UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-22327
CONCERO, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2796054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 343-6666
Indicate by check x 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,149,483 shares of the
Company's Common Stock, $.01 par value, were outstanding as of October 31, 2000.
<PAGE>
CONCERO, INC.
Table of Contents
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Page
Part I - Financial Information
<S> <C>
Item 1. Financial Statements (Unaudited)......................................................................3
Condensed Consolidated Balance Sheets - December 31, 1999 and September 30, 2000......................3
Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended
September 30, 1999 and 2000...........................................................................4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30,
1999 and 2000.........................................................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risks..........................................18
Part II - Other Information
Item 2. Changes in Securities................................................................................18
Item 6. Exhibits and Reports on Form 8-K.....................................................................18
Signatures...........................................................................................19
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Concero, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30,
December 31, 2000
1999 (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 2,108 $ 441
Short-term investments 18,149 14,836
Accounts receivable, net of allowance for doubtful
accounts of $380 at December 31, 1999 and $1,015 at
September 30, 1999 10,840 14,329
Unbilled revenue under customer contracts 1,150 408
Income tax receivable - 825
Net deferred taxes 447 2,180
Prepaid expenses and other current assets 445 1,430
Total current assets 33,139 34,449
Property and equipment, net 4,677 6,378
Total assets $ 37,816 $ 40,827
Liabilities and stockholders' equity
Current liabilities:
Trade payables $ 925 $ 1,080
Accrued expenses and other current liabilities 2,954 3,318
Total current liabilities 3,879 4,398
Net deferred taxes 515 515
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000
shares authorized and none issued and - -
outstanding
Common stock, par value $.01 per share, 34,000,000
shares authorized, 9,666,535 and 10,085,114 shares
issued and outstanding at December 31, 1999 and
September 30, 2000, respectively 97 101
Additional paid-in capital 30,491 33,483
Accumulated other comprehensive income (loss) (39) 6
Retained earnings 2,873 2,324
Total stockholders' equity 33,422 35,914
Total liabilities and stockholder' equity $ 37,816 $ 40,827
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Concero, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Revenue $ 11,632 $ 14,224 $ 33,033 $ 45,517
Operating expenses:
Technical staff 6,392 9,160 18,497 25,242
Selling and administrative staff 2,208 2,320 6,741 8,067
Other expenses 2,457 6,421 6,992 13,770
Total operating expenses 11,057 17,901 32,230 47,079
Income (loss) from operations 575 (3,677) 803 (1,562)
Interest income 259 226 747 698
Income (loss) before provision (benefit) for
income taxes 834 (3,451) 1,550 (864)
Provision (benefit) for income taxes 320 (1,225) 600 (315)
Net income (loss) $ 514 $ (2,226) $ 950 $ (549)
Basic earnings (loss) per share $ 0.05 $ (0.22) $ 0.10 $ (0.06)
Diluted earnings (loss) per share $ 0.05 $ (0.22) $ 0.09 $ (0.06)
Shares used in basic earnings (loss) per share
calculation 9,479 10,018 9,406 9,940
Shares used in diluted earnings (loss) per share
calculation 10,549 10,018 10,327 9,940
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Concero, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months
Ended September 30,
-------------------------------------
<S> <C> <C>
1999 2000
Operating activities
Net income (loss) $ 950 $ (549)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 999 1,696
Bad debt expense 28 1,154
Changes in operating assets and liabilities:
Accounts receivable (1,035) (4,643)
Unbilled revenue under customer contracts (1,082) 742
Prepaid expenses and other current assets (105) (985)
Trade payables 267 223
Deferred revenue 35 (123)
Accrued expenses and other current liabilities 1,255 599
Income taxes 1,046 (388)
Net cash provided by (used in) operating activities 2,358 (2,274)
Investing activities
Purchase securities (1,522) -
Proceeds from sale of short term investments - 3,358
Acquisition of property and equipment (1,190) (3,481)
Net cash used in investing activities (2,712) (123)
Financing activities
Issuance of common stock 165 730
Net cash provided by financing activities 165 730
Net decrease in cash (189) (1,667)
Cash, beginning of period 1,167 2,108
Cash, end of period $ 978 $ 441
Non-cash activities:
Unrealized gain on investments $ 24 $ 45
Reduction of income taxes payable associated with the
exercise of stock options $ 9 $ 2,266
</TABLE>
See accompanying notes.
<PAGE>
Concero, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Concero, Inc. and our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") regarding interim financial reporting.
Accordingly, they do not include all the information and notes required by
accounting principles generally accepted in the United States for complete
financial statements and should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1999 included in
our annual report on Form 10-K. The accompanying financial statements reflect
adjustments, all of which are of a normal recurring nature, which are, in the
opinion of management, necessary for a fair presentation. The results for
interim periods are not necessarily indicative of full year results.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions, including estimates to complete contracts, that affect the
reported amounts in the financial statements and accompanying notes. Actual
results could differ from those estimates.
3. Comprehensive Income (Loss)
As of January 1, 1998, we adopted SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on our net income or stockholders' equity. SFAS No. 130 requires
unrealized gains or losses on our available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income (loss).
The components of comprehensive income (loss) for the three and nine months
ended September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 514 $ (2,226) $ 950 $(549)
Unrealized gain (loss) on short term
investments (25) 22 42 70
Income tax expense (benefit) related to items
of other comprehensive income (10) 8 18 25
----------- ----------- ---------- ----------
Comprehensive income (loss) $ 499 $ (2,212) $ 974 $(504)
=========== =========== ========== ==========
</TABLE>
<PAGE>
Concero, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
4. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings
loss) per share (in thousands, except per share data) for the three months and
nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 514 $ (2,226) $ 950 $ (549)
============== ============== =============== ==============
Denominator:
Shares used in basic earnings (loss) per
share calculation 9,479 10,018 9,406 9,940
Effect of dilutive securities:
Employee stock options 638 - 463 -
Warrants 432 - 458 -
-------------- -------------- --------------- --------------
Shares used in diluted earnings (loss) per
share calculation 10,549 10,018 10,327 9,940
============== ============== =============== ==============
Basic earnings (loss) per share $ 0.05 $ (0.22) $ 0.10 $ (0.06)
============== ============== =============== ==============
Diluted earnings (loss) per share $ 0.05 $ (0.22) $ 0.09 $ (0.06)
============== ============== =============== ==============
</TABLE>
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis below contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties, such as
statements regarding our ability to continue to market our services and sell our
services to achieve anticipated results or to address emerging markets
successfully. Such forward looking statements are generally accompanied by words
such as "plan," "estimate," "expect," "believe," "could," "would," "anticipate,"
"may," or other words that convey uncertainty of future events or outcomes.
These forward-looking statements and other statements made elsewhere in this
report are made in reliance on the Private Securities Litigation Reform Act of
1995. The section below entitled "Factors That May Affect Future Results,
Financial Condition and Market Price of Securities" sets forth certain factors
that could cause our actual future results to differ materially from these
statements.
Overview
We are an e-business services firm that offers strategic consulting skills
with deep technology and integration expertise. This combination enables us to
utilize existing and new technologies to provide reliable, flexible and scalable
e-business solutions. Our alliances with leading Internet and interactive
television technology providers allow us to gain a thorough understanding of
their products and perspective on other products as well as next-generation
technologies. Using our technology insight and skills, we assist our clients to
define, design, develop and deploy e-business solutions that enhance their
competitive positions.
We derive our revenues from fees for services that are generated on an
engagement-by-engagement basis. During the first nine months of 2000, we derived
approximately 91% of revenues from time and materials contracts. We recognize
revenues generated under time and materials contracts as the services are
provided. For fixed price contracts, which accounted for the balance of our
first nine months of 2000 revenues, we recognize revenues using the
percentage-of-completion method. Using this method, we recognize revenue
proportionate to the percentage of units of labor incurred to the date of
measurement relative to the estimated total units of labor for completion.
Revenues exclude expenses reimbursed by clients. Software licensing fees do not
constitute a material portion of our revenue base.
<PAGE>
Results of Operations
The following table sets forth the percentage of revenue of certain items
included in our condensed statement of operations for the period indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, Ended September 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
Operating expenses:
Technical staff 55 64 56 55
Selling and administrative staff 19 16 21 18
Other expenses 21 46 21 30
Total operating expense 95 126 98 103
Income (loss) from operations 5 (26) 2 (3)
Interest income 2 1 3 1
Provision (benefit) for income taxes 3 (9) 2 (1)
Net income (loss) 4% (16)% 3% (1)%
</TABLE>
Revenue
Our revenue consists primarily of fees for software services provided. Revenue
increased 22% to $14.2 million in the quarter ended September 30, 2000 from
$11.6 million in the quarter ended September 30, 1999. In the first nine months
of 2000, revenue increased 38% to $45.5 million from $33.0 million in the first
nine months of 1999. These increases are principally due to the improvement in
our average hourly bill rate. Comparing the first nine months of 2000 with the
same period in 1999 our average hourly bill rate increased 39%, as a result of
two primary factors. First, we shifted our focus from performing primarily
software development maintenance and support services in 1999 to delivering
strategic e-business services supported by our national eStrategy, eSolutions,
ePerformance, and eTV and Broadband practices. In the first nine months of 2000,
our e-business services average bill rate was 140% higher than the average bill
rate for our maintenance and support services. Second, we improved the average
bill rate for our e-business services. In the first nine months of 2000 our
average e-business solutions bill rate improved by 23% over the same period in
1999.
We experienced a 17% decrease in our revenue in the third quarter of 2000
compared with the second quarter of 2000. This decline was principally due to
changing market dynamics that resulted in lower demand and billed hours for
e-business services in the third quarter of 2000 compared with the second
quarter of 2000. Much of this is attributable to the reduced funding of, and
spending by, Internet and start-up businesses and lengthening sales cycles for
the more established companies.
IBM accounted for 11% and 29% of revenue in each of the first nine months of
2000 and 1999, respectively. The IBM revenue consists of revenues from three
different IBM organizations: IBM, Tivoli and Lotus. Another client accounted for
11% of revenue for the first nine months of 1999 and another client accounted
for 13% of revenue for the first nine months of 2000. No other client accounted
for more than 10% of revenue for either period.
Technical Staff
Technical staff expenses consist of the cost of salaries, payroll taxes, health
insurance and workers' compensation for technical staff personnel assigned to
client engagements and unassigned technical staff
<PAGE>
personnel, and fees paid to any subcontractors for work performed in connection
with a client engagement. Technical staff expenses increased 43% to $9.2 million
in the quarter ended September 30, 2000 from $6.4 million in the quarter ended
September 30, 1999. Technical staff expenses were $25.2 million in the first
nine months of 2000, an increase of 36% over $18.5 million for the first nine
months of 1999. The increase in technical staff expenses is primarily due to the
addition of personnel to service the increase in scope and number of client
engagements.
As a percentage of revenue, technical staff expenses increased to 64% in the
quarter ended September 30, 2000 from 55% in the quarter ended September 30,
1999. This increase was primarily the result of a decline in revenue from the
second quarter of 2000 coupled with an increase in our billable staff. Technical
staff expenses decreased to 55% of revenues for the nine months ended September
30, 2000 from 56% for the nine months ended September 30, 1999, primarily as a
result of higher revenues resulting from the improvement in our average hourly
bill rate.
Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling, marketing
and administrative personnel, and all commissions and bonuses paid to technical
and administrative staff. Selling and administrative staff expenses increased 5%
to $2.3 million in the quarter ended September 30, 2000 from $2.2 million in the
quarter ended September 30, 1999. This increase is due to the addition of
selling and administrative staff offset by a reversal of an accrued bonus pool
of $590,000 during the third quarter of 2000 as a consequence of lower operating
income when compared with fiscal year 2000 targets required for payment under
the bonus plan. Selling and administrative staff expenses were $8.1 million in
the first nine months of 2000, an increase of 20% from $6.7 million in the first
nine months of 1999. This increase was as a result of additions to our selling
and administrative staff.
As a percentage of revenues, selling and administrative staff expenses decreased
to 16% in the quarter ended September 30, 2000 from 19% in the quarter ended
September 30, 1999, largely as a result of the reversal of an accrued bonus pool
of $590,000 during the third quarter of 2000. Selling and administrative staff
expenses decreased to 18% of revenue for the nine months ended September 30,
2000 from 21% for the first nine months of September 30, 1999, primarily as a
result of higher revenues and the reversal of the aforementioned bonus pool.
Other Expenses
Other expenses consist of all non-staff related costs, such as occupancy costs,
travel, business insurance, business development, recruiting, training and
depreciation. Other expenses increased 161% to $6.4 million in the quarter ended
September 30, 2000 from $2.5 million in the quarter ended September 30, 1999.
During the third quarter of 2000, other expenses increased due to several items,
including the addition of $1.1 million to our bad debt reserves, the recognition
of $750,000 of deferred expenses related to a cancelled secondary offering and
the write-off of a $125,000 investment in a start-up company. The remaining
increase is primarily due to the addition and expansion of our facilities and
higher recruiting, advertising, training and travel related costs. Other
expenses were $13.8 million in the first nine months of 2000, an increase of 97%
over other expenses of $7.0 million in the first nine months of 1999. This
increase is primarily due to the aforementioned items affecting the third
quarter and the cost of our branding and public relations launch associated with
the change of our name to Concero during the first quarter of 2000.
As a percentage of revenues, other expenses increased to 46% in the quarter
ended September 30, 2000 from 21% for the quarter ended September 30, 1999.
Other expenses increased to 30% of revenue in the first nine months of 2000
compared to 21% in the first nine months of 1999.
<PAGE>
Income from Operations
We recorded a loss from operations of $3.7 million for the quarter ended
September 30, 2000 a decrease from income from operations of $575,000 for the
quarter ended September 30, 1999. We recorded a loss from operations of $1.6
million in the first nine months of 2000, a decrease from income from operations
of $803,000 in the first nine months of 1999. As a percentage of revenues, loss
from operations was 26% for the quarter ended September 30, 2000 compared to
income from operations of 5% for the quarter ended September 30, 1999. Loss from
operations was 3% of revenue in the first nine months of 2000, compared to 2% of
revenue in the first nine months of 1999.
Income Taxes
The benefit from income taxes of $315,000 for the nine months ended September
30, 2000 is computed using an estimated annual effective tax rate of 36%. This
differs from the federal statutory rate of 34% as a result of state taxes,
tax-exempt interest income and permanent differences for meals and entertainment
expenses.
The provision for income taxes of $600,000 for the nine months ended September
30, 1999 is computed using an estimated annual effective tax rate of 39%, which
differs from the federal statutory rate of 34% primarily due to state taxes and
permanent differences for meals and entertainment expenses.
Liquidity and Capital Resources
We have historically financed our operations and met our capital expenditure
requirements primarily through cash flows from operations. Our liquidity and
financial position consisted of $30.1 million in working capital as of September
30, 2000 compared to $29.3 million as of December 31, 1999. Our operating
activities used cash of $2.3 million for the first nine months of 2000. Our
operating activities provided cash of $2.4 million for the first nine months of
1999. We purchased approximately $3.5 million and $1.2 million of computers,
office and system equipment and software in the first nine months of 2000 and
1999, respectively. At September 30, 2000, we had cash, cash equivalents and
short-term investments totaling $15.3 million.
At September 30, 2000, we did not have any material commitments for capital
expenditures. We have budgeted approximately $4.0 million for capital
expenditures for fiscal 2000 of which $3.5 million has been spent through
September 30, 2000. Our capital expenditures normally consist primarily of
purchases of laptop computers, computer servers and furniture, the amount of
which fluctuates based on the number of additional employees we hire and the
number of new offices that we open in any period.
The number of days of revenue in our accounts receivable balance fluctuated from
84 days to 95 days during the first nine months of 2000 and increased from 93
days as of June 30, 2000. We may experience longer collection periods if the
work we perform for smaller companies increases as a percentage of our total
services.
We anticipate that our existing cash, cash equivalents and short-term investment
balances and potential cash flows from operations will be adequate to fund our
working capital and capital expenditure requirements for at least the next 12
months. However, changes may occur that could consume available capital
resources before such time. Our capital requirements depend on numerous factors,
including potential acquisitions, the timing of the receipt of accounts
receivable, employee growth and the percentage of projects performed at our
facilities.
We currently do not maintain any committed credit facilities. We cannot assure
you that commercial credit, if necessary, will be available to us on favorable
terms, or at all.
<PAGE>
Factors That May Affect Future Results, Financial Condition
and Market Price of Securities
Risks that Relate to Our Business Strategy
We are subject to a number of risks related to our business strategy. We
describe some of these risks below. If any of these risks materializes, our
business, financial condition and results of operations could be harmed, and our
stock price could fall.
We have refocused our business strategy. This may not be successful.
In August 1998, we began building a new management team. The new management
team has refocused our business strategy. This strategy is described in the
"Business" section in our Annual Report on Form 10-K filed March 14, 2000. Some
of the changes to our business strategy include:
o expansion into new and largely untested business areas such as eTV and
broadband services;
o realignment of our internal corporate structure on a geographic basis;
and
o a shift in focus of our client base from technology vendors to
technology users, and a shift from longer-term development and
maintenance arrangements to specific, shorter-term e-business project
engagements.
Our shift from ongoing development and maintenance engagements to strategic
engagements has favorably affected our average billing rates but negatively
affected our technical staff utilization rates. If we are unable to offset
decreases in our utilization rates through increases in our billing rates, our
profitability will be harmed. Adverse economic conditions, a lack of consumer
acceptance of eTV, broadband and other advanced technologies, increased
competition and other factors could hurt both our utilization rates and our
billing rates. As a result, it is too early to know whether the refocusing of
our business strategy will help us achieve long-term success. Companies that
implement major changes in their business strategy can face more challenging
risks and unexpected difficulties. These risks and difficulties apply
particularly to us because the market for our Internet and e-business consulting
services is new and rapidly evolving.
The success of our business strategy depends on our ability to identify
emerging technologies that will gain wide acceptance in future markets.
Our business strategy requires us to:
o identify promising technologies at an early stage in their development;
o accurately assess their long-term viability; and
o rapidly gain expertise in these technologies.
Our business may suffer if we invest time and resources in technologies
that ultimately do not reach widespread use or commercial success. Even if we
identify the best technologies, their widespread use and deployment may not
occur within a time span that is compatible with our business plans and revenue
expectations.
In particular, some of the technologies that we are focusing on heavily,
such as eTV and broadband, may not achieve business or consumer acceptance in
the near term, or at all. For example, companies promoting eTV and broadband
services may find that consumers are reluctant to use them, for reasons of cost
or complexity. As a result, we may use substantial resources developing
expertise in areas that will not yield substantial revenues or profits for us in
the next few years.
<PAGE>
Our business strategy depends on our ability to create and maintain
strategic alliances with other e-business and technology companies. These
alliances may shift or terminate suddenly.
We currently maintain strategic alliances with other companies that help us
to gain access to new technology and business opportunities. This is one of the
principles of our exponet strategy. Like many in our industry, we sometimes
refer to these companies as our "partners", but they are not partners in a legal
sense. In particular, these companies are under no binding obligation to remain
in relationships with us or to continue to cooperate with us, and these
relationships are generally not exclusive.
Any of our alliance partners may choose to end the alliance, alter the
terms of the alliance in a way that harms our business or increase the level of
business they conduct with our competitors. Similarly, if one of our alliance
partners undergoes a management or ownership change, we could lose access to
critical technology and business opportunities. In addition to a decrease in
revenue, the publicity that could accompany these kinds of changes could have a
damaging effect on our stock price.
Moreover, our brand may be closely associated with the business success or
failure of some of our high-profile alliance partners, many of whom are pursuing
unproven business models in competitive markets. As a result, the failure or
other difficulties of these companies may damage our brand and hurt our business
opportunities.
Some of our clients are emerging companies that have little or no operating
history and may lack the resources to pay our fees.
Because we focus on emerging technologies, we derive some of our revenues
from small companies, particularly start-up companies that have limited
operating histories and resources to pay our fees. Our business model
contemplates increasing the amount of business we do with these companies. These
companies often have little or no earnings or cash flow and are generally
considered to have a greater risk of failing than more established businesses.
As a result, these clients may not be able to pay for our services in a timely
manner, or at all. These effects would lead to an extension of our collection
period, which would harm our liquidity, and an increase in our bad debt expense,
which would harm our profitability.
We may make investments in clients or potential clients that are emerging
companies. These investments are risky, we have limited experience in making
these investments and we could lose all of our investment.
Although not a key part of our strategy, we may make strategic investments
in small, emerging clients or potential clients, either in cash or in kind. We
may also agree to take some or all of our fees in the form of equity securities
issued by these clients as part of our engagement. Investments in such emerging
companies are extremely risky and some or all of our investment could be lost.
We have limited experience in these investments or in managing these
arrangements.
Potential acquisitions could be difficult to integrate, disrupt our business
dilute stockholder value and hurt our operating results.
As part of our growth strategy, we intend to pursue acquisitions of
businesses and technologies that are complementary to our core businesses. Our
ability to grow through acquisitions will depend on the availability of
attractive acquisition candidates, our ability to successfully compete for these
acquisition candidates and the availability of capital to finance these
acquisitions.
The benefits of an acquisition often may take considerable time to develop,
and the acquisition may never produce the intended benefits. Factors that could
cause an acquisition to be unsuccessful include:
<PAGE>
o the loss of employees or clients of the acquired business, and thus a
loss of one of the key rationales for making the acquisition;
o our failure to appreciate the dynamics of markets in which we have
limited or no prior experience;
o the diversion of management's attention from our core businesses;
o any difficulties we experience in assimilating the operations of an
acquired business or in realizing projected efficiencies, cost
savings and revenue synergies;
o our failure to assess or discover liabilities;
o the dilution of our stockholders' equity and earnings per share,
particularly if we finance the acquisitions with equity; and
o an increase in our debt and contingent liabilities, which in turn
could restrict our ability to access additional capital when needed
or to pursue other important elements of our business plan.
If we fail to manage our growth, our resources may be strained and our
ability to implement our business strategy will be harmed.
Our growth could place significant demands on our management and other
resources. In order to manage our growth effectively, we must continue to
develop and improve our operational, financial and other internal systems, as
well as our business development capabilities, and we must continue to attract,
train, retain, motivate and manage our employees. We may not succeed in these
efforts.
Risks that Relate to Our Business
We are subject to a number of risks that are particular to our business and
that may or may not affect our competitors. We describe some of these below. If
any of these risks materializes, our business, financial condition and results
of operations could be harmed, and our stock price could fall.
Our key employees are critical to our continued success. The loss of any of
these employees could impair our ability to execute our strategy or grow our
business.
Our future success will depend in part upon the continued services of a
number of key management and technical employees. The loss of any of our key
personnel could hurt our ability to execute our strategy and grow our business.
We do not maintain key-person life insurance on any of our employees. In
addition, if one or more of our key employees resign to join a competitor or to
form a competing business, we could lose existing or potential clients. In the
event we lose any of these employees, we may not be able to prevent the
disclosure or use of our proprietary technical knowledge, practices and
procedures.
We need to recruit, train and retain qualified employees to successfully grow
our business.
Our success depends on our ability to recruit, train, retain, motivate and
manage highly skilled employees. Qualified project managers, software architects
and senior technical and professional staff with the skills we need are in great
demand worldwide and are likely to remain a limited resource for the foreseeable
future. We may not be able to hire a sufficient number of highly skilled
employees. In addition, the highly competitive labor market may require us to
raise salaries faster than we have in the past, and faster than we raise our
billing rates.
<PAGE>
We have experienced a high rate of attrition in the past, particularly
around the time of our management change. If we continue to experience high
rates of attrition, it will be even more difficult to execute our growth
strategy.
We may also be unsuccessful in training, retaining and motivating our
employees. If our employees do not achieve the required levels of performance,
our ability to manage and staff existing projects and to obtain new projects
might suffer.
We changed our name.
We changed our name to Concero, Inc. Although we have filed a trademark
application for this name, we may be unable to protect our name or prevent
others from using our name. Other parties may claim that our use of Concero
violates their intellectual property rights. If we are prevented from using the
Concero name, it may become more difficult for us to carry out our business
plans. In addition, our planned advertisement of the change and promotion of our
new brand may fail to reach important segments of our potential customer base,
and our marketing campaign may yield little results.
We may not be able to protect our intellectual property and proprietary
rights.
Our proprietary intellectual property consists of the business processes
and software that we develop to assist clients. Our efforts to protect our
proprietary rights may not be adequate to deter theft or misuse of our
intellectual property. We may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If third
parties infringe, misappropriate or copy our trade secrets, proprietary
processes, copyrights, trademarks or other proprietary information, we could
lose important competitive advantages.
We could be subject to claims that we infringe the intellectual property
rights of others.
There has been a marked increase in patent and intellectual property
litigation in recent months, particularly involving competitors in the
technology sector. Although we are not aware that any of our activities infringe
the patent or other intellectual property rights of others, we have not sought
any formal assurances that this is the case. Other parties may assert
infringement claims against us or claim that we have violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may distract our management. If we are required to
stop using a particular methodology or technology because of an infringement
lawsuit, it could become extremely difficult to carry out our business plans.
We depend on a small number of clients for a significant portion of our
revenues.
During the first nine months of 2000, we derived 40% of our revenue from
our five largest clients. Our largest client accounted for 13% of our revenue in
the first nine months of 2000. The volume of work performed for specific clients
is likely to vary from year to year, and a major client in one year may not use
our services in another year. The loss or reduction of our revenue due to a
decline in services performed for any large client could harm our business.
Our lack of long-term contracts with clients makes our revenues difficult to
predict.
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts. As a result, the size and number of client
engagements are difficult to predict, and vary markedly from quarter to quarter.
At the same time, our operating expenses are relatively fixed and cannot be
reduced on short
<PAGE>
notice for unanticipated shortfalls in our revenue. This is because our most
significant operating expense is employee salaries.
Moreover, our clients can generally reduce the scope of our services or
cancel our engagements without penalty and with little or no notice. If a client
postpones, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, we might not be able to redeploy our employees
quickly to other engagements.
Some of our client contracts are on a fixed-price basis. If we fail to
accurately estimate the resources required for a fixed-price project, our
profitability could be harmed.
During the first nine months of 1999 and 2000, we generated approximately
22% and 9%, respectively, of our revenue on a fixed-price,
fixed-delivery-schedule basis, rather than on a time-and-materials basis. If we
fail to accurately estimate the resources required for a fixed-price project or
fail to complete our obligations on time, our revenues could be harmed and our
expenses could increase. We sometimes must revise project plans after beginning
a project because we failed to accurately estimate the resources required.
Risks that Relate to Our Industry
We are subject to a number of risks that are inherent in the technology
industry. We describe some of these below. If any of these risks materializes,
our business, financial condition and results of operations could be harmed, and
our stock price could fall.
Our industry is intensely competitive.
We expect competition to persist and intensify in the future. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully, our business would be seriously
harmed. Competition can make it more difficult for us to:
o attract and retain customers;
o expand our sales and marketing activities;
o create and maintain the strategic relationships that are vital to
success in the Internet and e-business marketplace, and thus develop
and acquire knowledge of leading-edge technologies; and
o recruit and maintain the highly skilled technical staff that our
business model demands.
We compete against numerous companies that offer Internet services,
software engineering, systems integration, or management consulting, as well as
the consulting divisions of large accounting firms. Because relatively low
barriers to entry characterize the market, we expect other companies to enter
our market. Some large information technology firms have announced that they
will focus more resources on e-business opportunities.
Many of our current competitors have longer operating histories, larger
client bases, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. This may place
us at a disadvantage in responding to our competitor's pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. In addition, many of our competitors have well-established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more
<PAGE>
standardized or less customized services than we do may have a substantial
cost advantage, which could force us to lower our prices, adversely affecting
our operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
Our success depends on the continued growth and acceptance of advanced
technologies.
Our future success depends heavily on the further widespread use of the
Internet as a means for commerce, and consumer and commercial acceptance of eTV
and broadband. Despite the large amount of investor and media attention these
technologies have received, they are in early stages of development and it is
difficult to predict whether or how they will continue to develop. A number of
factors, such as government regulation, taxation, general economic conditions
and lack of consumer acceptance could hinder development of these technologies.
If these new technologies fail to gain widespread acceptance or grow more slowly
than expected, our business opportunities will diminish.
Risks that Relate to Our Stock
Our stock price is subject to a number of risks. We describe some of these
below. If any of these risks materializes, our stock price could fall.
Our quarterly operating results will vary, which may affect the market price
of our common stock in a manner unrelated to our long-term performance.
Our quarterly operating results have varied in the past and we expect that
they will continue to vary in the future depending on a number of factors, many
of which are outside of our control. Factors that may cause our quarterly
operating results to vary include:
o the number, size and scope of projects in which we are engaged;
o the contractual terms and degree of completion of these projects;
o any delays incurred in connection with a project;
o our success in earning bonuses or other contingent payments;
o our employee hiring and utilization rates;
o the adequacy of provisions for losses;
o the accuracy of our estimates of resources required to complete
ongoing projects;
o customer budget cycles and spending priorities; and
o general economic conditions.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, unanticipated
variations in the number of our projects, in our progress on projects or in our
employee utilization rates may cause significant variations in operating results
in any particular quarter. Given the possibility of these quarterly
fluctuations, we believe that comparisons of our
<PAGE>
quarterly results are not necessarily meaningful and that results for one
quarter should not be relied upon to predict our future performance.
Any quarterly shortfall in revenue or earnings from expected levels, or
other short-term failures to meet the expectations of securities analysts or the
market in general, can have an immediate and damaging effect on the market price
of our common stock.
Our common stock may experience extreme price and volume fluctuations.
The stock market, from time to time, has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet and
technology companies have been especially volatile, including fluctuations that
often are unrelated to the operating performance of the affected companies.
Broad market fluctuations of this type may adversely affect the market price of
our common stock.
The market price of our common stock has fluctuated since we became a
public company. Our stock price could continue to fluctuate significantly due to
a variety of factors, including:
o public announcements concerning us, our competitors or the technology
industry;
o fluctuations in our operating results;
o introductions of new products or services by us or our competitors;
o changes in analysts' revenue or earnings estimates; and
o announcements of technological innovations.
In the past, companies that have experienced volatility in the market price
of their stock have been the target of securities class action litigation. If we
were sued in a securities class action, we could incur substantial costs and
suffer from a diversion of our management's attention and resources.
<PAGE>
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Information concerning market risk is contained on page 24 of our 1999
Annual Report on Form 10-K and is incorporated by reference to such annual
report.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
We issued approximately 18,000 shares from July 1 through September
30, 2000 and approximately 8,000 shares from April 1, 2000 through
June 30, 2000 of our common stock pursuant to exercises of stock
purchase warrants issued in connection with the transfer of assets
to the Company from Pencom Systems Incorporated in October 1996.
The warrants have an exercise price of $0.04 per share. The
issuances were deemed exempt from registration under Section 5 of the
Securities Act of 1933 in reliance upon Section 4(2) thereof or Rule
701 thereunder and appropriate restrictive transfer legends were
affixed to the share certificates issued in such transaction.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Number Description
<PAGE>
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCERO, INC.
(Registrant)
Date: November 14, 2000 /s/ Timothy D. Webb
Timothy D. Webb
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ Keith D. Thatcher
Keith D. Thatcher
Vice President of Finance, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2000 /s/ Kasaundra L. Smith
Kasaundra L. Smith
Controller
(Principal Accounting Officer)
