. We recognize this revenue upon shipment of the
duplicated CD-ROMs. The revenue for software license is recognized upon
shipment, or upon notification by the customer, dependent on the delivery
medium. We recognize revenue for maintenance and content hosting ratably over
the period of the maintenance or content hosting contract. We recognize
professional services revenue on a percentage of completion basis as services
are performed.
A limited number of large customers have accounted for a majority of our
revenue, and will continue to do so for the foreseeable future. Although no
customer accounted for more than 10% of our total revenue for the three months
ended June 30, 1999, one customer accounted for more than 10% of our total
revenue for the three months ended June 30, 2000. To date, most of our customers
have been in the telecommunications, software, high-technology manufacturing,
financial services and pharmaceuticals industries.
Stock-based compensation charges consist primarily of charges related to the
difference between employee option exercise prices and deemed fair market values
on the date of grant amortized over the vesting period of the options. Through
June 30, 2000, we have recorded a total of $19.3 million in stock-based
compensation charges in connection with stock option grants to our employees and
consultants, which is being amortized using an accelerated method of
amortization as described in Financial Accounting Standards Board Interpretation
No. 28, over the vesting periods of the options, generally four to five years.
No costs for our software development efforts have been capitalized as of June
30, 2000 because Eloquent's products generally have reached technological
feasibility and have been released for sale at substantially the same time.
However, costs incurred for outside contractors to develop aspects of our
internal production management system were capitalized as an asset on our
balance sheet.
We have not achieved profitability on a quarterly or annual basis to date and we
anticipate that we will continue to incur net losses for the foreseeable future.
As of June 30, 2000, we had an accumulated deficit of $55.3 million. We expect
to increase our operating expenses significantly, expand our sales and marketing
operations and continue to develop and expand our solutions platform. If these
increased expenses are not accompanied by increased revenue, our business,
financial condition and operating results would suffer.
We have experienced and expect to continue to experience seasonality in our
business. Due to the marketing cycles of our customers, sales of our content
production services generally tend to be lower in the fourth calendar quarter of
each year. Because the market for rich media business-to-business communications
using the Web is still new, additional seasonal and other patterns in the usage
of our products and services may emerge as the market matures.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software licenses and maintenance............. 41% 19% 37% 18%
Content production services................... 51 73 53 77
Professional services......................... 8 8 10 5
---- ---- ---- ----
Total revenue.............................. 100 100 100 100
---- ---- ---- ----
Cost of revenue:
Software licenses and maintenance............. 5 5 7 5
Content production services................... 31 44 27 50
Professional services......................... 11 13 13 10
---- ---- ---- ----
Total cost of revenue...................... 47 62 47 65
---- ---- ---- ----
Gross margin 53 38 53 35
---- ---- ---- ----
Operating expenses:
Research and development...................... 24 17 22 20
Sales and marketing........................... 105 66 96 78
General and administrative.................... 24 29 22 35
Stock-based compensation...................... 39 33 46 43
---- ---- ---- ----
Total operating expenses................... 192 145 186 176
---- ---- ---- ----
Loss from operations............................... (139) (107) (133) (141)
Interest expense and other charges................. (4) (4) (13) (4)
Interest and other income.......................... 18 1 14 2
---- ---- ---- ----
Net loss before extraordinary expense.............. (125) (110) (132) (143)
Extraordinary loss on extinguishment of debt....... 0 0 (76) 0
---- ---- ---- ----
Net loss........................................... (125%) (110%) (208%) (143%)
==== ==== ==== ====
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue. Total revenue increased 86% to $5.2 million for the three months ended
June 30, 2000 from $2.8 million for the comparable period in fiscal 1999. Total
revenue increased 107% to $9.8 million for the six months ended June 30, 2000
from $4.7 million for the comparable period in 1999. The increase in revenue for
both periods is attributable to an increase in the number and average size of
sales of our products and services, additional product and service offerings and
higher prices.
Software licenses and maintenance. Revenue from software licenses and
maintenance increased 291% to $2.1 million for the three months ended June 30,
2000 from $540,000 for the same period in 1999. Revenue from software licenses
and maintenance revenue for the six months ended June 30, 2000 increased 311% to
$3.6 million from the same period in 1999. The increase, in
12
<PAGE> 13
both periods, was primarily due to the introduction of a new server product, the
Eloquent Communications Server, that added functionality and was offered at a
substantially higher price than our previously available server products. The
remainder was attributable to an increase in the number of server products sold
in the current year.
Content production services. Content production services revenue increased to
$2.7 million for the three months ended June 30, 2000 from $2.0 million for the
same period in 1999. The majority of the increase was attributable to an
increase in the number of rich media events we produced from 78 to 105. Content
production services revenue for the six months ended June 30, 2000 was $5.3
million, an increase of 44% from the same period in 1999. Over 60% of the
increase was the result of an increase in the number of rich media events we
produced from 145 to 190. Approximately 25% of the increase was attributable to
final settlement of a production contract.
Professional services. We launched our professional services organization in the
first quarter of 1999. Professional services revenue was $430,000 for the three
months ended June 30, 2000 and $218,000 for the comparable period in 1999.
Professional services revenue for the six months ended June 30, 2000 was
$956,000, an increase of 329% from the same period in 1999. In both the three
and six months ended June 30, 2000 the increase in revenue compared to the same
periods in 1999 is attributable to an increase in professional services
engagements. Revenue was recognized on 20 professional services engagements for
three months ended June 30, 2000 as compared to 5 engagements for the same
period in 1999. Revenue was recognized on 26 professional services engagements
for the six months ended June 30, 2000 as compared to 6 engagements for the same
period in 1999.
Cost of revenue. Cost of revenue consists primarily of software licenses and
maintenance costs, content production services costs, and professional services
costs. Cost of software licenses and maintenance consists of customer support
and content hosting personnel and royalty payments due to the owners of licensed
third-party software. Cost of content production services consists of event
production costs and direct personnel expenses associated with event production,
with some fixed overhead components for facilities and infrastructure support
charges. Direct labor costs associated with content production services are
deferred until revenue is recognized, at which time they are expensed as cost of
revenue. Cost of professional services consists of direct labor costs associated
with providing professional services, which are deferred until revenue is
recognized, at which time they are expensed as cost of revenue.
Software licenses and maintenance. Cost of software licenses and maintenance was
$277,000 in the three months ended June 30, 2000 compared to $135,000 for the
same period in 1999. Cost of software licenses and maintenance was $704,000 in
the six months ended June 30, 2000 compared to $231,000 for the same period in
1999. In both the three and six months ended June 30, 2000, over 70% of the
increase in expense compared to the same periods in 1999 is due to higher
software royalty payments associated with increased software license revenue.
The remainder of the increase reflects costs associated with additional customer
support personnel.
Content production services. Cost of content production services increased 27%
to $1.6 million for the three months ended June 30, 2000 compared to $1.2
million for the same period in 1999. Cost of content production increased 13% to
$2.7 million for the six months ended June 30, 2000 compared to $2.4 million for
the same period in 1999. The absolute increase in content production costs for
both the three and six months ended June 30, 2000 compared to the same periods
in 1999 is attributable to the increase in content production services revenue.
The decrease in costs as a percentage of revenue is attributable to our efforts
to more closely manage the correlation of our direct labor force with content
production volume. Additionally, several efficiency measures were introduced
subsequent to June 30, 1999, including initiating content production on an
event-only basis only after all customer materials are received, parallel
processing paths for certain production activities, electronic exchange with
customers for revisions of certain event elements, greater workflow and document
integration with our automated event management system to minimize paper
documents, and earlier production
13
<PAGE> 14
involvement in the post-sales process to clearly delineate customer
requirements. These restructuring initiatives yielded higher production
efficiency, including faster content production turn-times and higher production
capacity.
Professional services. The professional services department was established in
mid February 1999. Cost of professional services was $595,000 for the three
months ended June 30, 2000 compared to $355,000 for the same period in 1999. For
the six months ended June 30, 2000 the cost of professional services was $1.2
million compared to $464,000 for the same period in 1999. The increase in
expenses for both periods is due to higher personnel and recruiting costs
associated with growth of our professional services offerings.
Operating expenses. For the three months ended June 30, 2000, operating expenses
were $10.0 million compared to $4.1 million for the same period in 1999. Without
the effect of stock-based compensation charges, operating expenses for the three
months ended June 30, 2000 and 1999 would have been $8.0 million and $3.2
million, respectively.
For the six months ended June 30, 2000 operating expenses were $18.4 million
compared to $8.3 million for the same period in 1999. Without the effect of
stock-based compensation, operating expenses for the six months ended June 30,
2000 and 1999 would have been $13.9 million and $6.3 million, respectively.
Research and development. Research and development expenses consist primarily of
personnel expenses associated with software development. Research and
development expenses were $1.3 million for the three months ended June 30, 2000
compared to $484,000 for the same period in 1999. Approximately 95% of this
increase in expenses is associated with additional personnel dedicated to
developing future versions of our software products. For the six months ended
June 30, 2000 research and development expenses were $2.2 million compared to
$1.0 million for the same period in 1999. In addition to the new personnel, the
increase in expenses also reflects additional facilities costs associated with
establishing an office in Boulder, Colorado. We expect research and development
expenses to increase in absolute dollars as we seek to increase the
functionality of our solutions platforms.
Sales and marketing. Sales and marketing expenses consist primarily of personnel
expenses associated with the sale of our products and services, personnel and
marketing materials and other expenses associated with the marketing of our
products and services. Sales and marketing expenses were $5.5 million for the
three months ending June 30, 2000 compared to $1.9 million for the three months
ending June 30, 1999. Higher personnel costs accounted for approximately 69% of
the increase. Sales and marketing expenses were $9.5 million for the six months
ended June 30, 2000 compared to $3.7 million for the six months ended June 30,
1999. Approximately 71% of the increase was due to higher personnel expenses and
recruiting costs associated with growth in our sales force and marketing staff
as well as the additional travel costs associated with the increase in
personnel. New marketing programs accounted for approximately 13% of the
increase. We expect sales and marketing expenses to increase in absolute dollars
as we continue to grow the sales force.
General and administrative. General and administrative expenses consist
primarily of administrative personnel expenses, professional fees and facilities
costs. General and administrative expenses were $1.3 million for the three
months ended June 30, 2000 compared to $816,000 for the same period in 1999. For
the six months ending June 30, 2000 general and administrative expenses were
$2.2 million compared with $1.7 million for the same period in 1999.
Approximately 55% of the increase in expenses for the three months ended June
30, 2000 compared to the same period in 1999 is attributable to growth in
administrative personnel
14
<PAGE> 15
to support the Company's continued growth. The remainder of the increase was
associated with professional services fees.
Interest expense and other charges. Interest expense and other charges were
$190,000 for the three months ended June 30, 2000 and $103,000 for the three
months ended June 30, 1999. Interest expense and other charges for the three
months ended June 30, 2000 consist primarily of interest payments on equipment
leases and amortization of charges related to a bank line of credit. Interest
expense and other charges for the same period in 1999 consist primarily of
interest payments on equipment leases and a bank line of credit.
Interest expense and other charges for the six months ended June 30, 2000 were
$1.2 million, an increase of 529% over the same period in 1999. Interest expense
and other charges for the six months ended June 30, 2000 consist primarily of
interest paid and the amortization of the debt issuance costs and the discount
related to the $20.0 million subordinated notes and warrants. The subordinated
notes were repaid upon our initial public offering. The majority of the increase
in expense for the six months ended June 30, 2000 compared to the six months
ended June 30, 1999 reflects interest costs associated with the $20.0 million
subordinated notes.
Interest income and other income. Interest income and other income consists
primarily of interest earnings on our cash, cash equivalents and short-term
investments. Interest income and other income was $948,000 for the three months
ended June 30, 2000 compared to $38,000 for the three months ended June 30,
1999. Interest income and other income for the six months ended June 30, 2000
was $1.4 million compared to $88,000 for the same period in 1999. In both
periods, the increase was due to larger average cash balances as a result of our
initial public offering.
Extraordinary loss on extinguishment of debt. In October 1999, Eloquent sold
convertible notes and detachable warrants to purchase 1,500,000 shares of common
stock for aggregate gross consideration of $20.0 million. In conjunction with
the sale of the notes, Eloquent incurred approximately $1.5 million in debt
issuance costs. In accordance with applicable accounting rules, we allocated the
gross proceeds among the notes, the beneficial conversion feature of the notes,
and the warrants. As a result of that allocation, the subordinated notes were
originally recorded on our balance sheet at a discounted value of approximately
$7.5 million. The $7.5 million discount resulting from the issuance of warrants
was being amortized over the five-year term of the notes and the $5.0 million
discount resulting from the beneficial conversion feature was being amortized
over the period from issuance to December 31, 2000, during which the note could
not be converted. In accordance with the terms of the notes, all amounts
outstanding under the notes were repaid upon consummation of our initial public
offering. Because the notes were repaid prior to the end of their term, the
unamortized portion of the discount resulting from the issuance of the warrants
and debt issuance costs was recorded as an extraordinary loss on extinguishment
of debt.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales of
preferred stock, our initial public offering of common stock and, to a lesser
extent, borrowings under lines of credit. Net proceeds from our initial public
offering of common stock were approximately $75.7 million. At June 30, 2000, we
had approximately $56.4 million of cash equivalents and short-term investments.
We have capital lease arrangements that provide for up to $1.5 million for
equipment purchases, of which we have utilized approximately $437,000 as of June
30, 2000. In
15
<PAGE> 16
addition, we have a revolving line of credit and debt facility that provides for
borrowings up to $6.0 million for working capital requirements and equipment
purchases.
Net cash used in operating activities was $9.1 million for the six months ended
June 30, 2000 and $4.7 million for the six months ended June 30, 1999. Net cash
used in operating activities in both periods was primarily attributable to net
losses.
Net cash used in investing activities was $32.4 million for the six months ended
June 30, 2000 and $190,000 for the six months ended June 30, 1999. Net cash used
in investing activities in 2000 was related primarily to investments in
short-term marketable securities. Net cash used in investing activities in 1999
was primarily related to purchases of property and equipment.
Net cash provided by financing activities was $52.9 million for the six months
ended June 30, 2000 and $1.1 million for the six months ended June 30, 1999. Net
cash provided by financing activities in 2000 resulted primarily from the sale
of common stock in our initial public offering, partially offset by repayment of
borrowings. Net cash provided by financing activities in 1999 resulted primarily
from borrowings under our lines of credit.
We believe that our current cash and cash equivalents will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. We may need to raise additional funds thereafter
through public or private financings, or other arrangements. There can be no
assurance that such additional financings, if needed, will be available on terms
attractive to us, if at all. Our failure to raise capital when needed could have
a material adverse effect on our business, financial condition and operating
results. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our then-current, stockholders would be
reduced. Furthermore, such equity securities may have rights, preferences or
privileges senior to those of common stock.
RISK FACTORS
Our business, financial condition or operating results could be seriously harmed
by any of the following risks. In addition, the trading price of our common
stock could decline due to any of the following risks, and you may lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS AND PROSPECTS.
Eloquent was formed in March 1995. Thus, we have a limited operating history,
which may make it difficult for you to evaluate our business. In part because we
are subject to the risks, expenses and uncertainties frequently encountered by
companies in new and rapidly evolving technology and Web-related markets, we
cannot be sure that our business model and future operating performance will
yield the results that we seek. Moreover, because these markets are constantly
changing, we may need to change our business model to adapt. We have not yet
proven our ability, on a sustained basis, to achieve the following:
o maintain and expand our customer base;
o identify new applications for our existing products;
16
<PAGE> 17
o expand and enhance our customer solutions;
o maintain market prices for our solutions despite competition;
o effectively integrate any acquired businesses or technologies with our
operations;
o prevent technologies we use in our operations from failing or
operating poorly, and
o identify, attract, retain and motivate qualified personnel.
We may not be successful in achieving these objectives on a long-term basis. If
we are unable to do so, our business, financial condition and operating results
would suffer.
WE EXPECT TO CONTINUE TO INCUR LOSSES, AND AS A RESULT WE MAY NOT ACHIEVE
PROFITABILITY.
We have not achieved profitability on a quarterly or annual basis to date and we
anticipate that we will continue to incur net losses for the foreseeable future.
Our failure to achieve profitability could deplete our current capital resources
and reduce our ability to raise additional capital. We incurred net losses of
approximately $20.5 million in the six months ended June 30, 2000 compared to
$6.8 million in the six months ended June 30, 1999. As of June 30, 2000, we had
an accumulated deficit of approximately $55.3 million. We expect to increase
our operating expenses significantly, expand our sales and marketing operations
and continue to develop and expand our service offerings. If these increased
expenses are not accompanied by increased revenue, we will not achieve
profitability.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND AN
UNANTICIPATED DECLINE IN REVENUE MAY CAUSE OUR STOCK PRICE TO FALL.
In some future quarter, our operating results may be below the expectations of
public market analysts and investors, which would cause the price of our common
stock to fall. The factors that may cause our quarterly operating results to
fall short of expectations include:
o delays of large customer orders, which could prevent us from
recognizing revenue until later quarters;
o seasonal trends in sales of our solutions, which could result in lower
quarterly revenue in the fourth quarter;
o downward pressure on prices paid by our customers, as a result of
competition or other factors, which could reduce our quarterly revenue
even if we maintain or increase the number of sales;
o new product and service introductions by our competitors, which could
cause our competitors to capture revenue that we otherwise could have
received;
o increased costs incurred as we expand operations, increase our
marketing efforts or undertake other initiatives, which could reduce
our profit margin if not matched by a corresponding growth in revenue;
and
17
<PAGE> 18
o technical difficulties or system downtime affecting the Web generally
or the operation of our network or servers, which could cause customer
dissatisfaction and reduce our revenue.
We have experienced and expect to continue to experience seasonality in our
business. Due to the marketing cycles of our customers, sales of our content
production services generally tend to be lower in the fourth calendar quarter of
each year. Because the market for rich media business-to-business communications
using the Web is still new, additional seasonal and other patterns in the usage
of our products and services may emerge as the market matures.
Our quarterly operating results may fluctuate significantly in the future
because of a variety of factors, many of which are outside our control. As a
result, operating results for any particular quarter may not be indicative of
future operating results.
WE DEPEND ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A MAJORITY OF OUR REVENUE,
SO THE LOSS OF OR DELAY IN PAYMENT FROM ONE OR A SMALL NUMBER OF CUSTOMERS COULD
HAVE A LARGE IMPACT ON OUR REVENUE AND OPERATING RESULTS.
If we were to lose a key customer, our business, financial condition and
operating results would suffer. In addition, if a key customer fails to pay
amounts it owes us, or does not pay those amounts on time, our revenue and
operating results would suffer. A limited number of large customers have
accounted for a majority of our revenue and will continue to do so for the
foreseeable future. For example, our top 15 customers during the six months
ended June 30, 2000 accounted for a majority of our revenue during that period.
Due to our limited number of large customers, the cancellation or delay of a
customer order during a given quarter is likely to significantly reduce revenue
for the quarter.
THE LENGTH OF OUR SALES CYCLE IS UNCERTAIN AND THEREFORE COULD CAUSE SIGNIFICANT
VARIATIONS IN OUR OPERATING RESULT.
Because our customers are typically large corporations, the length of our sales
cycle -- the time between an initial customer contact and completing a sale --
can be unpredictable. The time between the date of our initial contact with a
potential new customer and the execution of a sales contract with that customer
ranges from less than two weeks to more than three months, depending on the size
of the customer, the application of our solution and other factors. Our sales
cycle is also subject to delays as a result of customer-specific factors over
which we have little or no control, including budgetary constraints and internal
acceptance procedures. During the sales cycle, we may expend substantial sales
and management resources without generating corresponding revenue. Our expense
levels are relatively fixed in the short term and are based in part on our
expectations of our future revenue. As a result, any delay in our sales cycle
could cause significant variations in our operating results, particularly
because a relatively small number of customer orders represents a large portion
of our revenue.
WE MAY NOT BE ABLE TO INCREASE THE SIZE OF OUR SALES ORGANIZATION, WHICH WOULD
PREVENT US FROM ACHIEVING THE INCREASED SALES VOLUME NECESSARY FOR US TO ACHIEVE
PROFITABILITY.
In order to increase our revenue, we must recruit, train and retain a
significant number of sales personnel. If we do not do so, we will not be able
to increase our sales sufficiently to achieve profitability. In the past, we
have had difficulty recruiting and retaining qualified sales personnel. We
cannot guarantee that we will not encounter similar difficulties in the future.
Competition for personnel, particularly in the San Francisco Bay Area, where we
are located, is intense. Many of the companies competing with us for qualified
sales personnel are larger and more established
18
<PAGE> 19
than we are and have greater financial resources than we do. This may make it
even more difficult for us to recruit and retain such personnel.
Our operational history suggests that the level of sales we achieve is generally
determined by the number of sales personnel we employ. In 1998 and early 1999,
we suffered a significant decline in sales to customers in the western United
States primarily due to attrition in our West Coast sales force. If we
experience turnover in our sales force in the future, our business, financial
condition and operating results will suffer. Newly hired sales personnel
generally do not become fully productive until they have worked for at least two
quarters. Because of the time required to recruit new sales personnel and for
them to become fully productive, an unanticipated loss of sales personnel could
result in an under productive sales organization and reduced sales for a
significant period of time.
WE FACE INTENSE COMPETITION FOR PERSONNEL, WHICH COULD IMPAIR OUR ABILITY TO
RECRUIT AND RETAIN KEY PERSONNEL.
Our ability to develop, market and sell our solutions and to maintain our
competitive position depends on our ability to attract, retain and motivate
highly skilled technical, sales and marketing and other personnel. There is a
limited number of people with the necessary technical skills and understanding,
and competition for their services, particularly in the San Francisco Bay Area,
is intense. If we fail to recruit or retain these personnel, our ability to
develop, market and sell our solutions will suffer.
WE DEPEND ON TECHNOLOGY LICENSED FROM OTHER COMPANIES. WE MAY NOT BE ABLE TO
RENEW THESE LICENSES AS THEY EXPIRE FROM TIME TO TIME, AND WE MAY NOT BE ABLE TO
REPLACE THE LICENSED TECHNOLOGY WITHOUT SIGNIFICANT EXPENSE OR ENGINEERING
EFFORTS, IF AT ALL.
Our desktop player software, which runs on an end user's personal computer to
allow the user to view an event, and our Enterprise Communications Server
product, which enables customers to deliver events to their target audiences
through Web-based channels, include technologies that other companies have
licensed to us. If we are unable to maintain or renew these licenses when they
expire, we would be forced to remove these technologies from our products and
develop or license comparable technologies. This could require additional
license fees or extensive engineering efforts, or significantly decrease our
products' functionality, either of which could harm our business, financial
condition and operating results.
In addition, we have developed our products to integrate well with the Microsoft
Windows NT operating system, the operating system used by most of our customers
to run our software. If the Windows NT operating system is changed by Microsoft
so that it no longer integrates well with our products, or if Windows NT
experiences technical problems, the operation of our software could be impaired.
In that event, our business, financial condition and operating results could be
harmed. Microsoft is not obligated to ensure that Windows NT integrates well
with our products.
We may be required to obtain licenses from third parties to refine, develop,
market and deliver new products. We may be unable to obtain any needed license
on commercially reasonable terms or at all and rights granted under any licenses
may not be valid and enforceable.
WE OPERATE IN MARKETS THAT WILL BECOME INCREASINGLY COMPETITIVE, WHICH COULD
LEAD TO DECREASING PRICES AND REDUCED PROFITABILITY.
The market for rich media business-to-business communications solutions is new
and rapidly evolving. We expect that competition will intensify. Increased
competition could lead
19
<PAGE> 20
to decreasing prices and profitability. We compete with companies that offer
components of a rich media business-to-business communications solution,
including:
o providers of rich media software tools;
o multimedia content production and delivery companies;
o companies that provide content hosting services, which include
storing, delivering and tracking the distribution of content; and
o traditional business-to-business communications and learning solution
companies that offer live meeting and seminar services.
In addition, our customers and potential customers represent a source of
competition to the extent they decide to develop in-house business-to-business
communications solutions.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical and marketing resources, greater name
recognition and larger existing customer bases than we do. These competitors may
also be able to undertake more extensive marketing campaigns for their brands
and services, adopt more aggressive pricing policies and make more attractive
offers to potential employees and partners. We may be unable to compete
successfully against current or future competitors, and competitive pressures
may cause our business to suffer.
MOST OF OUR MANAGEMENT TEAM HAS ONLY RECENTLY JOINED ELOQUENT AND HAS LITTLE
EXPERIENCE WORKING TOGETHER, WHICH COULD LIMIT THE TEAM'S EFFECTIVENESS IN
OPERATING OUR BUSINESS.
Our management team does not have significant experience working together at
Eloquent, because most members of our management team have been employed by
Eloquent for a short period of time. This could prevent or limit our management
team's ability to work together effectively. The failure of our new management
team to work together effectively could delay efficient decision-making and
execution of business objectives, which would negatively impact our business,
financial condition and operating results.
WE MAY NOT BE ABLE TO ADEQUATELY MANAGE OUR ANTICIPATED GROWTH, WHICH COULD
IMPAIR OUR EFFICIENCY AND NEGATIVELY IMPACT OUR OPERATIONS.
We may not be able to manage our growth effectively, which could impair our
efficiency, reduce the quality of our solutions, impair further growth and harm
our business, financial condition and operating results. If we do not
effectively manage this growth, we will not be able to operate efficiently or
maintain the quality of our products. Either outcome would harm our operating
results. In the past, we have experienced rapid growth, and we plan to continue
to expand our operations. This expansion is expensive and places a significant
strain on our personnel and other resources. To manage our expanded operations
effectively, we will need to further improve our operational, financial and
management systems and successfully hire, train, motivate and manage our
employees.
20
<PAGE> 21
WE PLAN TO EXPAND OUR BUSINESS INTO INTERNATIONAL MARKETS, IN WHICH WE HAVE NO
PRIOR EXPERIENCE. INTERNATIONAL EXPANSION WILL REQUIRE SIGNIFICANT RESOURCES AND
WILL SUBJECT US TO NEW RISKS THAT MAY LIMIT OUR RETURN FROM OUR INTERNATIONAL
SALES EFFORTS.
One of our strategies to increase our sales sufficiently to achieve
profitability is to add an international sales force and operations. This
expansion will involve a significant use of management and financial resources,
particularly because we have no previous experience with international
operations. We may not be successful in creating international operations or
sales. In addition, international business activities are subject to a variety
of risks, including the adoption of laws, currency fluctuations, actions by
third parties and political and economic conditions, any of which could restrict
or eliminate our ability to do business in foreign jurisdictions.
WE WILL DEPEND ON REVENUE FROM OUR CONTENT HOSTING BUSINESS, WHICH WILL SUFFER
IF OUR HOSTING EQUIPMENT AND SOFTWARE EXPERIENCE SYSTEM FAILURES.
Our future success depends in part on our ability to successfully host our
customers' content on our servers. Our ability to host content will depend on
the efficient and uninterrupted operation of our computer and communications
hardware and software systems. We do not have fully redundant content hosting
systems, a formal disaster recovery plan or alternative providers of hosting
services. We also may not have business interruption insurance sufficient to
compensate us for losses that may occur. All of our content hosting servers are
located at Concentric Network Corporation's facilities in Cupertino, California.
These systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures or similar
events. They are also subject to computer viruses, break-ins, sabotage,
intentional acts of vandalism and similar misconduct. Despite any precautions we
may take, the occurrence of a natural disaster or other unanticipated problems
at the Concentric Network facility could result in interruptions in our content
hosting service. In addition, the failure by Concentric Network to provide the
data communications capacity that we require could result in interruptions in
our content hosting service. Any damage to or failure of our content hosting
systems could result in interruptions in our content hosting service. System
interruptions will reduce our revenue and profits, and our future revenue and
profits will be harmed if our customers believe that our content hosting system
is unreliable.
POTENTIAL ERRORS IN OUR SOFTWARE COULD HARM OUR REPUTATION AND REDUCE OUR SALES
AND PROFITABILITY.
Software defects discovered after we release our software could result in loss
of revenue, delays in market acceptance and harm to our reputation. Any product
liability claim against us, if successful and of sufficient magnitude, could
harm our profitability and future sales. Our software has in the past contained,
and may in the future contain, "bugs" or errors. Although we typically design
our customer license agreements to contain provisions that limit our exposure to
potential product liability claims, we cannot guarantee that contractual
limitations of liability would be enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in our software.
Even though we maintain insurance that covers damages arising from the
implementation and use of our software, we cannot assure you that our insurance
would cover or be sufficient to cover any product liability claims against us.
21
<PAGE> 22
WE HAVE IN THE PAST EXPERIENCED RETURNS OF OUR PRODUCTS, AND AS OUR BUSINESS
GROWS WE MAY EXPERIENCE INCREASED RETURNS, WHICH COULD HARM OUR REPUTATION AND
NEGATIVELY IMPACT OUR OPERATING RESULTS.
In the past, some of our customers have returned our rich media events to us
because they felt that modifications were required for the product to meet
project specifications and the customer's requirements. It is likely that we
will experience some level of returns in the future and, as our business grows,
the amount of returns may increase despite our efforts to minimize returns.
Also, returns may adversely affect our relationship with affected customers and
may harm our reputation. This could cause us to lose potential customers and
business in the future. We maintain a reserve for future returns that we believe
is adequate given our historical level of returns. If returns increase, however,
our reserve may not be sufficient and our operating results would be negatively
affected.
THE FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY IMPAIR OUR COMPETITIVE
POSITION.
Our copyrights, service marks, trademarks, trade secrets, proprietary technology
and similar intellectual property are critical to our success. If we are unable
to adequately protect our rights from infringement by competitors or others, or
from misuse by our licensees, the competitive advantage that our rights provide
will be weakened.
We rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees and independent
contractors to protect our proprietary rights. We strategically pursue the
registration of trademarks and service marks in the United States and abroad.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available.
We have licensed in the past, and expect to license in the future, certain of
our proprietary rights to third parties. The steps taken by us to protect our
proprietary rights may not be adequate. Although we attempt to ensure that the
quality of our brand is maintained by these licensees, licensees may take
actions that may harm the value of our proprietary rights or reputation.
WE MAY BECOME SUBJECT TO INTELLECTUAL PROPERTY LITIGATION IN THE FUTURE THAT
COULD CAUSE US TO INCUR SIGNIFICANT EXPENSE AND COULD REQUIRE US TO ALTER OUR
PRODUCTS.
We may be subject to legal proceedings and claims associated with our
intellectual property from time to time in the future. These claims, even if
without merit, could cause us to expend significant financial and managerial
resources. Further, if these claims are successful, we may be required to change
our trademarks, alter our copyrighted material or pay financial damages, any of
which could harm our business. Third parties may infringe or misappropriate our
copyrights, trademarks or similar proprietary rights in the future. In such
event, we may be forced to pursue infringement claims against such third
parties. These claims also could cause us to expend significant financial and
managerial resources.
22
<PAGE> 23
RISKS RELATED TO THE INTERNET
OUR FUTURE SUCCESS DEPENDS ON CONTINUED GROWTH IN USE OF THE WORLD WIDE WEB FOR
BUSINESS-TO-BUSINESS COMMUNICATIONS.
Our business could suffer if Web usage does not continue to grow. Web usage may
be inhibited for a number of reasons, including:
o inadequate network infrastructure;
o security concerns;
o inconsistent quality of service;
o lack of availability of cost-effective and high-speed service; and
o changes in government regulation of the Web.
If Web usage grows, the Web infrastructure may not be able to support the
demands placed on it by this growth, or its performance and reliability may
decline. In addition, future outages and other interruptions occurring
throughout the Web could lead to decreased use of our products and would
therefore harm our business.
IF WE ARE UNABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGES THAT
CHARACTERIZE THE WEB, OUR BUSINESS WOULD SUFFER.
Our future success will depend on our ability to continually improve our
solutions. To do so, we will need to continually enhance our solutions in
response to the rapid technological developments, evolving industry standards
and user demands, and frequent new product introductions and enhancements that
characterize the market for Web products and services. In the event new
multimedia enabling technologies are developed and widely adopted, we may be
required to make fundamental and costly changes in our technology. We may not be
able to make these enhancements or changes in a cost-effective manner fast
enough to keep up with our competitors or at all. In this event, our business
would suffer.
RISKS RELATED TO OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE IN THE PAST AND IS LIKELY TO BE
EXTREMELY VOLATILE IN THE FUTURE, WHICH COULD CAUSE YOU TO LOSE ALL OR A PART OF
YOUR INVESTMENT AND MAY RESULT IN COSTLY AND DISTRACTING SECURITIES LITIGATION.
The market price of our common stock has been volatile in the past and is likely
to be extremely volatile in the future. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Securities
litigation could result in substantial costs and a diversion of our management's
attention and resources. The stocks of Web-related and technology companies like
ours have experienced extreme price and volume fluctuations in recent months,
many of which appear unrelated to the companies' business, financial condition
or operating results. Although the market price of our stock will in part be
based on our business, financial condition and operating results, we expect that
it will also be affected to a significant degree by these market-wide and
industry-wide price and volume fluctuations.
23
<PAGE> 24
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A MAJORITY OF OUR COMMON STOCK, WHICH
ENABLES THEM TO CONTROL MATTERS DECIDED BY THE STOCKHOLDER.
Our directors and executive officers and their affiliates beneficially own a
majority of our outstanding common stock. As a result of their beneficial
ownership, our directors and executive officers, acting alone or with others,
are able to control most matters requiring stockholder approval, including the
election of directors and approval of significant transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of Eloquent. This could prevent our stockholders from
realizing a premium over the market price for their shares or from bringing
about a change in management.
THE LARGE NUMBER OF SHARES THAT MAY BE RESOLD IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO DECLINE.
As our shares become eligible for public resale, the market price of our common
stock may drop if the holders of these shares sell them or are perceived by the
market as intending to sell them. Most of the shares we have outstanding or
issuable upon exercise of options or warrants will become eligible for public
resale 180 days after the closing of our initial public offering, in August
2000. For a more detailed description of the eligibility of the outstanding
shares of our common stock for resale in the public market, see our Registration
Statement filed with the SEC, SEC File No. 333-89537.
ADDITIONAL DISCUSSION OF THESE AND OTHER RISK FACTORS IS DISCLOSED IN OUR
REGISTRATION STATEMENT ON FORM S-1, AS AMENDED, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, SEC FILE NO. 333-89537.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our exposure to market risk is limited to interest income sensitivity, which is
affected by changes in the general level of U.S. interest rates, particularly
because the majority of our investments are in short-term debt securities issued
by corporations. We place our investments with high-quality issuers and limit
the amount of credit exposure to any one issuer. Due to the nature of our
short-term investments, we believe that we are not subject to any material
market risk exposure. We do not have any foreign currency or other derivative
financial instruments.
24
<PAGE> 25
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Sales of Registered Securities. We commenced our initial
public offering on February 16, 2000 pursuant to a Registration Statement on
Form S-1 (the "Registration Statement") (File No. 333-89537). The managing
underwriters of the public offering were U.S. Bancorp Piper Jaffray, Banc of
America Securities LLC and Thomas Weisel Partners (the "Underwriters"). In the
offering, we sold an aggregate of 5,175,000 shares of our common stock for an
initial price of $16.00 per share. The aggregate proceeds from the offering were
$82.8 million. We paid expenses of approximately $7.1 million, of which
approximately $5.8 million represented underwriting discounts and commissions
and approximately $1.3 million represented expenses related to the offering. Net
proceeds from the offering were $75.7 million. Of the net proceeds, as of June
30, 2000, approximately $3.0 million has been used to repay existing
indebtedness owed under our existing credit facility, approximately $20.0
million has been used to repay the subordinated notes we issued in October 1999,
approximately $3.0 million has been invested in a strategic partner and the
remainder has been used for working capital and for general corporate purposes.
The use of the proceeds from the offering does not represent a material change
in the use of proceeds described in our Registration Statement. As of June 30,
2000, we had invested the remainder of the net proceeds in short-term,
interest-bearing, investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.01* Form of Underwriting Agreement.
3.01* Amended and Restated Certificate of Incorporation.
3.02* Amended and Restated Bylaws.
3.03* Form of Amended and Restated Certificate of Incorporation to be filed
upon completion of this offering.
3.04* Form of Amended and Restated Bylaws to be effective upon completion of
this offering.
4.01* Form of Specimen Stock Certificate.
4.02* Fourth Amended and Restated Investors' Rights Agreement, dated October
20, 1999, among Eloquent and certain investors named therein.
4.03* Securities Purchase Agreement, dated October 20, 1999, by and among
Eloquent and certain investors named therein.
5.01* Opinion of Cooley Godward LLP regarding legality of the securities
being registered.
10.01* Form of Indemnity Agreement entered into by Eloquent with each of its
directors and executive officers.
10.02* Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Equity Incentive Plan.
10.04* 1997 Equity Incentive Plan.
10.05* Form of Stock Option Agreement under the 1997 Equity Incentive Plan.
10.06* 1999 Equity Incentive Plan.
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
10.07* Form of Stock Option Agreement under the 1999 Equity Incentive Plan.
10.08* Form of Nonstatutory Stock Option Agreement for Non-Employee Director
Grants under the 1999 Equity Incentive Plan.
10.09* 1999 Employee Stock Purchase Plan.
10.10* Form of 1999 Employee Stock Purchase Plan Offering.
10.11* Employment Agreement, dated December 23, 1998, between Eloquent and
Abraham Kleinfeld.
10.12* Office Lease, dated November 19, 1996, between Eloquent and California
Casualty Indemnity Exchange, as amended.
10.13* OEM Agreement, dated May 30, 1997, between Eloquent and Verity, Inc.
10.14* Software License Agreement, dated June 30, 1997, between Eloquent and
Voxware, Inc.
10.15* Co-location Service Agreement, dated March 30, 1998, between Eloquent
and Concentric Network Corporation.
10.16* Sublease Agreement, dated June 1, 1999, between Eloquent and
California Casualty Indemnity Exchange.
10.17* ISV Software License Agreement, dated August 1, 1999, between Eloquent
and WebXpress, Inc.
10.18* Assignment of Sublease, dated November 24, 1999, between Eloquent and
California Casualty Management Company.
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02* Consent of PricewaterhouseCoopers LLP.
24.01* Power of Attorney. Reference is made to page II-7.
27.01 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Regulation Statement on Form S-1 (SEC File No. 333-89537).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the six months
ended June 30, 2000.
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.
Date: August 11, 2000
ELOQUENT, INC.
By: /s/ R. JOHN CURSON
--------------------------------------
R. John Curson
Chief Financial Officer, Secretary and
Treasurer (Principal Accounting and
Financial Officer)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.01* Form of Underwriting Agreement.
3.01* Amended and Restated Certificate of Incorporation.
3.02* Amended and Restated Bylaws.
3.03* Form of Amended and Restated Certificate of Incorporation to be filed
upon completion of this offering.
3.04* Form of Amended and Restated Bylaws to be effective upon completion of
this offering.
4.01* Form of Specimen Stock Certificate.
4.02* Fourth Amended and Restated Investors' Rights Agreement, dated October
20, 1999, among Eloquent and certain investors named therein.
4.03* Securities Purchase Agreement, dated October 20, 1999, by and among
Eloquent and certain investors named therein.
5.01* Opinion of Cooley Godward LLP regarding legality of the securities
being registered.
10.01* Form of Indemnity Agreement entered into by Eloquent with each of its
directors and executive officers.
10.02* Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Equity Incentive Plan.
10.04* 1997 Equity Incentive Plan.
10.05* Form of Stock Option Agreement under the 1997 Equity Incentive Plan.
10.06* 1999 Equity Incentive Plan.
10.07* Form of Stock Option Agreement under the 1999 Equity Incentive Plan.
10.08* Form of Nonstatutory Stock Option Agreement for Non-Employee Director
Grants under the 1999 Equity Incentive Plan.
10.09* 1999 Employee Stock Purchase Plan.
10.10* Form of 1999 Employee Stock Purchase Plan Offering.
10.11* Employment Agreement, dated December 23, 1998, between Eloquent and
Abraham Kleinfeld.
10.12* Office Lease, dated November 19, 1996, between Eloquent and California
Casualty Indemnity Exchange, as amended.
10.13* OEM Agreement, dated May 30, 1997, between Eloquent and Verity, Inc.
10.14* Software License Agreement, dated June 30, 1997, between Eloquent and
Voxware, Inc.
10.15* Co-location Service Agreement, dated March 30, 1998, between Eloquent
and Concentric Network Corporation.
10.16* Sublease Agreement, dated June 1, 1999, between Eloquent and
California Casualty Indemnity Exchange.
10.17* ISV Software License Agreement, dated August 1, 1999, between Eloquent
and WebXpress, Inc.
10.18* Assignment of Sublease, dated November 24, 1999, between Eloquent and
California Casualty Management Company.
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02* Consent of PricewaterhouseCoopers LLP.
24.01* Power of Attorney. Reference is made to page II-7.
27.01 Financial Data Schedule.
</TABLE>
27
