CONTINUUS SOFTWARE CORP /CA
10-Q, 1999-11-15
COMPUTER PROGRAMMING SERVICES
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<PAGE>   1

================================================================================

                                  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, 1999.

                                                   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 000-26797

- --------------------------------------------------------------------------------

                               CONTINUUS SOFTWARE
                                   CORPORATION

             (Exact name of registrant as specified in its charter)

- --------------------------------------------------------------------------------

         DELAWARE                                              43-1070080
      (State or other                                       (I.R.S. Employer
      jurisdiction of                                      Identification No.)
     incorporation or
       organization)

                                  108 Pacifica
                            Irvine, California 92618
                         (Address of principal executive
                                    offices)
                                 (949) 453-2200
                           (Registrant's phone 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, $.001 par
value, was 8,944,570 as of November 1, 1999.

================================================================================
<PAGE>   2

                         CONTINUUS SOFTWARE CORPORATION

                                TABLE OF CONTENTS

PART I  FINANCIAL INFORMATION

<TABLE>
<S>                                                                                     <C>
Item 1.    Financial Statements

        Consolidated Balance Sheets at December 31, 1998 and September 30, 1999
          (unaudited).................................................................   3
        Consolidated Statements of Operations and Comprehensive  Income (Loss)
          for the  Three and Nine Months Ended September 30, 1998 and 1999
          (unaudited).................................................................   4
        Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 1998 and 1999 (unaudited).....................................   5
        Notes to Consolidated Financial Statements (unaudited)........................   6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
           Operations.................................................................  10
        Risk Factors..................................................................  15

Item 3. Quantitative and Qualitative Disclosure About Market Risk...................... 23

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings........................................................... 23
Item 2.    Changes in Securities and Use of Proceeds................................... 23
Item 6.    Exhibits and Reports on Form 8-K............................................ 25
           Signatures...................................................................26
</TABLE>



                                       2.
<PAGE>   3

PART I     FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,      SEPTEMBER 30,
                                                                                       1998              1999
                                                                                     --------          --------
                                                                                                      (unaudited)
<S>                                                                                <C>               <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................         $  2,452          $ 17,490
Short-term investments .....................................................                -             4,497
Accounts receivable, net ...................................................            7,067             7,877
Prepaid expenses and other current assets ..................................              777               904
                                                                                     --------          --------
  Total current assets .....................................................           10,296            30,768
Property, net ..............................................................            1,691             1,869
Other assets ...............................................................              761               840
  Total assets .............................................................         $ 12,748          $ 33,477
                                                                                     ========          ========
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable ...........................................................         $    796          $  2,289
Accrued liabilities ........................................................            3,568             5,445
Deferred revenue ...........................................................            4,400             4,407
Current portion of capital lease obligations ...............................              699               545
                                                                                     --------          --------
   Total current liabilities ...............................................            9,463            12,686
Capital lease obligations, net of current portion ..........................              440               315
Convertible note payable ...................................................            6,000             6,000
Commitments and contingencies
Shareholders equity (deficiency):
Preferred stock, $.001 par value, 5,000,000 shares authorized, 5,000 shares
  issued and outstanding ...................................................                -             4,000

Series A convertible preferred stock, no par value; 2,291,518 shares
  authorized, 2,275,659 and no shares issued and outstanding at December 31,
  1998 and September 30, 1999 ..............................................            7,900                 -
Series B convertible preferred stock, no par value; 451,243 shares
  authorized, 451,243 and no shares issued and outstanding at December 31,
  1998 and September 30, 1999 ..............................................            1,769                 -
Series C convertible preferred stock, no par value; 804,667 shares
  authorized, 747,525 and no shares issued and outstanding at December 31,
  1998 and September 30, 1999 ..............................................            4,118                 -
Series D convertible preferred stock, no par value; 361,178 shares
  authorized, 361,178 and no shares issued and outstanding at December 31,
  1998 and September 30, 1999 ..............................................            1,879                 -
Series E convertible preferred stock, no par value; 783,019 shares
  authorized, 470,849 and no share issued and outstanding at December 31,
  1998 and September 30, 1999 ..............................................            2,352                 -
Common stock $.001 par value; 40,000,000 shares authorized, 1,630,250 and
  8,930,870 shares issued and outstanding at December 31, 1998 and September
  30, 1999 .................................................................                2                 9
Additional paid-in capital .................................................            1,898            33,956
Warrants to purchase common stock ..........................................              114                70
Warrants to purchase Series E convertible preferred stock ..................              248                 -
Accumulated other comprehensive income - net unrealized gain on available for
  sale securities ..........................................................                -                17
Accumulated deficit ........................................................          (23,435)          (23,576)
                                                                                     --------          --------
   Net shareholders equity (deficiency) ....................................           (3,155)           14,476
                                                                                     --------          --------
   Total liabilities and shareholders equity (deficiency) ..................         $ 12,748          $ 33,477
                                                                                     ========          ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       3.
<PAGE>   4

                CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                    (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                         SEPTEMBER 30,                      SEPTEMBER 30,
                                                  --------------------------         --------------------------
                                                    1998              1999             1998              1999
                                                  --------          --------         --------          --------
                                                           (unaudited)                       (unaudited)
<S>                                               <C>               <C>              <C>               <C>
Revenues:
  Software licenses .....................         $  2,852          $  5,304         $ 10,162          $ 14,304
  Services ..............................            3,256             4,348            9,491            12,399
                                                  --------          --------         --------          --------
         Total revenues .................            6,108             9,652           19,653            26,703
Cost of revenues:
  Software licenses .....................              157               152              493               470
  Services ..............................            1,935             2,230            5,546             6,375
                                                  --------          --------         --------          --------
        Total cost of revenues .........             2,092             2,382            6,039             6,845
                                                  --------          --------         --------          --------
Gross profit ...........................             4,016             7,270           13,614            19,858
Operating expenses:
  Sales and marketing ...................            3,932             4,565           11,455            12,803
  Research and development ..............            1,159             1,438            3,347             4,007
  General and administrative ............              679               895            1,976             2,413
  Compensation expense related to stock
     option grants ......................               --                57               --               155
                                                  --------          --------         --------          --------
         Total operating expenses .......            5,770             6,955           16,778            19,378
                                                  --------          --------         --------          --------
Income (loss) from operations ...........           (1,754)              315           (3,164)              480
Other expense, net ......................              138                34              487               612
                                                  --------          --------         --------          --------
Income (loss) before income tax provision           (1,892)              281           (3,651)             (132)
Income tax provision ....................                3                 1               19                 8
                                                  --------          --------         --------          --------
Net income (loss) .......................         $ (1,895)         $    280         $ (3,670)         $   (140)
                                                  ========          ========         ========          ========
Other comprehensive income - Net
  unrealized gain on available for sale
  securities ............................               --                17               --                17
                                                  --------          --------         --------          --------
Comprehensive income (loss) .............         $ (1,895)         $    297         $ (3,670)         $   (123)
                                                  ========          ========         ========          ========
Basic earnings (loss) per share .........         $  (1.17)         $   0.04         $  (2.27)         $  (0.04)
                                                  ========          ========         ========          ========
Diluted earnings (loss) per share .......         $  (1.17)         $   0.03         $  (2.27)         $  (0.04)
                                                  ========          ========         ========          ========
Basic weighted average common shares ....            1,624             6,888            1,615             3,426
                                                  ========          ========         ========          ========
Diluted weighted average common shares ..            1,624            10,188            1,615             3,426
                                                  ========          ========         ========          ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       4.
<PAGE>   5

                 CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                            --------------------------
                                                                              1998              1999
                                                                            --------          --------
                                                                                    (unaudited)
<S>                                                                         <C>               <C>
Cash flows from operating activities:
Net loss ..........................................................         $ (3,670)         $   (140)
Adjustments to reconcile net loss to net cash (used in) provided by
  operating activities:
  Provision for doubtful accounts .................................               81                80
  Depreciation and amortization ...................................              965               827
  Loss (gain) on disposition of property ..........................               (1)                2
  Compensation expense related to stock option grants .............               --               155
  Changes in operating assets and liabilities:
    Accounts receivable ...........................................            2,137              (890)
    Prepaid expenses and other assets .............................              (33)             (141)
    Accounts payable ..............................................              160             1,493
    Accrued liabilities ...........................................             (112)            1,877
    Deferred revenue ..............................................           (1,600)                7
                                                                            --------          --------
      Net cash (used in) provided by operating activities .........           (2,073)            3,270
Cash flows from investing activities:
Purchases of property .............................................             (436)             (627)
Purchase of short-term investments ................................               --            (4,480)
Proceeds from disposition of property .............................               13                 1
                                                                            --------          --------
      Net cash used in investing activities .......................             (423)           (5,106)
Cash flows from financing activities:
Payments on obligations under capital leases ......................             (816)             (660)
Proceeds from issuance of common stock, net .......................               43            17,534
                                                                            --------          --------
      Net cash (used in) provided by financing activities .........             (773)           16,874
                                                                            --------          --------
Net (decrease) increase in cash and cash equivalents ..............           (3,269)           15,038
Cash and cash equivalents, beginning of period ....................         $  6,175          $  2,452
                                                                            ========          ========
Cash and cash equivalents, end of period ..........................         $  2,906          $ 17,490
                                                                            ========          ========
Supplementary disclosures of cash flow information
  Cash paid during the year for:
    Interest ......................................................         $    659          $    636
                                                                            ========          ========
    Income taxes ..................................................         $     17          $      8
                                                                            ========          ========
Noncash items:
Acquisition of property through capital lease .....................         $    508          $    381
                                                                            ========          ========
Issuance of warrants to purchase common stock .....................         $     --          $     65
                                                                            ========          ========
Conversion of common stock to preferred stock .....................         $     --          $  4,000
Net exercise of warrants to purchase common stock .................         $     --          $    109
Net exercise of warrants to purchase Series E convertible
    preferred stock ...............................................         $     --          $    248
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       5.
<PAGE>   6

                 CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1999
                                   (UNAUDITED)

1.  Basis of Presentation

The accompanying consolidated financial statements have been prepared by
Continuus Software Corporation (the "Company") without audit (except for balance
sheet information as of December 31, 1998) in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The accompanying consolidated financial
statements do not include certain footnotes and financial presentations normally
required under generally accepted accounting principles and, therefore, should
be read in conjunction with the audited consolidated financial statements
included in the Company's Registration Statement on Form S-1 (333-76893) (the
"Registration Statement") declared effective by the Securities and Exchange
Commission on July 28, 1999. The accounting policies followed by the Company are
set forth in Note 1 of the Notes to those Consolidated Financial Statements.

The results of operations for the interim periods ended September 30, 1999, are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1999. For further information on additional factors
that may affect future results, please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under Item 2 and the
Consolidated Financial Statements and Notes thereto included in the Registration
Statement.

2.  Net Income (Loss) Per Share

The Company has adopted SFAS No. 128, Earnings per Share, which replaces the
presentation of "primary" earnings per share with "basic" earnings per share and
the presentation of "fully diluted" earnings per share with "diluted" earning
per share. Basic earnings per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities by including other common stock equivalents, including
stock options, warrants and convertible preferred stock, in the weighted average
number of common shares outstanding for a period, if dilutive.

3.  Recent Accounting Pronouncements

Pursuant to SFAS No. 130, Reporting Comprehensive Income, the Company has
included statements of comprehensive income (loss) for the three and nine months
ended September 30, 1998 and 1999.

 In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which the
Company is required to adopt effective in its fiscal year 2000. SFAS No. 133
will require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities and will
continue to evaluate the effects of adopting SFAS No. 133. The Company will
adopt SFAS No. 133 in its fiscal year 2000.



                                       6.
<PAGE>   7

4.  Significant Agreements

On April 22, 1999, the Company entered into a revolving line of credit agreement
with a bank, which provides for borrowings up to $2,000,000. Borrowings accrue
interest at a per annum rate equal to the bank's prime rate. The revolving line
of credit does not provide for any financial covenants and expires on April 22,
2001. On the same date, the Company entered into a Contribution Agreement, which
requires that certain preferred shareholders guarantee outstanding amounts under
the revolving line of credit agreement. Under terms of the Contribution
Agreement, the Company granted warrants to purchase 53,910 shares of common
stock at $9.01 per share to the guarantors on a pro rata basis. The warrants are
immediately exercisable and expire on April 22, 2002. The fair value allocated
to the warrants using the Black-Scholes pricing model was $23,452. This amount
is recorded as deferred financing costs and is being amortized over the term of
the revolving line of credit. The Company is also obligated to grant additional
warrants to purchase 35,940 shares of common stock at $9.01 per share to the
guarantors on a pro rata basis in the event the guarantors are required to make
a payment on the revolving line of credit.

On April 30, 1999, the Company entered into an agreement with a third party to
lease certain qualified capital equipment. The agreement expires on December 1,
1999. In connection with this lease agreement, the Company granted warrants to
purchase 20,755 shares of common stock at $9.01 per share. The warrants are
immediately exercisable and expire on April 30, 2006. The fair value allocated
to the warrants using the Black-Scholes pricing model was $41,673. This amount
is recorded as deferred financing costs and is being amortized over the term of
the lease agreement.

5.  Segment Information (in thousands)

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance.

The Company's reportable operating segments include Software Licenses and
Services. The Software Licenses operating segment develops and markets the
Company's process-oriented software development management products. The
Services segment provides after-sale support for software products and fee-based
training and consulting services related to the Company's products.

The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of sales and gross profit.



                                       7.
<PAGE>   8

Operating segment data for the three months and nine months ended September 30,
1998 and 1999 was as follows:

<TABLE>
<CAPTION>
                                             Software
                                             Licenses         Services         Total
                                              -------         -------         -------
<S>                                          <C>              <C>             <C>
Three months ended September 30, 1998
    Revenues ........................         $ 2,900         $ 3,200         $ 6,100
    Cost of revenues ................             200           1,900           2,100
                                              -------         -------         -------
       Gross profit .................         $ 2,700         $ 1,300         $ 4,000
                                              =======         =======         =======
Three months ended September 30, 1999
    Revenues ........................         $ 5,300         $ 4,400         $ 9,700
    Cost of revenues ................             200           2,200           2,400
                                              -------         -------         -------
       Gross profit .................         $ 5,100         $ 2,200         $ 7,300
                                              =======         =======         =======
Nine months ended September 30, 1998
    Revenues ........................         $10,200         $ 9,500         $19,700
    Cost of revenues ................             500           5,600           6,100
                                              -------         -------         -------
       Gross profit .................         $ 9,700         $ 3,900         $13,600
                                              =======         =======         =======
Nine months ended September 30, 1999
    Revenues ........................         $14,300         $12,400         $26,700
    Cost of revenues ................             500           6,300           6,800
                                              -------         -------         -------
       Gross profit .................         $13,800         $ 6,100         $19,900
                                              =======         =======         =======
</TABLE>


Revenues are attributed to geographic areas based on the location of the entity
to which the products or services were sold. United States information is
derived from U.S. operations and includes revenues from sales to Canadian
entities for the three and nine months ended September 30, 1998 of $200 and
$800, respectively, and for the three and nine months ended September 30, 1999
of $400 and $1,900, respectively. No single country had a material amount of
long-lived assets except for such assets in the United Kingdom of $541 at
September 30, 1999.

<TABLE>
<CAPTION>
                                               United States   International    Eliminations       Total
                                               -------------   -------------    ------------       -----
<S>                                            <C>             <C>              <C>               <C>
Three months ended September 30, 1998
    Revenues ............................         $ 3,700         $ 3,500         $(1,100)        $ 6,100
    Gross profit ........................           2,700           1,300                           4,000
    Long-lived assets ...................           1,700           1,100                           2,800
Three months ended September 30, 1999
    Revenues ............................           6,400           4,600          (1,300)          9,700
    Gross profit ........................           5,200           2,100                           7,300
    Long-lived assets ...................           1,700           1,000                           2,700
Nine months ended September 30, 1998
    Revenues ............................          12,600          10,400          (3,300)         19,700
    Gross profit ........................           9,300           4,300                          13,600
    Long-lived assets ...................           1,700           1,100                           2,800
Nine months ended September 30, 1999
    Revenues ............................          17,700          13,000          (4,000)         26,700
    Gross profit ........................          14,300           5,600                          19,900
    Long-lived assets ...................           1,700           1,000                           2,700
</TABLE>

During the three months and nine months ended September 30, 1998 and 1999, no
single customer accounted for 10% or more of total revenue.



                                       8.
<PAGE>   9

6.  Stock Option Plans

The following is a summary of stock option transactions under the Company's
stock option plans, including the Employee Stock Option Plan and 1997 Equity
Incentive Plan, for the three months ended September 30, 1999:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                   average exercise
                                                     Shares             price
                                                     ------        ----------------
<S>                                                <C>             <C>
Outstanding, June 30, 1999 ..............          2,527,706           $ 2.78
Granted .................................             44,169             6.67
Exercised ...............................            (15,042)            1.50
Canceled ................................            (45,965)            2.63
                                                   ---------
Balance, September 30, 1999 .............          2,510,868             2.86
                                                   =========
Options exercisable at September 30, 1999          1,199,016
                                                   =========
</TABLE>


7.  Initial Public Offering

On August 3, 1999, the Company completed its initial public offering of
2,523,642 shares of common stock at $8.00 per share. The 2,523,642 shares were
sold by the Company resulting in net proceeds of approximately $17.4 million.
Additional information is contained in the Company's Prospectus dated July 29,
1999 which was filed with the Securities and Exchange Commission.

8.   Subsequent Event

On October 21, 1999, the Board of Directors of the Company approved the grant
of stock options pursuant to the Company's 1997 Equity Incentive Plan to
purchase up to an aggregate of 650,000 shares of common stock to employees of
the Company.







                                       9.
<PAGE>   10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. These forward-looking statements include, but
are not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained that are not historical facts. When
used in this Report, the words "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions are generally intended
to identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including to differ materially from those expressed
or implied by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."

OVERVIEW

We provide software products and services for eAsset management, an emerging
market segment that enables organizations to more effectively develop, enhance,
deploy and manage their Internet and enterprise software systems. We originally
incorporated in 1984 as a supplier of application software for the automotive
industry. In 1987, we sold our application software business to focus on the
development of a software change management product. In subsequent years, we
expanded our focus to encompass a fully integrated change management suite. In
1994, we released the 4.0 version of the Continuus Change Management Suite. In
May 1998, we released Continuus WebSynergy, a web content and application
management solution, and began expanding our focus to include eAsset management.

Substantially all revenues to date have been derived from software licenses or
from related services. Software license revenues are primarily based on the
number of end-user seats and the number of copies of our server products that
are licensed by customers. Customers often obtain an initial license for small
groups and may later purchase additional licenses to cover more users.
Currently, over half of our software license revenues result from sales to
existing customers. Software license transactions generally average less than
$100,000, although larger transactions do occur. We recognize revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 97-2. License revenues from sales to end users are recognized
upon shipment of the product if a signed contract exists, the fee is fixed and
determinable and collection is deemed probable. If an acceptance period is
provided, revenue is recognized upon the earlier of customer acceptance or the
expiration of that period.

Service revenue includes consulting, training and maintenance services. We
recognize consulting and training service revenue when earned and maintenance
revenues ratably over the term of the agreement, generally 12 months. Consulting
and training revenues are dependent upon the number of new software licenses and
the number of employees and consultants available to staff engagements.
Maintenance revenues are also dependent upon new software licenses and the rate
at which existing customers renew their support agreements. The gross margins on
the software licenses are significantly higher than the gross margins achieved
for services. Total gross margins may be lower to the extent that service
revenues increase as a percentage of total revenues.

We market our software and services in North America through a direct sales
organization. Since 1995, we have invested significant financial and management
resources to establish and grow our direct sales and support operations in
France, Germany and the United Kingdom. Our foreign subsidiaries bill customers
and incur expenses in their local currencies which are translated into U.S.
dollars for financial accounting purposes. Accordingly, fluctuations in foreign
currency exchange rates may cause fluctuations in our reported operating
results. In addition, fluctuations in foreign currency exchange rates



                                      10.
<PAGE>   11

impact the dollar value of foreign currency-denominated accounts receivable and
other assets. We do not currently utilize foreign currency hedging instruments;
however, we believe that hedging may be utilized in the future to manage risks
associated with foreign currency fluctuations. We market our software through
distributors covering Australia, Denmark, Finland, India, Italy, Israel, the
Netherlands, Norway, Spain and Sweden. The transactions with our distributors
are conducted in U.S. dollars. Total revenues from customers located outside
North America accounted for approximately 53.9% and 44.2% for the three months
ended September 30, 1998 and 1999.

RESULTS OF OPERATIONS

Software Licenses. Software license revenues were $2.9 million and $10.2 million
for the three and nine months ended September 30, 1998, respectively, and $5.3
million and $14.3 million for the comparable periods in 1999. This represents
increases of 86.0% and 40.8% for the three and nine month periods, respectively.
Software license revenues in North America were $1.2 million and $4.7 million
for the three and nine months ended September 30, 1998, respectively, and $3.0
million and $8.1 million for the comparable periods in 1999. This represents
increases of 160.3% and 73.2% for the three and nine month periods,
respectively. These increases were primarily due to increased sales to
internet-related customers. These customers consist of relatively new
internet-centric businesses as well as internet and e-commerce operations within
global 1000 class businesses. Software license revenues from international
operations were $1.7 million and $5.5 million for the three and nine months
ended September 30, 1998, respectively, and $2.3 million and $6.2 million for
the comparable periods in 1999. This represents increases of 34.5% and 13.4% for
the three and nine month periods, respectively.

Services. Service revenues were $3.2 million and $9.5 million for the three and
nine months ended September 30, 1998, respectively, and $4.4 million and $12.4
million for the comparable periods in 1999. This represents increases of 33.5%
and 30.6% for the three and nine month periods, respectively. These increases
were primarily due to increased orders for consulting and training services from
new customers, which reflects the growth in software license revenues, as well
as increased orders for consulting, training and maintenance services from
existing customers.

Cost of Software Licenses. The cost of software license revenues includes both
the amortization of prepaid royalty costs associated with third-party software
which is embedded in our products and the costs associated with product
documentation, packaging and shipping. The cost of software license revenues was
$157,000 and $493,000 for the three and nine months ended September 30, 1998,
respectively, and $152,000 and $470,000 for the comparable periods in 1999. This
represents decreases of 3.2% and 4.7% for the three and nine month periods,
respectively. The decreases were primarily due to lower product documentation
costs. Gross margins on software licenses were 94.5% and 95.1% for the three and
nine months ended September 30, 1998, respectively, and 97.1% and 96.7% for the
comparable periods in 1999.

Cost of Services. The cost of service revenues consists primarily of salaries
and related expenses for consultants and technical support personnel. The cost
of service revenues was $1.9 million and $5.6 million for the three and nine
months ended September 30, 1998, respectively, and $2.2 million and $6.3 million
for the comparable periods in 1999. This represents increases of 15.2% and 14.9%
for the three and nine months periods, respectively. The increases were
primarily due to increases in the size of our professional services organization
worldwide. Gross margins on service revenues were 40.6% and 41.6% for the three
and nine months ended September 30, 1998, respectively, and 48.7% and 48.6% for
the comparable periods in 1999. The increases in gross margins on service
revenues were primarily due to increased utilization as new employees became
more productive.



                                      11.
<PAGE>   12

Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses and travel and entertainment and promotional expenses. Sales and
marketing expenses were $3.9 million and $11.5 million for the three and nine
months ended September 30, 1998, respectively, and $4.6 million and $12.8
million for the comparable periods in 1999. This represents increases of 16.1%
and 11.8% for the three and nine month periods, respectively. The higher sales
and marketing expenses for the periods ended September 30, 1999 were due to
increases in sales personnel expenses, including commissions and compensation,
resulting from new hires, a larger sales force and increased sales. As a
percentage of total revenues, sales and marketing expenses were 64.4% and 58.3%
for the three and nine months ended September 30, 1998, respectively, and 47.3%
and 47.9% for the comparable periods in 1999.

Research and Development. Research and development expenses consist primarily of
expenses related to software development personnel and other costs associated
with product development. All costs incurred in the research and development of
software products and enhancements to existing software products have been
expensed as incurred. Research and development costs were $1.2 million and $3.3
million for the three and nine months ended September 30, 1998, respectively,
and $1.4 million and $4.0 million for the comparable periods in 1999. This
represents increases of 24.1% and 19.7% for the three and nine month periods,
respectively. The increases were primarily due to staffing increases to support
the development of new products and the enhancement of existing products. As a
percentage of total revenues, research and development expenses were 19.0% and
17.0% for the three and nine months ended September 30, 1998, respectively, and
14.9% and 15.0% for the comparable periods in 1999.

General and Administrative. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes and administrative costs,
including legal and accounting fees and bad debts. General and administrative
expenses were $679,000 and $2.0 million for the three and nine months ended
September 30, 1998 and $895,000 and $2.4 million for the comparable periods in
1999. This represents increases of 31.8% and 22.1% for the three and nine month
periods, respectively. The increases were due to increased personnel expenses,
including salaries, bonuses and payroll taxes resulting from new hires and
increased legal and accounting fees and other costs as a result of being a
public company. As a percentage of revenue, general and administrative expenses
were 11.1% and 10.1% for the three and nine months ended September 30, 1998,
respectively, and 9.3% and 9.0% for the comparable periods in 1999.

Compensation Expenses Related to Stock Option Grants. Compensation expense
related to the grant of options to purchase shares of common stock at exercises
prices below the deemed value of the company's common stock were $57,000 and
$155,000 for the three and nine months ended September 30, 1999; there was no
such expense in 1998.

Other Expenses. Other expenses consist primarily of interest expense and foreign
currency translation losses. Other expenses were $138,000 and $487,000 for the
three and nine months ended September 30, 1998, respectively, and $34,000 and
$612,000 for the comparable periods in 1999. The increases for the nine month
period ended September 30, 1999 were primarily due to higher losses from foreign
currency translation caused by the strengthening of the dollar as compared to
certain foreign currencies. As a percentage of total revenues, other expenses
were 2.3% and 2.5% for the three and nine months ended September 30, 1998,
respectively, and 0.4% and 2.2% for the comparable periods in 1999.

Income Tax Provision. The income tax provision for the three and nine months
ended September 30, 1998 and September 30, 1999 consisted solely of minimum
state income taxes due to our net loss on a year to date basis for the nine
months ended September 30, 1998 and September 30, 1999.



                                      12.
<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1999, we had cash and cash equivalents and short-term
investments of approximately $22.0 million, an increase of $19.5 million from
December 31, 1998. From inception through July 1999, we financed our operations
through private placements of our equity and debt securities. The private
placement of equity securities provided us with aggregate gross proceeds of
approximately $18.4 million as of September 30, 1999. We also borrowed $6.0
million through the issuance of a senior secured convertible debenture in 1997.
In August 1999, we completed an initial public offering of 2,523,642 shares of
our common stock, generating net proceeds of $17.4 million.

As of September 30, 1999, the Company had outstanding the $6.0 million senior
secured convertible debenture and additional capital commitments in the form of
capital leases of $860,000. As of September 30, 1999, we also had available a
$2.0 million revolving line of credit with a commercial bank which expires on
April 22, 2001. The revolving line of credit does not provide for any financial
covenants. To date, we have not made any draws on this line of credit. We have
also entered into an equipment lease line for an aggregate of $1.0 million of
which $214,000 was outstanding at September 30, 1999.

Our operating activities generated cash of $3.3 million for the nine months
ended September 30, 1999 as compared to $2.1 million in cash used for the nine
months ended September 30, 1998. The increase in cash generated was primarily
due to our ability to generate income from operations.

Our investing activities used approximately $5.1 million and $423,000 for the
nine months ended September 30, 1999 and 1998, respectively, primarily from
property purchases and the purchase of short-term investments. Expenditures for
property and equipment were $1.0 million for the nine months ended September 30,
1999 as compared to $944,000 for the nine months ended September 30, 1998. Most
property acquired was computer hardware and software. We anticipate that we will
purchase similar levels of new equipment through the remainder of 1999. We
anticipate moving to larger facilities in the first quarter of 2000 when our
current lease expires, which will increase our expenditures for new property and
equipment.

We believe that our existing cash balances and cash from operations will be
sufficient to finance our operations through at least the next 18 months. If
additional financing is needed, there can be no assurances that such financing
will be available to us on commercially reasonable terms.

IMPACT OF YEAR 2000 PROBLEMS

Many computers, software applications and other equipment are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, some computers, software and other equipment could
fail to operate or fail to produce correct results if "00" is interpreted to
mean 1900, rather than 2000. These problems are commonly referred to as the
"year 2000 problem."

GENERAL READINESS ASSESSMENT. The year 2000 problem affects the computers,
software applications and other equipment that we use, operate or maintain for
our operations. As a result, we have established a year 2000 readiness committee
fully supported by representatives of all departments.

ASSESSMENT OF CONTINUUS' SOFTWARE PRODUCTS. Beginning in 1997, we began
assessing the ability of our software to operate properly in the year 2000. We
believe the latest revisions, version 4.5 and higher, of our currently available
software products on Windows and supported variants of UNIX are year 2000
compliant and that this software accurately processes date data from, into and
between the 20th and 21st centuries. In particular, in June 1998, we issued a
new version of our Continuus Change Management Suite that is year 2000
compliant. Approximately 90% of our customers have installed the year 2000



                                      13.
<PAGE>   14

compliant version of the Continuus Change Management Suite to date. The needs of
the remainder of our customers to install the year 2000 compliant version by the
end of 1999 may require significant assistance from our consulting personnel
later this year, which could interfere with our ability to fulfill all demands
for our services. We expect to continue to test our new software and products
for year 2000 compliance and compliance when used with other standard operating
systems or computer platforms, including those developed by other companies.

ASSESSMENT OF INTERNAL INFRASTRUCTURE. We substantially completed year 2000
testing of our major information technology systems in October 1998 and
identified those components which were not year 2000 compliant. As of September
30, 1999 all remediation efforts have been completed.

SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, telephone switches, security systems and other common devices may be
affected by the year 2000 problem. As of September 30, 1999 all remediation
efforts have been completed.

VENDORS AND SUPPLIERS. We completed our communications with external vendors and
suppliers that provide us with material software and information systems in
February 1999 to determine the extent to which their failure to remedy their own
year 2000 problems would materially affect us. Based on our vendors' and
suppliers' representations, we believe that the third-party hardware and
software we employ is year 2000 compliant. As we establish relationships with
additional third parties, we intend to identify and resolve issues involving the
year 2000 problem. However, we have limited or no control over the actions of
these third parties. Thus, while we expect that we will be able to resolve any
issues involving third parties, there can be no assurance that the third parties
will resolve any or all year 2000 problems before the occurrence of a material
disruption to the operation of our business. Any failure of these third parties
to timely resolve year 2000 problems with their systems could harm our business.

COSTS OF REMEDIATION. To date, we have not incurred any material costs directly
associated with year 2000 compliance efforts, except for compensation expense
associated with existing salaried employees who have devoted some of their time
away from their primary responsibilities and instead to year 2000 assessment and
remediation efforts. We estimate the total cost to us associated with year 2000
compliance, including costs of completing any required modification, upgrades or
replacements of our internal systems, has not exceeded $50,000, most of which
was incurred before the end of the third quarter of 1999.

MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and
resolve all year 2000 problems that could harm our business operations before
the end of 1999. However, we believe that it is not possible to determine with
complete certainty that all year 2000 problems affecting us have been identified
or corrected. The number of devices and systems that could be affected and the
interactions among these devices and systems are too numerous to address. In
addition, no one can accurately predict which year 2000 problem-related failures
will occur or the severity, timing, duration or financial consequences of these
potential failures. As a result, we believe that the following consequences are
possible:

        -       a significant number of operational inconveniences and
                inefficiencies for us and our customers that will divert
                management's time and attention as well as financial and human
                resources from ordinary business activities;

        -       possible minor business disputes and claims, including claims
                under product warranty, due to year 2000 problems experienced by
                our customers and incorrectly attributed to our



                                      14.
<PAGE>   15

                products or performance, which we believe will be resolved in
                the ordinary course of business; and

        -       possible serious business disputes alleging that we failed to
                comply with the terms of contracts or industry standards, some
                of which could result in litigation or contract termination.

CONTINGENCY PLANS. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. Our contingency plan could include:

        -       accelerated replacement of affected equipment or software;

        -       short to medium-term use of back-up equipment and software or
                other redundant systems;

        -       increased work hours for our personnel or the hiring of
                additional information technology staff; and

        -       the use of contract personnel to correct, on an accelerated
                basis, any year 2000 problems that arise or to provide interim
                alternate solutions for information system deficiencies.

The discussion of our efforts and expectations relating to year 2000 compliance
are forward-looking statements. Our ability to achieve year 2000 compliance, and
the level of incremental costs associated with compliance, could be adversely
affected by, among other things, the availability and cost of contract personnel
and external resources, third party suppliers' ability to modify proprietary
software, and unanticipated problems not identified in our ongoing review.

EUROPEAN MONETARY UNION

Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.

We have not experienced any significant operational disruptions to date and we
do not currently expect the continued implementation of the euro to cause any
significant operational disruptions.

RISK FACTORS

Our business, financial condition or results of operations could be harmed by
any of the following risks.

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY

Our quarterly revenues and operating results fluctuate significantly and may
cause the price of our stock to fall. Our revenues and operating results depend
primarily on the volume and timing of customer contracts we receive during a
given quarter and the percentage of each contract we can recognize as revenue
during each quarter. We have often recognized a substantial portion of our
revenues in the last month of a quarter, with a concentration of these revenues
in the last weeks or days of the third month. A delay in an anticipated sale
near the end of a quarter can seriously harm our operating results for that



                                      15.
<PAGE>   16

quarter. Accordingly, our operating results may be below the expectations of
analysts and investors. In this event, the price of our common stock will likely
fall.

Our expense levels are relatively fixed in the short term and are based, in
part, on our expectations of our future revenues. As a result, any delay in
generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.

SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS

We have experienced and expect to continue to experience seasonality in sales of
our software products. These seasonal trends materially affect our
quarter-to-quarter operating results. We may experience weaker demand for our
products and services in our third quarter each year, particularly in
international markets, as a result of reduced sales activities during the summer
months. As a result of customer buying patterns, we may also realize lower
revenues in the first quarter of each year than in the preceding fourth quarter.

WE MAY INCUR FUTURE LOSSES

We may not be able to sustain profitability. Although we achieved a small net
income in the three months ended September 30, 1999, we incurred net losses of
$3.9 million in 1998 and $140,000 for the nine months ended September 30, 1999.
As of September 30, 1999, we had an accumulated deficit of $23.6 million. We
expect to continue to increase our sales and marketing, product development and
administrative expenses. As a result, we will need to generate significant
additional revenues to achieve and maintain profitability.

Although our revenues have grown in recent quarters, we cannot be certain that
revenue growth will continue or that we will achieve sufficient revenues for
profitability. If we do achieve profitability in any period, we cannot be
certain that we will sustain or increase profitability on a quarterly or annual
basis.

CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION MAY REDUCE OUR FUTURE
REVENUES

Our revenues may be reduced by customer focus on year 2000 problems. Many
computers, software applications and other equipment are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, some computers, software and other equipment could
fail to operate or fail to produce correct results if "00" is interpreted to
mean 1900 rather than 2000. These problems are commonly referred to as the "year
2000 problem."

Many customers may spend their limited financial and personnel resources
remediating year 2000 problems, thereby delaying or foregoing entirely
investment in more general IT products such as our products. This trend could
reduce our revenues in 1999 and 2000.

A REDUCTION IN REVENUES FROM THE CONTINUUS CHANGE MANAGEMENT SUITE WOULD HARM
OUR BUSINESS

A decline in the demand for Continuus Change Management Suite and the revenues
associated with licenses of the Continuus Change Management Suite would reduce
our total revenues and harm our business. In 1998, sales of the Continuus Change
Management Suite or its components accounted for approximately 94% of our total
software license revenues. In comparison, Continuus WebSynergy-related sales
accounted for 6% of our total software license revenues in 1998. We expect that
the Continuus Change Management Suite will continue to account for a substantial
portion of our total revenues for the



                                      16.
<PAGE>   17

foreseeable future. The following events may reduce the demand for the Continuus
Change Management Suite:

        -       competition from other products;

        -       significant flaws in our software products or incompatibility
                with third-party hardware or software products;

        -       negative publicity or evaluation; or

        -       obsolescence of the hardware platforms or software environments
                in which our systems run.

SINCE OUR FUTURE REVENUES PARTIALLY DEPEND ON OUR NEW INTERNET PRODUCTS, OUR
REVENUES MAY SUFFER IF WE CANNOT SUCCESSFULLY MARKET THESE NEW PRODUCTS

A substantial portion of our revenues in the future may be derived from new
internet products and related services. A decline in the price of, or demand
for, new internet products, or our failure to achieve broad market acceptance of
new internet products, may reduce our revenues.

WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO ACHIEVE
SIGNIFICANT REVENUE GROWTH

We may not be able to recruit and retain the personnel we need to achieve
significant revenue growth. Our future success depends upon our ability to
recruit, train and retain additional sales and technical support personnel. We
sell our products primarily through our direct sales force and we support our
customers with our internal technical support staff. In the past, we have had
difficulty recruiting and retaining qualified personnel, and we cannot guarantee
that we will not experience similar difficulties in the future. Factors that may
affect our ability to recruit and retain personnel include:

        -       our ability to effectively manage an expansion of our sales and
                technical support personnel and retain this personnel; and

        -       competition for qualified personnel from larger, more
                established companies who have greater financial resources than
                we do.

In 1996 and 1998, we suffered a material decline in sales growth due to turnover
in our sales force. If we experience turnover in our sales force in the future,
our operating results will suffer. Newly hired sales personnel generally do not
become fully productive until they have worked for at least two quarters.
Because of the time required to recruit new sales personnel and for them to
become fully productive, we cannot quickly and easily expand our sales force in
response to unanticipated events.

THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND MAY HARM OUR OPERATING RESULTS

The period of time between initial customer contact and an actual sales order
may span six months or more. This long sales cycle increases the risk that we
will not forecast our revenue accurately and adjust our expenditures
accordingly. The longer the sales cycle lasts, the more likely a customer is to
decide not to purchase our products or to scale down its order of our products
for various reasons, including:

        -       changes in our customers' budgets and purchasing priorities;



                                      17.
<PAGE>   18

        -       actions by competitors, including introduction of new products
                and price reductions; and

        -       diversion of resources and management's attention to other
                information technology issues, such as year 2000 issues.

In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our products, which may
cause additional delays during the evaluation process.

IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS, OUR
REVENUE WILL SUFFER

In 1998, we generated approximately 58% of our software license revenues from
repeat business from existing customers. If we fail to generate repeat and
expanded business from our customers, our revenues will suffer. Our ability to
generate repeat business from current customers depends on many factors. Most of
our current customers initially purchase a limited number of licenses as they
implement and adopt our products. Even if the customer successfully uses our
products, customers may not purchase additional licenses to expand the use of
our products. Purchases of expanded licenses by these customers will depend on
their success in deploying our products, their satisfaction with our products
and support services and their perception of competitive alternatives. A
customer's decision whether to widely deploy our products and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our products or services. In addition, as we
deploy new versions of our products or introduce new product suites, our current
customers may not require the functionality of our new products and may not
ultimately license these products.

INTENSE COMPETITION MAY CAUSE US TO REDUCE PRICES OR LOSE CUSTOMERS

The markets for integrated Internet and enterprise software asset management
solutions are intensely competitive, subject to rapid change and sensitive to
new product introductions or enhancements and marketing efforts by industry
participants. We expect to experience significant and increasing levels of
competition in the future. Competition may result in price reductions, reduced
margins or loss of customers which in turn could harm our profitability.

Many of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations, and significantly greater financial resources than we do.
Moreover, we have limited proprietary barriers to entry that could keep our
competitors from developing similar products or selling competing products in
our markets. We may not be able to maintain our competitive position against
current or future competitors, especially those with greater resources.

IF THE EMERGING MARKET FOR EASSET MANAGEMENT SOLUTIONS DOES NOT DEVELOP AS WE
ANTICIPATE, OUR REVENUES MAY SUFFER

We are expanding beyond our traditional software change management solution to
provide our customers with e-asset management, which provides a more
comprehensive, integrated solution to support broader needs. Potential customers
may not fully appreciate the value of our comprehensive and integrated eAsset
management solution as compared to traditional change management software. As a
result, the eAsset management market generally may not develop and continue or
grow as we anticipate. Any failure of this market to develop or grow would harm
our revenues.



                                      18.
<PAGE>   19

CHANGES IN INTERNET TECHNOLOGY AND STANDARDS MAY IMPEDE MARKET ACCEPTANCE OF OUR
INTERNET PRODUCTS

Rapidly changing Internet technology and standards may impede market acceptance
of new internet products. The success of internet products will require us to
develop and introduce new technologies and product suites and to offer
functionality that we do not currently provide. New internet product has been
designed and the full e-asset management solution will be designed based upon
prevailing Internet technology. If Internet technologies emerge that are
incompatible with new Internet products we develop, our products may become
obsolete and existing and potential new customers may seek alternatives to them.
We may not be able to quickly adapt our products to new Internet technology.

THE COSTS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS MAY NEGATIVELY IMPACT OUR
OPERATING MARGINS

During the nine months ended September 30, 1999, we derived approximately 46%
from sales outside North America, principally in Europe. Our international
operations require and will continue to require significant management attention
and financial resources. If we fail to expand international sales in a timely
and cost-effective manner, our operating margins will decrease. We believe that
our growth and profitability will depend in part on additional expansion of
sales in foreign markets.

IF WE CANNOT MANAGE THE ADDITIONAL CHALLENGES PRESENTED BY OUR INTERNATIONAL
OPERATIONS, OUR REVENUES AND PROFITABILITY MAY SUFFER

We face additional challenges from our continued operations in foreign
countries. Our revenues and profitability could suffer if we cannot manage these
challenges, which include:

        -       longer payment cycles;

        -       difficulties in staffing and managing foreign operations;

        -       increased sales and marketing and research and development
                expenses;

        -       costs and risks of relying upon distributors;

        -       various and changing regulatory requirements;

        -       export restrictions and availability of export licenses;

        -       tariffs and other trade barriers;

        -       political and economic instability; and

        -       potentially adverse tax laws.

Foreign laws also govern a certain number of our customer purchase agreements,
which may differ significantly from U.S. laws. Therefore, we may be limited in
our ability to enforce our rights under foreign agreements and to collect
payments should any customer refuse to pay us.



                                      19.
<PAGE>   20

FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES

Our international customers pay us in their local currencies. For the nine
months ended September 30, 1999, we derived approximately 40% of our revenues in
foreign local currencies. Consequently, any gains and losses on the conversion
to U.S. dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in our operating
results. Although we may utilize some hedging in the future, we currently do not
utilize foreign currency hedging instruments. Historically foreign currency
gains and losses have not been material to our financial performance. We cannot
guarantee that fluctuations in currency rates will not harm our business,
operating results and financial condition in the future.

FAILURE TO MANAGE OUR GROWING OPERATIONS COULD INCREASE COSTS AND CAUSE DELAYS
IN MEETING OUR BUSINESS OBJECTIVES

We plan to increase business opportunities through an expansion of our
distribution network in the United States and internationally. However, we
cannot guarantee that the efforts and funds directed towards expanding our
distribution network will succeed. Our failure to implement new operational and
financial control systems to accommodate growth could increase costs and cause
delays in meeting our objectives. Any future growth will also depend on, among
other things, our ability to gain market acceptance for our products in new
geographic areas and to monitor and control the additional costs and expenses
associated with expansion. We cannot guarantee that we can successfully manage
these aspects of our business.

Any business opportunities will increase demands on our systems and controls. To
deal with these concerns, we will need to implement a variety of new and
upgraded operational and financial systems, procedures and controls and to hire
additional administrative personnel. We cannot be sure that we can complete the
implementation of these systems, procedures and controls or hire needed
personnel in a timely manner.

OUR PRODUCTS MAY BECOME OBSOLETE AND UNMARKETABLE

The introduction of products utilizing new technologies and the emergence of new
industry standards could render our existing products and products currently
under development obsolete and unmarketable.

The following factors characterize the markets for our products:

        -       rapid technological advances;

        -       evolving industry standards;

        -       changes in end-user requirements; and

        -       frequent new product introductions and enhancements.

As a result, our future success depends upon our ability to enhance our current
products and successfully develop, introduce and sell new products that
incorporate new technology and respond to evolving end-user requirements. Any
failure to anticipate or adequately respond to technological developments or
end-user requirements, any significant delays developing or introducing new
products, or any failure of new products or features to provide the benefits
expected or to achieve market acceptance could damage our competitive position
in the marketplace and reduce revenues. We cannot guarantee that we will succeed



                                      20.
<PAGE>   21

in developing and marketing new products or enhancements on a timely basis or
that we will not experience significant delays in the future.

SIGNIFICANT LIABILITY CLAIMS FROM OUR CUSTOMERS COULD REDUCE OUR REVENUES,
INCREASE OUR COSTS AND DELAY MARKET ACCEPTANCE OF OUR PRODUCTS

Because our software products are complex, they often contain errors or "bugs"
that can be detected at any point in a product's life cycle. These defects are
most frequently found during the period immediately following the introduction
of new products or enhancements to existing products and may be discovered in
the future. Software defects discovered after we ship our products could result
in loss of revenues or delays in market acceptance. Although we do from time to
time incur costs in correcting software defects, to date, no errors in our
software products have materially affected our results of operations. Because we
rely on our own products in connection with developing our software, any
software errors or defects could make it more difficult for us to develop
software in the future.

We typically design our customer license agreements to contain provisions which
limit our exposure to potential product liability claims. Specifically, in
agreements with our customers we attempt to limit our liability for special and
indirect damages, as well as damages related to the loss of data, revenue or
profits. We also attempt to limit our liability to the contract price or the
replacement cost of the software. However, we cannot guarantee that contractual
limitations of liability would be enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
products, or associated with the professional services we render. Although we
maintain insurance which covers damages arising from the implementation and use
of our products, we are not certain that our insurance would cover or be
sufficient to cover any product liability claims against us. Moreover, we incur
risks of professional and other liability stemming from our training and
consulting services. Any product liability or other claims against us, if
successful and of sufficient magnitude, could harm our profitability and future
sales.

IF WE CANNOT OBTAIN A COST-EFFECTIVE LICENSE TO AN APPROPRIATE DATABASE
MANAGEMENT SYSTEM, OUR PROFITABILITY MAY SUFFER

We rely upon a database management system developed by Informix Software, Inc.,
embedded in the Continuus Change Management Suite pursuant to a license that
expires on December 31, 1999. The Informix system, which is an industry standard
relational database engine, manages the repository database that contains all of
the information about the eAssets managed by the Continuus Change Management
Suite. We cannot be sure that Informix's product lines will continue to be
available to us on commercially reasonable terms. If Informix is acquired or
abandons or fails to enhance the database, we may need to seek other suppliers.
A replacement system may not be available upon similar economic terms. An
increase in the expense of a database management system could reduce our
profitability.

FUTURE ACQUISITIONS MAY DECREASE OUR PROFIT MARGINS BY CONSUMING RESOURCES

Acquisitions can be expensive and time-consuming transactions. If we acquire
businesses or technologies in future acquisitions, our resources may be diverted
to completing the acquisitions and assimilating the acquired businesses or
technologies. Our profit margins could be negatively affected by this
consumption of resources.



                                      21.
<PAGE>   22

THE VALUE OF AN ACQUIRED BUSINESS OR TECHNOLOGY MAY DIMINISH FOLLOWING AN
ACQUISITION

We do not have significant experience at evaluating or completing acquisitions.
If the value of a business or technology we acquire diminishes following an
acquisition, our profitability could be harmed. The following occurrences may
cause the value to diminish:

        -       we might lose the key employees and customers of an acquired
                business;

        -       the technology acquired may prove to be unproductive or may
                infringe on the rights of another;

        -       a newly-acquired business may not perform as well as we
                expected; and

        -       we may assume unknown liabilities.

POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE OR OUR INTERNAL OPERATING SYSTEMS
COULD INCREASE COSTS AND REDUCE REVENUES

If any of our licensees experience year 2000 problems as a result of their use
of our software products, those licensees could assert claims for damages which,
if successful, could harm our profitability. We believe that current versions of
our software products are generally year 2000 compliant. However, we may learn
that certain of our software products do not contain all of the software
routines and codes necessary for the accurate calculation, display, storage and
manipulation of data involving dates.

IF CUSTOMERS NEED TO INSTALL THE YEAR 2000 COMPLIANT VERSION OF CONTINUUS CHANGE
MANAGEMENT SUITE BEFORE THE END OF 1999, OUR CONSULTING SERVICES MAY BE
SIGNIFICANTLY AFFECTED

Our ability to provide adequate levels of service to our customers may be
affected by demands on our personnel which are related to year 2000 compliance.
In June 1998, we issued a new version of the Continuus Change Management Suite
that is year 2000 compliant. Approximately 90% of our customers have implemented
the year 2000 compliant version to date. The needs of the remainder of our
customers to implement the year 2000 compliant version by the end of 1999 may
divert the attention of our consulting personnel. Our consulting personnel may
be unable to adequately provide our standard services because of the need to
address year 2000 compliance issues. Consequently, customer relations may be
strained.

OUR STOCK PRICE IS VOLATILE

The stock market in general, and the Nasdaq National Market and the stock of
software companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to a company's
operating performance. The trading prices of many software companies' stocks are
at or near historical highs and these trading prices and multiples are
substantially above historical levels. The trading price of our common stock has
fluctuated and may continue to fluctuate in response to factors described
elsewhere in this Report and:

        -       general market conditions;

        -       announcements of technological innovations or new products;



                                      22.
<PAGE>   23

        -       publicity regarding actual or potential results with respect to
                technologies or products under development;

        -       changes in recommendations of securities analysts; and

        -       other events or factors, many of which are beyond our control.

These broad market and industry factors may reduce our stock price, regardless
of our actual operating performance.

WE MAY BE SUBJECT TO LITIGATION DUE TO THE VOLATILITY OF OUR STOCK PRICE

In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
volatile companies. Securities class-action litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our profitability.

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL

If our stockholders sell substantial amounts of our common stock in the public,
the market price of our common stock could fall. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial instruments include cash and long-term debt. At September 30,
1999, the carrying values of our financial instruments approximated their fair
values based on current market prices and our incremental borrowing rate.

We have not invested in derivative financial instruments. We have foreign
currency exposure since we transact business in foreign currencies. However,
foreign currency translation and transaction gains and losses have not been
significant. A significant change in foreign currency values could harm our
financial position and results of operations.

PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

        Recent Sales of Unregistered Securities

During the quarter ended September 30, 1999, we sold and issued the following
securities which were not registered under the Securities Act of 1933:

        (1) During the period, 6,696 shares of common stock were issued pursuant
to the exercise of stock options granted under our Employee Stock Option Plan.



                                      23.
<PAGE>   24

        (2) During the period, 2,923 shares of common stock were issued pursuant
to the exercise of stock options granted under the 1997 Equity Incentive Plan.

        (3) On August 31, 1999, we filed a Current Report on Form 8-K to report
the issuance of 5,000 shares of our Series A Non-Voting Convertible Preferred
Stock (the "Preferred Stock") to U.S. Bancorp Piper Jaffray Inc. ("Piper
Jaffray") in exchange for 500,000 shares of our common stock (the "Piper Jaffray
Exchange"). Piper Jaffray had owned in excess of 5% of our voting stock. The
exchange of Preferred Stock for common stock reduced Piper Jaffray's common
stock holdings to enable Piper Jaffray to satisfy the Bank Holding Company Act
requirements that a bank holding company and its affiliates own less than 5% of
the voting stock of a publicly trade corporation. Each share of Preferred Stock
is convertible into 100 shares of our common stock. The Preferred Stock does not
have voting rights or a liquidation or redemption preference. The Preferred
Stock has the same right to dividends as the common stock.

The sale of stock options described in paragraphs (1) and (2) above were deemed
to be exempt from registration under the Securities Act of 1933 by virtue of
Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to written compensatory benefit plans or pursuant to a written contract
relating to compensation, as provided by Rule 701.

The exchange of securities in the transactions described in paragraph (3) above
was deemed to be exempt from registration under the Securities Act of 1933 by
virtue of Section 3(a)(9).

On July 28, 1999, our Form S-1 registration statement (File No. 333-76893) was
declared effective by the Securities and Exchange Commission. The registration
statement, as amended, covered the offering of 2,523,642 shares of our common
stock, $.001 par value. The offering commenced on July 29, 1999 and the sale to
the public of 2,523,642 shares of common stock at $8.00 per share was completed
on August 3, 1999 for an aggregate price of approximately $20.2 million. The
registration statement covered an additional 378,546 shares of common stock that
the underwriters had the option to purchase solely to cover over-allotments.
These share were not purchased and were cancelled. The managing underwriters for
the offering were U.S. Bancorp Piper Jaffray Inc. and CIBC World Markets Corp.

Expenses we incurred through July 29, 1999 in connection with the issuance and
distribution of common stock in the offering included underwriting discounts,
commissions and allowances of approximately $1.41 million and other expenses of
approximately $1.36 million. Total offering expenses of approximately $2.77
million resulted in net offering proceeds to Continuus of approximately $17.4
million. No expenses were paid to directors, officers or affiliates of Continuus
or 10% owners of any class of equity securities of Continuus.

Of the net offering proceeds to the Company of approximately $17.4 million,
through September 30, 1999, the entire amount remains as working capital. No
payments were made to directors, officers or affiliates of Continuus or 10%
owners of any class of equity securities of Continuus.



                                      24.
<PAGE>   25

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

        A)     EXHIBITS:

               11.1          Computation of net income (loss) per share

               27.1          Financial Data Schedule

        B)     REPORTS ON FORM 8-K:

                On August 31, 1999, we filed a Current Report on Form 8-K to
report the Piper Jaffray Exchange. No financial statements were filed with this
report



                                      25.
<PAGE>   26

                                   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.

                                            CONTINUUS SOFTWARE CORPORATION

Date:   November 15 1999                 By: /s/ John R. Wark
                                            ------------------------------------
                                            John R. Wark
                                            President, Chief Executive Officer
                                            and Chairman of
                                            the Board of Directors
                                            (Principal Executive Officer)

Date:   November 15, 1999
                                         By: /s/ Steven L. Johnson
                                            ------------------------------------
                                            Steven L. Johnson
                                            Vice President, Finance, Chief
                                            Financial Officer and Secretary
                                            (Principal Financial and Accounting
                                            Officer)



                                      26.

<PAGE>   1

                                                                    EXHIBIT 11.1

                   COMPUTATION OF NET INCOME (LOSS) PER SHARE


<TABLE>
<CAPTION>
                                                                        Three months ended       Nine months ended
                                                                        ------------------------------------------
<S>                                                                     <C>                      <C>
EPS CALCULATION AS OF SEPTEMBER 30, 1998

Shares issued and outstanding at June 30, 1998
     and December 31, 1997                                                       1,618,060              1,604,202

Weighted average shares from options exercised during the period                     5,846                 10,348
                                                                        ------------------------------------------

Weighted average common shares - basic and diluted                               1,623,906              1,614,550


Net loss at September 30, 1998                                                 $(1,894,586)           $(3,669,621)

Net loss per share - basic and diluted                                               (1.17)                 (2.27)
                                                                        ==========================================
</TABLE>



<TABLE>
<CAPTION>
                                                                  Three months ended             Nine months ended
                                                           -------------------------------------------------------
<S>                                                        <C>                                   <C>
EPS CALCULATION AS OF SEPTEMBER 30, 1999

Shares issued and outstanding at June 30, 1999
    and December 31, 1998                                                        1,690,400              1,630,250

Options issued during period                                                         8,364                 46,699

Issuance of common stock from IPO (7/29/99)                                      1,755,577              1,811,156

Conversion of p/s from IPO (7/29/99)                                             2,995,794

Issuance of common stock from IPO warrants (7/29/99)                               623,037

Conversion of c/s to p/s (8/31/99)                                                (184,783)               (62,271)
                                                                              ------------------------------------

Weighted average common shares - basic                                           6,888,389              3,425,834

Incremental shares from assumed conversion:
Conversion of p/s to c/s (7/29/99)                                               1,310,660

IPO Warrants (7/29/99)                                                             272,578

Preferred Stock (7/29/99)                                                          184,783

Options                                                         2,158,568
Proceeds                                                        4,365,732
Assumed buyback                                              $       6.49
                                                             ------------

Shares boughtback                                                 672,686        1,485,882


Warrants                                                          124,096
Proceeds                                                          507,203
Assumed buyback                                              $       6.49
                                                             ------------

Shares boughtback                                                  78,151           45,945
                                                                              ------------------------------------

Weighted average common shares - diluted                                        10,188,237              3,425,834

Net income (loss) at September 30, 1999                                       $    280,314           $   (139,629)

Net income/(loss) per share - basic                                                   0.04                  (0.04)
                                                                              ====================================

Net income/(loss) per share - diluted                                                 0.03                  (0.04)
                                                                              ====================================
</TABLE>


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                          17,490
<SECURITIES>                                     4,497
<RECEIVABLES>                                    8,242
<ALLOWANCES>                                       365
<INVENTORY>                                          0
<CURRENT-ASSETS>                                30,768
<PP&E>                                           6,446
<DEPRECIATION>                                   4,577
<TOTAL-ASSETS>                                  33,477
<CURRENT-LIABILITIES>                           12,686
<BONDS>                                              0
                                0
                                      4,000
<COMMON>                                        33,965
<OTHER-SE>                                     (23,489)
<TOTAL-LIABILITY-AND-EQUITY>                    33,477
<SALES>                                         14,304
<TOTAL-REVENUES>                                26,703
<CGS>                                              470
<TOTAL-COSTS>                                    6,845
<OTHER-EXPENSES>                                19,378
<LOSS-PROVISION>                                    80
<INTEREST-EXPENSE>                                 636
<INCOME-PRETAX>                                   (132)
<INCOME-TAX>                                         8
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                      (140)
<EPS-BASIC>                                    (0.04)
<EPS-DILUTED>                                    (0.04)


</TABLE>


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