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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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 000-27985
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QUINTUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0021612
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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47212 MISSION FALLS COURT
FREMONT, CALIFORNIA 94539
(ADDRESS PRINCIPAL EXECUTIVE OFFICES, INCLUDING AREA CODE)
(510) 624-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
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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 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference by Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 30, 2000, there were 34,079,358 shares of the registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the registrant (based on the closing price for the Common
Stock on the Nasdaq National Market on April 28, 2000) was approximately
$334,403,700.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2000 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended March 31, 2000.
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INDEX TO FORM 10-K
PART I
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Securities Holders....... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 23
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 52
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 53
Signatures............................................................ 55
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PART I
ITEM 1. BUSINESS
Except for historical information contained or incorporated by reference in
this section, the following discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Quintus' actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
elsewhere in this report in the section entitled "Risk Factors".
OVERVIEW
Quintus was incorporated in 1984 to develop artificial intelligence
software and was acquired in 1989 by Intergraph Corporation, a provider of
interactive computer graphics systems. Quintus was purchased from Intergraph in
May 1995 in a management-led buyout with the financial backing of new investors.
At the time of the buyout Quintus primarily provided application software and
consulting services to the help desk market. Since then Quintus has introduced
several customer relationship management applications for call centers. In
November 1997, Quintus acquired Nabnasset Corporation, a provider of computer
telephony integration software. Following the acquisition Quintus introduced its
Quintus CTI product and began integrating it with its customer relationship
management applications. As new communication channels have emerged, Quintus has
introduced new products and added functionality to its existing products. In
February 1999, Quintus introduced its Quintus eContact suite as a platform for
integrating its existing products with new channel applications. In November
1999, Quintus acquired Acuity Corp., a provider of software products to manage
Internet-based customer interactions.
Quintus provides a comprehensive e-Customer Relationship Management or eCRM
solution to manage customer interactions, such as customer orders, inquiries and
service requests, and deliver consistent customer service across multiple
communication channels, including the Internet, email and the telephone.
Quintus' eContact software suite includes applications that address the needs of
customer service representatives and agents in sales and service, consumer
relations, technical support and human resources centers and a routing engine to
manage customer interactions. These applications and Quintus' routing engine can
be sold separately or in a group. eContact enables companies to handle high
volumes of customer interactions and leverage opportunities to sell additional
products and services to their customers.
The Quintus eContact software suite allows companies to personalize, route
and manage customer interactions. Quintus' eContact suite enables consistent
customer service through the use of common rules for prioritizing, handling and
responding to customer interactions, shared customer profile information,
uniform strategies for selling additional products and services to customers,
and consolidated management and reporting functions that allow companies to
capture and analyze customer information.
Quintus derives substantially all of its revenues from licenses and
services associated with its products. License revenues are derived from product
sales to customers and through resellers and distributors. Service revenues are
attributable to the installation, consulting, maintenance and other support
services related to the sale of Quintus' products.
License revenues from sales to end users are recognized upon shipment of
the product if a signed contract exists, the fee is fixed and determinable,
collection is deemed probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement. License revenues for
contracts requiring Quintus to provide significant customization services are
recognized using percentage of completion accounting using labor days as the
basis for determining the percentage complete. License revenues from sales to
resellers and distributors are generally recognized when all obligations to the
distributors and resellers are satisfied and the license fees are deemed to be
nonrefundable.
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Service revenues include maintenance revenues which were initially deferred
and recognized ratably over the maintenance period, which in most cases is one
year, and revenues from training and consulting services, which are recognized
as services are performed.
Quintus sells its products to customers in North and South America, Europe,
South Africa and Asia Pacific through a direct sales force and indirectly
through resellers and distribution partners. All of Quintus' sales are
denominated in U.S. dollars. International revenues accounted for 23.9% of total
revenues in fiscal 2000. Quintus intends to establish additional distribution
relationships with partners outside of the United States and it expects
international revenues to continue to increase as a percentage of its total
revenues in the future. Quintus also expects that sales of its products to a
limited number of parties will continue to account for a large percentage of
total revenues for the foreseeable future.
In July 1997, Quintus acquired Call Center Enterprises, a provider of
strategic call center consulting services, for $965,000 in cash. The acquisition
was accounted for as a purchase. In February 1999, Quintus sold this business to
AnswerThink Consulting Group for $2.1 million in cash. The results of operations
for Call Center Enterprises are presented as discontinued operations in Quintus'
consolidated financial statements.
In November 1997, Quintus acquired Nabnasset for $3.5 million in cash,
stock and options to purchase Quintus common stock. The transaction was
accounted for as a purchase. In this acquisition, acquired technology included
both existing technology and in-process research and development. The valuation
of acquired technology was made by applying the income forecast method, which
considers the present value of cash flows by product lines. Acquired in-process
technologies of $2.2 million were charged to operations, as the technologies did
not have alternative future uses as of the date of the acquisition.
In November 1999, Quintus acquired Acuity for $47.1 million based on
capital stock issued, the value of the options and warrants assumed, and
transaction costs incurred. The transaction was accounted for as a purchase. The
valuation of acquired technology was made by applying the income forecast
method, which considers the present value of cash flows by product lines.
Acquired in-process technologies of $3.0 million were charged to operations
during the quarter ended December 31, 1999.
RECENT EVENTS
On May 18, 2000, Quintus completed its acquisition of Mustang.com, Inc.
Mustang.com develops, markets, services and supports the Mustang Message Center,
an e-mail management software solution that offers companies and other
enterprises the ability to manage their inbound e-mail and Internet-based
inquiries timely and accurately. The transaction was accounted for using the
purchase method of accounting. Quintus issued approximately 5,394,000 shares of
common stock and assumed options and warrants to purchase approximately 636,000
shares and approximately 41,000 shares of common stock, respectively. The
purchase price for the acquisition was approximately $275,000,000, based on
capital stock issued, the value of options and warrants assumed, and transaction
costs incurred.
On May 16, 2000, Quintus entered into a worldwide reseller, marketing and
technology alliance with Siebel Systems, Inc., a supplier of eBusiness
application software. Under the terms of the alliance, Quintus will market and
sell Siebel eBusiness Applications through Quintus' worldwide sales force and
distribution channels, and Siebel will license Quintus' eContact universal
queuing technology to add multimedia queuing and intelligent routing
capabilities to future Siebel eBusiness Application releases. Quintus has also
become a Strategic Software Partner in the Siebel Alliance program, which
provides for joint marketing and sales programs between the two companies.
As a result of this alliance, Quintus anticipates that its cost of sales
will increase by the reseller fee incurred from selling Siebel's eBusiness
Applications, thereby, decreasing the gross margin percentage. However, the
gross profit may or may not change significantly due to the level of total
license and service revenues generated.
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INDUSTRY BACKGROUND
In today's competitive global marketplace, customer service is increasingly
critical to attracting and retaining customers. Many companies are re-orienting
their businesses to be more responsive to customer needs and are focusing on
customer service and satisfaction to differentiate themselves from their
competitors. Moreover, companies are recognizing that every customer interaction
provides an opportunity to sell additional products and services, as well as
increase customer loyalty. As a result, customer service is becoming a key
competitive advantage in many industries.
The Internet has emerged as a major medium for communication and commerce,
enabling new, highly efficient channels through which companies can engage in
commerce and interact directly with their customers. The growth of e-commerce
has increased competition for customers and reduced the importance of
traditional competitive advantages such as price, location, availability and
access. International Data Corporation estimates that the number of customers
buying goods and services over the Internet worldwide will grow from
approximately 30.8 million in 1998 to 182.6 million in 2003 and that the value
of these purchases will increase from $50.4 billion to $1.3 trillion over the
same period.
The Internet enables companies to interact with their customers in more
ways than ever before. In addition to traditional telephone-based communication
channels, customers and companies can now interact through email, Web chat and
Web self-service. These Internet-based communication channels are growing
rapidly, creating new challenges for companies attempting to provide quality
customer service. The Gartner Group estimates that approximately 25% of all
customer interactions will take place over the Internet via email or Web
communications by 2001. Forrester Research estimates that by 2001 consumers will
send companies approximately 50 million emails per day requesting product
information or service.
As a result of the growing use of these new communication channels,
companies are struggling to handle the volume and variety of customer
interactions. While Internet-based communications are forecast to grow
substantially, telephone-based communications will remain a critical component
of companies' customer service. Many companies are not equipped to address the
convergence of traditional and Internet-based communication channels and,
consequently, cannot offer customers the flexibility and service they demand.
Customers increasingly expect to be able to interact with companies through
whichever channel best suits their needs and are likely to use a combination of
communication channels. For example, a customer may request product literature
via email, review marketing materials or fill in an application on the Web, call
to receive more detailed information or assistance, send a signed form by fax,
and check the status of an order online. Companies' ability to provide
consistent customer service across all these communication channels will become
increasingly critical to delivering a superior customer experience.
In many industries, Internet-based companies have captured increasing
market share and emerged as competitive threats to traditional "brick and
mortar" companies. As a result, many Global 1000 companies are under pressure to
quickly expand their online presence. These companies have typically provided
customer service through telephone-based communication channels and are now
looking to support new Internet-based communication channels. Many of these
companies have invested considerable resources to establish call centers that
manage inbound and outbound customer calls, including customer orders, inquiries
and service requests, and telesales and telemarketing operations. As these
companies move to support Internet-based communication channels and establish
customer service centers with capabilities for handling multi-channel
communications, they will seek to leverage their existing investments in call
center infrastructure and personnel. Frost and Sullivan estimates that spending
on Web-enabled call centers in the U.S. was $111.9 million in 1999 and will grow
at a compound annual rate of 41.4% from 1999 until 2006.
Similarly, many Internet-based companies that have grown rapidly and built
sizable customer bases are faced with increasingly competitive online market
environments and are looking for ways to differentiate themselves from their
competitors. These Internet-based companies have relied primarily on email and
Web self-service to interact with their customers. Many have delivered
unsatisfactory customer service. According to a survey of Internet sites by
Jupiter Communications, more than a third had no email address listed, took five
days or more to respond or never responded to an email.
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To date, companies have turned to several types of products to deliver
customer service. These products have primarily been point solutions targeted at
discrete communication channels. For example, computer telephony integration
software products, which automate call routing and reduce the time it takes to
respond to customer calls, are designed for telephone-based communications and
often are not able to handle or integrate with Internet-based communication
channels. Similarly, email management software products, which automate email
responses, typically are not integrated with other communication channels and
therefore do not provide a complete and accurate view of the customer. Companies
have also deployed customer relationship management applications to automate
customer interactions such as problem management and to provide a repository for
customer information. However, these applications are usually not integrated
with the underlying communication infrastructure and therefore cannot leverage
call routing or other features that enable more timely, efficient and
personalized customer service. Deploying these disparate solutions requires
significant integration and, as a result, they can be difficult and expensive to
implement and maintain.
Quintus believes a significant market opportunity exists for solutions that
provide both traditional "brick and mortar" companies and new Internet-based
companies with the ability to manage customer relationships across a broad range
of communication channels including the Internet, email and the telephone. This
market is referred to as the e-Customer Relationship Management or eCRM market.
eCRM solutions enable companies to:
- manage high volumes of customer interactions;
- support a broad range of communication channels;
- deliver consistent and integrated customer service;
- leverage Internet and telephone technologies; and
- capture all relevant customer information.
THE QUINTUS SOLUTION
Quintus provides a comprehensive eCRM solution that enables companies to
manage customer interactions, such as customer orders, inquiries and service
requests, and deliver consistent customer service across multiple communication
channels, including the Internet, email and the telephone. Quintus' eContact
software suite includes applications that address the needs of customer service
representatives and agents in sales and service, consumer relations, technical
support and human resources centers and a routing engine that manages customer
interactions. This eContact software suite enables companies to personalize,
route and manage customer interactions and is designed to leverage third party
products that support email and Internet-based customer service. eContact suite
provides customer service functionality through Web chat, Web self-service,
browser-based collaboration and email. Quintus' eContact suite enables companies
to handle high volumes of customer interactions, increase the efficiency of
their customer service operations and leverage opportunities to sell additional
products and services to their customers through the use of common rules for
prioritizing, handling and responding to customer interactions, shared customer
profile information, and consolidated management and reporting functions that
allow companies to capture and analyze customer information.
Quintus has designed Quintus eContact to be a highly scalable and flexible
solution that can be easily deployed to assist companies in reducing the costs
and improving the efficiency of their customer service operations. eContact is
based on an open, standards-based architecture and can be integrated with other
systems, enabling companies to leverage their existing customer relationship
management applications and communication infrastructure. eContact addresses the
customer service needs of large organizations as well as rapidly growing
companies that require highly functional solutions to automate and manage high
volumes of customer interactions across traditional as well as Internet-based
communication channels.
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The key features of the Quintus eContact solution are:
Broad range of communication channels. Quintus eContact is a comprehensive
solution that enables companies to provide sophisticated routing, tracking and
reporting capabilities across their communication infrastructure and manage
customer interactions via telephone, email, Web self-service, Web chat, browser-
based collaboration and Web callback. Quintus' solution also supports
third-party e-commerce applications, facsimile and imaging applications, and
advanced telephony systems, such as automatic call distributors and interactive
voice response systems.
Integrated applications and communication infrastructure. Quintus eContact
integrates communication infrastructure with customer relationship management
applications. Quintus currently sells four customer relationship management
applications that address the needs of sales and service, consumer relations,
technical support and human resources contact centers. These applications
provide out-of-the-box functionality and allow companies to accelerate the
deployment of its solution.
Consistent customer service across communication channels. Quintus eContact
allows companies to set business rules and personalization strategies to handle
customer interactions and deliver a consistent level of customer service across
multiple communication channels. Individual customer interactions can be managed
using transaction histories, legacy data, customer profiles and resource status
to offer a consistent and personalized level of customer service. Rules for
prioritizing, handling and responding to customer interactions and
personalization strategies can also be defined for specific communication
channels in order to leverage the attributes of each channel to provide more
targeted customer service and opportunities to sell additional products and
services to customers.
Consolidated customer interaction repository. Quintus eContact provides a
consolidated repository of information about each customer interaction
regardless of communication channel. Companies can analyze customer interactions
and determine the use and effectiveness of different channels by different
customer segments. Customer service agents can access complete customer
histories and review previous interactions. As a result, agents can respond more
effectively when, for example, a customer calls to discuss an email she received
in response to an order she previously placed online.
Highly scalable and flexible. Quintus eContact is designed to handle
millions of customer interactions per day and support thousands of agents across
multiple customer service centers. eContact allows companies to increase the
number of customer interactions handled by customer service agents by routing
customer interactions to the best resource available, based on agent
availability and experience, as well as prior contact history. eContact is a
modular solution, providing companies with the flexibility to implement the
solution they need today and add functionality as they expand the scope of their
customer service centers. In addition, Quintus' solution is based on open
standards, enabling it to share information with existing customer relationship
management applications and legacy systems.
QUINTUS' GROWTH STRATEGY
Quintus' objective is to be the leading provider of eCRM software solutions
that manage customer interactions across a broad range of communication
channels. Key elements of Quintus' strategy include:
Maintain and extend technology leadership. Quintus continues to leverage
leading Internet and telephony technologies to enhance the performance and
functionality of its products. Quintus believes its Quintus eContact suite is
the most comprehensive solution that enables companies to efficiently and cost
effectively manage high volumes of customer interactions across multiple
communication channels. Quintus plans to incorporate new technologies, such as,
speech recognition and digital video, into its solution as they achieve
significant market acceptance. Quintus intends to maintain its technology
leadership through focused research and development and, potentially, through
the licensing or acquisition of complementary technologies or businesses.
Broaden direct and indirect distribution capabilities. Quintus intends to
continue to develop and extend its distribution capabilities. Quintus sells its
solution through a direct sales force in North America and indirectly through 23
domestic and international resellers and distribution partners including
Intecom,
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Convergent Group, eGlobal Technology, Lucent Technologies and Newtel. Quintus
plans to increase the size of its direct sales organization and broaden its
indirect distribution network with strategic resellers and other distribution
partners.
Target Global 1000 companies. Quintus plans to continue to target Global
1000 companies as they rapidly transition their businesses online. Quintus
believes that there is a significant opportunity to provide a solution that
enables these companies to leverage their existing customer service
infrastructure and deliver a consistent and integrated level of customer service
across both traditional and Internet-based communication channels. Its customers
include Global 1000 companies such as Citigroup, Lucent Technologies,
Ticketmaster, Sun Microsystems and United Airlines.
Target leading internet-based companies. Quintus plans to continue to
target leading Internet-based companies. Quintus believes that these companies
increasingly recognize the need for higher levels of customer service in order
to attract and retain customers, and are looking for highly scalable solutions
that are easy to deploy and support both their existing Internet-based
communication channels as well as traditional communication channels. Leading
Internet-based companies that have purchased its WebCenter product line include
drugstore.com, Coldwater Creek and REI.com.
Develop and expand strategic relationships. Quintus plans to continue to
develop technology and marketing relationships with leading vendors of
complementary products in order to increase its visibility in the marketplace
and broaden the functionality of its solution. Quintus also intends to expand
its strategic relationships with leading systems integrators that have
significant influence over companies' purchasing decisions. Quintus believes
that systems integrators help provide industry-specific expertise and support
its growth and entry into new markets. Quintus currently has implementation
relationships with Ernst and Young, Cambridge Technology Partners and eLoyalty.
PRODUCTS
The Quintus eContact suite is a comprehensive eCRM solution that allows
companies to provide consistent customer service across a broad range of
communication channels, including voice, email, Web self-service, Web chat,
browser-based collaboration and Web callback. The eContact suite includes the
eContact engine, channel applications and business applications that can be sold
separately or in a group.
The Quintus eContact suite is priced according to the product components
purchased and the number of users. Each product component is typically priced
from $50,000 to $100,000 per installation, with per user prices typically
ranging from $800 to $4,200.
QUINTUS ECONTACT ENGINE
The Quintus eContact engine is the foundation of its eContact suite and
enables customer interactions, such as customer orders, inquiries and service
requests, to be managed consistently across multiple communication channels.
Quintus' eContact engine routes, tracks, and manages customer interactions,
consolidates all relevant customer information into a common data source, and
provides reporting capabilities that allow companies to capture and analyze
customer information. The eContact engine includes the following features:
- Personalization services. The Quintus eContact engine allows companies to
personalize each customer interaction based on sophisticated rules for
prioritizing, handling and responding to customer interactions that take
into account customer profiles, transaction histories and resource
availability. A customer interaction can be managed and routed based upon
the communication channel, the customer or the purpose of that specific
customer interaction. As a result, customers can receive the same level
of service across multiple communication channels and companies can
leverage the attributes of each communication channel to deliver more
targeted and effective customer service.
- Coordination services. For each customer interaction, the Quintus
eContact engine captures all relevant customer information in real time.
By sharing customer information across systems, agents
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and communication channels, companies can provide better informed,
consistent and synchronized customer service.
- Consolidated data source and reporting. All customer profiles and
histories, as well as detailed records of every customer interaction
regardless of communication channel, are stored in a common data source.
The Quintus eContact engine provides reporting capabilities that allow
companies to perform in-depth customer segmentation and trend analysis.
- Centralized customization and administration. Companies can customize
rules for prioritizing, handling and responding to customer interactions,
screen layouts, Web pages, data models and data access using Quintus
eContact's drag-and-drop graphical tools. This common tool set gives
companies the flexibility to respond to changing business needs. Quintus'
eContact engine also provides centralized administration of its solution.
Companies can control and monitor system status and availability as well
as receive notification alerts when pre-defined thresholds are met.
The Quintus eContact engine includes an enterprise data access layer that
provides access to relational databases as well as external data sources and
transactional systems, enabling companies to use their own business data to
manage customer interactions. Customer service agents interact with Quintus'
eContact suite through Quintus' agent console. The agent console provides an
intuitive user interface that displays customer information and pre-defined
scripts, and can be integrated with multiple applications, including front and
back office systems and legacy applications.
QUINTUS ECONTACT CHANNEL APPLICATIONS
Quintus' channel applications enable companies to manage customer
interactions consistently across multiple communication channels including the
Internet, e-mail and the telephone. Companies can deploy Quintus' channel
applications separately or as a comprehensive solution to meet their evolving
needs for customer service centers handling interactions across multiple
communications channels.
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CHANNEL APPLICATION PRODUCT DESCRIPTION
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Computer Telephony Integration Quintus CTI integrates eContact with advanced telephony
systems.
Web Interaction Quintus WebCenter provides Web self-service and online
customer service through Web chat, browser-based
collaboration and Web callback.
E-mail Management Quintus has integrated its Mustang Message Center with the
other self-help and live-help capabilities of Quintus
WebCenter. Emails are routed and managed using the same
business rules, routing capabilities, and agent interface
used for other types of web and phone interaction. Email
Management is completely integrated with WebCenter's self
help and live help capabilities and also has the ability to
respond automatically to the email or routes the email to
the most appropriate agent along with suggested responses
and relevant customer information.
Electronic Commerce Connector Quintus eCommerce Connector integrates eContact with
e-commerce applications to capture transaction information.
</TABLE>
Computer telephony integration. Quintus CTI provides a highly scalable
platform for integrating advanced telephony systems such as automatic call
distributors and interactive voice response systems from major
telecommunications equipment vendors. Quintus CTI allows companies to apply
sophisticated rules for prioritizing, handling and responding to customer
interactions to qualify and route telephone-based customer communications. By
integrating the telephony infrastructure with Quintus' eContact solution,
Quintus CTI also enables traditional voice-only call centers to be extended to
handle Web, email and other communication channels.
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Web interaction. Quintus WebCenter provides a comprehensive framework to
manage Internet-based customer interactions, including Web self-service, Web
chat, browser-based collaboration and Web callback. WebCenter enables companies
to provide live customer service on the Internet. Through WebACD Web-based
customer interactions are routed to the appropriate resources based on agent
availability and experience. Agents can collaborate with customers by
synchronizing their browsers, seeing the Web pages that customers are viewing
and pushing new Web pages to customers to assist them. WebCenter also allows
companies to build a knowledge base of frequently asked questions, deploy it on
the Web and provide customers with full search capabilities. With WebCenter,
companies can enhance their Web sites and deliver a more engaging and
personalized customer experience by providing immediately available online
customer service options. Quintus has implemented WebCenter as part of its
eContact suite at few customer sites.
Email management. Quintus Email Automation provides intelligent email
analysis and automated response capabilities, allowing organizations to promptly
respond to ever-increasing email loads without having to increase the number of
contact center agents at the same rate. Quintus Email Automation analyzes
message content, automatically acknowledges the customer, determines the nature
of the customer's requests, and makes decisions about whether to automatically
respond or to queue the email for agent consideration. Responses can be
automatically generated and populated with data accessed from the Quintus
eContact repository or from external data sources. Customer-specific decisions
can be made about whether to automatically respond or queue to an agent with a
pre-built suggested response. All email interactions are captured so that the
Quintus eContact repository has a complete and consistent view of all customer
interactions. This information provides agents with visibility into all the
customer's email that they may want to discuss later in a phone call or web
interaction. Because Quintus had a pre-existing OEM relationship with
Mustang.com, Email Automation has already been integrated into the eContact
Suite.
Electronic commerce connector. Quintus eCommerce Connector enables its
eContact solution to exchange information with e-commerce applications using
standard Internet protocols. Online customer transactions and purchases can be
recorded in the eContact data source and displayed to agents providing customer
service. Companies can integrate Quintus' Internet-based customer service
solution with their e-commerce applications to offer online customer assistance
at the time of purchase as well as aftersales support. In addition, Quintus'
eCommerce Connector enables companies to leverage information on customer
purchasing patterns to sell additional products or services with each customer
interaction.
QUINTUS ECONTACT BUSINESS APPLICATIONS
Quintus currently markets four business applications that address the needs
of customer service centers for sales and service, consumer relations, technical
support and human resources. Quintus' business applications can run separately
or be integrated with the Quintus eContact suite, can be deployed across
multiple locations and are accessed through agent desktops or via a Web browser.
Companies can easily customize data models, rules for handling customer
interactions, screen forms and Web pages to meet their specific requirements.
Quintus' business applications can also be integrated with third-party
applications and data sources.
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BUSINESS APPLICATION PRODUCT DESCRIPTION
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Sales and Service Quintus CallCenterQ supports multi-function
business-to-consumer sales, service and marketing centers.
Consumer Relations Quintus CallCenterQ for Consumer Relations supports consumer
relations centers in the consumer product, service, travel,
hospitality and other industries.
Technical Support Quintus CustomerQ supports business-to-business technical
support centers.
Human Resources Quintus HRQ supports human resources centers serving
employees, former employees and retirees.
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Sales and service. Quintus CallCenterQ is designed for multi-function
sales, service and marketing centers. Targeted at business-to-consumer
industries, CallCenterQ enables agents to easily access pricing and product
information, process returns, track service issues and capture orders as well as
qualify and manage customer leads. CallCenterQ also allows companies to define
and manage marketing campaigns, and agents can be automatically prompted with
targeted opportunities to sell additional products or services to customers.
Additional features include list management, literature fulfillment, automatic
personalized letter generation, agent scripting, and outbound preview dialing.
CallCenterQ is designed to help companies maximize revenue by enabling them to
set up, administer and evaluate the effectiveness of their sales and marketing
campaigns.
Consumer relations. Quintus CallCenterQ for Consumer Relations is designed
for consumer relations centers and is targeted primarily at the consumer
product, service, travel and hospitality industries. CallCenterQ for Consumer
Relations provides agents with the information they need to resolve customer
issues including customer history and product information, and the ability to
issue vouchers and other forms of compensation. Additional features include
scanned letter/fax viewing, frequently asked questions knowledge base, automatic
personalized letter generation, and literature fulfillment. In addition,
CallCenterQ for Consumer Relations enables companies to gather important
customer feedback and market research to help them manage their brands.
Technical support. Quintus CustomerQ is designed for business-to-business
technical support centers. CustomerQ provides agents with complete customer
history and product information, as well as service contracts, warranties,
billing and shipping information. Companies can also allow customers to search
for solutions, enter issues, and track the status of their technical problems
through the Internet. Other features include problem resolution, case
management, access to knowledge bases, defect tracking, automatic notification
and escalation, return processing and report generation. CustomerQ enables
companies to increase customer loyalty by rapidly and effectively addressing
customer requests for technical support.
Human resources. Quintus HRQ is designed for human resources centers
serving employees, former employees and retirees. HRQ provides human resources
personnel with detailed employee history as well as health care and financial
benefits information. Other features include problem resolution, dependent
profiles, scanned letter/fax viewing, automatic personalized letter generation
and literature fulfillment. In addition, HRQ can be integrated with leading
human resources applications and knowledge bases. HRQ helps companies be more
responsive to their employees while reducing administrative costs and improving
the productivity of human resource departments.
CUSTOMERS
To date, Quintus has licensed its software products to over 800 customers,
including companies in the financial services, telecommunications and consumer
product industries.
TECHNOLOGY
Quintus eContact is based on a scalable, multi-tiered architecture.
Quintus' eContact product suite enables eCRM features through a sequence of
cooperating, distributed software servers that perform a variety of functions,
including creating and manipulating data containers, routing customer contacts,
allowing agents to access data and interact with customers through a Web
browser. Quintus' multi-platform solution runs on all major UNIX and Windows NT
operating systems.
Electronic data container. When a customer contacts a company, whether by
telephone, fax, email or through a Web site, an electronic data container for
that customer interaction is created. Existing customer information can be
retrieved from the data repository to populate the data container, or new
information can be obtained directly from the customer. The data container
continually collects information throughout the life cycle of the customer
interaction and can be routed throughout an enterprise, carrying detailed
information about the customer, including the customer's history with the
company and details of this particular customer interaction. If the customer is
transferred to another agent at another site or to an agent using a different
communication channel, the data container accompanies the transition, ensuring
that the customer perceives a seamless service process.
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Enterprise data access layer. Quintus eContact includes an enterprise data
access layer that provides access to relational and legacy data sources. The
enterprise data access layer creates a uniform view of third party data
regardless of the data source and allows eContact to incorporate third-party
customer information.
Abstraction and customization. Quintus eContact uses a data abstraction
layer that allows companies to store data entities, business rules and screen
layouts as business objects. Customizations are performed on the business
objects to modify them. All changes to the business objects are automatically
reflected throughout Quintus' eContact suite.
Workflow and routing engine. Quintus' eContact provides a graphical tool to
create and modify customer interaction flows, define routing rules and build
agent scripts. These customer interaction flows, rules and scripts are
specified, distributed and stored in Extensible Markup Language, allowing
eContact to leverage industry-standard tools and technologies. Customer
interaction flows are defined using re-usable building blocks that can be used
to create new routing rules as companies' needs evolve.
High availability. Quintus has built its system using a modular,
component-based approach. Additional customer service center capabilities and
applications can be introduced without requiring companies to change their
computing infrastructure and, in most cases, without affecting their operations.
Quintus' system also provides multiple redundant configurations, delivering the
ability to "failover" to an alternative configuration in the event of a system
failure.
CUSTOMER SUPPORT SERVICES
Quintus believes that high quality services and support are critical
requirements for continued growth and increased sales of its products. Quintus
has made and expects to continue to make significant investments to increase its
ability to service and support its customers.
Quintus' customer support services organization is organized into four
groups including customer service management, professional services, technical
support and education services.
Customer service management. Quintus' customer service management team
handles many aspects of its customer relationships including answering general
questions, renewing maintenance agreements, shipping product upgrades and
coordinating with its other resources to meet customer needs.
Professional services. Quintus' professional services group helps
facilitate the implementation of its solution. Quintus provides systems
integration services to support its entire product suite. Quintus' services
include integration, customization, data modeling, project management and
business rules development. The professional services group also provides
support for Quintus' implementation partners.
Technical support. Quintus' technical services group is dedicated to
providing the highest level of support to its customers. Quintus currently
operates three technical support centers in the United States and relies upon a
network of service providers internationally to provide consultations via
toll-free telephone, email and the Web. Additionally, customers have 24-hour
access to Quintus' online knowledge repository and the ability to directly log
and track their issues through its Web site. Quintus offers a tiered maintenance
and support program. Customers can choose from its existing support packages or
have a custom package developed to meet their particular needs including 24x7
coverage and other assistance options.
Education services. Quintus' education services group offers a full
spectrum of classes providing the training needed to understand, implement and
use its solution. Quintus offers lectures and teaching labs to end-users,
administrators, developers and system integration partners at its facilities in
California and Massachusetts. Upon request, Quintus can also provide customized
on-site training.
SALES AND MARKETING
Sales. Quintus sells its products through a direct sales force and
indirectly through resellers and distribution partners. To date, Quintus
targeted its sales efforts at Global 1000 companies and other rapidly growing
companies pursuing eCRM initiatives, including those in the financial services,
telecommunications and consumer products industries. Quintus' sales force
consists primarily of sales people and sales engineers
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located in its sales offices in numerous locations across the United States.
Quintus also maintains international offices in Amsterdam and London from which
it provides sales support to its international distribution partners.
Quintus currently has relationships with 23 domestic and international
reseller and distribution partners including Intecom, Convergent Group, eGlobal
Technology, Lucent Technologies and Newtel. Quintus also enhances its sales
efforts through strategic relationships with systems integrators such as Ernst
and Young, Cambridge Technology Partners and eLoyalty. Quintus intends to
continue to expand its sales efforts by increasing the size of its direct sales
force and broadening its indirect distribution channels.
Marketing. Quintus' marketing efforts focus on creating market awareness
for eCRM solutions, promoting its products and services, and generating sales
opportunities. Quintus has a comprehensive marketing strategy that includes
print advertising, public relations campaigns, direct mailings, newsletters,
industry events including trade shows, analyst programs and speaking
engagements, and joint marketing arrangements. Quintus also advertises on the
Internet and uses its Web site to enhance its market presence and generate
additional leads.
RESEARCH AND DEVELOPMENT
Quintus' research and development efforts are focused primarily around
enhancing its core technology and developing additional applications for the
Quintus eContact suite. Quintus operates development centers in California,
Massachusetts and Texas. Quintus' software development approach consists of a
well-defined methodology that provides guidelines for planning, controlling and
implementing projects. This approach uses a cross-functional, team-based
development and release process. Quintus' research and development group works
closely with customers, partners, Quintus' sales and marketing group and senior
management to assist in defining product direction and to ensure that products
are brought to market successfully. Members of Quintus' research and development
group have extensive experience in customer relationship management software as
well as Internet and telephony communication technologies.
Quintus' research and development expenditures were approximately $11.2
million, $6.7 million, and $5.1 million in fiscal 2000, 1999 and 1998,
respectively. Quintus believes that its future performance will depend in large
part on its ability to enhance its current product line, develop new products
and maintain its technological competitiveness. As a result, Quintus intend to
continue to expend significant resources in research and development.
COMPETITION
Quintus currently faces competition primarily from customer relationship
management software vendors such as Nortel Networks' Clarify, emerging Internet
customer interaction software vendors such as Kana Communications and Cisco
Systems, and computer telephony software vendors such as Genesys
Telecommunications Laboratories (recently acquired by Alcatel). Because there
are relatively low barriers to entry in the software market, Quintus expects
additional competition from other established and emerging companies. Potential
future competitors include traditional call center technology providers and
large enterprise application vendors as well as independent systems integrators,
consulting firms and in-house information technology departments that may
develop solutions that compete with Quintus' products. Quintus may not be able
to compete effectively in the future as current competitors expand their product
offerings and new companies enter the rapidly evolving eCRM market.
Many of Quintus' current and potential competitors have longer operating
histories, significantly greater financial, technical, sales, marketing and
other resources, greater name recognition and a larger installed base of
customers than Quintus does. As a result, these competitors can devote greater
resources to the development, promotion and sale of products than Quintus can
and may be able to respond to new or emerging technologies and changes in
customer requirements more quickly than Quintus can.
Current and potential competitors have established and may in the future
establish relationships among themselves or with third parties to increase the
ability of their products to address the needs of Quintus'
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current or prospective customers. In addition, a number of companies with
significantly greater resources than Quintus could attempt to increase their
presence in the eCRM market by acquiring or forming strategic alliances with
Quintus' competitors. As a result, it is likely that new competitors or
alliances among competitors will emerge and may rapidly acquire significant
market share. Recently, a number of Quintus' competitors have been acquired by
significantly larger companies, creating a number of stronger competitors with
greater resources than Quintus'. Cisco Systems acquired GeoTel Communications in
June 1999 and WebLine Communications in November 1999. These acquisitions
strengthen Cisco's position as a provider of call routing and Web chat software.
In December 1999, PeopleSoft acquired The Vantive Corporation, a provider of
customer relationship management software. In January 2000, Alcatel acquired
Genesys Telecommunications Laboratories, adding Genesys' computer telephony
software functionality to Alcatel's voice and data network capabilities. In
addition, in March 2000, Nortel Networks acquired Clarify, a provider of
customer relationship management software.
Quintus cannot assure you that it will be able to compete successfully
against current and future competitors. Increased competition is likely to
result in price reductions, reduced margins and loss of market share, any of
which could harm Quintus' business, financial condition and results of
operations. In order to be successful in the future, Quintus must respond
promptly and effectively to technological change, changing customer requirements
and competitors' innovations. The introduction of new products by competitors or
shifts in market demands could render Quintus' existing products obsolete.
PATENTS AND PROPRIETARY RIGHTS
Quintus' success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Quintus relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Quintus also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Quintus' products, to
obtain and use information that Quintus regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
harm Quintus' business, operating results and financial condition. In addition,
the laws of some foreign countries may not protect Quintus' proprietary rights
to the same extent as the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions.
Quintus may need to take legal action in the future to enforce or defend
its intellectual property and proprietary rights, to protect its trade secrets
or to determine the validity and scope of the intellectual property and
proprietary rights of others. Litigation, whether successful or unsuccessful,
could result in substantial costs and diversion of management and technical
resources, either of which could harm Quintus' business, operating results and
financial condition.
Quintus attempts to avoid infringing upon known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Quintus has not conducted and does not plan to conduct comprehensive patent
searches to determine whether the technology used in its products infringes
patents held by others. In addition, product development is inherently uncertain
in a rapidly evolving technological environment in which there may be numerous
patent applications pending, many of which are confidential when filed, with
regard to similar technologies. If Quintus' products were to violate the
proprietary rights of others, Quintus may be liable for substantial damages. In
addition, Quintus may be required to re-engineer its products or seek to obtain
licenses to continue offering its products. Quintus cannot assure you that such
efforts would be successful.
EMPLOYEES
As of March 31, 2000, Quintus had a total of 292 employees, including 89
people in research and development, 100 people in sales and marketing, 63 people
in customer support services and 40 people in general and administrative
services. Quintus does not have a collective bargaining agreement with any of
its employees and Quintus considers its employee relations to be good.
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EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
officers as of May 15, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers
Alan Anderson.................... 37 Chairman and Chief Executive Officer
Paul Bartlett.................... 39 Chief Operating Officer
Nancy Brumfield.................. 46 Chief Marketing Officer
Susan Salvesen................... 44 Chief Financial Officer and Secretary
Muralidhar Sitaram............... 36 Senior Vice President, Engineering
Other Officers
Lawrence Byrd.................... 42 Vice President, Strategy
John Cecala...................... 37 Vice President, Sales
Roger Nunn....................... 45 Senior Vice President, Channels and
International Sales
Mark Payne....................... 45 Vice President, International Operations
Candace Sestric.................. 53 Vice President, Worldwide Customer
Support Services
</TABLE>
Alan Anderson has served as Quintus' Chief Executive Officer since May 1995
and Quintus' Chairman since September 1999. From May 1995 to July 1999, Mr.
Anderson also served as Quintus' President. From October 1992 to May 1995, Mr.
Anderson served as Senior Vice President responsible for the North American
operations of OpenVision Technologies, a systems management software developer.
From December 1991 to October of 1992, Mr. Anderson served as a director for
consulting services at Oracle Corporation, a database software company. From
April 1989 to December 1991, Mr. Anderson served as a director of professional
services for Sybase, a database software company. Mr. Anderson received his B.S.
in information systems from the University of San Francisco.
Paul Bartlett has served as Quintus' Chief Operating Officer since May
2000. Since May 1995, Mr. Bartlett served as a director of Quintus. From
September 1996 to March 2000, Mr. Bartlett served as President of Hall Kinion &
Associates, a recruiting and staffing firm, and served as a director of Hall
Kinion from January 1996 to March 2000. From August 1990 to September 1996, he
was with the Sprout Group, a venture capital firm, most recently as a partner.
Mr. Bartlett received his A.B. in economics from Princeton University and his
M.B.A. from the Stanford University Graduate School of Business.
Nancy Brumfield has served as Quintus' Chief Marketing Officer since April
2000. From July 1992 to March 2000, Ms. Brumfield served as Vice President,
Marketing for Business-to-Business Products at AT&T Wireless Services. From May
1990 to June 1992, Ms. Brumfield served as the Director of Marketing at Brown &
Haley, an international packaged goods company. From March 1987 to April 1990,
Ms. Brumfield served as the Director of Branch Marketing & Business Development
for Charles Schwab. Ms. Brumfield received her B.A. from the University of
Kentucky and her M.B.A. from the University of Hawaii.
Susan Salvesen has served as Quintus' Chief Financial Officer and Secretary
since January 1998. From April 1996 to September 1997, Ms. Salvesen served as
Vice President, Finance and Administration and Chief Financial Officer and
Secretary at Unify Corporation, a provider of e-commerce software solutions.
From May 1994 to April 1996, Ms. Salvesen served as Vice President of Finance
and Chief Financial Officer at AG Associates, a semiconductor equipment
manufacturer. From February 1988 to May 1994, Ms. Salvesen served as Corporate
Controller at Aspect Telecommunications, a telecommunications equipment company.
Ms. Salvesen received her B.A. in economics from Rutgers University and her
M.B.A. from the University of Pittsburgh.
Muralidhar Sitaram has served as Quintus' Senior Vice President,
Engineering since June 1996. From January 1994 to June 1996, Mr. Sitaram served
as Quintus' Director of Engineering. Mr. Sitaram received his
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B.S. in physics and computer science from Bombay University, India and his M.S.
in computer science from the Case Western Reserve University.
OTHER OFFICERS
Lawrence Byrd was a co-founder of Quintus in 1984 and has served as its
Vice President, Strategy since April 2000. From May 1998 to April 2000, Mr. Byrd
served as its Vice President, Marketing. From October 1997 to May 1998, Mr. Byrd
served as Quintus' Vice President, Product Marketing, from June 1996 to October
1997, as its Chief Technology Officer, from June 1995 to June 1996, as its Vice
President, Engineering and from December 1993 to June 1995, as a vice president
in its consulting group. Prior to this, Mr. Byrd held a range of engineering,
consulting and marketing positions for Quintus. Mr. Byrd received his B.A. in
philosophy from the University of Durham, England.
John Cecala has served as Quintus' Vice President, Sales since January
1999. From October 1995 to January 1999, Mr. Cecala served as a regional sales
manager, and from January 1994 to October 1995 he served as one of Quintus'
sales representatives. Prior to January 1994, Mr. Cecala served as a national
and strategic account sales representative for Lotus Development, a computer
software developer. Mr. Cecala received his B.A. degree in business and computer
science from Concordia University.
Roger Nunn has served as Quintus' Senior Vice President, Channels and
International Sales since January 2000. From September 1999 to December 1999,
Mr. Nunn served as Quintus' Vice President, Americas Operations. From January
1999 to September 1999, he served as Quintus' Senior Vice President of Sales.
From October 1997 to December 1998, Mr. Nunn served as Quintus' Vice President
of Channel Sales. From May 1994 to September 1997, Mr. Nunn served as a Director
of Marketing for Auspex Systems, a provider of network file servers. From
December 1988 to April 1994, Mr. Nunn was an area channels manager for Sun
Microsystems, a provider of computer workstations. Mr. Nunn received his B.Sc.
in engineering and his M.Sc. in management science from Imperial College of
London, England.
Mark Payne has served as Quintus' Vice President, International Operations
since July 1998. From June 1996 to June 1998, Mr. Payne served as Senior Vice
President of International Operations for Versatility, a software development
company. From July 1992 to June 1996, he served as General Manager of Northern
Europe for Gupta (now Centura), an applications development software company.
Candace Sestric has served as Quintus' Vice President, Worldwide Customer
Support Services since April 1997. From April 1996 to April 1997, Ms. Sestric
served as Vice President, Professional Services for Knowledge Networks, a
customer relationship management systems integrator. From November 1995 to
February 1996, Ms. Sestric served as Vice President, Customer Services for
Siebel Systems, a sales force automation software company. From June 1993 to
November 1995, Ms. Sestric served as Vice President, Worldwide Customer Support
Services for Gupta (now Centura). Ms. Sestric received her B.A. in business
administration from the College of Santa Fe.
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RISK FACTORS
QUINTUS MAY NOT ACHIEVE PROFITABILITY AND, AS A RESULT, THE TRADING PRICE OF ITS
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT
Quintus has not had a profitable quarter and it cannot assure you that it
will become profitable. Quintus expects to increase its sales and marketing,
research and development, and other expenses as it attempts to grow its
business. As a result, Quintus will need to generate significant revenues to
become profitable, which it may be unable to do. If Quintus fails to become
profitable, the trading price of its common stock could decline significantly.
Quintus has funded its operations through the sale of equity securities,
borrowings and the sale of its products and services. Quintus incurred net
losses from continuing operations of $15.9 million, $10.6 million, and $10.1
million in fiscal 2000, 1999, and 1998, respectively. As of March 31, 2000,
Quintus had an accumulated deficit of $50.2 million. In addition, in November
1999, Quintus acquired Acuity which had incurred net losses of $4.6 million,
$7.7 million, and $6.6 million for the nine months ended September 30, 1999 and
in years ended December 31, 1998 and 1997, respectively. Acuity had an
accumulated deficit of $25.3 million as of September 30, 1999. In connection
with its acquisition of Acuity, Quintus recorded approximately $44.6 million of
goodwill and intangible assets, which will be amortized on a monthly basis over
periods of four to five years. In connection with the acquisition of Acuity,
Quintus recognized a charge for in-process technologies of approximately $3.0
million in the quarter ending December 31, 1999.
BECAUSE QUINTUS RECENTLY EXPANDED THE SCOPE OF ITS PRODUCT OFFERING, IT MAY BE
DIFFICULT FOR YOU TO EVALUATE ITS BUSINESS PROSPECTS
In February 1999, Quintus expanded the scope of its product offering with
components for managing email and Internet-based customer interactions and
introduced the Quintus eContact suite. As a result, while it sold many of the
components that are included in its eContact suite prior to 1999, Quintus has
only recently sold the components for managing email and Internet-based customer
interactions. Quintus sold its first email management and Internet-based
customer service components in the quarter ended September 30, 1999, and it has
completed the implementation of these components at some customer sites. Quintus
cannot assure you that its eContact suite will achieve market acceptance.
Quintus has integrated Acuity's WebCenter and WebACD products into its eContact
suite. However, Quintus may encounter technical difficulties, delays and
unforeseen expenses as Quintus continues its development efforts.
IF INITIAL IMPLEMENTATION OF THE QUINTUS ECONTACT SUITE SUFFERS PROBLEMS OR
DELAYS, QUINTUS' REPUTATION AND FUTURE OPERATING RESULTS MAY BE HARMED
The initial implementations of its eContact suite may encounter problems or
delays. Although Quintus has successfully deployed some of the components of its
eContact suite, Quintus has not deployed eContact with integrated computer
telephony, email, Web chat and Web self-service capabilities. To successfully
implement its eContact suite, Quintus must complete the integration of these
components and will likely have to integrate eContact with a wide variety of
complex systems currently used by its customers. If these initial
implementations meet with significant technological obstacles, Quintus may be
forced to spend additional resources, harming its operating results. If the ease
and speed of these implementations do not meet the expectations of its
customers, Quintus' reputation and ability to sell its eContact suite will be
harmed.
BECAUSE QUINTUS' QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE
SIGNIFICANTLY, THE TRADING PRICE OF ITS COMMON STOCK IS LIKELY TO BE VOLATILE
It is likely that in some future quarter Quintus' revenues and operating
results will fall below the expectations of market analysts and investors. If
this happens, the trading price of Quintus common stock may fall substantially.
Quintus' revenues and operating results are likely to vary significantly from
quarter to quarter due to a variety of factors, including the risks described in
this section.
Quintus' ability to forecast revenues is limited. Quintus derives
substantially all of its revenues from licenses of Quintus' software and related
services. License revenues in any quarter are substantially dependent
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on orders booked and shipped in that quarter, and Quintus cannot predict
revenues for any future quarter with any significant degree of certainty. In
addition, Quintus expects that sales derived through indirect channels, which
are more difficult to forecast, may increase as a percentage of total revenues
in the future. Quintus' expenses are relatively fixed and are based, in part, on
its expectations of future revenues. Consequently, if revenue levels do not meet
Quintus' expectations, its operating results will suffer.
BECAUSE QUINTUS DEPENDS UPON A LIMITED NUMBER OF LARGE SALES FOR A SUBSTANTIAL
PORTION OF ITS REVENUES, THE FAILURE TO OBTAIN LARGE PROSPECTIVE CUSTOMERS COULD
CAUSE QUINTUS' REVENUES TO FALL QUICKLY AND UNEXPECTEDLY
Quintus depends upon a limited number of large sales for a substantial
portion of its revenues in each quarter. For example, in fiscal 2000, its
largest customer, Ticketmaster, accounted for 13.7% of its total revenues.
Quintus' failure to successfully close one or more large sales in any particular
period could cause its revenues to drop quickly and unexpectedly. Quintus
expects to continue to be dependent upon a limited number of customers for a
significant portion of its revenues, and these customers are expected to vary
from period-to-period. The loss of prospective major customers could result in
its failure to meet quarterly revenue expectations, causing the trading price of
its common stock to fall.
QUINTUS RELIES HEAVILY ON ITS INDIRECT DISTRIBUTION CHANNELS, PARTICULARLY ITS
DISTRIBUTION AGREEMENT WITH LUCENT TECHNOLOGIES
If Lucent Technologies were to cease reselling or fail to continue to
promote its products, Quintus' operating results could be harmed. Lucent
Technologies accounted for 15.0% and 21.7%, and 9.3% of its total revenues in
fiscal 2000, 1999, and 1998, respectively. Quintus' distribution agreement with
Lucent Technologies expires in May 2001 and can be terminated beforehand on 30
days' notice following a material breach of the agreement. Lucent Technologies
is not obligated to make any minimum purchases.
In addition, the loss of a reseller, the failure of a reseller to sell its
products, or its failure to attract and retain qualified new resellers in the
future could also harm Quintus' business. Typically its resellers do not have
minimum purchase or resale obligations, can cease marketing Quintus' products at
any time, and may offer competing products. Quintus intends to expand its
indirect distribution channels by establishing additional relationships with
resellers and distribution partners. Competition for these relationships is
intense, and Quintus may be unable to establish relationships on favorable
terms, if at all. Even if Quintus is successful in establishing these
relationships, they may not substantially increase its revenues.
QUINTUS FACES A NUMBER OF RISKS RELATED TO QUINTUS' RECENT ACQUISITIONS OF
ACUITY AND MUSTANG.COM, AND QUINTUS MAY FACE SIMILAR RISKS IN THE FUTURE IF
QUINTUS ACQUIRES OTHER BUSINESSES OR TECHNOLOGIES
In November 1999 and May 2000, Quintus acquired Acuity, a company located
in Austin, Texas and Mustang.com, a company located in Bakersfield, California,
respectively. Quintus previously had no other operations in either of these two
locations. Although Quintus' integration of Acuity's products, personnel and
systems is largely complete, unknown complications could arise in the future. In
addition, Quintus is currently integrating Mustang.com's products, personnel,
and systems, and unknown complications could arise in the future relating to
this integration. If difficulties stemming from these integrations arise in the
future, Quintus' business and operating results are likely to suffer. Further,
the acquisition of Mustang was Quintus' fourth acquisition within the last three
years, and it may make more acquisitions in the future. If Quintus is unable to
integrate effectively any newly acquired businesses, technologies or products,
Quintus' operating results could suffer. Integrating any newly acquired
businesses, technologies or products may be expensive and time-consuming. Future
acquisitions could also result in large and immediate write-offs for in-process
research and development, increased amortization charges or the incurrence of
debt and contingent liabilities. To finance acquisitions, Quintus may need to
raise additional funds through public or private financings. Additional funds
may not be available on favorable terms, or at all, and, in the case of equity
financings, may result in dilution to Quintus shareholders. Moreover, Quintus
may not be able to operate any acquired businesses profitably or otherwise
implement its growth strategy successfully.
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BECAUSE MANY OF QUINTUS' SALES PEOPLE ARE NEW HIRES AND HIRING ADDITIONAL SALES
PERSONNEL IS PARTICULARLY COMPETITIVE, IT MAY BE UNABLE TO EXPAND ITS BUSINESS
Quintus has replaced a large number of its sales people during the last
year. As a result, many of its sales personnel are new to Quintus. Quintus
expects its new sales personnel will require substantial training in its
products and sales practices. New sales personnel tend to be less productive
than those with greater experience selling its products. Moreover, Quintus
intends to hire additional direct sales force personnel in the United States.
Competition for qualified sales personnel is particularly intense in the
software industry. In the past, Quintus has experienced difficulty hiring
employees with appropriate qualifications in the time frame desired. Any delays
or difficulties Quintus encounters in these recruiting, training or retention
efforts could impair its ability to attract new customers and enhance its
relationships with existing customers.
BECAUSE THE ECRM MARKET IS HIGHLY COMPETITIVE, QUINTUS MAY NOT BE ABLE TO
SUCCEED AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT
If Quintus fails to compete successfully in the highly competitive and
rapidly changing eCRM market, it may not be able to succeed and you may lose
part or all of your investment. Quintus faces competition primarily from
customer relationship management software firms, emerging Internet customer
interaction software vendors and computer telephony software companies. Quintus
also faces competition from traditional call center technology providers, large
enterprise application software vendors, independent systems integrators,
consulting firms and in-house IT departments. Because barriers to entry into the
software market are relatively low, Quintus expects to face additional
competition in the future.
Many of Quintus' competitors can devote significantly more resources to the
development, promotion and sale of products than Quintus can, and many of them
can respond to new technologies and changes in customer preferences more quickly
than Quintus can. Further, other companies with resources greater than Quintus
may attempt to gain market share in the eCRM market by acquiring or forming
strategic alliances with its competitors.
QUINTUS' BUSINESS WILL SUFFER IF THE ECRM MARKET DOES NOT GROW
The eCRM market is new and may not grow. The use of email, Web chat and Web
self-service as channels for companies to interact with their customers is
recent and may not grow as expected. Quintus' potential customers are just
beginning to look for solutions for managing customer interactions across
multiple communication channels, and concerns about the security, reliability
and quality of customer service delivery over the Internet may inhibit the
growth of its market. If eCRM software fails to achieve market acceptance, its
business will suffer and may not succeed.
BECAUSE QUINTUS DEPENDS ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL AND IMPLEMENT
ITS PRODUCTS, ITS REVENUES WILL LIKELY SUFFER IF IT DOES NOT DEVELOP AND
MAINTAIN THESE RELATIONSHIPS
Quintus relies on systems integrators to promote, sell and implement its
solution. If Quintus fails to maintain and develop relationships with systems
integrators, its revenues will likely suffer. Quintus currently relies on
systems integrators such as Ernst and Young, Cambridge Technology Partners and
eLoyalty to recommend its products to their customers and to install its
products. If Quintus is unable to rely on systems integrators to implement its
products, Quintus will likely have to provide these services itself, resulting
in increased costs. As a result, its ability to grow may be harmed. In addition,
systems integrators may develop, market or recommend products that compete with
its products. For this reason, Quintus must cultivate its relationships with
these firms, and its failure to do so could result in reduced sales revenues.
Further, if these systems integrators fail to implement Quintus' products
successfully, its reputation may be harmed.
BECAUSE THE SALES CYCLE FOR QUINTUS' PRODUCTS CAN BE QUITE LENGTHY, IT IS
DIFFICULT FOR QUINTUS TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE
The timing of Quintus' revenues is difficult to predict in large part due
to the length and variability of the sales cycle for its products. Companies
often view the purchase of Quintus' products as a significant and
19
<PAGE> 20
strategic decision. As a result, companies tend to take significant time and
effort evaluating Quintus' products. The amount of time and effort depends in
part on the size and the complexity of the deployment. This evaluation process
frequently results in a lengthy sales cycle, typically ranging from three to
nine months. During this time Quintus may incur substantial sales and marketing
expenses and expend significant management efforts. Quintus does not recoup
these investments if the prospective customer does not ultimately license its
product
IF QUINTUS IS UNABLE TO INTRODUCE NEW ECRM PRODUCTS OR PRODUCT ENHANCEMENTS ON A
TIMELY BASIS, OR IF THE MARKET DOES NOT ACCEPT THESE PRODUCTS OR PRODUCT
ENHANCEMENTS, QUINTUS' BUSINESS WILL SUFFER
The eCRM market is new and is likely to change rapidly. Quintus' future
success will depend on its ability to effectively and timely anticipate changing
customer requirements and offer products and services that meet these demands.
Potential customers may seek features that its products do not have. As a
result, Quintus may need to develop these features, and this may result in a
longer sales cycle, increased research and development expenses and reduced
profit margins. In addition, the development of new or enhanced eCRM products is
a complex and uncertain process. Quintus may experience design, development,
marketing and other difficulties that could delay or prevent the introduction of
new products and enhancements. For example, Quintus' ability to introduce new
products would be impaired if Quintus cannot continue to attract, hire, train
and retain highly skilled personnel.
QUINTUS' FAILURE TO MANAGE ITS RAPID GROWTH COULD INCREASE ITS COSTS AND HARM
ITS BUSINESS
Quintus has experienced rapid growth and plans to continue to significantly
expand its operations. Quintus may not be able to manage this growth
effectively, which would impair its ability to attract and service customers and
cause it to incur higher operating costs. Expanding its operations has placed a
significant strain on its personnel and other resources. Its revenues have grown
to $51.7 million in fiscal 2000 from $21.9 million in fiscal 1998. Quintus'
headcount increased to 292 as of March 31, 2000 from 196 employees as of March
31, 1998. To manage its growth effectively, Quintus may need to further improve
its operational, financial and management systems. Quintus cannot assure you
that it will improve these systems adequately.
IF QUINTUS DOES NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF
ITS INTERNATIONAL OPERATIONS, ITS OPERATING RESULTS MAY SUFFER
Quintus has limited experience in international operations and may not be
able to compete effectively in international markets. Quintus currently intends
to expend significant financial and management resources to expand its
international operations. Quintus believes that the future expansion of its
international operations is important to the growth of its business. Most of its
international sales are generated through resellers and distributors, and
Quintus expects substantial costs and resources will be required to continue to
train and support these resellers.
Among the various risks Quintus faces in conducting business
internationally are:
- difficulties and costs of staffing and managing foreign operations;
- longer accounts receivable payment cycles and possible difficulties in
collecting accounts receivable, which may increase Quintus' operating
costs and hurt its financial performance;
- technology standards that are different from those on which Quintus
products are designed, which could require expensive redesigns of
Quintus' products;
- political and economic instability;
- unexpected changes in regulatory requirements that could make Quintus'
products and services more expensive and therefore less attractive to
potential customers; and
- fluctuations in currency exchange rates and the imposition of currency
exchange controls.
20
<PAGE> 21
BECAUSE QUINTUS DEPENDS ON LICENSED THIRD-PARTY TECHNOLOGIES, QUINTUS WILL FACE
ADDITIONAL COSTS IF IT HAS TO REPLACE THESE TECHNOLOGIES
Quintus' products incorporate technologies that are licensed from third
parties. Although Quintus believes it could obtain similar technologies from
alternative sources, substituting and integrating replacement technologies could
require Quintus to divert significant resources. These efforts, if required,
could delay the shipment of existing products and could delay the introduction
of new products or enhancements as a result of the diversion of development
resources. In addition, Quintus may be required to license replacement
technologies on terms less favorable than its current terms, which would
increase its expenses. If Quintus is unable to obtain the third-party
technologies necessary for the successful operation of its products, its
business would be harmed.
UNKNOWN SOFTWARE DEFECTS COULD HARM QUINTUS' BUSINESS AND REPUTATION
Quintus' software interacts with other complex systems and software. Its
software products may contain defects, particularly when first introduced.
Despite Quintus' software testing procedures, it may not discover software
defects that affect its products until after they are deployed. These defects
could result in:
- damage to Quintus' reputation;
- product returns or lost sales;
- product liability claims against Quintus;
- delays in or loss of market acceptance of Quintus' products; and
- unexpected expenses and diversion of resources to remedy errors.
The occurrence of any of these events would hurt Quintus' operating results. In
addition, Quintus' customers generally use its products together with products
from other vendors. As a result, when problems occur, it may be difficult to
identify the source of the problem. Therefore, even if these problems are not
caused by Quintus' products, they may cause Quintus to incur significant
warranty and repair costs, divert the attention of its engineering personnel and
cause significant customer relations problems.
ALTHOUGH QUINTUS HAS TAKEN MEASURES TO PROTECT ITS INTELLECTUAL PROPERTY, ITS
COMPETITIVE POSITION MAY SUFFER IF THESE MEASURES PROVE TO BE INADEQUATE
Third parties may infringe or misappropriate Quintus' copyrights,
trademarks and similar proprietary rights. Quintus cannot be certain that the
steps it has taken to prevent the misappropriation of its intellectual property
are adequate, particularly in foreign countries where the laws may not protect
its proprietary rights as fully as in the United States. Quintus relies on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect its intellectual property rights. In
addition, Quintus enters into confidentiality agreements with its employees and
certain customers, vendors and strategic partners. Quintus has one issued U.S.
patent and one filed U.S. patent application. Through its acquisition of Acuity,
it acquired one additional issued U.S. patent as well as nine additional filed
U.S. patent applications. Quintus cannot assure you that any patents will be
issued from these applications or that any issued patent will protect its
intellectual property. Furthermore, other parties may independently develop
similar or competing technology or design around any patents that may be issued
to Quintus.
QUINTUS MAY FACE COSTLY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
Companies have in the past alleged that Quintus' products infringe their
patents, and others may make similar allegations in the future. Such claims, or
other claims that Quintus' products infringe other intellectual property rights,
may force Quintus to seek expensive licenses, re-engineer its products, engage
in expensive and time-consuming litigation or stop marketing the challenged
product. Further, by contract Quintus typically indemnifies its customers
against infringement claims related to its products. Intellectual property
litigation is expensive and time-consuming and could divert management's
attention away from running Quintus' business. This litigation could also
require Quintus to develop non-infringing technology or enter into
21
<PAGE> 22
royalty or license agreements. These royalty or license agreements, if required,
may not be available on acceptable terms, if at all. Quintus' failure or
inability to develop non-infringing technology or license the proprietary rights
on a timely basis in a cost-effective manner would harm its business.
SALES OF QUINTUS COMMON STOCK INTO THE PUBLIC MARKET COULD HARM THE MARKET PRICE
OF QUINTUS COMMON STOCK AND ITS ABILITY TO RAISE MONEY THROUGH SALES OF EQUITY
SECURITIES
The value of an investment in Quintus common stock and Quintus' ability to
raise money through the sale of additional equity securities could be adversely
affected if its existing shareholders sell large amounts of their Quintus common
stock into the public market. If significant volumes of Quintus common stock are
sold into the public market, the market price of its common stock, and therefore
the value of your investment, could fall. This could impair Quintus' ability to
raise capital through the sale of additional equity securities. With the
exception of the shares sold in its initial public offering, substantially all
of its currently outstanding shares were subject to transfer restrictions that
recently expired on May 14, 2000. An increase in sales of Quintus' common stock
as a result of the expiration of these transfer restrictions could cause the
trading price of Quintus' common stock to fall.
ANTI-TAKEOVER PROVISIONS IN QUINTUS CHARTER DOCUMENTS, AS WELL AS PROVISIONS OF
EMPLOYMENT AGREEMENTS OF SOME OF ITS KEY EXECUTIVE OFFICERS AND PROVISIONS OF AN
AGREEMENT WITH SIEBEL SYSTEMS, COULD PREVENT OR DELAY A CHANGE IN CONTROL OF
QUINTUS
Provisions in Quintus' bylaws and in its certificate of incorporation may
have the effect of delaying or preventing a change of control or changes in
management of Quintus. These provisions include:
- the requirement that a special meeting of shareholders may only be called
by shareholders owning at least a majority of its outstanding shares;
- the ability of its board of directors to issue preferred stock without
shareholder approval; and
- the right of its board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
Some of Quintus' officers have agreements with it that provide for
acceleration of vesting following certain sales or mergers of Quintus. These
provisions could make Quintus' acquisition by a third party more costly and
could delay or prevent a change of control or changes in its management.
In addition, Quintus has entered into an agreement with Siebel Systems that
requires Quintus to notify Siebel if Quintus receives and intends to pursue an
unsolicited offer from a third party to acquire Quintus or if Quintus intends to
solicit offers from third parties to acquire Quintus. Quintus has also agreed to
negotiate with Siebel if Siebel, having received a notification from Quintus,
submits a competing offer to acquire Quintus. These provisions could delay or
prevent a change of control.
QUINTUS MAY HAVE CONTINGENT LIABILITY ARISING OUT OF A POSSIBLE VIOLATION OF
SECTION 5 OF THE SECURITIES ACT OF 1933 IN CONNECTION WITH ELECTRONIC MAIL SENT
TO SOME EMPLOYEES REGARDING PARTICIPATION IN ITS DIRECTED SHARE PROGRAM
As part of its initial public offering, Quintus and the underwriters
determined to make available up to 250,000 shares at the initial public offering
price for employees and other persons associated with its company. On October
25, 1999, representatives of Quintus sent electronic mail with respect to this
directed share program to its employees located in the United Kingdom and the
Netherlands and representatives of Acuity sent electronic mail with respect to
this directed share program to all Acuity employees. This electronic mail set
forth procedural aspects of the directed share program and informed the
recipients that they might have an opportunity to participate in the proposed
directed share program. Quintus may not have delivered a preliminary prospectus
for its initial public offering to its employees in the United Kingdom and the
Netherlands or to all Acuity employees prior to their receipt of the electronic
mail regarding the directed share program. Also, this electronic mail may
constitute a non-conforming prospectus. Quintus may have a contingent liability
arising out of a possible violation of Section 5 of the Securities Act of 1933
in connection
22
<PAGE> 23
with the electronic mail sent to these potential participants who did not
receive the preliminary prospectus prior to the email regarding the directed
share program and who may have received a non-conforming prospectus. Any
liability would depend upon the number of shares purchased by the recipients of
the electronic mail. If any such liability is asserted, Quintus will contest the
matter strenuously. Quintus does not believe that any such liability would be
material to its financial condition.
ITEM 2. PROPERTIES
Quintus' principal administrative, sales, marketing, support and research
and development facilities are located in approximately 36,000 square feet of
space in Fremont, California. Quintus' lease of approximately 30,000 square feet
expires in December 2000, and its lease of approximately 6,000 square feet
expires in April 2001. Quintus leases several office suites in the United States
and the United Kingdom for sales and service personnel. In addition, Quintus
maintains offices in Acton, Massachusetts; Austin, Texas; Bakersfield,
California; and Chicago, Illinois and has its European headquarters in
Amsterdam, the Netherlands.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quintus' common stock is traded on the Nasdaq National market under the
symbol "QNTS." Quintus' initial public offering of its common stock was on
November 15, 1999. The table below reflects the high and low sales prices for
Quintus' common stock as reported by the Nasdaq National Market during each
quarter the stock has been publicly traded. On May 15, 2000, the closing sales
price of Quintus' common stock as reported by the Nasdaq National Market was
$8.75.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Quarter Ended December 31, 1999.................... $56.50 $39.88
Quarter Ended March 31, 2000....................... $56.38 $27.50
</TABLE>
Quintus' present policy is to retain earnings, if any, to finance future
growth. Quintus has never paid cash dividends and has no present intention to
pay cash dividends. As of May 15, 2000, there were approximately 545 holders of
record of Quintus' common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this report.
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<PAGE> 24
The consolidated statements of operations data and the consolidated balance
sheet data for each of the five years in the period ended March 31, 2000 are
derived from Quintus' audited consolidated financial statements.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM MAY 25,
1995
YEAR ENDED MARCH 31, THROUGH
---------------------------------------- MARCH 31,
2000 1999 1998 1997 1996
-------- -------- -------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 51,707 $ 30,307 $ 21,890 $13,614 $ 6,441
Cost of revenues........................... 13,343 9,177 8,290 5,171 1,622
Gross profit............................... 38,364 21,130 13,600 8,443 4,819
Loss from continuing operations............ (16,646) (9,669) (9,606) (3,366) (8,263)
Net loss from continuing operations........ (15,908) (10,586) (10,146) (3,526) (8,295)
Net loss................................... (15,560) (11,466) (11,249) (3,526) (8,295)
Basic and diluted net loss per share from
continuing operations.................... $ (1.10) $ (3.73) $ (6.88) $ (4.25) $(76.63)
Basic and diluted net loss per share....... $ (1.08) $ (4.04) $ (7.53) $ (4.25) $(76.63)
Shares used in computation, basic and
diluted.................................. 14,428 2,835 1,695 868 109
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 21,867 $ 1,785 $ 1,986 $ 3,045 $ 792
Working capital (deficiency)................. 61,956 (8,644) (11,250) 1,552 582
Total assets................................. 132,120 19,594 23,141 9,852 5,699
Long-term obligations, net of current........ 1,234 2,201 4,246 19 528
Redeemable convertible preferred stock....... -- 17,811 17,811 14,110 9,478
Total stockholders' equity (deficiency)...... 109,114 (20,091) (20,333) (10,831) (7,850)
</TABLE>
See note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute basic and diluted
net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained or incorporated by reference in
this section, the following discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Quintus' actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
elsewhere in this report in the section entitled "Risk Factors".
OVERVIEW
Quintus provides a comprehensive e-Customer Relationship Management or eCRM
solution to manage customer interactions, such as customer orders, inquiries and
service requests, and deliver consistent customer service across multiple
communication channels, including the Internet, email and the telephone.
Quintus' eContact software suite includes applications that address the needs of
customer service representatives and agents in sales and service, consumer
relations, technical support and human resources centers and a routing engine to
manage customer interactions. These applications and Quintus' routing engine can
be sold separately or in a group. eContact enables companies to handle high
volumes of customer interactions and leverage opportunities to sell additional
products and services to their customers.
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<PAGE> 25
The Quintus eContact software suite allows companies to personalize, route
and manage customer interactions. Quintus' eContact suite enables consistent
customer service through the use of common rules for prioritizing, handling and
responding to customer interactions, shared customer profile information,
uniform strategies for selling additional products and services to customers,
and consolidated management and reporting functions that allow companies to
capture and analyze customer information.
Quintus sells its products to customers in North and South America, Europe,
South Africa and Asia Pacific through a direct sales force and indirectly
through resellers and distribution partners. All of Quintus' sales are
denominated in U.S. dollars. International revenues accounted for 23.9% of total
revenues in fiscal 2000. Quintus intends to establish additional distribution
relationships with partners outside of the United States and it expects
international revenues to continue to increase as a percentage of its total
revenues in the future.
RESULTS OF OPERATIONS
The following sets forth Quintus' results of operations as a percentage of
total revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
REVENUES:
License........................................... 66.6% 58.0% 59.2%
Service........................................... 33.4 42.0 40.8
----- ----- -----
Total revenues............................ 100.0 100.0 100.0
COST OF REVENUES:
License........................................... 4.4 1.8 3.3
Service........................................... 21.4 28.5 34.6
----- ----- -----
Total cost of revenues.................... 25.8 30.3 37.9
----- ----- -----
Gross profit........................................ 74.2 69.7 62.1
OPERATING EXPENSES:
Sales and marketing............................... 51.8 56.6 51.8
Research and development.......................... 21.6 22.2 23.3
General and administrative........................ 11.1 11.8 14.8
Amortization of intangibles....................... 12.9 10.5 6.1
Acquired in-process technologies.................. 5.8 -- 10.0
Stock-based compensation.......................... 3.2 0.5 --
----- ----- -----
Total operating expenses.................. 106.4 101.6 106.0
----- ----- -----
Loss from continuing operations..................... (32.2) (31.9) (43.9)
Other income (expense), net......................... 1.4 (3.0) (2.5)
----- ----- -----
Net loss from continuing operations................. (30.8) (34.9) (46.4)
Discontinued operations:
Loss from discontinued operations................. -- (6.2) (5.0)
Gain on disposal of discontinued operations....... 0.7 3.3 --
----- ----- -----
Net loss............................................ (30.1)% (37.8)% (51.4)%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2000, 1999, AND 1998
REVENUES
Total Revenues. Total revenues were $51.7 million, $30.3 million, and $21.9
million in fiscal 2000, 1999, and 1998, respectively, increasing 70.6% from
fiscal 1999 to fiscal 2000 and 38.5% from fiscal 1998 to fiscal 1999.
License. License revenues were $34.4 million, $17.6 million, and $12.9
million in fiscal 2000, 1999, and 1998, respectively, increasing 95.9% from
fiscal 1999 to 2000 and 35.8% from fiscal 1998 to 1999. The increase
25
<PAGE> 26
in license revenues in fiscal 2000 from fiscal 1999 was primarily due to an
increase in the number of licenses sold to new and existing customers and
increased sales generated by Quintus' expanded sales force. The increase in the
number of licenses was primarily due to increased market acceptance of Quintus'
products, both in the United States and internationally. The increase in license
revenues in fiscal 1999 from 1998 was primarily due to a full year of CTI
product sales in fiscal 1999 compared to fewer than five months in fiscal 1998.
License revenue from Quintus' CTI product increased to $7.7 million in fiscal
1999 from $3.1 million in fiscal 1998.
Service. Service revenues were $17.3 million, $12.7 million, and $8.9
million in fiscal 2000, 1999, and 1998, respectively, increasing 35.7% from
fiscal 1999 to 2000 and 42.4% from fiscal 1998 to 1999. The increase was
primarily due to growth in Quintus' consulting business, growth in its installed
base of customers with a maintenance contract, and maintenance renewals from
products licensed in prior periods. Service revenues decreased as a percentage
of total revenues in fiscal 2000 as Quintus continued to have third-party system
integrators undertake a greater percentage of its product implementation. In
future years, Quintus expects this trend to continue.
COST OF REVENUES
License. Cost of licenses consists primarily of royalties, product
packaging, documentation, and production. Cost of licenses was $2.3 million,
$554,000, and $708,000 in fiscal 2000, 1999, and 1998, respectively, increasing
310.5% from fiscal 1999 to 2000 and decreasing 21.8% from fiscal 1998 to 1999.
Cost of licenses as a percentage of license revenues represented 6.6%, 3.2%, and
5.5% in fiscal 2000, 1999, and 1998, respectively. The increase in fiscal 2000
was primarily due to an increase in sales of third-party license revenues and
the resulting increase in third-party royalty payments and to a lesser extent
increases in material costs and other related expenses. The decrease in fiscal
1999 from fiscal 1998 was due to a decrease in royalty payments associated with
licensing of Quintus' products.
Service. Cost of services consists primarily of personnel costs and
third-party consulting fees associated with implementation, customization,
maintenance and other support services. Cost of services was $11.1 million, $8.6
million, and $7.6 million in fiscal 2000, 1999, and 1998, respectively,
increasing 28.4% from fiscal 1999 to 2000 and 13.7% from fiscal 1998 to 1999.
Cost of services as a percentage of service revenues represented 64.1%, 67.7%,
and 84.8% in fiscal 2000, 1999, and 1998, respectively. The dollar increase was
primarily due to the number of third-party consultants Quintus engaged to
provide consulting and implementation of its products and an increase in its
installed base for its maintenance contracts. Cost of services as a percentage
of service revenues declined primarily due to an increase in margins for service
revenues. Cost of services as a percentage of service revenues may vary between
periods due to the mix of services provided and the resources used to provide
these services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, bonuses, travel, public relations, marketing materials,
and trade shows. Sales and marketing expenses were $26.8 million, $17.1 million,
and $11.3 million in fiscal 2000, 1999, and 1998, respectively, representing
51.8%, 56.6% and 51.8% of total revenues in the respective periods. The dollar
increases for each of the periods were primarily due to the expansion of
Quintus' worldwide sales and marketing organization, which increased from 62
employees in fiscal 1998 to 100 employees in fiscal 2000, an increase in sales
commissions associated with increases in revenues and higher marketing costs due
to expanded advertising and promotional activities. The decrease in sales and
marketing expenses as a percentage of total revenues in fiscal 2000 from fiscal
1999 was primarily due to growth in total revenues. Quintus intends to invest
substantial resources to expand its direct sales force and other distribution
channels, to establish additional sales offices in the United States and
internationally, and to conduct marketing programs to support its existing and
new product offerings. As a result, sales and marketing expenses are expected to
increase in future periods.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses associated with the development of
new products, the enhancement and localization of
26
<PAGE> 27
existing products, and quality assurance and testing costs incurred prior to
commercial production. Research and development expenses were $11.2 million,
$6.7 million, and $5.1 million in fiscal 2000, 1999, and 1998, respectively,
representing 21.6%, 22.2% and 23.3% of total revenues in the respective periods.
The dollar increases for each of the periods were primarily due to increases in
personnel, which increased from 53 employees in fiscal 1998 to 89 employees in
fiscal 2000. The decline in research and development expenses as a percentage of
total revenues for each of the periods was due to the growth in total revenues.
Quintus anticipates that research and development expenses in absolute dollars
will continue to increase in future periods. To date, all research and
development costs have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for finance and human resource
employees, as well as accounting, legal, other professional fees and allowance
for doubtful accounts. General and administrative expenses were $5.7 million,
$3.6 million, and $3.2 million in fiscal 2000, 1999, and 1998, respectively,
representing 11.1%, 11.8% and 14.8% of total revenues in the respective periods.
The dollar increases for each of the periods was primarily due to increases in
personnel, which increased from 24 employees in fiscal 1998 to 40 employees in
fiscal 2000, and associated expenses necessary to manage and support Quintus'
increased scale of operations and expenses related to being a public company.
The decline in general and administrative expenses as a percentage of revenues
for each fiscal year was primarily due to the growth in total revenues. Quintus
currently expects general and administrative expenses to increase in absolute
dollars in the future as it continues to expand its infrastructure.
Amortization of Intangibles. Amortization of intangibles represents costs
arising from Quintus' acquisition of Acuity in November 1999 and its acquisition
of Nabnasset in November 1997. Amortization is recorded on a straight-line basis
over a period of three to five years ending September 2004. Amortization of
intangibles was $6.7 million, $3.2 million, and $1.3 million in fiscal 2000,
1999, and 1998, respectively, representing 12.9%, 10.5% and 6.1% of total
revenues in fiscal 2000, 1999, and 1998, respectively.
Acquired In-Process Technologies. In November 1999, Quintus acquired Acuity
for $47.1 million based on capital stock issued, the value of options and
warrants assumed, and transaction costs incurred. In November 1997, Quintus
acquired Nabnasset for $3.5 million in cash, stock and options to purchase
Quintus' common stock. Both transactions were accounted for as a purchase. In
both acquisitions, acquired technology included both existing technology and
in-process research and development. The valuation of acquired technology was
made by applying the income forecast method, which considers the present value
of cash flows by product lines. Acquired in-process technologies of $3.0 million
and $2.2 million were charged to operations in fiscal 2000 and 1998,
respectively, as the technologies did not have alternative future uses as of the
date of the acquisition.
Stock-Based Compensation. During fiscal 2000, 1999, and 1998, Quintus
recorded deferred stock-based compensation of $2.7 million, $1.1 million, and
$99,000, respectively, relating to stock options granted to employees in each of
those years. Such amounts represent the difference between the exercise price
and the deemed fair market value of Quintus' common stock at the date of grant.
These amounts are being amortized over the vesting periods of the granted
options. Quintus recognized $1.6 million and $171,000 of stock-based
compensation in operating expenses in fiscal 2000 and 1999, respectively. There
was no stock based compensation expense recorded in operating expenses in fiscal
1998.
Other Income (Expense), Net. Other income of $738,000 in fiscal 2000
consisted primarily of interest income from Quintus' investments of initial
public offering proceeds in short-term investments. Other expense of $917,000
and $540,000 from fiscal 1999 and 1998, respectively, was primarily due to
Quintus' line of credit with a financial institution, which was repaid in full
during the third quarter of fiscal 2000. Included within interest expense in
fiscal 1999 is $165,000 with respect to warrants granted in connection with
notes payable to stockholders.
DISCONTINUED OPERATIONS
Quintus' Call Center Enterprises division, which was sold in February 1999,
had revenues of $3.2 million and $2.5 million in fiscal 1999 and 1998,
respectively, and incurred a loss from operations of $1.9 million and $1.1
million in fiscal 1999 and 1998, respectively. There were no assets or
liabilities remaining as of March 31,
27
<PAGE> 28
1999. During fiscal 2000, the Company earned the right to receive additional
payments of approximately $348,000 based on the number of former CCE employees
who remained employed by the purchaser for one year subsequent to the date of
disposition. This amount has been reflected as a gain on disposal of
discontinued operations in fiscal 2000. Included within the $1.0 million gain on
disposal of discontinued operations in fiscal 1999 is the fair value of options
granted in connection with the sale of Call Center Enterprises of $453,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, Quintus' principal source of liquidity was
approximately $59.1 million of cash, cash equivalents and short-term
investments.
On November 16, 1999, Quintus completed an initial public offering in which
we sold 5,175,000 shares of common stock at $18 per share, including 675,000
shares in connection with the exercise of the underwriters' over allotment
option. The total proceeds from this transaction were $84.9 million, net of
underwriters' discounts and other related costs of $8.2 million. Immediately
after the closing of the offering, Quintus paid $18.1 million to holders of some
series of its preferred stock. The remaining net proceeds were added to cash
equivalents and short-term investments.
Cash used in operating activities was $11.4 million, $7.3 million and $4.0
million in fiscal 2000, 1999, and 1998, respectively. Cash used in fiscal 2000
was primarily due to a net loss of $15.6 million and an increase in accounts
receivable, offset in part by increases in depreciation and amortization,
increases in accounts payable, and a $3.0 million non-cash charge for in-process
technologies related to Quintus' acquisition of Acuity. Cash used in fiscal 1999
was primarily due to a net loss of $11.5 million and a $1.0 million gain on
disposal of discontinued operations, offset in part by depreciation and
amortization expenses. Cash used in fiscal 1998 was primarily due to a net loss
of $11.2 million and an increase in accounts receivable, offset in part by an
increase of deferred revenues, depreciation and amortization expenses, and a
$2.2 million non-cash charge for in-process technologies related to Quintus'
acquisition of Nabnasset.
Cash (used in) provided by investing activities was ($39.4 million),
$924,000, and ($3.7 million) in fiscal 2000, 1999, and 1998, respectively. Cash
used in investing activities in fiscal 2000 was primarily for purchases of
short-term investments of $37.3 million, net of maturities, and $2.9 million in
purchases of property and equipment. Cash provided by investing activities in
fiscal 1999 was primarily due to proceeds from the sale of discontinued
operations, offset by purchases of property and equipment. Cash used in
investing activities in fiscal 1998 was primarily due to $2.5 million for the
acquisition of Nabnasset and purchases of property and equipment.
Cash provided by financing activities was $70.9 million, $6.2 million, and
$6.6 million in fiscal 2000, 1999, and 1998, respectively. Cash provided by
financing activities consisted primarily of net proceeds from Quintus' initial
public offering in November 1999 of $84.9 million and net proceeds from issuance
of preferred stock of $11.2 million, offset in part by payments of $18.1 million
to some series of its preferred shareholders and $4.9 million in repayments of
Quintus' bank line of credit. For fiscal 1999 and 1998, cash provided by
financing activities consisted primarily of proceeds from private sales of
preferred stock and borrowings under a bank line of credit.
Quintus expects to experience significant growth in its operating expenses,
particularly sales and marketing and research and development expenses, for the
foreseeable future in order to execute its business plan. As a result, Quintus
anticipates that these operating expenses, as well as planned capital
expenditures, will constitute a material use of its cash resources. In addition,
Quintus may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. Quintus currently
anticipates that its current cash, cash equivalents and investments will be
sufficient to meet its anticipated cash needs for working capital and capital
for at least the next 12 months. Thereafter, Quintus may find it necessary to
obtain additional equity or debt financing. In the event additional financing is
required, Quintus may not be able to raise it on acceptable terms or at all.
28
<PAGE> 29
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting For Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for Quintus' fiscal year ending March 31, 2002. Management believes
that this statement will not have a significant impact on Quintus' financial
position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, Quintus had an outstanding balance of $1.7 million in
loans with interest rates ranging from 8.25% to 10.00%. A 10.00% movement in
market interest rates would not significantly impact Quintus' financial position
or results of operations.
Quintus' interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of its funds are invested
in instruments with maturity of less than two years. Quintus' policy is to limit
the risk of principal loss and ensure the safety of invested founds by limiting
market and credit risk. Funds in excess of current operating requirements are
primarily invested in obligations of large corporations. Due to the nature of
Quintus' investments, its has concluded that there is no material market risk
exposure. Therefore, no quantitative tabular disclosures are required.
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report -- Deloitte & Touche LLP....... 31
Report of Ernst & Young LLP, Independent Auditors........... 32
Consolidated Balance Sheets................................. 33
Consolidated Statements of Operations....................... 34
Consolidated Statements of Stockholders' Equity
(Deficiency).............................................. 35
Consolidated Statements of Cash Flows....................... 36
Notes to Consolidated Financial Statements.................. 37
</TABLE>
30
<PAGE> 31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Quintus Corporation:
We have audited the accompanying consolidated balance sheet of Quintus
Corporation and subsidiaries (the Company) as of March 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the two years in the period ended March
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the two years in the period ended March 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
San Jose, California
April 18, 2000
(May 18, 2000 as to Note 14)
31
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quintus Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficiency), and cash flows of Quintus Corporation for the
year ended March 31, 1998. Our audit also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Quintus Corporation for the year ended March 31, 1998 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Palo Alto, California
April 30, 1998
32
<PAGE> 33
QUINTUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 21,867 $ 1,785
Short-term investments.................................... 37,209 --
Accounts receivable, less allowance for doubtful accounts
of $1,323 and $729..................................... 22,580 8,671
Prepaid expenses and other assets......................... 2,072 573
-------- --------
Total current assets.............................. 83,728 11,029
Property and equipment, net................................. 5,061 3,162
Purchased technology, less accumulated amortization of
$3,279 and $1,889......................................... 1,421 2,111
Intangible assets, less accumulated amortization of $7,925
and $2,630................................................ 41,583 2,970
Other assets................................................ 327 322
-------- --------
Total assets...................................... $132,120 $ 19,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable.......................................... $ 6,383 $ 2,352
Accrued compensation and related benefits................. 4,011 2,114
Other accrued liabilities................................. 2,803 2,268
Deferred revenue.......................................... 7,668 6,615
Borrowings under bank line of credit...................... -- 4,868
Current portion of capital lease obligations.............. 177 109
Current portion of long-term debt......................... 730 1,347
-------- --------
Total current liabilities......................... 21,772 19,673
Capital lease obligations, less current portion............. 300 101
Long-term debt, less current portion........................ 934 1,700
Deferred revenue............................................ -- 400
Commitments and Contingencies (Notes 7 and 13)
Redeemable convertible preferred stock...................... -- 17,811
Stockholder's Equity (Deficiency):
Redeemable convertible preferred stock, $0.001 par value;
authorized shares -- none in March 2000 and 14,555,000
in March 1999; issued and outstanding shares -- none in
March 2000 and 13,970,914 in March 1999................ -- 14
Convertible preferred stock, $0.001 par value; authorized
shares -- 10,000,000 in March 2000 and 4,500,000 in
March 1999; issued and outstanding shares -- none in
March 2000 and 3,967,935 in March 1999................. -- 3
Common stock, $0.001 par value; authorized
shares -- 100,000,000 in March 2000 and 40,000,000 in
March 1999; issued and outstanding shares -- 33,478,191
in March 2000 and 4,208,478 in March 1999.............. 33 4
Additional paid-in capital................................ 161,632 15,483
Notes receivable from stockholders........................ (223) (117)
Deferred compensation..................................... (2,076) (884)
Accumulated other comprehensive loss...................... (98) --
Accumulated deficit....................................... (50,154) (34,594)
-------- --------
Total stockholders' equity (deficiency)........... 109,114 (20,091)
-------- --------
Total liabilities and stockholders' equity (deficiency)..... $132,120 $ 19,594
======== ========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License.................................................. $ 34,427 $ 17,577 $ 12,948
Service.................................................. 17,280 12,730 8,942
-------- -------- --------
Total revenues................................... 51,707 30,307 21,890
Cost of Revenues:
License.................................................. 2,274 554 708
Service.................................................. 11,069 8,623 7,582
-------- -------- --------
Total cost of revenues........................... 13,343 9,177 8,290
-------- -------- --------
Gross profit............................................... 38,364 21,130 13,600
Operating Expenses:
Sales and marketing...................................... 26,774 17,147 11,336
Research and development................................. 11,180 6,719 5,102
General and administrative............................... 5,739 3,577 3,233
Amortization of intangibles.............................. 6,684 3,185 1,335
Acquired in-process technologies......................... 3,000 -- 2,200
Stock-based compensation................................. 1,633 171 --
-------- -------- --------
Total operating expenses......................... 55,010 30,799 23,206
-------- -------- --------
Loss from continuing operations............................ (16,646) (9,669) (9,606)
Other Income (Expense):
Interest expense......................................... (702) (804) (567)
Other income (expense), net.............................. 1,440 (113) 27
-------- -------- --------
738 (917) (540)
Net loss from continuing operations........................ (15,908) (10,586) (10,146)
Discontinued operations:
Loss from discontinued operations........................ -- (1,891) (1,103)
Gain on disposal of discontinued operations.............. 348 1,011 --
-------- -------- --------
Net loss................................................... (15,560) (11,466) (11,249)
Redeemable preferred stock accretion....................... -- -- (1,519)
-------- -------- --------
Loss applicable to common stockholders..................... (15,560) (11,466) (12,768)
======== ======== ========
Other Comprehensive loss:
Foreign currency translation adjustments................. (39) -- --
Unrealized loss on short-term investments................ (59) -- --
-------- -------- --------
Comprehensive loss......................................... $(15,658) $(11,466) $(12,768)
======== ======== ========
Basic and Diluted Net Loss Per Common Share:
Continuing operations.................................... $ (1.10) $ (3.73) $ (6.88)
Discontinued operations.................................. -- (0.67) (0.65)
Gain on disposal......................................... 0.02 0.36 --
-------- -------- --------
Basic and diluted net loss per common share................ $ (1.08) $ (4.04) $ (7.53)
======== ======== ========
Shares used in computation, basic and diluted.............. 14,428 2,835 1,695
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
----------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1997........... 12,515,918 $ 13 3,031,118 $ 3 $ 1,090 $ (58) $ --
Issuance of common stock under stock
option plan........................ -- -- 944,949 1 166 -- --
Issuance of common stock and stock
options in connection with business
combinations....................... -- -- 518,921 -- 1,044 -- --
Repurchase of common stock.......... -- -- (377,688) -- (42) -- --
Issuance of warrants to purchase
common stock....................... -- -- -- -- 258 -- --
Issuance of preferred stock......... 1,454,996 1 -- -- 1,818 -- --
Preferred stock accretion........... -- -- -- -- (1,519) -- --
Compensatory stock arrangements..... -- -- -- -- 99 -- (99)
Amortization of deferred
compensation....................... -- -- -- -- -- -- 20
Net loss............................ -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ----- -------
Balances at March 31, 1998.......... 13,970,914 14 4,117,300 4 2,914 (58) (79)
Issuance of common stock under stock
option plan........................ -- -- 303,090 -- 166 (59) --
Repurchase of common stock.......... -- -- (211,912) -- (42) -- --
Issuance of warrants to purchase
common stock....................... -- -- -- -- 165 -- --
Issuance of preferred stock......... 2,604,601 3 -- -- 10,772 -- --
Compensatory stock arrangements..... -- -- -- -- 1,508 -- (1,055)
Amortization of deferred
compensation....................... -- -- -- -- -- -- 250
Net loss............................ -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ----- -------
Balances at March 31, 1999.......... 16,575,515 17 4,208,478 4 15,483 (117) (884)
Issuance of common stock under stock
option plan........................ -- -- 589,031 1 672 (165) --
Issuance of common stock for
warrants exercised................. -- -- 161,041 -- 109 -- --
Repurchase of common stock.......... -- -- (55,736) -- (5) -- --
Issuance of common stock from
initial public offering, net....... -- -- 5,175,000 5 84,899 -- --
Issuance of common stock in
connection with business
combination........................ -- -- 2,021,146 2 16,656 -- --
Issuance of preferred stock in
connection with business
combinations....................... 3,047,378 3 -- -- 25,138 -- --
Issuance of preferred stock......... 1,363,334 1 -- -- 11,246 -- --
Conversion of preferred stock to
common stock....................... (20,986,227) (21) 20,986,227 21 -- -- --
Issuance of warrants to purchase
common stock....................... -- -- -- -- 660 -- (100)
Issuance of options and warrants in
connection with business
combination........................ -- -- -- -- 4,360 -- --
Repayment of notes receivables...... -- -- -- -- -- 59 --
Compensatory stock arrangements..... -- -- -- -- 2,725 -- (2,725)
Amortization of deferred
compensation....................... -- -- -- -- -- -- 1,633
Distribution to preferred
stockholders on exercise of
preferred stock series B and C
warrants and conversion to common
stock.............................. -- -- -- -- (311) -- --
Net exercise of warrants............ -- -- 393,004 -- -- -- --
Unrealized loss on short-term
investments........................ -- -- -- -- -- -- --
Foreign currency translation
adjustments........................ -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ----- -------
Balances at March 31, 2000.......... -- $ -- 33,478,191 $33 $161,632 $(223) $(2,076)
=========== ==== ========== === ======== ===== =======
<CAPTION>
TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY
LOSS DEFICITS (DEFICIENCY)
------------- ----------- -------------
<S> <C> <C> <C>
Balances at April 1, 1997........... $ -- $(11,879) $(10,831)
Issuance of common stock under stock
option plan........................ -- -- 167
Issuance of common stock and stock
options in connection with business
combinations....................... -- -- 1,044
Repurchase of common stock.......... -- -- (42)
Issuance of warrants to purchase
common stock....................... -- -- 258
Issuance of preferred stock......... -- -- 1,819
Preferred stock accretion........... -- -- (1,519)
Compensatory stock arrangements..... -- -- --
Amortization of deferred
compensation....................... -- -- 20
Net loss............................ -- (11,249) (11,249)
---- -------- --------
Balances at March 31, 1998.......... -- (23,128) (20,333)
Issuance of common stock under stock
option plan........................ -- -- 107
Repurchase of common stock.......... -- -- (42)
Issuance of warrants to purchase
common stock....................... -- -- 165
Issuance of preferred stock......... -- -- 10,775
Compensatory stock arrangements..... -- -- 453
Amortization of deferred
compensation....................... -- -- 250
Net loss............................ -- (11,466) (11,466)
---- -------- --------
Balances at March 31, 1999.......... -- (34,594) (20,091)
Issuance of common stock under stock
option plan........................ -- -- 508
Issuance of common stock for
warrants exercised................. -- -- 109
Repurchase of common stock.......... -- -- (5)
Issuance of common stock from
initial public offering, net....... -- -- 84,904
Issuance of common stock in
connection with business
combination........................ -- -- 16,658
Issuance of preferred stock in
connection with business
combinations....................... -- -- 25,141
Issuance of preferred stock......... -- -- 11,247
Conversion of preferred stock to
common stock....................... -- -- --
Issuance of warrants to purchase
common stock....................... -- -- 560
Issuance of options and warrants in
connection with business
combination........................ -- -- 4,360
Repayment of notes receivables...... -- -- 59
Compensatory stock arrangements..... -- -- --
Amortization of deferred
compensation....................... -- -- 1,633
Distribution to preferred
stockholders on exercise of
preferred stock series B and C
warrants and conversion to common
stock.............................. -- -- (311)
Net exercise of warrants............ -- -- --
Unrealized loss on short-term
investments........................ (59) -- (59)
Foreign currency translation
adjustments........................ (39) -- (39)
Net loss............................ -- (15,560) (15,560)
---- -------- --------
Balances at March 31, 2000.......... $(98) $(50,154) $109,114
==== ======== ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
QUINTUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net loss.................................................. $(15,560) $(11,466) $(11,249)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 8,698 5,090 3,148
Stock based compensation and fair value of warrants
issued................................................. 2,193 250 20
Noncash interest expense................................ -- 231 118
Gain on disposal of discontinued operations............. (348) (1,011) --
Loss on disposal of property and equipment.............. -- -- 50
Acquired in-process technologies........................ 3,000 -- 2,200
Provision for doubtful accounts......................... 912 235 408
Changes in operating assets and liabilities:
Accounts receivable................................... (14,708) (1,333) (1,522)
Prepaid expenses and other current assets............. (367) 35 (68)
Accounts payable...................................... 4,052 590 (1,110)
Accrued compensation and related benefits............. 1,867 41 1,219
Other accrued liabilities............................. (173) (469) (1,145)
Deferred revenue...................................... (970) 507 3,981
-------- -------- --------
Net cash used in operating activities....................... (11,404) (7,300) (3,950)
-------- -------- --------
Investing Activities:
Purchase of business, net of cash acquired................ 744 -- (2,461)
Purchase of property and equipment........................ (2,904) (1,073) (1,172)
Proceeds from sale of discontinued operations............. -- 2,100 --
Purchase of short-term investments........................ (49,094) -- --
Maturities of short-term investments...................... 11,826 -- --
Increase in other assets.................................. 62 (103) (45)
-------- -------- --------
Net cash provided by (used in) investing activities......... (39,366) 924 (3,678)
-------- -------- --------
Financing Activities:
Proceeds from initial public offering, net................ 84,904 -- --
Proceeds from issuance of preferred stock................. 11,247 5,275 --
Proceeds from issuance of common stock.................... 617 107 167
Repurchase of common stock................................ (5) (42) (42)
Collections from payment of notes receivable.............. 59 -- --
Proceeds from notes payable to stockholders............... -- 1,000 4,500
Distribution to preferred stockholders.................... (18,122) -- --
Borrowings (repayment) under bank line of credit.......... (4,868) (82) 4,950
Borrowings (repayments of) bank loan...................... (2,779) 51 (2,943)
Principal payments on capital lease obligations........... (180) (134) (63)
-------- -------- --------
Net cash provided by financing activities................... 70,873 6,175 6,569
-------- -------- --------
Effect of exchange rate on cash............................. (21) -- --
Net increase (decrease) in cash and cash equivalents........ 20,082 (201) (1,059)
Cash and cash equivalents at beginning of period............ 1,785 1,986 3,045
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 21,867 $ 1,785 $ 1,986
======== ======== ========
Supplemental disclosure of cash flow:
Cash paid for interest.................................... $ 702 $ 643 $ 282
======== ======== ========
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Issuance of common stock and preferred stock and
assumption of options and warrants for the acquisition
of Acuity............................................... $ 46,159 $ -- $ --
Unrealized loss on short-term investments................. $ 59 $ -- $ --
Issuance of common stock in exchange for notes
receivable.............................................. $ 165 $ 59 $ --
Property acquired under capital lease..................... $ 183 $ 101 $ --
Issuance of Series E preferred stock for notes payable to
stockholders............................................ $ -- $ 5,684 $ --
Issuance of Series D preferred stock in exchange for notes
payable to stockholders................................. $ -- $ -- $ 3,001
Issuance of Series D preferred stock, common stock and
stock options for purchase of business.................. $ -- $ -- $ 2,044
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quintus Corporation (Quintus or the Company) provides a comprehensive
e-Customer Relationship Management ("eCRM") solution to manage customer
interactions and deliver consistent customer service across multiple
communication channels, including the Internet, email and advanced telephony
systems. The Company was founded in Delaware in May 1995.
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries after the elimination
of all significant intercompany balances and transactions.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- Cash and cash equivalents consist of money
market instruments and other highly liquid investments purchased with an
original maturity of three months or less.
Short-Term Investments -- The Company classifies its investments as
"available-for-sale." Such investments are recorded at fair value based on
quoted market prices, with unrealized gains and losses recorded as other
comprehensive income (loss) until realized.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, which are generally two to five years. Assets recorded under capital
leases and leasehold improvements are amortized by the straight-line method over
the shorter of their respective useful lives or the lease term.
Revenue Recognition -- Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), was issued in October 1997 by the American Institute
of Certified Public Accountants ("AICPA") and was amended by Statement of
Position 98-4 ("SOP 98-4"). The Company adopted SOP 97-2 and SOP 98-4 effective
April 1, 1998. The Company believes its current revenue recognition policies and
practices are consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA
issued SOP 98-9 in March 1998, which provides for certain amendments to SOP
97-2, and is effective for transactions entered into by the Company beginning
April 1, 1999. The adoption of these pronouncements did not have a material
impact on its financial position, results of operations or cash flows.
The Company licenses software to end users under noncancelable license
agreements and provides services such as installation, implementation, training,
and software maintenance. Software license revenue for contracts not requiring
significant customization services is recognized upon meeting each of the
following criteria: an executed agreement has been signed; products have been
shipped; the license fee is fixed and determinable; collection of the resulting
receivable is probable; and vendor specific objective evidence exists to
allocate the total fee to elements of the arrangement. Vendor-specific objective
evidence is based on the price generally charged when an element is sold
separately, or if not yet sold separately, is established by authorized
management. For sales made through distributors the Company recognizes revenue
when all obligations to the distributor are satisfied and the license fees are
deemed to be non-refundable. Software license revenue from contracts requiring
the Company to perform significant customization services are recognized on the
percentage-of-completion method based on the ratio of labor hours incurred to
total estimated labor hours. Provisions for estimated losses on contracts are
made in the period in which the anticipated losses become known. Actual costs
and gross margins on such contracts could differ from management's estimates,
and such differences could be material to the financial statements. Allowances
for estimated future warranty costs are provided at the time revenue is
recognized. Service revenue includes maintenance revenue, which is initially
deferred and recognized ratably over the maintenance period, which in most cases
is one year, and revenue
37
<PAGE> 38
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from training services which is recognized as services are performed. Consulting
revenues are recognized as services are performed.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Computer Software to be Sold,
Leased or Otherwise Marketed. The costs to develop such software have not been
capitalized as the Company believes its current software development process is
essentially completed concurrent with the establishment of technological
feasibility.
Impairment of Long-Lived Assets -- In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
evaluates its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Intangible Assets -- Intangible assets, including purchased technology, are
related to the business acquisitions described in Note 2. Amortization is
recorded on a straight-line basis over a period of three to five years.
Income Taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is recorded
to reduce net deferred tax assets to amounts that are more likely than not to be
realized.
Stock-Based Compensation -- The Company accounts for employee stock
options, using the intrinsic value method, in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25).
Loss Per Common Share -- Basic loss per common share excludes dilution and
is computed by dividing loss applicable to common stockholders by the weighted
average number of common shares outstanding, less the weighted average number of
common shares subject to repurchase by the Company. Diluted earnings per common
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants and
common stock options) were exercised or converted into common stock. Common
share equivalents are excluded from the computation in loss periods as their
effect would be antidilutive.
Foreign Currency Transactions -- Prior to the fourth quarter of fiscal
2000, the functional currency of the Company's foreign subsidiaries was the U.S.
dollar. Accordingly, all monetary assets and liabilities were remeasured at the
current exchange rate at the end of each period reported. Nonmonetary assets and
liabilities were remeasured at historical rates and revenues and expenses were
remeasured at average exchange rates in effect during the period, except for
those expenses related to balance sheet amounts that were remeasured at
historical exchange rates. Transaction gains and losses, which are included in
other income (expense) in the accompanying consolidated statements of
operations, have not been significant.
In the fourth quarter of fiscal 2000, the Company determined that the
functional currency of its foreign subsidiary is the local currency of the
country in which it operates. Assets and liabilities are translated using the
exchange rate at the balance sheet date. Revenues, expenses, gains, and losses
are translated at the average exchange rate in effect during the period.
Translation adjustments, which have not been material to date, are included in
other comprehensive loss. The effect of the change in functional currency did
not have a material impact on the Company's consolidated financial position,
results of operations or cash flow.
Concentration of Credit Risks -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of trade
receivables. The Company sells its products to
38
<PAGE> 39
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies in diverse industries and generally does not require its customers to
provide collateral to support accounts receivable. To reduce credit risk,
management performs ongoing credit evaluations of its customers' financial
condition. The Company maintains allowances for potential credit losses.
Certain Significant Risks and Uncertainties -- The Company operates in the
software industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company's future financial
position, results of operations and cash flows: ability to obtain additional
financing; regulatory changes; fundamental changes in the technology underlying
software products; market acceptance of the Company's products under
development; development of distribution channels; ability to implement and
expand operational customer support and financial control systems to manage
rapid growth, both domestically and internationally; the hiring and retention of
key employees; relationship with Lucent; fundamental changes in technology
underlying software products; litigation or other claims against the Company.
Comprehensive Income -- In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. The Company has
reported components of comprehensive loss in its consolidated statements of
operations.
Segment Reporting -- In fiscal 1998, the Company adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, which
established annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services and geographic
areas and major customers. During the fiscal years ended March 31, 1999 and
1998, the Company operated in two reportable segments (see Note 12).
Recent Accounting Standards -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal
year ending March 31, 2002. Management believes that this statement will not
have a significant impact on the Company's financial position, results of
operations or cash flows.
2. BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS
Call Center Enterprises, Inc.
In July 1997, the Company acquired Call Center Enterprises, Inc. (CCE), a
provider of strategic call center consulting services, for $965,000 in cash in a
transaction that was accounted for as a purchase. Assets acquired and
liabilities assumed in the acquisition were as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable........................................ $ 826
Other assets............................................... 30
Goodwill................................................... 1,262
Less liabilities assumed................................... (1,153)
-------
$ 965
=======
</TABLE>
During fiscal 1999 the Company was required to make additional cash
payments of approximately $962,000 to former stockholders of CCE based upon
achievement of certain performance goals. These payments, which were contingent
upon the continued employment of the former CCE stockholders, were recorded as
charges to operations when the performance goal was attained.
39
<PAGE> 40
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 26, 1999, the Company sold the assets of CCE, which provided
implementation services for support and help-desk centers software application.
The division was sold for cash of $2,100,0000 with a gain on disposal of
$1,011,000. As a result, the operations of CCE have been classified as
discontinued operations in the statement of operations. The Company recorded
$453,000 as a reduction in the gain on disposal of discontinued operations for
the fair value of options, due to the Company accelerating vesting of CCE
employees' options as if they had been employed for 12 additional months. The
division had revenues of $3,210,000 and $2,528,000 for the years ended March 31,
1999 and 1998, respectively. There were no assets or liabilities remaining as of
March 31, 2000. During fiscal 2000, the Company earned the right to receive
additional payments of approximately $348,000 based on the number of former CCE
employees who remained employed by the purchaser one year after the date of
disposition. This amount has been reflected as a gain on disposal of
discontinued operations in the consolidated statements of operations.
Nabnasset Corporation
In November 1997, the Company acquired Nabnasset Corporation (Nabnasset), a
provider of software which integrates telephone, voice, and data for $1,496,000
in cash, preferred stock with a fair value of $1,000,000, and 518,921 shares of
common stock and options to purchase 617,528 shares of common stock with an
aggregate fair value of $1,044,000. The transaction was accounted for as a
purchase. Assets acquired and liabilities assumed in the acquisition were as
follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable........................................ $ 1,036
Property and equipment..................................... 2,062
Other assets............................................... 75
In-process technologies.................................... 2,200
Purchased technology....................................... 4,000
Intangible assets.......................................... 5,599
Accounts payable and accrued liabilities................... (4,230)
Notes payable.............................................. (6,070)
Other liabilities.......................................... (1,132)
-------
$ 3,540
=======
</TABLE>
In this acquisition, acquired technology included both existing technology
and in-process research and development. The valuation of acquired technology
was made by applying the income forecast method, which considers the present
value of cash flows by product lines. As of the date of acquisition, multiple
research and development projects were underway including efforts related to the
next generation of Voice Enhanced Services Platform (VESP). The key elements of
Nabnasset's development process include: sales specification, functional
specifications, prototype development, question and answer sessions,
documentation and product release. A project is considered to be technologically
feasible upon the completion of beta testing that occurs as the final step in
the prototype development phase. At the date of acquisition, an additional
research and development effort of approximately 14 months was anticipated prior
to its release. Value was allocated to in process research and development based
on a discounted cashflow model and considered the core technology resident in
the in-process products, Nabnasset's past experience with typical product life
cycles, demand from Nabnasset customers for new versions incorporating
additional features, the migration of technology between platforms and the
roadmap for future development. Quintus completed development of the next
generation of VESP and introduced CTI version 5.0 in January 1999. This version
is sold on a stand-alone basis as a CTI product and is also integrated into
Quintus' eContact suite. Acquired in-process technologies were charged to
operations, as the technologies did not have alternative future uses as of the
date of the acquisition.
40
<PAGE> 41
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Acuity Corporation
On November 10, 1999, Quintus completed its acquisition of Acuity
Corporation ("Acuity"), a company specializing in providing Web based customer
interaction software. The transaction was accounted for using the purchase
method of accounting and, accordingly, the net assets and results of operations
of Acuity have been included in Quintus' consolidated financial statements since
the acquisition date. Quintus issued 2,021,146 shares of common stock and
3,047,378 shares of preferred stock. The shares of preferred stock were
converted to common stock upon the completion of the initial public offering on
November 16, 1999. In addition, Quintus assumed warrants and options to purchase
328,364 shares and 422,867 shares of common stock, respectively. The purchase
price for the acquisition was $47.1 million based on capital stock issued, the
value of the options and warrants assumed, and transaction costs incurred.
Quintus recognized a charge for in-process technologies of $3.0 million in the
quarter ended December 31, 1999. The fair market value of assets acquired and
liabilities assumed in the acquisition were as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets............................................ $ 3,616
Goodwill and other intangible assets....................... 44,609
In-process research and development........................ 3,000
Liabilities assumed........................................ (4,079)
-------
$47,146
=======
</TABLE>
Intangible assets consist of purchased technology and assembled workforce
of $1.4 million which are being amortized over four years, trademark and trade
name, customer related intangibles and goodwill of $43.2 million which are being
amortized over five years, the in-process research and development of $3.0
million which was expensed upon acquisition.
The acquired technology provides a comprehensive framework to manage
internet-based customer interactions, including Web self-service, Web chat,
browser-based collaboration and Web-call back. The in-process research and
development represents technology which has not yet reached technological
feasibility and does not have alternative future uses. The estimated value of
this in-process technology of $3.0 million was charged to Quintus' operations
during the quarter ended December 31, 1999. The in-process research and
development was identified and valued through extensive interviews and
discussions with Quintus and Acuity management and the analysis of data provided
by Acuity concerning developmental products, their respective stage of
development, the time and resources needed to complete them, their expected
income generating ability, target markets and associated risks. The income
forecast method, which included an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each in-process research and development project. A portion
of the purchase price was allocated to the developmental projects based on the
appraised fair values of such projects. The Company is in the process of
incorporating certain aspects of the acquired in-process technology to the
Company's eContact Suite version 5.6 which is expected to be released in
September 2000.
The following unaudited pro forma consolidated results of operations for
fiscal 2000 and 1999 assume the acquisition of Acuity occurred as of the
beginning of each period. The one-time $3.0 million charge for purchased
in-process technology was excluded from the pro forma results as it was a
material nonrecurring charge.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues....................................... $ 52,865 $ 35,922
Net Loss from Continuing Operations............ (22,806) (30,757)
Loss from Continuing Operations Per Share...... (1.46) (6.33)
</TABLE>
41
<PAGE> 42
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Available-for-sale securities consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Money market funds....................... $ 64 $ -- $ -- $ 64
Commercial paper......................... 31,417 -- -- 31,417
Corporate notes and bonds................ 16,117 -- (59) 16,058
Certificates of deposits................. 10,267 -- -- 10,267
Interest receivable...................... 435 -- -- 435
------- ------- ---- -------
$58,300 $ -- $(59) $58,241
======= ======= ==== =======
Included in cash and cash equivalents.... $21,032 $ -- $ -- $21,032
Included in short-term investments....... 37,268 -- (59) 37,209
------- ------- ---- -------
$58,300 $ -- $(59) $58,241
======= ======= ==== =======
</TABLE>
All investments have maturities of less than one year from March 31, 2000.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
Land.............................................. $ 170 $ 170
Building.......................................... 688 688
Computer equipment and software................... 11,208 6,075
Furniture and equipment........................... 1,326 1,279
Leasehold improvements............................ 917 306
------- ------
14,309 8,518
Less accumulated depreciation and amortization.... 9,248 5,356
------- ------
Net property and equipment........................ $ 5,061 $3,162
======= ======
</TABLE>
5. BANK LINE OF CREDIT
The Company maintained a committed revolving line with a bank that provided
for borrowings of up to $7,500,000, based on a percentage of eligible accounts
receivable, with interest at the bank's prime rate plus 1.5%. and were
collateralized by substantially all of the Company's assets and are subject to
the Company's compliance with certain financial and nonfinancial covenants. The
Company repaid the line of credit in full and closed the line of credit in
November 1999.
42
<PAGE> 43
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Amortizing term loan payable to a bank, due in monthly
installments of $32,563 through September 2001, interest
at prime rate (8% at March 31, 2000) plus 2%. The loan is
secured by substantially all of the Company's assets...... $ 508 $ 846
Mortgages payable to a bank, due in monthly installments of
$5,164 through 2020; interest rate is subject to
adjustment every three years (8.25% at March 31, 2000).... 606 618
Approximate fair value of non-interest bearing installment
obligation from acquisition of Acuity, due in quarterly
installments of $75,000 through September 2001............ 475 --
Notes payable from Nabnasset acquisition, due in monthly
installments of $55,555 and $27,778 with interest at
7.75%. The note was repaid in full in November 1999....... -- 1,583
Others...................................................... 75 --
------ ------
Total....................................................... 1,664 3,047
Less current portion........................................ 730 1,347
------ ------
Long-term debt.............................................. $ 934 $1,700
====== ======
</TABLE>
At March 31, 2000, maturities of long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
MARCH 31,
-------------------
<S> <C>
2001........................... $ 730
2002........................... 352
2003........................... 12
2004........................... 12
2005........................... 12
Thereafter.......................... 546
------
Total............................... $1,664
======
</TABLE>
7. COMMITMENTS
Leases
The Company leases office space under various noncancelable operating
leases. These leases have various expiration dates ranging from December 2000
through December 2003. The Company leases certain office equipment under
noncancelable lease agreements that are accounted for as capital leases.
Equipment under capital lease arrangements included in property and equipment
amounted to $1,000,000 and $693,000 at March 31, 2000 and 1999, respectively.
The related accumulated amortization was $662,000 and $425,000 at March 31, 2000
and 1999, respectively.
43
<PAGE> 44
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 2000, future minimum lease payments under noncancelable
operating leases and capital leases are as follows during the years ended March
31 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2001...................................................... $ 236 $614
2002...................................................... 229 141
2003...................................................... 95 138
2004...................................................... 17 106
----- ----
Total future minimum lease payments....................... 577 $999
====
Less amount representing interest......................... (100)
-----
Present value of future minimum lease payments............ 477
Less current portion...................................... 177
-----
Long-term portion......................................... $ 300
=====
</TABLE>
Rent expense was $1,103,000, $856,000 and $645,000 for the years ended
March 31, 2000, 1999 and 1998, respectively.
8. STOCKHOLDERS' EQUITY
Initial Public Offering
On November 16, 1999, Quintus completed an initial public offering in which
it sold 5,175,000 shares of common stock at $18 per share, which included
675,000 shares in connection with the exercise of the underwriters' over
allotment option. The total proceeds from this transaction were $84.9 million,
net of underwriters' discounts and other related costs of $8.2 million.
Immediately after the closing of the offering, Quintus paid $18.1 million to
holders of some series of preferred stock. Upon the completion of the offering,
all 20,986,227 shares of the preferred stock, par value $0.001 per share, as
required by the terms of those securities, were automatically converted to
common stock on a one for one basis.
1995 Stock Option Plan
The 1995 Stock Option Plan ("1995 Plan"), in effect through Quintus'
initial public offering, authorized the granting of options to purchase up to
4,993,391 shares of the Company's common stock. Under the 1995 Plan, incentive
options may be granted at a price per share no less than the fair market value
of common stock at the date of grant. Nonqualified stock options may be granted
at a price per share no less than 85% of the fair market value on the date of
grant. Options granted to any 10% stockholder may have an exercise price per
share that is not less than 110% of the fair market value per share of common
stock on the date of grant. Options granted are immediately exercisable, and
unvested shares are subject to repurchase by the Company at the amount
originally paid. Options granted generally have a maximum term of ten years and
generally vest over four or five years. At March 31, 2000, 730,168 shares of
common stock were subject to repurchase by the Company. Options that are
canceled under the 1995 Plan will be available for future grants under the 1999
Stock Incentive Plan. There were no shares available for option grants under the
1995 Plan at March 31, 2000.
1999 Stock Incentive Plan
The Company initially reserved 1,000,000 additional shares of common stock
under the 1999 Stock Incentive Plan ("1999 Plan"). Any shares not yet issued
under the 1995 Plan on November 16, 1999 are available under the 1999 Plan upon
adoption in November 1999. On January 1 of each year, starting with the
44
<PAGE> 45
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
year 2000, the number of shares in the reserve will automatically increase by
the lesser of 5% of the total number of shares of common stock that are
outstanding at that time or 2,000,000 shares. On January 1, 2000, the Company
increased options available for issuance under the 1999 Plan by 1,662,867. In
general, if options or shares awarded under the 1999 Plan or the 1995 Plan are
forfeited, then those options or shares will again become available for awards
under the 1999 Plan.
Outstanding options under the 1995 Plan are incorporated into the 1999 Plan
and no further option grants will be made under the 1995 Plan. The incorporated
options will continue to be governed by their existing terms, unless the Board
elects one or more features of the 1999 Plan to those options or to other
outstanding shares. The Board has elected to extend the change in control
acceleration feature of the 1999 Plan to all outstanding options and unvested
shares. Previously, options granted under the 1995 Plan provided that vesting of
the shares would accelerate upon an acquisition only if not assumed by the
acquiring entity.
Employee Stock Purchase Plan
Under the purchase plan, eligible employees are allowed to have salary
withholdings of up to 15% of their cash compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock on the first date immediately before the first day of the applicable
offering period or the fair market value on the purchase date. The initial
offering period commenced upon the effective date for the initial public
offering of the Company's common stock and ends on October 31, 2001. Each
offering period lasts 24 months and permits purchases at six-month intervals.
The Company has reserved 1,000,000 shares of common stock under this plan, plus
an annual increase to be added on May 1st beginning with the year 2000 equal to
the lesser of (i) 1,000,000 shares, or (ii) 2% of the shares of common stock
outstanding on May 1st.
Directors Option Plan
The Company has reserved 500,000 shares of common stock under the Director
Option Plan. The plan provides for an initial automatic grant of an option to
purchase 30,000 shares of common stock to a nonemployee director who first
becomes a director after the Company's initial public offering. The grant will
occur when the director takes office. The initial option will vest monthly over
the two-year period following the date of grant. In addition, at the time of the
annual stockholders' meeting beginning in 2000, each nonemployee director who
continues to be a director after that meeting will automatically be granted an
annual option to purchase 10,000 shares of common stock. However, a nonemployee
director who is receiving the 30,000 option initial grant will not receive the
annual option in the same calendar year. The annual options are fully vested on
the first anniversary of the date of grant.
Options Granted Outside the Plan
In connection with the acquisitions by the Company described in Note 2, the
Company granted options outside of the Plan to purchase up to 1,625,395 shares
of common stock. The options are generally exercisable immediately and have
similar vesting terms as options granted under the Plan with the exception of
options to purchase 486,168 shares of common stock, which vested immediately.
45
<PAGE> 46
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table presented below include 685,000 options at a price of $5.00,
which were granted to an employee outside of the Plan on June 11, 1999.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balances, April 1, 1997............................. 339,533 $ 0.07
Granted (weighted average fair value of $0.90)...... 2,699,367 0.57
Exercised........................................... (944,949) 0.20
Canceled............................................ (270,251) 0.32
---------
Balances, March 31, 1998 (616,824 vested at a
weighted average price of $0.42 per share)........ 1,823,700 0.70
Granted (weighted average fair value of $1.35)...... 1,205,612 1.57
Exercised........................................... (303,090) 0.44
Canceled............................................ (712,809) 0.96
---------
Balances, March 31, 1999 (624,632 vested at a
weighted average price of $0.58 per share)........ 2,013,413 1.17
Granted (weighted average fair value of $13.18)..... 2,907,181 12.98
Exercised........................................... (589,031) 1.18
Canceled............................................ (454,015) 2.03
---------
Balances, March 31, 2000............................ 3,877,548 $ 9.94
=========
</TABLE>
At March 31, 2000, 2,833,834 shares were available under the Plan for
future grant.
Additional information regarding options outstanding as of March 31, 2000
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING VESTED AT AVERAGE
RANGE OF NUMBER CONTRACTUAL MARCH 31, EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) 2000 PRICE
--------------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C>
$ 0.05 - $ 8.25 2,958,518 8.65 2,287,867 $ 4.37
$11.00 - $16.00 385,976 9.60 360,976 13.16
$32.75 - $39.94 394,948 9.89 3,039 34.17
$40.13 - $48.50 112,106 9.85 9,759 41.37
$50.25 - $56.38 26,000 9.79 -- --
--------- ---- --------- ------
3,877,548 8.91 2,661,641 $ 5.73
========= ==== ========= ======
</TABLE>
Additional Stock Plan Information
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of the
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method prior to
46
<PAGE> 47
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the initial public offering and the Black-Scholes model thereafter with the
following weighted average assumptions for fiscal 2000, 1999, and 1998; expected
life, 4.0 years for fiscal 2000 grants, 6.0 years for fiscal 1999 grants, and
6.0 years for 1998 grants; risk free interest rates of 6.1% in fiscal 2000 and
6.0% in both fiscal 1999 and 1998, volatility, 151% in fiscal 2000 and none for
fiscal 1999 and 1998; and no dividends during the expected term for all fiscal
years. The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the stock-based awards had been amortized over the vesting period of
the awards, pro forma net loss applicable to common stockholders would have been
approximately $20,157,000 ($1.40 per basic and diluted share), $11,887,999
($4.19 per basic and diluted share), and $13,185,000 ($7.78 per basic and
diluted share) for the years ended March 31, 2000, 1999 and 1998, respectively.
Stock-Based Compensation
In connection with options granted to employees to purchase common stock,
the Company recorded deferred stock compensation of $2,725,000, $1,055,000, and
$99,000 in fiscal years 2000, 1999, and 1998 respectively. Such amounts
represent the difference between the exercise price and the deemed fair value of
the Company's common stock at the date of grant. The deferred charges are being
amortized to expense through fiscal year 2003. The Company recognized stock
based compensation of $1,633,000 and $171,000 in continuing operations in fiscal
2000 and 1999, respectively. There was no stock based compensation from
continuing operations in fiscal 1998. Stock based compensation in discontinued
operations was $79,000 and $20,000 in fiscal 1999 and 1998, respectively.
Warrants
The Company had the following outstanding warrants to purchase common stock
at March 31, 2000:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE PER EXPIRATION
OF SHARES SHARE DATE ISSUED OF WARRANTS
--------- --------- ----------- -----------
<C> <C> <S> <C>
245,339 $0.30 November 1997 - May 1998 November 2001
128,320 $2.25 February 1999 February 2001
55,490 $2.25 September 1999 September 2001
8,466 $3.94 February 1996 January 2002
300,000 $7.50 July 1999 November 2000
25,000 $8.25 September 1999 November 2002
-------
762,615
=======
</TABLE>
In November 1999, in conjunction with the acquisition of Acuity, the
Company assumed 328,364 warrants to purchase common stock. The warrants were
valued at $1,252,601 and is included as part of the purchase price. The
Company's calculations were made using the Black Scholes model with the
following assumptions: contractual life of 0.3 to 1.5 years; risk-free interest
rate of 6.0%; volatility of 50%; and no dividends during the expected term.
In September 1999, the Company granted a financial institution a warrant to
purchase 25,000 shares of common stock at an exercise price of $8.25 per share
in conjunction with amending the terms and extending the maturity date of the
Company's revolving line of credit. The fair value of the warrant was deemed at
$100,000, which will be amortized over the extension of the maturity date. The
Company's calculations were made using the Black Scholes model with the
following assumptions: contractual life of 0.2 years; risk-free interest rate of
6.0%; volatility of 50%; and no dividends during the expected term.
In July 1999, as part of a license agreement, the Company issued a customer
a warrant to purchase up to 300,000 shares of the Company's common stock at an
exercise price of $7.50 per share. The fair value of the
47
<PAGE> 48
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
warrant of approximately $560,000, was recorded as a discount to reduce revenue
in the quarter ended September 30, 1999. The Company's calculations were made
using the Black Scholes model with the following assumptions: contractual life
of 1.2 years; risk-free interest rate of 6.0%; volatility of 50%; and no
dividends during the expected term.
During fiscal years 1999 and 1998, in connection with notes payable to
stockholders, the Company issued warrants to purchase 132,518 and 329,059 shares
of common stock. The balance outstanding on the notes payable to stockholders
was converted to preferred stock in May 1998. The fair value of these warrants
amounting to approximately $165,000 and $258,000 was charged to interest expense
during fiscal year 1999 and 1998, respectively, and was calculated using a risk
free interest rate of 6.0%, expected volatility of 50% and a term ranging from
2 1/2 to 3 years.
Common Stock Reserved
At March 31, 2000, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Issuance available under Stock Plans...................... 2,833,834
Exercise of options....................................... 3,877,548
Exercise of warrants...................................... 762,615
---------
7,473,997
=========
</TABLE>
Notes Receivable from Stockholder
On April 20, 1999 the Company loaned a shareholder $164,868 for the
exercise of 132,000 stock options. The Company entered into a stock pledge
agreement with the shareholder and became the holder of a full-recourse
promissory note from the shareholder in the amount of $164,868 bearing interest
at 5.28%, compounded semi-annually. Principal and interest are due on April 20,
2003.
On July 2, 1998 the Company loaned a shareholder $59,299 for the exercise
of 149,076 stock options. The Company entered into a stock pledge agreement with
the shareholder and became the holder of a full-recourse promissory note from
the shareholder in the amount of $59,299 bearing interest at 5.48%, compounded
semi-annually. Principal and interest were received by the Company in September
1999.
On May 14, 1996 the Company loaned a shareholder $57,143 for the exercise
of 1,142,858 stock options. The Company entered into a stock pledge agreement
with the shareholder and became the holder of a full-recourse promissory note
from the shareholder in the amount of $57,143 bearing interest at 6.36%,
compounded annually. Principal and interest are due on May 14, 2001.
48
<PAGE> 49
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LOSS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share from continuing operations (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss from continuing operations................ $(15,908) $(10,586) $(10,146)
Redeemable preferred stock accretion............... -- $ -- (1,519)
-------- -------- --------
Loss from continuing operations applicable to
common shareholders (numerator), basic and
diluted.......................................... $(15,908) $(10,586) $(11,665)
======== ======== ========
Shares (denominator):
Weighted average common shares outstanding....... 15,231 4,194 3,530
Weighted average common shares outstanding
subject to repurchase......................... (803) (1,359) (1,835)
-------- -------- --------
Shares used in computation, basic and diluted...... 14,428 2,835 1,695
======== ======== ========
Loss per share from continuing operations
applicable to common stockholders, basic and
diluted.......................................... $ (1.10) $ (3.73) $ (6.88)
======== ======== ========
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
--------- ---------- ----------
<S> <C> <C> <C>
Convertible preferred stock..................... -- 16,575,515 13,970,914
Shares of common stock subject to repurchase.... 730,168 949,998 1,873,390
Outstanding options............................. 3,877,548 2,013,413 1,823,700
Warrants........................................ 762,615 722,645 590,127
--------- ---------- ----------
Total........................................... 5,370,331 20,261,571 18,258,131
========= ========== ==========
</TABLE>
10. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
March 31:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards...................... $ 16,778 $ 8,394
Accruals deductible in different periods.............. 1,572 1,094
General business credits.............................. 1,594 327
Depreciation and amortization......................... 1,539 285
-------- -------
Total deferred tax assets............................... 21,483 10,100
Valuation allowances.................................... (18,670) (9,142)
-------- -------
Net deferred tax assets................................. 2,813 958
Deferred tax liabilities -- purchased intangibles....... (2,813) (958)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as
49
<PAGE> 50
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
net operating loss and tax credit carryforwards. Due to the uncertainty
surrounding the realization of the benefits of its favorable tax attributes in
future tax returns, as of March 31, 2000 and 1999, the Company has fully
reserved its net deferred tax assets of approximately $18,670,000 and
$9,142,000, respectively.
For all periods presented the Company's effective rate differs from the
expected benefit at the federal statutory tax rate due primarily to state taxes
of approximately 5% and nondeductible goodwill amortization, offset by a
valuation allowance against deferred tax assets.
The Company's loss from continuing operations for fiscal 2000 and 1999 was
generated by $14,738,000 and $9,081,000 from domestic operations, respectively
and $1,170,000 and $1,505,000 from international operations, respectively. The
Company did not have international operations in fiscal 1998.
At March 31, 2000, the Company has net operating loss (NOL) carryforwards
of approximately $47,796,000 and $9,023,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire in 2011, while the
state NOL carryforwards expire in 2001.
At March 31, 2000, the Company also has research and development credit
carryforwards of approximately $1,230,000 and $364,000 available to offset
future federal and state income taxes, respectively. The federal credit
carryforward expires in 2012, while the state credit carryforward has no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
11. SAVINGS PLAN
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, eligible employees may defer a portion of their
pretax salaries. Starting January 1, 2000, the Company matches 50% of the first
4% of employees' deferrals up to a maximum of 2% of their annual compensation.
In fiscal 2000, the Company contributed approximately $85,000.
12. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
As discussed in Note 1, the Company follows the requirements of SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. As
defined in SFAS No. 131, the Company operates in two reportable segments. The
Company's operations were divided into two segments: Quintus and CCE. As
discussed in Note 3, the Company discontinued its operations of CCE during
fiscal 1999. At the end of fiscal 2000 and 1999, the Company operated in one
reportable segment.
Geographic Information (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States................. $39,358 $5,258 $24,749 $3,391 $18,830 $3,727
Rest of the World(2).......... 12,349 130 5,558 93 3,060 --
------- ------ ------- ------ ------- ------
$51,707 $5,388 $30,307 $3,484 $21,890 $3,727
======= ====== ======= ====== ======= ======
</TABLE>
---------------
(1) Revenues are attributed to countries based on location of customer invoiced.
(2) No individual foreign country accounted for greater than 10% of total
revenues or long-lived assets in any of the periods presented.
50
<PAGE> 51
QUINTUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant Customers
One unrelated customer accounted for 13.7% and 19.3% of total revenues in
fiscal 2000 and 1999, respectively. No one customer accounted for greater than
10% of total revenues in fiscal 1998.
One unrelated customer accounted for 27.2%, 28.6%, and 21.1% of accounts
receivable at March 31, 2000, 1999 and 1998, respectively.
13. LITIGATION
The Company may be a potential defendant in lawsuits and claims arising in
the ordinary course of business. While the outcomes of such claims, lawsuits, or
other proceedings cannot be predicted with certainty, management expects that
such liability, to the extent not provided by insurance or otherwise, will not
have a material adverse effect on the financial condition of the Company.
14. SUBSEQUENT EVENTS
On May 18, 2000, Quintus completed its acquisition of Mustang.com, Inc.
Mustang.com develops, markets, services and supports the Mustang Message Center,
an e-mail management software solution that offers companies and other
enterprises the ability to manage their inbound e-mail and Internet-based
inquiries timely and accurately. The transaction was accounted for using the
purchase method of accounting. Quintus issued approximately 5,394,000 shares of
common stock and assumed options and warrants to purchase approximately 636,000
shares and approximately 41,000 shares of common stock, respectively. The
purchase price for the acquisition was approximately $275,000,000, based on
capital stock issued, the value of options and warrants assumed, and transaction
costs incurred.
51
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Directors of the Registrant is
incorporated by reference from the definitive Proxy Statements for the
Registrant's 2000 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the end of Quintus' fiscal year
ended March 31, 2000. The information as to the Executive Officers of the
Registrant is included in Part I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders.
52
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Item 8 of this Form 10-K.
2. Financial Statements Schedules
The following financial statement schedules are filed herewith.
<TABLE>
<S> <C>
Report on Schedule of Deloitte & Touche LLP, Independent
Auditors.................................................. 56
Schedule II -- Valuation and Qualifying Accounts............ 57
</TABLE>
3. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or incorporated
by reference into, this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.2(1) Agreement and Plan of Merger between the Registrant and
Mustang.com, Inc., dated February 25, 2000.
2.1(2) Agreement and Plan of Reorganization by and among
Registrant, Acuity Corp., Ribeye Acquisition Corp. and
certain stockholders of Acuity Corp., dated September 10,
1999.
3.3(2) Registrant's Restated Certificate of Incorporation.
3.5(2) Registrant's Amended and Restated Bylaws.
4.1(2) Reference is made to Exhibits 3.3 and 3.5.
4.2(2) Specimen Common Stock certificate.
4.3(2) Registrant's Amended and Restated Investors Rights
Agreement, dated November 10, 1999.
10.1(2) Form of Indemnification Agreement entered into between
Registrant and each of its directors and officers.
10.2(2) 1995 Stock Option Plan and forms of agreements thereunder.
10.3(2) 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4(2) Employee Stock Purchase Plan.
10.5(2) 1999 Director Option Plan.
10.6(2) Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7(2) Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8(2)+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10(2)+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
10.11(2) Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12(2) Employment agreement between Registrant and John Burke,
dated June 11, 1999.
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13(2) Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated September 18, 1998.
10.14(2) Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corp., dated December 19, 1996.
10.15(3)+ Authorized OEM/Reseller Agreement between Quintus
Corporation and Lipstream Networks, Inc., dated December 3,
1999.
10.16(3) Sublease between Quintus Corporation and Advanced Radio
Telecom Corp., dated December 13, 1999, and Corresponding
Master Lease.
10.17(3) Second Amendment to OEM/Reseller Agreement between Quintus
Corporation and Brightware, Inc., dated December 22, 1999.
10.18+ Amendment No. 5 to the Software Distribution Agreement
Between Lucent Technologies Inc. and Quintus Corporation
dated February 23, 2000
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
24.1 Power of attorney (see signatures page)
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-4/A filed April 11, 2000
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 declared effective by the Securities and Exchange Commission on
November 15, 1999.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
filed on February 14, 2000.
+ Portions of these exhibits have been omitted pursuant to requests for
confidential treatment.
(b) Reports on Form 8-K
Quintus filed a report on Form 8-K on February 29, 2000 announcing the
signing of a definitive agreement to acquire Mustang.com. On May 3,
2000, Quintus filed a report on Form 8-K to supplement the proxy
statement filed on April 11, 2000 in connection with the acquisition of
Mustang.com.
54
<PAGE> 55
QUINTUS CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by undersigned, thereunto duly authorized.
Quintus Corporation
Date: June 2, 2000 By: /s/ ALAN K. ANDERSON
------------------------------------
Alan K. Anderson
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Alan K. Anderson and
Susan Salvesen, and each or any of them, his or her true and lawful
attorneys-in-fact and agents, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his or her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following person on behalf of the
Registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALAN K. ANDERSON Chief Executive Officer (Principal June 2, 2000
----------------------------------------------------- Executive Officer and Director)
Alan K. Anderson
/s/ SUSAN SALVESEN Chief Financial Officer (Principal June 2, 2000
----------------------------------------------------- Financial and Accounting Officer)
Susan Salvesen
/s/ PAUL H. BARTLETT Director June 2, 2000
-----------------------------------------------------
Paul H. Bartlett
/s/ ANDREW BUSEY Director June 2, 2000
-----------------------------------------------------
Andrew Busey
/s/ FREDERIC W. HARMAN Director June 2, 2000
-----------------------------------------------------
Frederic W. Harman
/s/ WILLIAM HERMAN Director June 2, 2000
-----------------------------------------------------
William Herman
/s/ ALEXANDER ROSEN Director June 2, 2000
-----------------------------------------------------
Alexander Rosen
/s/ ROBERT SHAW Director June 2, 2000
-----------------------------------------------------
Robert Shaw
/s/ JEANNE WOHLERS Director June 2, 2000
-----------------------------------------------------
Jeanne Wohlers
</TABLE>
55
<PAGE> 56
REPORT ON SCHEDULE OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Quintus Corporation:
We have audited the consolidated financial statements of Quintus
Corporation and subsidiaries (the Company) as of March 31, 2000 and 1999 and for
each of the two years in the period ended March 31, 2000 and have issued our
report thereon dated April 18, 2000 (May 18, 2000 as to Note 14) (included
elsewhere in this Annual Report on Form 10-K). Our audits also included the
financial statement schedule of the Company, listed in Item 14(a)(2). The
financial statement schedule is the responsibility of the Company 's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 18, 2000
56
<PAGE> 57
QUINTUS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BEGINNING OF BALANCE
PERIOD ADDITIONS(1) DEDUCTIONS(2) AT END OF PERIOD
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Year ended March 31, 1998
Allowance for doubtful accounts..... $525 $ 408 $ (85) $ 848
Year ended March 31, 1999
Allowance for doubtful accounts..... $848 $ 235 $(354) $ 729
Year ended March 31, 2000
Allowance for doubtful accounts..... $729 $1,191 $(597) $1,323
</TABLE>
---------------
(1) For fiscal 2000, Quintus charged $912 to costs and expenses and assumed $279
from the acquisition of Acuity.
(2) Accounts written off against the reserve.
57
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.2(1) Agreement and Plan of Merger between the Registrant and
Mustang.com, Inc., dated February 25, 2000.
2.1(2) Agreement and Plan of Reorganization by and among
Registrant, Acuity Corp., Ribeye Acquisition Corp. and
certain stockholders of Acuity Corp., dated September 10,
1999.
3.3(2) Registrant's Restated Certificate of Incorporation.
3.5(2) Registrant's Amended and Restated Bylaws.
4.1(2) Reference is made to Exhibits 3.3 and 3.5.
4.2(2) Specimen Common Stock certificate.
4.3(2) Registrant's Amended and Restated Investors Rights
Agreement, dated November 10, 1999.
10.1(2) Form of Indemnification Agreement entered into between
Registrant and each of its directors and officers.
10.2(2) 1995 Stock Option Plan and forms of agreements thereunder.
10.3(2) 1999 Stock Incentive Plan and forms of agreements
thereunder.
10.4(2) Employee Stock Purchase Plan.
10.5(2) 1999 Director Option Plan.
10.6(2) Light Industrial Lease between Registrant and Teachers
Insurance and Annuity Association of America, dated October
6, 1995.
10.7(2) Sublease between Registrant and Oryx Technology Corporation
and SurgX Corporation, dated October 1, 1999.
10.8(2)+ Software Distribution Agreement dated May 5, 1997, between
Nabnasset Corporation and Lucent Technologies Inc.
10.10(2)+ Authorized OEM/Reseller Agreement dated December 22, 1998,
between Registrant and Brightware, Inc.
10.11(2) Employment agreement between Registrant and Alan Anderson,
dated May 23, 1995 and Notice of Grant of Stock Option.
10.12(2) Employment agreement between Registrant and John Burke,
dated June 11, 1999.
10.13(2) Loan and Security Agreement between Registrant and Silicon
Valley Bank, dated September 18, 1998.
10.14(2) Sublease Agreement between Pavilion Technologies, Inc. and
Acuity Corp., dated December 19, 1996.
10.15(3)+ Authorized OEM/Reseller Agreement between Quintus
Corporation and Lipstream Networks, Inc., dated December 3,
1999.
10.16(3) Sublease between Quintus Corporation and Advanced Radio
Telecom Corp., dated December 13, 1999, and Corresponding
Master Lease.
10.17(3) Second Amendment to OEM/Reseller Agreement between Quintus
Corporation and Brightware, Inc., dated December 22, 1999.
10.18+ Amendment No. 5 to the Software Distribution Agreement
Between Lucent Technologies Inc. and Quintus Corporation
dated February 23, 2000
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
24.1 Power of attorney (see signatures page)
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-4/A filed April 11, 2000.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 declared effective by the Securities and Exchange Commission on
November 15, 1999.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
filed on February 14, 2000.
+ Portions of these exhibits have been omitted pursuant to requests for
confidential treatment.
