<PAGE> 1
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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 JUNE 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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
YES [X] NO [ ]
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:
YES [ ] NO [X]
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, was 9,421,499 as of August 4, 1999.
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CONTINUUS SOFTWARE CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 and June 30, 1999(unaudited). 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1998 and 1999 (unaudited)....................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 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 4. Submission of Matters to a Vote of Security Holders........................ 25
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, JUNE 30,
1998 1999
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 2,452 $ 2,711
Accounts receivable, net ......................................................... 7,067 8,705
Prepaid expenses and other current assets ........................................ 777 872
-------- --------
Total current assets ........................................................... 10,296 12,288
Property, net .................................................................... 1,691 1,497
Other assets ..................................................................... 761 689
Total assets ................................................................... $ 12,748 $ 14,474
======== ========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable ................................................................. $ 796 $ 1,141
Accrued liabilities .............................................................. 3,568 4,065
Deferred revenue ................................................................. 4,400 5,588
Current portion of capital lease obligations ..................................... 699 644
-------- --------
Total current liabilities ............................................... 9,463 11,438
Capital lease obligations, net of current portion ................................ 440 354
Convertible note payable ......................................................... 6,000 6,000
Commitments and contingencies
Capital deficiency:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares
issued and outstanding
Series A convertible preferred stock, no par value; 2,291,518 shares
authorized, 2,275,659 shares issued and outstanding at December 31, 1998
and June 30, 1999 .............................................................. 7,900 7,900
Series B convertible preferred stock, no par value; 451,243 shares
authorized, issued and outstanding at December 31, 1998 and June 30, 1999 ...... 1,769 1,769
Series C convertible preferred stock, no par value; 804,667 shares
authorized, 747,525 shares issued and outstanding at December 31, 1998 and
June 30, 1999 .................................................................. 4,118 4,118
Series D convertible preferred stock, no par value; 361,178 shares
authorized, issued and outstanding at December 31, 1998 and June 30, 1999 ...... 1,879 1,879
Series E convertible preferred stock, no par value; 783,019 shares
authorized, 470,849 issued and outstanding at December 31, 1998 and June
30, 1999 ....................................................................... 2,352 2,352
Common stock $.001 par value; 30,000,000 shares authorized, 1,630,250 and
1,690,117 shares issued and outstanding at December 31, 1998 and June 30,
1999 ........................................................................... 2 2
Additional paid-in capital ....................................................... 1,898 2,090
Warrants to purchase common stock ................................................ 114 179
Warrants to purchase Series E convertible preferred stock ........................ 248 248
Accumulated deficit .............................................................. (23,435) (23,855)
-------- --------
Net capital deficiency .................................................. (3,155) (3,318)
-------- --------
Total liabilities and capital deficiency ................................ $ 12,748 $ 14,474
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3.
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CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Revenues: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Software licenses .............................. $ 3,565 $ 4,827 $ 7,310 $ 8,999
Services ....................................... 3,170 3,985 6,235 8,052
-------- -------- -------- --------
Total revenues .......................... 6,735 8,812 13,545 17,051
Cost of revenues:
Software licenses .............................. 169 162 336 318
Services ....................................... 1,930 2,201 3,611 4,146
-------- -------- -------- --------
Total cost of revenues .................. 2,099 2,363 3,947 4,464
-------- -------- -------- --------
Gross profit ..................................... 4,636 6,449 9,598 12,587
Operating expenses:
Sales and marketing ............................ 3,946 4,139 7,523 8,237
Research and development ....................... 1,123 1,335 2,188 2,568
General and administrative ..................... 548 814 1,297 1,518
Compensation expense related to stock
option grants .................................. -- 57 -- 98
-------- -------- -------- --------
Total operating expenses ................ 5,617 6,345 11,008 12,421
-------- -------- -------- --------
Income (loss) from operations .................... (981) 104 (1,410) 166
Other expense, net ............................... 142 283 349 579
-------- -------- -------- --------
Loss before income tax provision ................. (1,123) (179) (1,759) (413)
Income tax provision ............................. 4 2 17 7
-------- -------- -------- --------
Net loss ......................................... $ (1,127) $ (181) $ (1,776) $ (420)
======== ======== ======== ========
Basic and diluted net loss
per share....................................... $ 0.70 $ 0.11 $ 1.10 $ 0.25
======== ======== ======== ========
Weighted average shares outstanding............... 1,613 1,681 1,609 1,670
======== ======== ======== ========
Pro forma basic and diluted net loss
per share ...................................... $ 0.17 $ 0.03 $ 0.26 $ 0.06
======== ======== ======== ========
Pro forma weighted average shares outstanding .... 6,815 6,883 6,811 6,872
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4.
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CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1999
------- -------
Cash flows from operating activities: (unaudited)
<S> <C> <C>
Net loss ................................................................ $(1,776) $ (420)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Provision for doubtful accounts ....................................... 83 154
Depreciation and amortization ......................................... 615 568
Loss (gain) on disposition of property ................................ (1) 2
Compensation expense related to stock option grants ................... -- 98
Changes in operating assets and liabilities:
Accounts receivable ................................................. 2,841 (1,792)
Prepaid expenses and other assets ................................... 99 42
Accounts payable .................................................... 104 345
Accrued liabilities ................................................. (596) 497
Deferred revenue .................................................... (1,603) 1,188
------- -------
Net cash (used in) provided by operating activities ............... (234) 682
Cash flows from investing activities:
Purchases of property ................................................... (143) (77)
Proceeds from disposition of property ................................... 13 1
------- -------
Net cash used in investing activities ............................. (130) (76)
Cash flows from financing activities:
Payments on obligations under capital leases ............................ (565) (441)
Proceeds from issuance of common stock .................................. 29 94
------- -------
Net cash used in financing activities ............................. (536) (347)
------- -------
Net (decrease) increase in cash and cash equivalents .................... (900) 259
Cash and cash equivalents, beginning of period .......................... 6,175 2,452
------- -------
Cash and cash equivalents, end of period ................................ $ 5,275 $ 2,711
======= =======
Supplementary disclosures of cash flow information
Cash paid during the year for:
Interest ............................................................ $ 439 $ 421
======= =======
Income taxes ........................................................ $ 17 $ 7
======= =======
Noncash items:
Acquisition of property through capital lease ........................... $ 312 $ 300
======= =======
Issuance of warrants to purchase common stock ........................... $ -- $ 65
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5.
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CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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 the "Management 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 Loss Per Share and Pro Forma Net 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"
earnings per share. Basic earnings per share is computed by dividing net income
(loss) available to common shareholders 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.
Pro forma basic net loss per share amounts are based upon the weighted average
number of shares of common stock outstanding and the pro forma effect of the
conversion of all outstanding shares of preferred stock into common stock and
the issuance of 895,615 shares of common stock upon the net exercise of certain
warrants. Pro forma diluted net loss per share is based upon the weighted
average number of shares of common stock and common equivalent shares for each
period presented and the pro forma effect of the conversion of all outstanding
shares of preferred stock into common stock and the net exercise of warrants
discussed above. Common equivalent shares include stock options and warrants
using the treasury stock method but have been excluded from the diluted loss per
share calculation as the impact would be antidilutive.
3. Recent Accounting Pronouncements
The Company adopted SFAS No. 130, Reporting Comprehensive Income for the
three-month periods beginning in fiscal 1998. For the three-month and six month
periods presented, the Company has no differences between net loss and
comprehensive net loss. Therefore, no statement of comprehensive losses has been
presented.
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed below certain information about operating segments and certain
information about the Company's products, geographic areas to which the Company
sells its products, and major customers.
6.
<PAGE> 7
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.
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.
Operating segment data for the three months and six months ended June 30, 1998
and 1999 was as follows:
7.
<PAGE> 8
<TABLE>
<CAPTION>
Software
Licenses Services Total
-------- -------- --------
<S> <C> <C> <C>
Three months ended June 30, 1998
Revenues ........................... $ 3,600 $ 3,100 $ 6,700
Cost of revenues ................... 200 1,900 2,100
-------- -------- --------
Gross profit .................... $ 3,400 1,200 $ 4,600
======== ===== ========
Three months ended June 30, 1999
Revenues ........................... $ 4,800 $ 4,000 $ 8,800
Cost of revenues ................... 200 2,200 2,400
-------- -------- --------
Gross profit .................... $ 4,600 $ 1,800 $ 6,400
======== ======== ========
Six months ended June 30, 1998
Revenues ........................... $ 7,300 $ 6,200 $ 13,500
Cost of revenues ................... 300 3,600 3,900
-------- -------- --------
Gross profit .................... $ 7,000 $ 2,600 $ 9,600
======== ======== ========
Six months ended June 30, 1999
Revenues ........................... $ 9,000 $ 8,000 $ 17,000
Cost of revenues ................... 300 4,100 4,400
-------- -------- --------
Gross profit .................... $ 8,700 $ 3,900 $ 12,600
======== ======== ========
</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 six months ended June 30, 1998 of $300 and $600,
respectively, and for the three and six months ended June 30, 1999 of $800 and
$1,500, respectively. No single country had a material amount of long-lived
assets except for such assets in the United Kingdom of $547 at June 30, 1999.
<TABLE>
<CAPTION>
United States International Eliminations Total
------------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Three months ended June 30, 1998
Revenues ........................... $ 4,400 $ 3,500 $ (1,200) $ 6,700
Gross profit ....................... 3,300 1,300 4,600
Long-lived assets .................. 1,900 600 2,500
Three months ended June 30, 1999
Revenues ........................... 6,000 4,200 (1,400) 8,800
Gross profit ....................... 4,800 1,600 6,400
Long-lived assets .................. 1,200 1,000 2,200
Six months ended June 30, 1998
Revenues ........................... 8,800 6,900 (2,200) 13,500
Gross profit ....................... 6,600 3,000 9,600
Long-lived assets................... 1,900 600 2,500
Six months ended June 30, 1999
Revenues ........................... 11,200 8,500 (2,700) 17,000
Gross profit ....................... 9,100 3,500 12,600
Long-lived assets................... 1,200 1,000 2,200
</TABLE>
During the three months and six months ended June 30, 1998 and 1999, no single
customer accounted for 10% or more of total revenue.
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 June 30, 1999:
8.
<PAGE> 9
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
---------- ----------------
(unaudited)
<S> <C> <C>
Outstanding, March 31, 1999 ................. 2,436,704 $ 2.45
Granted ..................................... 146,412 8.00
Exercised ................................... (16,477) 1.60
Canceled .................................... (38,937) 2.65
----------
Balance, June 30, 1999 ...................... 2,527,706 2.78
==========
Options exercisable at June 30, 1999 ........ 1,003,500
==========
</TABLE>
7. Subsequent Event
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 estimated net proceeds of approximately $17.6
million. Additional information is contained in the Company's Prospectus dated
July 29, 1999 which was filed with the Securities and Exchange Commission.
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 e-asset 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 e-asset
management.
Substantially all revenues 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 49.3% and 45.0% for the three months
ended June 30, 1998 and 1999.
RESULTS OF OPERATIONS
Software Licenses. Software license revenues were $3.6 million and $7.3 million
for the three and six months ended June 30, 1998, respectively, and $4.8 million
and $9.0 million for the comparable periods in 1999. This represents increases
of 35.4% and 23.1% for the three and six month periods, respectively. Software
license revenues in North America were $1.7 million and $3.5 million for the
three and six months ended June 30, 1998, respectively, and $2.8 million and
$5.0 million for the comparable periods in 1999. This represents increases of
66.3% and 44.0% for the three and six 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 $1.8 million and
$3.8 million for the three and six months ended June 30, 1998, respectively,
and $2.0 million and $4.0 million for the comparable periods in 1999. This
represents increases of 6.9% and 4.1% for the three and six month periods,
respectively. International revenues were negatively impacted by the effect of
foreign currency fluctuations.
Services. Service revenues were $3.2 million and $6.2 million for the three and
six months ended June 30, 1998, respectively, and $4.0 million and $8.1 million
for the comparable periods in 1999. This represents increases of 25.7% and 29.1%
for the three and six 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
$169,000 and $336,000 for the three and six months ended June 30, 1998,
respectively, and $162,000 and $318,000 for the comparable periods in 1999. This
represents decreases of 4.1% and 5.4% for the three and six month periods,
respectively. The decreases were primarily due to lower product documentation
costs. Gross margins on software licenses were 95.3% and 95.4% for the three and
six months ended June 30, 1998, respectively, and 96.6% and 96.5% 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 $3.6 million for the three and six
months ended June 30, 1998, respectively, and $2.2 million and $4.1 million for
the comparable periods in 1999. This represents increases of 14.0% and 14.8% for
the three and six 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 39.1% and 42.1% for the three
and six months ended June 30, 1998, respectively, and 44.8% and 48.5% 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.
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 $7.5 million for the three and
11.
<PAGE> 12
six months ended June 30, 1998, respectively, and $4.1 million and $8.2 million
for the comparable periods in 1999. This represents increases of 4.9% and 9.5%
for the three and six month periods, respectively. The higher sales and
marketing expenses for the periods ended June 30, 1999 were due to increases in
sales personnel expenses, including commissions, compensation, recruiting and
training costs, resulting from new hires and a larger sales force. As a
percentage of total revenues, sales and marketing expenses were 58.6% and 55.5%
for the three and six months ended June 30, 1998, respectively, and 47.0% and
48.3% 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 $1.1 million and $2.2
million for the three and six months ended June 30, 1998, respectively, and $1.3
million and $2.6 million for the comparable periods in 1999. This represents
increases of 18.9% and 17.4% for the three and six 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 16.7% and
16.2% for the three and six months ended June 30, 1998, respectively, and 15.1%
for each of 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 $548,000 and $1.3 million for the three and six months ended June
30, 1998 and $814,000 and $1.5 million for the comparable periods in 1999. This
represents increases of 48.5% and 17.0% for the three and six month periods,
respectively. The increases were primarily due to increased personnel expenses,
including salaries, bonuses, payroll taxes and facilities costs, resulting from
new hires and a larger administrative staff. As a percentage of revenue, general
and administrative expenses were 8.1% and 9.6% for the three and six months
ended June 30, 1998, respectively, and 9.2 and 8.9% 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 our common stock were $57,000 and $98,000 for
the three and six months ended June 30, 1999; there was no such expense in 1998.
Other Expenses. Other expenses consist primarily of interest expense and foreign
currency translation expense. Other expenses were $142,000 and $349,000 for the
three and six months ended June 30, 1998, respectively, and $283,000 and
$579,000 for the comparable periods in 1999. The increases 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 2.1% and 2.6% for the three and six months ended
June 30, 1998, respectively, and 3.2% and 3.4% for the comparable periods in
1999.
Income Tax Provision. The income tax provision for the three and six months
ended June 30, 1998 and June 30, 1999 consisted solely of minimum state income
taxes due to our net loss in each of these periods.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had cash and cash equivalents of approximately $2.7
million, an increase of $259,000 from December 31, 1998. From inception through
July 1999, we have financed our operations through private placements of our
equity and debt securities. The private placement of equity securities has
provided us with aggregate gross proceeds of approximately $18.4 million as of
June 30, 1999. We
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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 estimated net proceeds of
approximately $17.6 million.
As of June 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 $998,000. As of June 30, 1999, we also had available a $2.0 million
revolving line of credit with a commercial bank which expires on April 22, 2001.
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
$156,000 was outstanding at June 30, 1999.
Our operating activities generated cash of $682,000 for the six months ended
June 30, 1999 as compared to $234,000 in cash used for the six months ended June
30, 1998. The increase in cash generated was primarily due to our ability to
generate income from operations.
Our investing activities used approximately $76,000 and $130,000 for the six
months ended June 30, 1999 and 1998, primarily from property purchases.
Expenditures for property and equipment were $377,000 for the six months ended
June 30, 1999 as compared to $455,000 for the six months ended June 30, 1998.
Most property acquired was computer hardware and software and was financed
through capital leases. 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 70% of our customers have installed the year 2000
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.
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ASSESSMENT OF INTERNAL INFRASTRUCTURE. We substantially completed year 2000
testing of our major information technology systems in October 1998 and have
identified those components which are not year 2000 compliant. We have
identified one information system which is not year 2000 compliant, our customer
service help desk function. We have the upgrade software necessary to make the
system compliant and we are in the process of installing the upgrade. In
addition, we continue to test our systems on an ongoing basis and anticipate
that the upgrade to the help desk function and any other remediation will be
completed before September 30, 1999.
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. We are currently assessing the potential
effect and costs of remediating the year 2000 problem on our office equipment
and our facilities. We expect to complete the process before September 30, 1999.
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, except for one application which is
expected to be updated and become year 2000 compliant in the third quarter of
1999. 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, will not exceed $50,000, most of which we
expect to incur before the end of the third quarter of 1999. This estimate is
being monitored, and we will revise it as additional information becomes
available.
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
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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. We expect to complete our contingency
plans by the end of the second quarter of 1999. Depending on the systems
affected, these plans 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
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.
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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 EXPECT FUTURE LOSSES
We may never become profitable. We have not achieved profitability and we expect
to incur net losses in the foreseeable future. We incurred net losses of $3.9
million in 1998 and $420,000 for the six months ended June 30, 1999. As of June
30, 1999, we had an accumulated deficit of $23.9 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 foreseeable future. The following events
may reduce the demand for the Continuus Change Management Suite:
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- 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 PRODUCT, OUR
REVENUES MAY SUFFER IF WE CANNOT SUCCESSFULLY MARKET THIS NEW PRODUCT
A substantial portion of our revenues in the future may be derived from
Continuus WebSynergy Suite and related services. A decline in the price of, or
demand for, Continuus WebSynergy, or our failure to achieve broad market
acceptance of Continuus WebSynergy, 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;
- actions by competitors, including introduction of new products
and price reductions; and
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- 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 E-ASSET 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 e-asset
management solution as compared to traditional change management software. As a
result, the e-asset 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.
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CHANGES IN INTERNET TECHNOLOGY AND STANDARDS MAY IMPEDE MARKET ACCEPTANCE OF OUR
INTERNET PRODUCT
Rapidly changing Internet technology and standards may impede market acceptance
of Continuus WebSynergy. The success of Continuus WebSynergy will require us to
develop and introduce new technologies and product suites and to offer
functionality that we do not currently provide. Continuus WebSynergy 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 Continuus WebSynergy or other 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
We derived approximately 52% of our total revenues in 1998 from sales outside
North America, principally in Europe. During the six months ended June 30, 1999,
we derived approximately 47% from sales outside North America. 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.
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FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES
Our international customers pay us in their local currencies. For the six months
ended June 30, 1999, we derived approximately 41% 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 NEW EXECUTIVE TEAM MAY NOT BE ABLE TO WORK TOGETHER TO MEET OUR BUSINESS
OBJECTIVES, WHICH MAY HARM OUR SALES AND PROFITABILITY
Several of our executive officers have been employed by us for a relatively
short period of time. Our Vice President, Research and Development, joined in
August 1998, our Chief Financial Officer joined in December 1998 and our Vice
President, Americas Operations, joined in March 1999. In addition, our former
Vice President, Research and Development, became Vice President, Marketing in
August 1998. The failure of the new management team to work together effectively
could delay efficient decision-making and execution by our executive team,
affecting product development and sales and marketing efforts, which would
negatively impact our profitability and sales.
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.
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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
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 e-assets 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
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acquired businesses or technologies. Our profit margins could be negatively
affected by this consumption of resources.
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 70% 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;
22.
<PAGE> 23
- announcements of technological innovations or new products;
- 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
market following our initial public offering, 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 June 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 June 30, 1999, we sold and issued the following
securities which were not registered under the Securities Act of 1933:
23.
<PAGE> 24
(1) During the period, 16,392 shares of common stock were issued
pursuant to the exercise of stock options granted under our Employee Stock
Option Plan.
(2) During the period, we granted stock options to employees, officers
and directors under our 1997 Equity Incentive Plan covering an aggregate of
146,412 shares of common stock. The options vest over a period of time following
their respective dates of grant. In addition, 85 shares of common stock were
issued pursuant to the exercise of stock options granted under the 1997 Equity
Incentive Plan.
(3) In April 1999, we issued warrants to purchase an aggregate of 53,910
shares of common stock at an exercise price of $9.01 per share. The warrants
were issued to certain of our investors in exchange for their guaranty of our
obligations under a $2,000,000 revolving line of credit.
(4) In April 1999, we issued warrants to purchase an aggregate of
20,755 shares of common stock at an exercise prices of $9.01 per share. The
warrants were issued to a third party in connection with an agreement with the
same third party to lease certain capital equipment.
The grant 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 sale and issuance of securities in the transactions described in paragraphs
(3) and (4) above were deemed to be exempt from registration under the
Securities Act of 1933 by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the securities issued in such transactions.
All recipients either received adequate information about Continuus or had
access, through employment or other relationships, to such information.
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 covers an additional 378,546 shares of common stock that
the underwriters have the option to purchase solely to cover over-allotments.
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 $1.17 million. Total estimated offering expenses of approximately
$2.58 million are expected to result in net offering proceeds to Continuus of
approximately $17.6 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 estimated net offering proceeds to the Company of approximately $17.6
million, through August 3, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 24, 1999 we distributed an information statement in connection with our
initial public offering for written consent of our shareholders. The proposals
contained in the information statement were as follows:
1. Reverse stock split. Proposal to effect a 1-for-2.65 reverse stock split of
our common stock.
2. Reincorporation of Continuus in Delaware. Proposal to change our state of
incorporation from California to Delaware.
3. Amendment and Restatement of Certificate of Incorporation. Proposal to amend
and restate our Certificate of Incorporation to delete obsolete and unnecessary
provisions following our initial public offering.
4. 1999 Employee Stock Purchase Plan. Proposal to approve the 1999 Employee
Stock Purchase Plan which would provide our employees with an opportunity to
purchase our common stock at a discount through accumulated payroll deductions.
5. Indemnity Agreements. Proposal to approve the form of Indemnity Agreement and
to authorize us to enter into the agreement with our directors and executive
officers.
Each of the proposals was approved by a vote of 15,271,553 shares in favor and
17,188 shares opposed (pre-split).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
<TABLE>
<S> <C>
11.1 Computation of net loss per share and pro forma net
loss per share
27.1 Financial Data Schedule
</TABLE>
B) REPORTS ON FORM 8-K:
None.
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: August 16, 1999 By: /s/ John R. Wark
-----------------------------------------
John R. Wark
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: August 16, 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 LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
<S> <C> <C>
EPS CALCULATION AS OF JUNE 30, 1998
Shares issued and outstanding at March 31, 1998
and December 31, 1997 1,610,758 1,604,202
Weighted average shares from options exercised
during the period 1,959 4,781
--------- ---------
Weighted average common shares - basic and diluted 1,612,717 1,608,983
Warrants to purchase common stock 895,615 895,615
Conversion of preferred stock 4,306,454 4,306,454
--------- ---------
Pro forma weighted average shares 6,814,786 6,811,052
Net loss at June 30, 1998 $1,126,501 $1,775,033
Net loss per share - basic and diluted $ 0.70 $ 1.10
========= =========
Pro forma net loss per share - basic and diluted $ 0.17 $ 0.26
========= =========
Three months ended Six months ended
------------------ ----------------
<C> <C>
EPS CALCULATION AS OF JUNE 30, 1999
Shares Issued and outstanding at March 31, 1999
and December 31, 1998 1,673,640 1,630,250
Weighted average shares from options exercised
during the period 7,673 39,791
--------- ---------
Weighted average common shares - basic and diluted 1,681,313 1,670,041
Warrants to purchase common stock 895,615 895,615
Conversion of preferred stock 4,306,454 4,306,454
--------- ---------
Pro forma weighted average shares 6,883,382 6,872,110
Net loss at June 30, 1999 $ 180,988 $ 419,944
Net loss per share - basic and diluted $ 0.11 $ 0.25
========= =========
Pro forma net loss per share - basic and diluted $ 0.03 $ 0.06
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,711
<SECURITIES> 0
<RECEIVABLES> 9,146
<ALLOWANCES> 441
<INVENTORY> 0
<CURRENT-ASSETS> 12,288
<PP&E> 5,816
<DEPRECIATION> 4,319
<TOTAL-ASSETS> 14,474
<CURRENT-LIABILITIES> 11,438
<BONDS> 0
0
18,018
<COMMON> 2,092
<OTHER-SE> (23,428)
<TOTAL-LIABILITY-AND-EQUITY> 14,474
<SALES> 8,999
<TOTAL-REVENUES> 17,051
<CGS> 318
<TOTAL-COSTS> 4,464
<OTHER-EXPENSES> 12,421
<LOSS-PROVISION> 102
<INTEREST-EXPENSE> 419
<INCOME-PRETAX> (413)
<INCOME-TAX> 7
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (420)
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
