<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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: 000-29799
CROSSWORLDS SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3240149
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
577 Airport Boulevard, Suite 800
Burlingame, CA 94010
(Address, including zip code, of registrant's principal executive offices)
(650) 685-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 [_]
The number of shares outstanding of the Registrant's Common Stock, par value
$0.001, as of October 31, 2000 was 26,308,364.
--------------------------------------------------------------------------------
<PAGE>
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999......................................................................... 3
Consolidated Condensed Statements of Operations (Unaudited) for the three and
nine months ended September 30, 2000 and 1999............................................. 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2000 and 1999.................................................. 5
Notes to the Consolidated Condensed Financial Statements (Unaudited)...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 22
Item 2. Changes in Securities and Use of Proceeds......................................... 22
Item 3. Defaults Upon Senior Securities................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............................... 22
Item 5. Other Information................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................................. 22
Signature.................................................................................... 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 47,819 $ 12,506
Accounts receivable, net............................. 21,766 11,689
Prepaid and other current assets..................... 2,160 1,019
--------- --------
Total current assets................................ 71,745 25,214
Property and equipment, net.......................... 5,023 3,846
Deposits and other assets............................ 1,468 117
--------- --------
Total assets........................................ $ 78,236 $ 29,177
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable..................................... $ 2,186 $ 1,011
Accrued payroll and related expenses ............... 5,241 2,657
Accrued commissions.................................. 3,414 2,742
Other accrued liabilities............................ 7,593 3,728
Current portion of capital lease obligations......... 468 347
Current portion of long-term debt.................... 2,731 2,622
Deferred revenue..................................... 28,312 13,158
--------- --------
Total current liabilities........................... 49,945 26,265
Other long-term liabilities.......................... 115 124
Capital lease obligations, less current portion...... 446 577
Long-term debt, less current portion................. 823 2,936
--------- --------
Total liabilities................................... 51,329 29,902
--------- --------
Stockholders' equity (deficit):
Convertible preferred stock.......................... -- 161
Common stock......................................... 26 3
Additional paid-in capital........................... 154,838 96,758
Deferred stock-based compensation.................... (2,919) (2,540)
Accumulated deficit.................................. (125,038) (95,107)
--------- --------
Total stockholders' equity (deficit)................ 26,907 (725)
--------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $ 78,236 $ 29,177
========= ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license..................................... $ 6,552 $ 2,270 $ 14,766 $ 5,688
Service, maintenance and other....................... 8,503 3,012 19,366 7,384
------- ------- -------- --------
Total revenue....................................... 15,055 5,282 34,132 13,082
------- ------- -------- --------
Cost of revenue:
Software license and royalties....................... 272 562 597 1,001
Service, maintenance and other (1)................... 6,879 2,698 17,123 6,897
------- ------- -------- --------
Total cost of revenue............................... 7,151 3,260 17,720 7,898
------- ------- -------- --------
Gross profit .................................... 7,904 2,022 16,412 5,184
------- ------- -------- --------
Operating expenses:
Research and development (2)......................... 4,423 3,548 12,312 9,901
Sales and marketing (3).............................. 7,976 5,439 22,606 15,189
General and administrative (4)....................... 3,369 1,641 8,458 3,985
Amortization of deferred stock-based
compensation........................................ 633 823 2,193 1,745
------- ------- -------- --------
Total operating expenses............................ 16,401 11,451 45,569 30,820
------- ------- -------- --------
Operating loss.................................... (8,497) (9,429) (29,157) (25,636)
Other income (expense), net............................ 638 (370) (774) (858)
------- ------- -------- --------
Net loss.......................................... $(7,859) $(9,799) $(29,931) $(26,494)
======= ======= ======== ========
Net loss per share:
Basic and diluted.................................... $ (0.30) $ (3.40) $ (2.26) $ (9.93)
Weighted average shares used in computation.......... 25,849 2,883 13,266 2,668
</TABLE>
(1) Excludes stock-based compensation of $100 and $65 for the three months
ended September 30, 2000 and 1999, and $306 and $242 for the nine-months
ended September 30, 2000 and 1999.
(2) Excludes stock-based compensation of $128 and $123 for the three months
ended September 30, 2000 and 1999, and $495 and $46 for the nine-months
ended September 30, 2000 and 1999.
(3) Excludes stock-based compensation of $240 and $322 for the three months
ended September 30, 2000 and 1999, and $1,061 and $1,026 for the nine-
months ended September 30, 2000 and 1999.
(4) Excludes stock-based compensation of $165 and $313 for the three months
ended September 30, 2000 and 1999, and $331 and $431 for the nine-months
ended September 30, 2000 and 1999.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
---------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net loss.............................................. $(29,931) $(26,494)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation........................................ 2,237 1,696
Amortization of warrants for financing
commitment........................................ 1,406 --
Amortization of deferred stock-based
compensation...................................... 2,193 1,745
Changes in operating assets and liabilities:
Accounts receivable............................... (10,077) (1,223)
Prepaid and other current assets.................. (1,141) (294)
Other assets...................................... (1,351) 50
Accounts payable.................................. 1,175 1,611
Accrued payroll and related expenses.............. 2,584 540
Accrued commissions............................... 672 (736)
Other accrued liabilities......................... 3,865 939
Deferred revenue.................................. 15,154 2,342
Other long-term liabilities....................... (9) 25
-------- --------
Net cash used in operating activities............ (13,223) (19,799)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................... (2,988) (579)
-------- --------
Net cash used in investing activities............ (2,988) (579)
-------- --------
Cash flows from financing activities:
Proceeds from convertible notes payable to
stockholder.......................................... -- 2,000
Proceeds from long-term debt.......................... -- 5,000
Repayments of capital lease obligation and long-
term debt............................................ (2,440) (2,891)
Proceeds from issuance of common stock, net........... 53,964 462
Proceeds from issuance of preferred stock, net........ -- 12,254
Repurchase of restricted stock........................ -- (28)
-------- --------
Net cash provided by financing activities........ 51,524 16,797
-------- --------
Net increase (decrease) in cash and cash equivalents... 35,313 (3,581)
Cash and cash equivalents at beginning of period....... 12,506 5,415
-------- --------
Cash and cash equivalents at end of period............. $ 47,819 $ 1,834
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated condensed statements of operations,
statements of cash flows for the nine months ended September 30, 2000 and 1999,
and balance sheets at September 30, 2000 and December 31, 1999 have been
prepared by CrossWorlds Software, Inc. ("the Company") on the same basis as the
audited consolidated financial statements and reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present fairly
the financial position and the results of operations for the interim periods
presented. These unaudited consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements and notes
included in the Company's Registration Statement on Form S-1 declared effective
on June 1, 2000 by the Securities and Exchange Commission (File No. 333-96055).
The results of operations for the three- and nine-month periods ended September
30, 2000 are not necessarily indicative of results for the entire fiscal year.
(2) Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition." The Company's software arrangements typically
involve significant production, customization, or modification of the software,
or services that are essential to the functionality of the software and, as a
result, software license revenue for the entire arrangement is generally
recognized using the percentage-of-completion method. Progress toward completion
is measured by achieving certain standard and objectively verifiable milestones
present in each project. These milestones typically require customer acceptance
of a deliverable. In certain instances, the Company may recognize software
license revenue upon delivery when persuasive evidence of an arrangement exists,
the fee is fixed and determinable, acceptance is certain, collection is
probable, and the arrangement does not involve significant production,
customization, or modification of the software or services that are essential to
the functionality of the software. In the event costs to complete a contract are
expected to exceed anticipated revenue, a loss is accrued. In certain
circumstances where the Company is unable to estimate the amount of effort
required to customize or implement the software license, revenue is recognized
using the completed-contract method. To date, no amounts have been recognized
under the completed contract method. Consulting and service revenue is
recognized as the services are performed. Maintenance revenue from customer
support and product upgrades, including maintenance bundled with original
software licenses, are deferred and recognized ratably over the term of the
maintenance agreement, typically twelve months. When the Company enters into
software arrangements with resellers, the Company does not recognize revenue
until the reseller demonstrates it has entered into an arrangement with an end
user that satisfies the Company's revenue recognition criteria. When the
Company's services are essential to the end user implementation of the software
sold by the reseller, the software license revenue for the arrangement is
recognized using the percentage-of-completion method.
(3) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the as-if converted basis. All potential common
shares have been excluded from the computation of diluted net loss per share for
all periods presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
6
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
--------- --------- --------- ---------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Stock options and warrants.................... 5,592 1,291 4,507 1,211
Common stock subject to repurchase............ 86 264 86 264
</TABLE>
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------- -------- -------- --------
(In thousands except (In thousands except
per share amounts) per share amounts)
<S> <C> <C> <C> <C>
Net loss........................................... $(7,859) $(9,799) $(29,931) $(26,494)
Weighted average shares of common stock
outstanding....................................... 25,935 3,147 13,352 2,932
Less: weighted average common shares
subject to repurchase............................. (86) (264) (86) (264)
------- ------- -------- --------
Weighted average shares used in computing
basic and diluted net loss per common share....... 25,849 2,883 13,266 2,668
Basic and diluted net loss per share............... $ (0.30) $ (3.40) $ (2.26) $ (9.93)
</TABLE>
(4) Initial Public Offering
In June 2000, the Company completed its initial public offering ("IPO") of
4.6 million shares of its common stock, including the exercise of 0.6 million
shares of underwriters' over-allotment option, at $10.00 per share. The Company
also completed a sale of 0.9 million shares of its common stock in private
placements concurrent with the IPO at $9.30 per share. Upon the closing date of
the IPO, all of the convertible preferred stock outstanding prior to the IPO was
converted into approximately 16.5 million shares of common stock. The Company
realized aggregate net proceeds from the IPO and private placements of
approximately $49.7 million, after deducting IPO underwriting discounts and
commissions of $2.8 million and offering expenses of approximately $1.9 million.
7
<PAGE>
(5) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
2000 1999
------ ------
(In thousands)
<S> <C> <C>
Cash paid during the period for interest....................... $ 552 $ 614
Non-cash investing and financing activities:
Issuance of preferred stock for conversion of
convertible notes............................................ -- 5,000
Issuance of preferred stock warrants in connection
with long-term debt.......................................... -- 500
Issuance of common stock warrants for financing
commitment................................................... 1,406 --
Equipment acquired through equipment lease
facility..................................................... 301 993
</TABLE>
(6) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. The statement, as amended,
is effective for fiscal quarters of all fiscal years beginning after June 15,
2000. The Company will adopt the standard during the first quarter of fiscal
year 2001. Management does not believe the adoption of SFAS 133 will have a
material effect on the Company's consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statement"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The staff accounting bulletin, as amended, must be adopted no later than the
Company's fourth quarter of fiscal 2000. Management does not believe the
adoption of SAB 101 will have a material effect on the Company's consolidated
financial position or results of operations.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and the related notes that appear
elsewhere in this document.
The information in this report contains forward-looking statements that are
based on management's current expectations. These forward-looking statements are
subject to business and economic risks and uncertainties. Statements and
information contained herein concerning markets for CrossWorlds' products and
trends in financial results, and all other statements that include the word
"may," "will," "should," "believe," "anticipate," "intend," "estimate,"
"expect," "project," "plan," "predict," "potential," "continue," "strategy" and
similar expressions are intended to identify forward-looking statements,
CrossWorlds' actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the factors and the
risks to our business set forth elsewhere herein. Additional potential risks and
uncertainties include, without limitation, those mentioned in CrossWorlds'
prospectus dated June 1, 2000 under the heading "Risk Factors."
Overview
Business
CrossWorlds provides an e-business integration platform both for
integrating internal operations and extending these operations over the
Internet. CrossWorlds' products help businesses work more efficiently with
customers and suppliers through end-to-end business processes. The CrossWorlds
platform enhances competitiveness and reduces information technology costs by
decreasing long-term maintenance costs and enabling faster business application
integration than traditional approaches.
Revenues
Revenues to date have been derived from the sale of our e-business
infrastructure software and from maintenance and support, consulting and
training services. Customers who license our software generally purchase
maintenance contracts, typically covering a twelve-month period. Customers may
also purchase consulting services, which are customarily billed by us at a fixed
daily or hourly rate plus out-of-pocket expenses. We also offer training
services that are billed on a per student or per class session basis.
Revenue recognition policy
Our software arrangements typically involve significant customization or
implementation services. As a result, software license revenue is generally
recognized using the percentage-of-completion method over the project
implementation cycles, which typically range from three to nine months. In
circumstances where we are unable to estimate the amount of effort required to
customize or implement the software, software license revenue is recognized
using the completed contract method. To date, we have not encountered any
circumstances where we have been unable to estimate the amount of effort
required to customize or implement our software.
We have and may recognize revenues for projects implemented by our systems
integrator partners upon shipment when our services are not essential to the
functionality of the software. Consulting and service revenue is recognized as
the services are performed. Maintenance revenue from customer support and
product upgrades, including maintenance bundled with original software licenses,
are deferred and recognized ratably over the term of the maintenance agreement.
When we enter into software arrangements with resellers, we do not recognize
revenue until the reseller demonstrates it has an arrangement with the end user
that satisfies our revenue recognition criteria. Our revenue recognition policy
complies with the American Institute of Certified Public Accountants' Statement
of Position 97-2, "Software Revenue Recognition."
9
<PAGE>
Revenue mix
As a result of our revenue recognition policy, which generally requires us
to defer and recognize license revenue over the software customization or
implementation period, the mix of license, service and other revenue for the
current quarter does not necessarily reflect the mix in sales activities for the
current quarter. For example, revenues recognized during the quarter ended
September 30, 2000 generally resulted from sales made during the first and
second quarters of fiscal 2000.
Results of Operations
The following table sets forth the results of operations for the three
months and nine months ended September 30, 2000 and 1999 expressed as a
percentage of total revenue.
<TABLE>
<CAPTION>
Three months Nine months
------------ -----------
ended September 30, ended September 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software license.............................. 43.5% 43.0% 43.3% 43.6%
Service, maintenance and other................ 56.5 57.0 56.7 56.4
------ ------- ------ -------
Total revenue................................. 100.0 100.0 100.0 100.0
------ ------- ------ -------
Cost of revenue:
Software license and royalties................ 1.8 10.6 1.7 7.7
Service, maintenance and other................ 45.7 51.1 50.2 52.7
------ ------- ------ -------
Total cost of revenue......................... 47.5 61.7 51.9 60.4
------ ------- ------ -------
Gross margin............................... 52.5 38.3 48.1 39.6
------ ------- ------ -------
Operating expenses:
Research and development...................... 29.4 67.2 36.1 75.7
Sales and marketing........................... 53.0 103.0 66.2 116.1
General and administrative.................... 22.3 31.0 24.8 30.5
Amortization of deferred stock-based
compensation................................ 4.2 15.6 6.4 13.3
------ ------- ------ -------
Total operating expenses...................... 108.9 216.8 133.5 235.6
------ ------- ------ -------
Operating loss............................. (56.4) (178.5) (85.4) (196.0)
Other income (expense), net..................... 4.2 (7.0) (2.3) (6.5)
------ ------- ------ -------
Net loss................................... (52.2)% (185.5)% (87.7)% (202.5)%
====== ======= ====== =======
</TABLE>
Software license revenue. Total license revenue for the third quarter ended
September 30, 2000 was $6.6 million, an increase of 189% over the same period in
fiscal 1999. For the nine months ended September 30, 2000, license revenue was
$14.8 million, an increase of 159% over the same period in fiscal 1999. The
increase in license revenue was a result of increased acceptance of our expanded
product offering in the marketplace, a greater number of licenses sold and a
larger average transaction size.
Service, maintenance and other revenue. Service, maintenance and other
revenue for the third quarter ended September 30, 2000 was $8.5 million, an
increase of 182% over the same period in fiscal 1999. For the nine months ended
September 30, 2000, service, maintenance and other revenue was $19.4 million, an
increase of 162% compared to the corresponding period in fiscal 1999. These
increases were due to the increase in consulting, training and maintenance fees
associated with the increased number of licenses sold, the increased average
transaction size and a larger installed license base.
Cost of software license revenue and royalties. Cost of software license
and royalties revenue for the three months ended September 30, 2000 was $0.3
million and 1.8% of total revenue compared to $0.6 million and 10.6% of total
revenue for the same period in fiscal 1999. For the nine months ended September
30, 2000, cost of software
10
<PAGE>
license and royalties revenue was $0.6 million and 1.7% of total revenue
compared to $1.0 million and 7.7% of total revenue for the same period in fiscal
1999. The percentage decrease year over year was a result of replacing
technology licensed by CrossWorlds with our own product in the fourth quarter of
1999.
Cost of service, maintenance and other revenue. Cost of service,
maintenance and other revenue was $6.9 million and 45.7% of total revenue for
the third quarter of fiscal 2000 compared to $2.7 million and 51.1% of total
revenue for the same period in fiscal 1999. For the nine months ended September
30, 2000, cost of services, maintenance and other revenue was $17.1 million and
50.2% of total revenue versus $6.9 million and 52.7% of total revenue for the
corresponding period in fiscal 1999. The percentage decrease year over year was
due to higher revenues resulting from higher utilization of the services
personnel and rate increases for services and maintenance. We expect our cost of
service, maintenance and other revenue to continue to increase in absolute
dollars in future periods as a result of continuing efforts to add service
personnel to meet increased customer demand.
Research and development expenses. Research and development expenses were
$4.4 million for the three months ended September 30, 2000, an increase of 25%
over the same period in fiscal 1999. For the nine months ended September 30,
2000, research and development expenses were $12.3 million, an increase of 24%
compared to the corresponding period in fiscal 1999. The increases were
primarily due to an increase in personnel costs associated with new product
initiatives. Research and development personnel costs, excluding amortization of
deferred stock-based compensation, were $2.8 million for the three months ended
September 30, 2000 compared to $2.3 million for the corresponding period in
fiscal 1999. For the nine months ended September 30, 2000, research and
development personnel costs, excluding amortization of deferred stock-based
compensation, were $8.0 million compared to $6.6 million for the same period in
fiscal 1999. Research and development expenses as a percentage of total revenue
for the third quarter in fiscal 2000 were 29.4% compared to 67.2% for the same
period in fiscal 1999. For the nine months ended September 30, 2000, research
and development expenses as a percentage of total revenue were 36.1% compared to
75.7% for the same period in fiscal 1999. The decrease as a percentage of total
revenues was due to growth in our total revenues. We expect our research and
development expenses to continue to increase in absolute dollars in future
periods.
Sales and marketing expenses. Sales and marketing expenses for the third
quarter of fiscal 2000 were $8.0 million, an increase of 47% over the same
period in fiscal 1999. For the nine months ended September 30, 2000, sales and
marketing expenses were $22.6 million, a 49% increase compared to the same
period in fiscal 1999. The increases were primarily the result of higher sales
commissions and bonuses associated with higher sales volume. Sales commissions
and bonuses for the three months ended September 30, 2000 were $2.4 million,
compared to $0.7 million during the same period in fiscal 1999. For the nine
months ended September 30, 2000, sales commissions and bonuses were $7.7 million
compared to $2.3 million for the same period in fiscal 1999. Sales and marketing
expenses as a percentage of total revenue were 53.0% in the three months ended
September 30, 2000 compared to 103.0% compared to the same period in fiscal
1999. For the nine months ended September 30, 2000, sales and marketing expenses
as a percentage of total revenue were 66.2% versus 116.1% for the same period in
fiscal 1999. The decline in sales and marketing expenses as a percentage of
total revenue was the result of growth in total revenue. We expect to continue
hiring additional sales personnel and to increase promotion and other marketing
expenditures in the future. As a result, we expect that sales and marketing
expenses will increase in absolute dollars in future periods.
General and administrative expenses. General and administrative expenses
for the third quarter of fiscal 2000 were $3.4 million, an increase of 105% over
the same period in fiscal 1999. For the nine months ended September 30, 2000,
general and administrative expenses were $8.5 million, an increase of 112% over
the same period in fiscal 1999. The increases were primarily a result of
increased personnel costs necessary to manage and support our growth, increased
costs associated with operating as a public company, and increased bad debt
expense. General and administrative personnel costs, excluding amortization of
deferred stock-based compensation, were $1.3 million for the third quarter of
fiscal 2000 compared to $0.7 million for the same period in fiscal 1999. Bad
debt expense increased $0.6 million in the third quarter of fiscal 2000 compared
to the same period in fiscal 1999. For the nine months ended September 30, 2000,
general and administrative personnel costs, excluding amortization of deferred
stock-based compensation, were $3.7 million for the nine months ended September
30, 2000 compared to $1.6 million for the same period in fiscal 1999. Bad debt
expense increased $0.4 million for the nine months ended September 30, 2000
versus the same period in fiscal year 1999. General and administrative expenses
as a percentage of total revenue were 22.3% in the three months ended September
30, 2000 versus 31.0% for the same
11
<PAGE>
period in fiscal 1999. For the nine months ended September 30, 2000, general and
administrative expenses as a percentage of total revenue were 24.8% compared to
30.5% during the same period in fiscal 1999. The decline in general and
administrative expenses as a percentage of total revenue was the result of
growth in total revenue. We expect that general and administrative expenses will
increase in absolute dollars for the foreseeable future as a result of the
expansion of our operations and the expenses associated with operating as a
public company.
Amortization of deferred stock-based compensation. Deferred stock-based
compensation for the third quarter of fiscal 2000 was $0.6 million, a decrease
of 23% over the same period in fiscal 1999. For the nine months ended September
30, 2000, deferred stock-based compensation was $2.2 million, an increase of 26%
compared to the same period in fiscal 1999. Both decrease and increase of this
expense over the respective time periods reflect the timing of employee
terminations and stock option grants during the periods, which are amortized on
a straight-line basis over the vesting periods of the applicable options.
Other income (expense), net. Other income for the third quarter ended
September 30, 2000 was $0.6 million compared to other expense of $0.4 million
during the same period in fiscal 1999. For the nine months ended September 30,
2000, other expense was $0.8 million, a decrease of 10% over the same period in
fiscal 1999. The increase in other income and decrease in other expense during
the respective time periods were primarily due to interest income from cash
proceeds related to the initial public offering. Interest income was $0.8
million during the third quarter in fiscal 2000 compared to $31,000 for the same
period in fiscal 1999. Interest income was $1.1 million for the nine months
ended September 30, 2000 compared to $0.2 million in the corresponding period in
fiscal 1999.
Provision for income taxes. We incurred net operating losses in the three
and nine months ended September 30, 2000 and 1999 and consequently paid no
federal, state and foreign income taxes in any of these periods.
Liquidity and Capital Resources
In June 2000, we completed an initial public offering ("IPO") of 4.6
million shares of our common stock, including the exercise of 0.6 million shares
of underwriters' over-allotment option, at a price of $10.00 per share. The
Company also completed a sale of 0.9 million shares of its common stock in
private placements concurrent with the IPO at $9.30 per share. The aggregate net
proceeds realized from the IPO and private placements were approximately $49.7
million. Prior to the IPO, we had financed our operations through private sales
of preferred equity securities, totaling $85.7 million and commercial bank loans
and equipment leases. As of September 30, 2000, we had $47.8 million in cash and
cash equivalents and $21.8 million in working capital.
Net cash used in operating activities was $13.2 million for the nine months
ended September 30, 2000 and $19.8 million for the same period in fiscal 1999.
Compared with the same period a year ago, net cash flows primarily reflect an
increase in accounts receivable offset by a larger increase in deferred revenue.
Net cash used in investing activities was $3.0 million for the nine months
ended September 30, 2000 and $0.6 million for the corresponding period in fiscal
1999. Investing activities in each period reflect the purchases of capital
equipment. In April 1999, we began leasing equipment through a $1.5 million
master lease agreement with a lender. As of September 30, 2000, we have used
$0.9 million of this lease line.
Net cash provided by financing activities of $51.5 million for the nine
months ended September 30, 2000 was primarily from the net proceeds of our
initial public offering, offset by the repayments of subordinated debt and
equipment loans. For the nine months ended September 30, 1999, net cash provided
by financing activities of $16.8 million was primarily from the issuance of
preferred stock and the issuance of subordinated debt, partially offset by
repayments of credit facilities.
As of September 30, 2000, outstanding borrowings were $4.5 million, which
are payable through 2003. We have a revolving line of credit that provides for
borrowing of up to $10.0 million based on 65% of eligible accounts receivable.
Borrowings under this line of credit accrue interest that is payable monthly at
0.5% above prime rate. As of September 30, 2000, we had no borrowings against
this line of credit. Borrowings are secured by all of our assets, and we have
agreements that require us to comply with financial covenants. As of September
30, 2000, we were in compliance with these financial covenants.
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We believe that the net proceeds from our initial public offering and
private placements and the cash flows generated by operations will be sufficient
to satisfy our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. After that we may require
additional funds to support our working capital requirements, or for other
purposes. We may also seek to raise additional funds through public or private
equity financings or from other sources. However, there can be no assurance that
we will be able to obtain adequate financing on favorable terms, if at all, at
that time. Also, financing may dilute shareholder interests.
A portion of our cash may be used to acquire or invest in complementary
businesses, products, or technologies. We have no current plans, agreements or
commitments of this nature, and we are not currently engaged in any negotiations
involving a transaction of this nature.
Factors That Could Affect Future Results
BECAUSE OF OUR LIMITED OPERATING HISTORY, IT IS DIFFICULT FOR US TO PREDICT AND
PLAN FOR CHALLENGES. AS A RESULT, OUR FUTURE PERFORMANCE MAY BE HARMED.
We were incorporated in March 1996 and shipped our first products in
November 1997. Because our operating history is limited, our future operating
results and our future stock price are difficult to predict. We may not foresee
trends that may emerge and harm our business, and we cannot forecast operating
expenses based on our historical results. It is also difficult to plan to meet
the challenges we face in the future, specifically:
. expanding our customer base;
. competing effectively with:
. other software vendors that offer e-business infrastructure
products,
. systems integrators that develop customized solutions and
. internal information technology departments of potential customers;
and
. managing expanding operations.
Also, there is little financial data that you can use to evaluate our business.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER ACHIEVE
PROFITABILITY.
We have experienced operating losses in each quarterly and annual period
since March 1996. Despite our history of losses, we believe it is vital to our
future success that we increase our research and development and sales and
marketing expenses. If expenditures related to the expansion of our operations
are not accompanied or shortly followed by significantly increased revenue, our
losses could be even greater than expected until we are able to delay or reduce
these expenditures. For example, during 1998 we increased our operating expenses
significantly, particularly sales and marketing expenses, based on our
expectations of revenue growth that did not materialize as quickly as
anticipated. These increased expense levels harmed our operating results for
that period. We may not be able to increase our revenue in the future. As a
result, we expect to incur significant losses in the future, and we may never
achieve profitability.
BECAUSE OUR QUARTERLY REVENUE FLUCTUATES SIGNIFICANTLY DUE TO THE NATURE OF OUR
PRODUCT IMPLEMENTATIONS, WE MAY DISAPPOINT INVESTORS' EXPECTATIONS OR MAY
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NOT FULFILL THE EXPECTATIONS OF THE FINANCIAL MARKETS OR FINANCIAL ANALYSTS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
We generally recognize license revenue from orders on a percentage-of-
completion basis as the customer reaches milestones in its implementation of our
products. We also recognize services revenue as we perform implementation
services. As a consequence, the timing of our revenue depends on the continued
progress of our customers' implementation cycles. Each customer has unique
integration requirements and, because our products are complex, we must
integrate a variety of enterprise applications in each implementation. Our
product implementation schedules can take three to nine months or more and span
multiple quarterly periods. If we fail to achieve continued progress on
anticipated implementation schedules, or our customers delay, suspend or
terminate their implementation efforts, we may not recognize the expected
revenue on these orders until subsequent quarters, if at all.
BECAUSE OUR QUARTERLY REVENUE FLUCTUATES SIGNIFICANTLY DUE TO THE NATURE OF OUR
SALES CYCLES AND SEASONALITY, WE MAY DISAPPOINT INVESTORS' EXPECTATIONS OR MAY
NOT FULFILL THE EXPECTATIONS OF THE FINANCIAL MARKETS OR FINANCIAL ANALYSTS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our sales cycle varies typically from two to nine months because:
. our e-business infrastructure solutions are expensive, with high
average selling prices,
. our products are complex and to generate sales we must spend a
significant amount of time educating our potential customers about the
uses and benefits of our products and
. some of our prospective customers evaluate our products on a trial
basis before entering a sales contract.
This lengthy sales cycle makes it difficult to predict the quarter in which
expected orders will occur. Delays in the execution of orders could cause some
or all of the licensing fee revenue from those orders to be shifted from the
expected quarter to a subsequent quarter or quarters.
Additionally, we have experienced, and expect to continue to experience,
seasonality in software and service orders. Historically, we have experienced
the highest demand for our products in the fourth quarter and the lowest demand
in the third quarter. We believe this seasonality is a result, in part, of year-
end pressures influencing our customer's buying patterns, our direct sales
force's efforts to meet or exceed year-end sales quotas, and the summer vacation
schedules of our customers and sales force. Both our sales cycle and seasonality
cause unpredictable fluctuations in our revenue, which could adversely affect
our quarterly operating results.
BECAUSE A SUBSTANTIAL MAJORITY OF OUR REVENUE HAS BEEN DERIVED FROM A SMALL
NUMBER OF SELECTED INDUSTRIES, A DECLINE IN DEMAND FOR OUR SOFTWARE IN THESE
INDUSTRIES COULD HURT OUR OPERATIONS.
We derive a large majority of our revenue to date from sales of our
software and related services to customers in the telecommunications industry
and the manufacturing industry. Any significant decline in the demand for, and
market acceptance of, our software in these industries, or any failure to
increase our sales to industries other than telecommunications and
manufacturing, could hurt the results of our operations. We expect that sales of
our software and related services to customers in the telecommunications and
manufacturing industries will continue to account for a majority of our revenue.
WE DERIVE OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS, AND OUR REVENUE COULD
DECLINE OR FAIL TO GROW IF WE LOSE A MAJOR CUSTOMER.
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We have generated a substantial portion of our revenue from a limited
number of customers. We expect that a small number of customers will continue to
account for a substantial portion of our revenue. Many of our current customers
will continue to provide a substantial portion of our revenue through additional
license, implementation services and maintenance fees. The loss of a small
number of customers, or a failure to increase our customer base, could have a
material adverse effect on our revenue.
IF WE ARE UNABLE TO INCREASE SOFTWARE LICENSE REVENUE AS A PROPORTION OF OUR
OVERALL REVENUE, OUR GROSS MARGINS AND PROFITABILITY COULD BE HARMED.
We believe that increasing our software license revenue as a proportion of
overall revenue is essential to achieve and maintain profitability. To achieve
this goal, we plan to further develop our relationships with systems integrators
to have them perform a majority of the consulting services for our products. If
we are unable to adequately train systems integrators to provide services for
our products, or if systems integrators do not devote resources to providing
services for our products, it will be significantly more difficult for us to
increase software license revenue as a portion of overall revenue, thus limiting
our ability to increase gross margins and profitability.
OUR REVENUE WILL LIKELY DECLINE OR FAIL TO GROW IF WE DO NOT DEVELOP AND
MAINTAIN SUCCESSFUL RELATIONSHIPS WITH SYSTEMS INTEGRATORS.
We engage in joint sales, marketing and implementation efforts with a
number of large systems integrators including Deloitte Consulting,
PricewaterhouseCoopers and Andersen Consulting. In many cases, these parties
have extensive relationships with our existing and potential customers and
influence the decisions of these customers. We rely on these firms to:
. recommend our products during the evaluation stage of the purchasing
process,
. provide industry expertise for developing products aimed at specific
industries,
. to refer prospective customers to us and
. to provide access to customers' executive-level decision makers.
If systems integrators are not appropriately trained to implement our products,
our reputation with existing and prospective customers could be harmed. Our
failure to establish or maintain these relationships could significantly harm
our ability to license and successfully implement our e-business infrastructure
software products. Our competitors may have stronger relationships with some
systems integrators and as a result, those systems integrators may be more
likely to recommend competitors' products.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR REVENUES
TO DECLINE OR FAIL TO GROW.
The market for e-business integration software platforms is relatively new
and rapidly evolving, and there is a variety of integration products and methods
available to prospective customers. We do not know if customers in our target
markets will prefer our products to other products and methods available. Thus
far, we have licensed our products to only a small number of customers. Our
products may not satisfy the objectives of our customers and prospective
customers. If we are unable to establish a sufficient base of customer
references in our target markets, prospective customers may be less likely to
buy our products and our ability to license our products to additional customers
may be significantly reduced.
IF WE ARE UNABLE TO COMPETE IN THE MARKET FOR BUSINESS INTEGRATION SOLUTIONS, WE
MAY LOSE SALES AND MAY BE FORCED TO LOWER OUR PRICES, WHICH WOULD CAUSE A
DECLINE IN OUR REVENUE.
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The market for our products is intensely competitive. It is expected to
become increasingly competitive as current competitors enhance and expand their
product offerings and new competitors enter the market. Competition could result
in:
. price reductions,
. reduced gross margins and
. loss of market share.
Any one of these results could significantly reduce our future revenues. Our
current competitors include a number of companies offering alternative e-
business infrastructure solutions.
To date, we have faced competition from:
. internal information technology departments of potential customers,
. systems integrators and other information technology service providers
and
. software vendors targeting one or more segments of our market including
Vitria Technology, Inc., webMethods, Inc., SEEBEYOND Technology
Corporation, NEON Software, Inc. and TIBCO Software, Inc.
It is also possible that alliances among competitors or new competitors,
including Oracle Corporation, Microsoft or IBM, may emerge and rapidly acquire
significant market share.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES. IF WE LOSE OUR RIGHT TO
USE LICENSED TECHNOLOGY, OUR REVENUE COULD BE HARMED AND OUR COSTS COULD
INCREASE.
Our software products incorporate technology licensed to us by third
parties, currently BEA Systems, IBM and Inprise/Borland Corporation, which
provides important messaging and other functionality. We depend on these third
parties to deliver and support reliable products, and to enhance their products
in response to industry trends and other technological changes. Any interruption
in the supply of our licensed software or increases in the pricing of these
licenses could harm our business by disrupting our operations, increasing our
costs, delaying our sales and hindering our ability to support our existing
customers.
THE LOSS OF, OR INABILITY TO ATTRACT, SENIOR MANAGEMENT AND OTHER KEY PERSONNEL
COULD HARM OUR BUSINESS AND DECREASE THE VALUE OF YOUR INVESTMENT.
Our future success depends on the skills, experience and performance of our
senior management team and other key personnel, and their ability to operate
effectively, both individually and as a group. The intense competition for
qualified personnel in our industry and geographic region could harm our ability
to replace any of the members of our senior management team if we were to lose
their services in the future. If we do not succeed in attracting new management
and key personnel, or retaining and motivating existing management and key
personnel, our business will be harmed. In particular, the services and
expertise of our senior management team could be difficult to replace.
OUR SUCCESS DEPENDS UPON OUR SALES, CONSULTING, BUSINESS DEVELOPMENT, MARKETING,
SUPPORT AND TECHNICAL PERSONNEL. IF WE FAIL TO ATTRACT AND RETAIN THESE
PERSONNEL, OUR BUSINESS MAY BE UNABLE TO GROW AND REVENUES COULD DECLINE.
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If we fail to retain and sufficiently expand our direct sales force, or our
consulting, business development, marketing, customer support and technical
staffs, we may not be able to increase revenue or achieve increased market
acceptance of our products. To date, we have sold our products primarily through
our direct sales force and have supported our customers through our consulting
and customer support staff. Our technical personnel develop and maintain our new
products and product enhancements. We believe that attracting and retaining
these personnel is particularly difficult for us because:
. the market for e-business infrastructure software is still emerging,
. market acceptance of our products has not yet been achieved,
. the sales cycles for our products are lengthy,
. we must constantly produce new products and product enhancements to
compete and
. high demand for qualified technical personnel in the San Francisco
metropolitan area.
OUR RECENT GROWTH HAS STRAINED OUR EXISTING RESOURCES. ANY FAILURE TO MANAGE
THIS GROWTH MAY HARM THE VALUE OF YOUR INVESTMENT.
Our recent growth has strained, and future growth may continue to strain,
our personnel, management systems and resources, which could harm our business.
To effectively manage and support our operations, we will be required to:
. integrate, train, motivate and manage our work force,
. continue to improve our operational, financial and management controls,
reporting systems and procedures and
. maintain close coordination among our executive, engineering,
accounting, finance, marketing, sales and operations organizations.
If we fail to manage and support our operations, our business would be harmed
and our operating losses could increase.
OUR INTERNATIONAL OPERATIONS ARE EXPENSIVE AND CHALLENGING. IF OUR INTERNATIONAL
OPERATIONS DO NOT PERFORM AS PROJECTED, OUR OPERATING LOSSES MAY INCREASE.
We have committed and expect to commit additional significant resources to
the opening of international offices and the expansion of international sales
and support channels in advance of revenue. We expect to incur expenses for
localizing our software for foreign markets. If our international expansion
strategy does not generate sufficient revenue to offset these expenditures, our
operating losses may increase. Revenues from international sales represented 41%
of total revenue for the three months ended September 30, 2000 and 37% of total
revenue for the nine months ended September 30, 2000.
OUR MANAGEMENT TEAM HAS LIMITED PRIOR EXPERIENCE TOGETHER AND MAY NOT
EFFECTIVELY MANAGE OUR OPERATIONS.
Two of our five current executive officers, our senior vice president
global services and senior vice president global sales and marketing, joined us
within the last twelve months. They have limited prior experience working
together and may not be effective working together. Management ineffectiveness
may disrupt our entire business operation, distract our employees and impair our
ability to execute our strategy.
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IF WE FAIL TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE WHICH CHARACTERIZES OUR
MARKET, WE COULD LOSE MARKET SHARE OR OUR PRODUCTS COULD BECOME OBSOLETE.
The market for e-business infrastructure software is characterized by:
. rapid technological change,
. frequent new product introductions and enhancements,
. uncertain product life cycles,
. changing customer requirements and
. evolving industry standards including Extensible Markup Language, or
XML, and Secure Sockets Layer, or SSL.
The introduction of products embodying new technologies and the emergence of new
industry standards could quickly make our existing products obsolete and
unmarketable, which could harm our revenue. Our future success depends upon our
ability to develop and introduce a variety of new products and product
enhancements, in a timely fashion and at our planned release dates, to address
the increasingly sophisticated needs of our customers.
IF OUR PRODUCTS DO NOT WORK WITH MULTIPLE HARDWARE, SOFTWARE AND NETWORKING
PLATFORMS, SOME CUSTOMERS WILL NOT BUY OUR PRODUCTS, AND OUR REVENUE WILL
DECLINE.
We currently serve a customer base with a wide variety of constantly
changing hardware, software and networking platforms. If we are unable to
provide and support our products on these multiple platforms, some customers
will not buy our products and our business would be hurt. We may have lost
potential sales due to our products' inability to support multiple hardware and
software platforms.
IF WE ARE UNABLE TO BUILD AND MAINTAIN RELATIONSHIPS WITH APPLICATION SOFTWARE
VENDORS, WE COULD BE UNABLE TO CREATE AND MAINTAIN OUR CONNECTIVITY PRODUCTS AND
OUR REVENUE COULD BE HARMED.
We have relationships with a number of application software vendors
including SAP, Oracle Corporation, Siebel Systems, Clarify Inc., Portal
Software, Inc., and MetaSolv Software, Inc. and plan to establish more of these
relationships in the future. These vendors provide access to their software and
documentation, which enables us to develop connectivity solutions that are
compatible with their products. If these relationships are terminated or
restricted, or we are unsuccessful in establishing relationships with other
vendors, our ability to develop connectivity solutions to integrate new and
existing versions of these vendors' packaged enterprise applications would be
harmed.
THE COST AND DIFFICULTIES OF IMPLEMENTING OUR PRODUCTS COULD SIGNIFICANTLY HARM
OUR REPUTATION, WHICH MAY DIMINISH OUR REVENUES.
Our products are often implemented as part of complex, time consuming and
expensive projects. Some of our customers have experienced delays and
difficulties in implementing our products. Prolonged delays and difficulties
have impaired our customer relationships. In many cases, our customers must
interact with, modify or replace significant elements of their existing computer
systems. This complicates the implementation process. If our customers are
dissatisfied with the implementation process, our ability to license further
products to these customers could be harmed. Dissatisfied customers may refuse
to recommend our products to prospective customers.
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DEFECTS IN OR SLOW PERFORMANCE OF OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND
FOR OUR PRODUCTS AND CAUSE COSTLY LIABILITY, WHICH WOULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
Our software products may contain undetected errors or defects, especially
when first introduced or when new versions are released. Any errors, defects or
slow performance that is discovered could result in:
. loss of revenue,
. delay in market acceptance,
. diversion of development resources,
. distraction of management,
. damage to our customer relationships or reputation,
. increased service and warranty cost or
. costly litigation defense.
We have previously discovered errors in our software after shipping the
software. These errors, when discovered by our customers, have impaired our
customer relationships. Any defects and errors found in our products could cause
customers to seek damages for loss of data, lost revenue, systems costs or other
harm they may suffer. These damages may be high because our software products
are critical to our customers' business operations. A successful product
liability claim brought against us could harm our business.
BECAUSE OUR PRODUCTS COULD INTERFERE WITH OUR CUSTOMERS' OTHER SOFTWARE
APPLICATIONS AND HARDWARE, WE MAY BE SUBJECT TO CLAIMS BY THESE CUSTOMERS, WHICH
MAY BE COSTLY AND MAY NOT BE ADEQUATELY COVERED BY INSURANCE.
Our e-business infrastructure products are integrated with our customers'
other software and their networks. Customers or others may bring product
liability or warranty claims based on damage to, or interference with, these
networks or applications. Any of these claims could result in costly litigation
or divert management's attention and resources. Our current insurance coverage
would likely be insufficient to protect us from all liability that may be
imposed under these types of claims.
OUR FAILURE TO SAFEGUARD OUR INTELLECTUAL PROPERTY COULD REDUCE OUR REVENUES, OR
CAUSE US TO INCUR COSTLY LITIGATION.
The value of our software products arises from the intellectual property in
those products. We rely primarily on a combination of:
. patents,
. copyrights,
. trademarks,
. trade secret laws and
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. contractual obligations with employees and third parties to protect the
proprietary aspects of our technology.
The legal protection is limited. Unauthorized parties may copy aspects of our
products and obtain and use information that we believe is proprietary. Other
parties may breach confidentiality agreements or other protective contracts they
have made with us. The laws of many foreign countries do not protect our
intellectual property rights to the same extent as the laws of the United
States. Litigation may be necessary to enforce our intellectual property rights.
Intellectual property litigation has an uncertain outcome and could result in
substantial costs and diversion of management's attention and resources.
BECAUSE OUR MARKET IS NEW, COMPETITIVE AND DEPENDENT UPON INTELLECTUAL PROPERTY
RIGHTS, WE COULD FACE COSTLY LITIGATION BROUGHT BY THIRD PARTIES FOR
INFRINGEMENT OF THEIR RIGHTS.
We may be subject to legal proceedings and claims for alleged infringement
of third party proprietary rights, including patents, trademarks or copyrights.
Any litigation could result in substantial costs and diversion of management's
attention and resources. Parties making infringement claims against us may
obtain judgments against us, which could prevent us from selling our products or
require us to enter into royalty or license agreements which are not
advantageous to us.
BECAUSE THE MARKET FOR STOCKS OF TECHNOLOGY COMPANIES HAS EXPERIENCED EXTREME
PRICE AND VOLUME FLUCTUATIONS, OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD
ADVERSELY AFFECT US.
Many factors, including the following, could cause the market price of our
common stock to fluctuate:
. variations in quarterly results,
. announcements of technological innovations by us or by our
competitors,
. introductions of new products or new pricing policies by us or by our
competitors,
. acquisitions or strategic alliances by us or by our competitors,
. departure or recruitment of key personnel,
. the gain or loss of significant customers,
. changes in the estimates of our operating performance or change in
recommendations by securities analysts and
. market conditions in the industry and the economy as a whole.
Furthermore, the market for stocks of technology companies, and Internet
companies in particular, has experienced extreme price and volume fluctuations
unrelated to these companies' operating performance. Such fluctuations could
harm the market price of our common stock regardless of our actual operating
performance.
In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could harm our business.
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WE MAY NOT BE ABLE TO OBTAIN ADEQUATE ADDITIONAL FUNDS TO SUPPORT OUR WORKING
CAPITAL REQUIREMENTS.
We believe that the net proceeds from our initial public offering and
private placements and the cash flows generated by operations will be sufficient
to satisfy our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. After that we may require
additional funds to support our working capital requirements, or for other
purposes. We may also seek to raise additional funds through public or private
equity financings or from other sources. However, there can be no assurance that
we will be able to obtain adequate financing on favorable terms, if at all, at
that time. Also, financing may dilute shareholder interests.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
Our risk management strategy uses forward contracts to hedge certain foreign
currency exposures. Our intent is to offset gains and losses that occur on the
underlying exposures, with gains and losses on the derivative contracts hedging
these exposures. We do not enter into derivatives for trading purposes. We
performed a sensitivity analysis assuming a hypothetical 10% adverse movement in
foreign exchange rates applied to the hedging contracts and underlying exposures
described above. As of September 30, 2000, these hypothetical market movements
would not have a material effect on our consolidated financial position, results
of operations or cash flows.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We place our investments with high credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
We have no investments denominated in foreign country currencies and therefore
are not subject to foreign currency risk on such investments.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use Of Proceeds.
In June 2000, the Company completed its initial public offering ("IPO") of
4.6 million shares of its common stock, including the exercise of 0.6 million
shares of underwriters' over-allotment option, at a $10.00 per share pursuant to
a Registration Statement on Form S-1 declared effective on June 1, 2000 by the
Securities and Exchange Commission (File No. 333-96055). The Company also
completed a sale of 0.9 million shares of its common stock in private placements
concurrent with the IPO at $9.30 per share. The Company realized aggregate net
proceeds from the IPO and private placements of approximately $49.7 million. The
net proceeds from our IPO are being used for working capital, general corporate
purposes, sales and marketing efforts, additional research and development, and
capital expenditures made in the ordinary course of business. In addition, the
Company may use a portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies. The Company has no current
plans, agreements or commitments of this nature, and is not currently engaged in
any negotiations involving a transaction of this nature. Pending these uses, the
Company intends to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission Of Matters to a Vote Of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.13 Amendment No. 1 to MQ SERIES Version 5 - Restricted Licenses Exhibit
dated August 18, 2000
10.16 Amendment, dated September 18, 2000 and effective as of June 30,
2000, to the Loan and Security Agreement between Silicon Valley Bank
and the Company
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
SIGNATURE
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, in the city of Burlingame, state of
California on November 7, 2000.
CROSSWORLDS SOFTWARE, INC.
(Registrant)
By: /s/ MARK R. KENT
----------------------------------------
Mark R. Kent
Chief Financial Officer (Principal Financial and
Accounting Officer)
23
