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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 000-26797
CONTINUUS SOFTWARE CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 43-1070080
(State of Incorporation) (I.R.S. Employer
Identification No.)
108 PACIFICA
IRVINE, CALIFORNIA 92618
(Address of principal executive (Zip Code)
offices)
(949) 453-2200
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange on
Title of each class which each class registered
Common Stock, $0.001 par value Nasdaq National Market
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $69,679,037 on March 14, 2000, based upon the
closing price on the Nasdaq National Market on such date.
As of March 14, 2000 there were 10,531,508 shares of the registrant's
common stock outstanding and there were no shares of the registrant's preferred
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II, III and IV incorporate certain information by reference
from the registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A in connection with the registrant's 2000 annual
meeting of stockholders.
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TABLE OF CONTENTS
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PART I
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Item 1. Business........................................................ 1
Item 2. Properties...................................................... 16
Item 3. Legal Proceedings............................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 16
Item 6. Selected Financial Data......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 22
Item 8. Financial Statements and Supplementary Data..................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 46
PART III
Item 10. Directors and Executive Officers of Continuus Software Corporation
Item 11. Executive Compensation.......................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 46
Item 13. Certain Relationships and Related Transactions.................. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 46
SIGNATURES................................................................... 49
INDEX OF EXHIBITS............................................................ 50
SCHEDULE
EXHIBITS
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PART I
This Annual Report on Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. Our actual future results may differ materially
from those discussed here. You can find additional information concerning
factors that could cause or contribute to such differences in this Annual Report
on Form 10-K in Part I, Item 1 under the caption "Risk Factors," Part II, Item 7
entitled "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and elsewhere throughout this Annual Report.
ITEM 1. BUSINESS
Continuus Software provides software products and services that enable
enterprises to manage their Internet and software assets, which we refer to as
eAsset management. eAsset management products and services, an emerging market
segment, enable organizations to more effectively develop, enhance, deploy and
manage their Internet and software systems. eAsset management provides an
alternative to using a collection of discrete products to automate various
aspects of the software development process by providing an integrated and
comprehensive platform for managing an enterprise's software-related assets,
processes, projects and people. Our integrated product line, simplifies the
development of the most complex and demanding Internet and software
applications. Our customer base includes the information technology departments
of Fortune 500 class business and government organizations as well as
engineering departments of organizations that develop software as a product or
as a component of a product, such as independent software vendors, computer
hardware vendors, defense and aerospace organizations, telecommunication
equipment suppliers and transportation equipment manufacturers.
INDUSTRY BACKGROUND
In today's increasingly competitive global markets, businesses are seeking to
continuously improve their products, services and operations. Businesses have
invested billions of dollars in information technology to more effectively
develop and operate new products, automate processes within the enterprise and
extend business interactions to external parties. Software has become essential
for many critical business operations and is one of the most strategic assets
for companies. Today, businesses are developing the next generation of software
applications as well as extending existing applications to offer differentiated
products and unique services to customers. These efforts to create new business
opportunities, enhance competitive advantage and further automate business
processes are leading to explosive growth in the scale and complexity of
software and software-related assets in organizations.
The Internet has further added complexity by increasing both the number and
sophistication of new applications and extending applications beyond the
enterprise. The Internet has highlighted and accelerated the trend that software
has become a major driver to both revenue growth and expense reduction.
Increasingly, businesses are using the Internet for general communication,
electronic commerce and complex applications. Business activities over the
Internet extend traditional business processes and transform the ways in which
organizations connect to and provide services to their customers, vendors,
employees and other partners. As organizations extend their core processes over
the Internet and conduct significant volumes of business through the Internet,
quality problems and delays in delivering those new Internet applications can
have an immediate, significant negative impact on customer service, revenue and
profitability.
The increased value of software is not simply driven by the Internet. Software
increasingly has become a critical value-added component of products as diverse
as automobiles, cellular telephones, medical instruments, home appliances and
defense and aerospace systems. In addition, future generations of many of these
devices will be linked together by networks, further increasing the scale and
complexity of embedded software. As software becomes more essential for many
uses, businesses are continuously seeking to develop new applications and
increase product functionality while simultaneously shortening development
cycles. These factors have made it increasingly difficult to develop, deploy and
manage software projects.
In response to increased technical complexity and the need to deliver
applications in accelerated "Internet time," businesses are also adopting more
complex organizational strategies. As organizations are increasingly
distributing
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development across locations to take advantage of the best qualified developers
and most cost-effective resources, they must control and manage an even more
complex development process. In addition, on many Internet application projects,
there are hundreds of content contributors. Coordinating the efforts of content
contributors and software developers is a highly complex and error-prone
process.
All of the above contributes to ever-increasing complexity in delivering high
quality software and Internet-based systems. At the same time it has become even
more critical to organizations that they be able to dependably and predictably
deliver required capabilities on time. Historically, this has not been an easy
task. For example, research by the Standish Group found that in 1998 as few as
26% of all corporate IT software projects were completed on time and with the
required functionality. The importance of software and the rapid adoption of the
Internet are increasing the need for products and services that help
organizations manage, develop, enhance, and deploy Internet and software systems
as strategic business assets.
We believe that up until now software providers have generally developed
products that address only discrete aspects of Internet and enterprise software
asset management. For example, version control products provide a way to archive
and track the history of changes to a software program. Project management
products provide a way to create a project plan for a software or Internet
development project and then to monitor and report on the status of the project.
Problem tracking products provide a way to record requests to change a software
program or system based on problems observed in the system and then to track the
progress of a project to correct the problem. Web content management products
that provide version control-type capability for web content such as text
instead of software programs are the latest example of products that address
discrete problems. With their focus on discrete aspects of Internet or software
asset management and the lack of shared databases, processes and interfaces,
these products cannot be integrated easily into a comprehensive solution.
In order to provide automated support of the software development process,
organizations use fragmented collections of such tools, using different tools
from project to project or from development group to development group, thus
creating isolated collections of software assets and non-integrated processes.
We believe that organizations are beginning to realize that they cannot meet the
requirements for speed and quality of software projects in the more complex
Internet environment without a better management infrastructure. We believe that
organizations using fragmented collections of discrete products are less able to
share best practices, automate currently manual processes, maintain up-to-date
management visibility or reuse components across teams and projects.
Alternatively, some organizations have internally developed partial or complete
asset management solutions, generally building them on top of basic version
control. These internally developed systems are expensive to maintain and are
generally not flexible or scalable. Also, internally developed systems and most
commercial packages were not designed to handle the new technologies that have
been introduced by the Internet.
Consequently, we believe businesses now are seeking comprehensive and integrated
solutions that work together to address all aspects of Internet and enterprise
software asset management, rather than toolkits and single purpose products. We
believe that a fully integrated eAsset management solution must:
- provide the ability to manage an organization's complete portfolio of
software-related assets, projects, processes and people;
- manage internally developed business applications, purchased software
packages, Internet-based systems and software as a component of other
products or devices;
- allow both software developers and Internet content contributors to
collaborate in a common team environment;
- allow management to monitor the status of projects, control process and
control approval cycles; and
- be highly scalable and adaptable to changes in technologies,
organizational structure and project team composition.
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We believe that we are the only provider offering an integrated eAsset
management solution.
THE CONTINUUS SOLUTION
Continuus provides eAsset management solutions that enable organizations to more
effectively develop, enhance, deploy and manage their Internet and enterprise
software systems. Our solution is specifically designed to support the
collaborative development, management, approval and deployment of all types of
software, Internet applications and web content. Our integrated product line,
utilizes a flexible and scalable architecture with embedded workflow capability
which simplifies the Internet and software development process and is capable of
handling the most complex and demanding applications. We also offer Continuus
Professional Services which include consulting, training and maintenance
services to facilitate the successful implementation of our products. Our
comprehensive solutions provide our customers with the following key benefits:
REDUCE TIME TO DELIVER INTERNET AND ENTERPRISE SOFTWARE APPLICATIONS.
Organizations using our solutions can more rapidly and predictably deliver
Internet and software development projects, thereby improving organizational
competitiveness and effectiveness. Our products increase productivity by
providing a common team environment for all participants in the development of
an Internet or software project, no matter what their level of technical
proficiency. By providing a common set of shared processes and a common platform
for team communication and collaboration, our products enable better
coordination of activities within teams and across multiple locations. Our
products also accelerate development by automating many of the error-prone
manual and repetitive tasks associated with software development, without
introducing levels of control and restrictions that developers will resist. In
addition, our products provide task-based change management, permitting
automatic visibility to the status of in-process development tasks. This reduces
development cycles by enabling management to accurately evaluate project status
and to ensure that problems are continually tracked and fixed early in the
development process.
IMPROVE THE QUALITY OF EASSETS. Our solution enables organizations to increase
software quality and integrity by continuously improving the processes used to
develop, enhance, deploy and manage Internet and software-based systems. Our
products provide non-intrusive process management capabilities that allow a
project team or organization to implement and enforce company or industry best
practices. This process automation eliminates many of the typical sources of
errors in building and configuring large software systems or Internet
applications. Our products' team collaboration capabilities eliminate errors
arising from team coordination issues such as interference from parallel changes
to shared components. Our solutions improve the quality of software assets by
enabling management to deploy only tested and approved new versions of
components or entire systems. For example, Continuus WebSynergy's workflow and
staging support ensure that only approved content changes become available on an
organization's production web servers.
MORE EFFECTIVELY MANAGE EASSETS. Our products are built on a common, shared
database repository that catalogs and manages an organization's entire portfolio
of eAssets. These assets include technical software that may itself be a product
or may be embedded into a business's products, and IT applications, such as
internally developed client-server applications, packaged applications and
Internet applications. eAssets include software source code as well as design
specifications, documentation, help files and web content, including HTML and
XML components and video, graphics and sound components. We track where assets
are used, ensure that no assets are lost over time and provide a complete asset
change history. Our repository also provides a foundation for improving an
organization's return on investment in its eAssets by enabling reuse of software
components.
QUICKLY ADAPT TO ORGANIZATIONAL AND TECHNOLOGICAL CHANGE. As organizations grow
and restructure, our products can be quickly and easily reconfigured to adapt to
these changes. The distributed architecture of our products can support a small
development team managing a single development project in a single location and
then rapidly scale to support hundreds of developers working on dozens of
concurrent projects dispersed across several locations. Our product's flexible
process infrastructure allows individual projects to adapt processes and
policies to project needs while complying with organization-wide standards. Our
product architecture is also open to provide maximum flexibility and
interoperability and supports a wide range of different development languages
and developer tools, as well as internally developed and externally sourced
software and other components.
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STRATEGY
Our objective is to become the leader in the emerging market for eAsset
management solutions. The key elements of our strategy are:
PROVIDE COMPREHENSIVE EASSET MANAGEMENT SOLUTIONS. We believe that our
consistent innovation has made us a leader in providing comprehensive eAsset
management solutions. We will continue to extend our current product suite to
provide comprehensive, integrated solutions for managing eAssets over their
entire life cycles. Continuus Change Management Suite and Continuus WebSynergy
Suite provide the core applications and platform for our solutions. In 1998, we
built upon our leadership position in integrated change management products by
introducing Continuus WebSynergy to address the challenges of developing and
managing Internet applications. In 1999, we launched Continuus ChangeSynergy, an
Internet-enabled change request and problem tracking component of our product
line. We also enhanced the entire product line with new features that allow
management to monitor project status. In addition, we released new versions of
Continuus WebSynergy and Continuus Change Management Suites. In February 2000 we
acquired our KnowledgeSynergy from our Pagoda Corporation acquisition.
FOCUS ON INTERNET AND E-COMMERCE APPLICATION DEVELOPMENT AND DEPLOYMENT.
Continuus WebSynergy addresses the critical issues associated with managing the
development and deployment of Internet applications including corporate intranet
applications, corporate web sites and e-commerce applications. We intend to
continue to focus on selling to companies in industry sectors where the
deployment of Internet applications provides a key competitive advantage. We
also intend to continue our focus on the rapidly growing community of e-commerce
vendors and Internet and application service providers. We believe that these
customers will have a need for the full Continuus Change Management Suite as
well as Continuus WebSynergy Suite to manage applications, web content and
related software asset development.
FOCUS ON SUCCESSFUL CUSTOMER IMPLEMENTATION. We believe that initial and ongoing
customer satisfaction can lead to significant revenue opportunities in the
future. Currently, approximately 60% of our license revenue comes from existing
customers expanding their use of Continuus products. Our long-term success
depends upon our customer's successful implementation of our products. Therefore
we intend to increase the size of our consulting and training staff as well as
to increase the scope of the service offerings we provide. We anticipate that
our expanded service offerings will result in an increased rate of deployment of
our products within our customers. We also expect to continue to augment our
service offerings through relationships with regional and national consulting
firms, systems integrators and other service providers.
LEVERAGE OUR CUSTOMER BASE. We have licensed our products to over 500
organizations worldwide and intend to expand the use of our products within our
existing customer accounts. We believe many customers would benefit from
deploying the Continuus Change Management Suite more broadly and utilizing
Continuus WebSynergy as they develop and deploy Internet-based applications. We
intend to make additional sales of our products and services to our existing
customers to help them meet these growing needs.
EXPAND SALES COVERAGE. We have already established effective direct sales
channels in North America and Europe. In 1999, North America contributed
approximately 55% of revenues and Europe contributed approximately 45%. In
targeted markets where we choose not to maintain our own sales force, we use
distributors to sell our products. We intend to expand our domestic and
international sales coverage in order to penetrate new markets and to increase
our presence in existing markets. We will also seek to expand our sales channels
to utilize the most effective means to reach the various sub-markets for our
products and services.
EXPAND STRATEGIC RELATIONSHIPS. Currently, we have strategic relationships with
leading vendors of complementary products and services such as Mercury
Interactive. We plan to continue to establish strategic relationships with
various entities to supplement and extend our direct sales force, expand the
scope of our consulting and training capabilities, leverage our marketing
efforts, enhance our product suite and establish technology standards. We intend
to co-market our products with those of other providers to generate additional
license revenues and to support joint marketing efforts. We also plan to expand
our relationships with vendors of desktop tools used by software developers,
software quality engineers, designers, content contributors and others to
provide better integrated solutions for our current and potential customers.
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PRODUCTS
We provide an integrated suite of applications and a platform for managing an
enterprise's software-related assets, processes, projects and people. The
Continuus Change Management Suite provides a platform for software developers
building technical and embedded software or commercial IT applications.
Continuus WebSynergy Suite extends our solutions to meet the needs of web
masters, content contributors and other members of the Internet application
development community. Used together, the Continuus products can provide a
complete solution for building, delivering and managing the full range of
client-server, intranet and e-commerce applications found in today's enterprise.
Our products contain the following five key capabilities:
TASK-BASED CHANGE MANAGEMENT. Our product line's task-based change management
capability provides an intuitive way for developers to interact with our change
management environment. In contrast to most competing products which deal with
each change to each component or file as an independent unit of work, our
task-based approach allows for changes to multiple components or files to be
logically grouped into a single set of changes. Each set of changes is related
to a logical unit of work, which we refer to as a task. Once a set of changes
are associated as a task, they can then be operated on at that level, making the
system both easier to use and also allowing our products to automate greater
levels of integrity checking, impact analysis and quality control. This approach
allows the user to improve software quality and reduce the time it takes to
complete a project by reducing bad software builds, wasted developer time and
software release cycles. It also provides management with a non-intrusive
ability to monitor and control the development process.
TEAM DEVELOPMENT SUPPORT. Our product line provides a wide range of features and
capabilities designed to improve the productivity of team-based software
development. We provide a controlled process or workflow to coordinate the work
of multiple developers in a project team and control the actions that
individuals can take based on their role in the project and the stage in the
project life cycle. The Continuus Change Management Suite provides each user
with an insulated personal work area that protects the user from being affected
by the work of other developers, while at the same time notifying the user of
changes or actions by other members of the team. Parallel development support is
a feature that removes development bottlenecks by allowing several developers to
make changes to shared components and enabling multiple projects to
simultaneously share a common base of components.
DISTRIBUTED DEVELOPMENT SUPPORT. Our product line provides distributed
management capabilities. Individual developers and small groups can use our
remote development support to work from copies of components with only
occasional connections to a server without losing the control and collaboration
capabilities of the Continuus solution. Our Distributed Change Management
capability supports distributed development teams of any size by providing
task-based change management across multiple servers and allowing multiple teams
to work in a decentralized mode, while synchronizing shared objects or entire
systems.
SCALABILITY AND FLEXIBILITY. Our product line supports the needs of teams
ranging in size from less than a dozen to over a thousand developers and
organizations with a few to dozens of concurrent projects controlled by many
different teams. Customers can adapt our products to a wide range of operating
configurations, providing individual projects with the ability to adapt
processes and policies to organization-wide standards. Our product line also
supports a wide range of different development languages and tools, as well as
internally developed and externally sourced software and other objects.
OPEN AND EXTENSIBLE ARCHITECTURE. Our product architecture provides a foundation
for the ongoing development of the Continuus product line and enables a highly
scalable, high performance and high availability enterprise solution. Our entire
product line is integrated around a common repository database. This database is
easily extensible by our customers to define new types of eAssets not defined in
the standard repository database shipped by Continuus. An embedded high
performance, industry standard relational database engine supplied by Informix
manages our repository database, helping to ensure our products are able to meet
the performance and reliability standards of enterprise-scale deployment. The
repository database is also open so that users can access it directly to perform
their own querying and reporting. Our products also have an open interface that
allows all interactive functions to be accessed by programs written by other
vendors or by users of our products.
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The following tables describe the products that we offer:
CONTINUUS CHANGE MANAGEMENT SUITE
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PRODUCTS DESCRIPTION PLATFORMS
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CLIENT PRODUCTS
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Continuus/CM Provides a task-based, workflow-centric - Windows 95/98
(Change Management) approach to software configuration management - Windows NT
that automates manual, error-prone development - SUN Solaris
processes yielding more productive teams and - HP-UX
higher quality software. - IBM AIX
- SGI IRIX
- Digital UNIX for
Alpha (Tru64)
- Siemens SINIX
- Linux
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Continuus/PT Simplifies the process of managing change
(Problem Tracking) requests across software development projects.
The product's automated workflow support team
collaboration and communication. Fully integrated with
Continuus/CM, the product provides graphical querying
and reporting of real-time development metrics and
status.
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Continuus/OM Provides an object-oriented build management
(Object Make) facility that automates software builds and
release processes. The product's distributed
architecture enables management of builds on
any network-available platform providing a high
performance, scalable solution for development
teams of any size.
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SERVER PRODUCTS
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Workgroup Server Provides a highly scalable platform for - Windows NT
managing all types of eAssets. The product - SUN Solaris
adapts to the growing needs of the organization - HP-UX
through a multi-tier architecture that scales - IBM AIX
to support any size remote and distributed - SGI IRIX
development team, with all team members sharing - Digital UNIX for
a central, active repository. Workgroup Server Alpha (Tru64)
manages access to and control of any type of - Siemens SINIX
eAsset. - Linux
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Continuus/DCM Provides distributed change management
(Distributed Change capabilities supporting multi-server,
Management) geographically dispersed and remote development
efforts. Allows development organizations to
work on a decentralized basis while providing
the full benefits of the task-based
Continuus/CM solution.
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CONTINUUS WEBSYNERGY SUITE
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PRODUCTS DESCRIPTION PLATFORMS
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CLIENT PRODUCTS
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WebSynergy Content Provides a browser-based client for web content Any hardware platform
Client contributors supporting the creation, with either Netscape
management and deployment of any type of web Navigator or
content. The product's task-based change Microsoft Explorer
management capabilities support teams of
software and web content contributors, allowing
them to collaborate and deliver business
critical, e-commerce applications with higher
quality.
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ChangeSynergy Automates and simplifies the management of change
requests for web applications. ChangeSynergy is fully
integrated with Continuus/CM and WebSynergy and supports
change management of content and software components
across diverse development teams.
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SERVER PRODUCTS
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TeamSynergy Server As an upgrade to the Continuus Workgroup - Sun Solaris
Server, applies the proven capabilities and - HP-UX
scalable Continuus server architecture to the - Windows NT
challenge of managing large, distributed - IBM AIX
development teams building business critical - Linux
web applications.
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CONSULTING SERVICES AND SUPPORT
We offer customers a wide range of consulting, training and technical support
services. Given the complexities of Internet and enterprise software application
development, deployment and management, our experienced consultants can help
reduce the time and risk associated with our product deployments. As of December
31, 1999, our consulting services and support organization consisted of 69
employees. Our professional services organization provides the following
services:
PLANNING, CONSULTING AND IMPLEMENTATION SERVICES. We offer a wide range of
customer services to support the implementation requirements of our products to
ensure successful deployment and promote customer self-sufficiency. We offer our
customers planning, consulting and implementation services, including
requirements planning and systems integration, configuration and installation.
Our consultants can also customize our products to reflect the business and
technological needs of the customer with services such as advanced methodology
and process planning and product customization for the customer's environment.
CUSTOMER EDUCATION AND TRAINING. We offer standard and customized training
courses designed to meet the needs of the various classes of users and
administrators of our products. Training classes are provided at our facilities
or on-site at customer locations. Fees for education and training services are
in addition to and separate from software licensing fees and are typically
charged per student, per class or on a per diem basis.
SOFTWARE MAINTENANCE AND SUPPORT. We provide telephone, electronic mail, web and
facsimile customer support through technical support centers located in Irvine,
California and Dublin, Ireland. Software maintenance and support services are
not included in software license fees. These support services include software
updates, maintenance releases and technical support.
CUSTOMERS
Our customer base is divided between the two major segments of the overall
enterprise software asset management market: the technical market segment and
the corporate IT market segment. The technical market consists of organizations
that develop software as a product or as a component of a product including
independent software vendors, computer hardware vendors, defense and aerospace
organizations, medical instrument manufacturers,
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telecommunications equipment suppliers and transportation equipment
manufacturers. The corporate IT market consists of the information technology
departments of Fortune 500 class and government organizations.
The following is a partial representative list of our customers who have
licensed our products in the last three years:
FINANCIAL SERVICES
Bank of America
Deutsche Morgan Grenfell
Dresdner Bank
Lehman Bros.
Liberty Mutual Insurance
Morgan Stanley
Pacific Life Insurance
Prudential
Societe Generale
Union Bank of Switzerland
Westdeutsche Landesbank
TELECOMMUNICATIONS
AT&T
Bell Atlantic
Bouygues Telecom
British Telecom
Deutsche Telekom
GTE
Nokia
Southwestern Bell Communications
Teligent
US West Communication Group
Vodaphone
GOVERNMENT
Defense Research Agency (UK)
National Security Agency
OFD (German Ministry of Finance)
Rechenzentrum der Bund esfinanzverwaltung
DEFENSE AND AEROSPACE
Boeing
Dassault Aviation
Huges
Jeppesen Sanderson
Lockheed Martin
Raytheon
SERVICES
DHL Worldwide Express
Hewitt
MANUFACTURING AND ELECTRONICS
ABB
ATI Technologies
Baker Hughes
BMW
Compaq
Dialogic
General Motors
ITT Industries
Johnson Controls
Magnetti Marelli
Motorola
Philips
Siemens
Texas Instruments
Volkswagen
SOFTWARE AND SERVICES
B2B dot.com
BMC Software
Cobalt Group
Computer Sciences Corp.
Compuware
ECash Technologies
Engineering Animation, Inc
GEAC
Intertainer.com
ISG Technologies
Kronos
Lawson
Max.mobile
New Era of Networks
Novell
QAD
Saville Systems
Telcordia Technologies
UMagic.com
Usinternetworking
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SALES AND MARKETING
We sell our products in North America, France, Germany and the United Kingdom,
through our direct sales and services organizations. As of December 31, 1999,
our North American sales and marketing staff included 52 people located in
California, Colorado, Georgia, Illinois, Massachusetts, Minnesota, New Jersey,
New York, Ontario, Texas and Virginia. As of December 31, 1999, our
international sales and marketing staff included 36 people located in France,
Germany, the United Kingdom and Australia. Typically, each sales person is
teamed with an engineer to assist in pre-sales activities and transitioning new
accounts to our professional services organization for implementation support.
The time between initial customer contact and an actual sales order may span six
months or more. We also maintain telemarketing organizations in North America
and the United Kingdom. The telemarketing groups' primary responsibility is to
work closely with the direct sales teams to proactively identify and qualify
high quality new prospects for our products. We also have distributors covering
Denmark, Finland, India, Israel, Italy, Mexico, the Netherlands, Norway,
Singapore, South Africa, Spain and Sweden.
We market our products through public relations activities, user group meetings,
programs to work closely with industry analysts and other influential third
parties, seminars, conference sponsorship, trade shows, telemarketing and direct
mail campaigns. We also utilize the web for advertising campaigns on frequently
visited web sites including those of our strategic partners. We use our web
site, www.continuus.com, to establish our market presence, generate leads and
extend our program offerings to customers and strategic partners.
We also market our products with other providers that sell complementary
products. Our current strategic relationships include relationships with Mercury
Interactive and Tivoli Systems, Inc., a division of IBM. We have designed our
products to be compatible with complementary products to provide a flexible and
expanded solution for our customers. Our joint sales and marketing efforts with
these partners allow us to leverage our marketing efforts and reach customers we
might otherwise not attract.
RESEARCH AND DEVELOPMENT
We have historically made significant investments in research and development
and related activities to maintain and enhance our product lines. We expect that
we will continue to devote a substantial portion of our resources to enhancing
and adding functionality to existing products, developing new products and
integrating our products with products from other leading vendors. We will also
evaluate on an ongoing basis externally developed technologies for integration
into our products.
COMPETITION
The market for Internet and enterprise software asset management products and
services is highly competitive and constantly evolving. We expect competition to
persist and intensify in the future. We have a large number of competitors which
provide some functions of our product line. We do not believe that any of our
competitors offers an integrated product line that addresses as broad a range of
Internet and enterprise software asset management as we provide. We have four
primary sources of competition:
- vendors of point solution software tools that address only a limited
number of enterprise software asset management functions, including
Rational Software and MERANT;
- vendors of point solution software tools that address only a limited
number of Internet asset management functions, such as Interwoven and
MKS;
- in-house development efforts by current and potential customers; and
- larger vendors such as Computer Associates, IBM and Microsoft whose
product lines include non-integrated components of Internet and
enterprise software asset management, including software version
control, project management, web content management, change request
tracking and/or automated software distribution.
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<PAGE> 12
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to our detriment. These
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies and offer more attractive terms to
purchasers than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We seek to protect our software, documentation and other written materials
primarily through a combination of trademark, trade secret and copyright laws,
confidentiality procedures and contractual provisions. For example, we license
rather than sell our software and require licensees to enter into license
agreements that impose restrictions on the licensees' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets, by,
among other things, requiring those persons with access to our proprietary
information to execute confidentiality agreements with us.
EMPLOYEES
As of December 31, 1999, we had 224 full and part-time employees, including 49
in research and development, 69 in professional services, 88 in sales and
marketing and 18 in general and administration. Of the total, 150 were based in
the United States and Canada, 24 in the United Kingdom, 8 in Ireland, 17 in
France, 20 in Germany and 5 in Australia. Our employees are not represented by
any collective bargaining unit, and we have never experienced a work stoppage.
We believe our relations with our employees are good.
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.
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.
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<PAGE> 13
WE MAY INCUR FUTURE LOSSES
We may not be able to sustain profitability. Although we were able to achieve
net income of $272,000 in 1999, we incurred net losses of $3.9 million in 1998.
As of December 31, 1999, we had an accumulated deficit of $23.2 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 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.
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. 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:
- 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.
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<PAGE> 14
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
- diversion of resources and management's attention to other information
technology 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 1999, we generated approximately 60% 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 eAsset 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.
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<PAGE> 15
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 products have been
designed and the full eAsset 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 fiscal year ended December 31, 1999, we derived approximately 45%
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.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES
Our international customers pay us in their local currencies. For the fiscal
year ended December 31, 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.
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<PAGE> 16
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
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
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<PAGE> 17
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.
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.
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.
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
also fluctuated and may continue to fluctuate in response to factors described
elsewhere in this report and due to:
- general market conditions;
- 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.
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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 2. PROPERTIES
Our principal executive offices are located in Irvine, California and consist of
approximately 25,000 square feet under leases expiring April 30, 2000. The
company has entered into a new five-year lease agreement commencing May 1, 2000
for the rental of new corporate offices consisting of approximately 48,000
square feet. We also lease office space in Paris, France; Munich, Germany;
Dublin, Ireland; Bracknell, United Kingdom; Ottawa, Canada; Chatswood,
Australia; Atlanta, Georgia; Schaumburg, Illinois; Rockville, Maryland;
Cambridge, Massachusetts; Morristown, New Jersey; New York, New York; Newtown,
Pennsylvania and Flower Mound and Wylie, Texas. We believe that we will require
additional space, including in Irvine, California as well as Germany, within the
next 12 months, but that suitable additional space will be available on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Continuus Software Corporation's common stock is traded on The Nasdaq National
Market ("Nasdaq") under the ticker symbol "CNSW." Our common stock starting
trading on the Nasdaq on July 29, 1999 in connection with our initial public
offering. The high and low closing prices (as reported by Nasdaq) for our common
Stock for the third and fourth quarter of the 1999 fiscal year were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1999
------------------
HIGH LOW
------- ------
<S> <C> <C>
Third Quarter (beginning July 29, 1999)..... $15.500 $6.875
Fourth Quarter.............................. 9.750 4.750
</TABLE>
As of March 14, 2000 there were approximately 124 shareholders of record. The
Company has not declared any dividends and does not expect to pay any dividends
in the foreseeable future.
On August 3, 1999, Continuus completed the sale of 2,523,642 shares of Common
Stock in an initial public offering at an offering price of $8.00 per share.
Total net proceeds after the reduction for the underwriting discount and
offering expenses were approximately $17.4 million. We utilized $1.2 million of
the proceeds for capital expenditures during 1999. The remaining amount has
been invested in short-term available for sale securities.
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ITEM 6. SELECTED FINANCIAL DATA
Continuus Software Corporation's consolidated statements of operations and
comprehensive income (loss) for the fiscal years ended December 31, 1999, 1998
and 1997 and consolidated balance sheets as of December 31, 1999 and 1998
included herein have been audited by Deloitte & Touche LLP, independent
auditors. Continuus' consolidated statements of operations for the fiscal years
ended December 31, 1996 and 1995 and consolidated balance sheets as of December
31, 1997, 1996 and 1995 not included herein, have also been audited by Deloitte
& Touche LLP, independent auditors. The information set forth below is not
necessarily indicative of the results of future operations and should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) DATA:
Revenues:
Software licenses ......................... $ 20,420 $ 14,429 $ 13,829 $ 9,611 $ 8,664
Services .................................. 16,898 13,007 9,434 6,488 4,436
-------- -------- -------- -------- --------
Total revenues ............................ 37,318 27,436 23,263 16,099 13,100
-------- -------- -------- -------- --------
Cost of revenues:
Software licenses ......................... 596 654 650 775 535
Services .................................. 9,068 7,446 6,007 4,207 2,583
-------- -------- -------- -------- --------
Total cost of revenues .................... 9,664 8,100 6,657 4,982 3,118
-------- -------- -------- -------- --------
Gross profit .............................. 27,654 19,336 16,606 11,117 9,982
Operating expenses:
Sales and marketing ....................... 17,777 15,469 12,079 11,776 9,296
Research and development .................. 5,513 4,493 3,574 3,473 2,434
General and administrative ................ 3,271 2,483 1,896 1,720 1,565
Compensation expense related to
stock option grants ....................... 212 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses .................. 26,773 22,445 17,549 16,969 13,295
-------- -------- -------- -------- --------
Income (loss) from operations ............. 881 (3,109) (943) (5,852) (3,313)
Other expense, net ........................ (584) (750) (637) (198) (94)
-------- -------- -------- -------- --------
Income (loss) before income tax
Provision ................................. 297 (3,859) (1,580) (6,050) (3,407)
Income tax provision ...................... 25 7 3 3 4
-------- -------- -------- -------- --------
Net income (loss) ......................... $ 272 $ (3,866) $ (1,583) $ (6,053) $ (3,411)
-------- -------- -------- -------- --------
Other comprehensive loss -
net unrealized loss on available
for sale securities ....................... (5) -- -- -- --
Comprehensive income (loss) ............... $ 267 $ (3,866) $ (1,583) $ (6,053) $ (3,411)
Basic earnings (loss) per share ........... $ .06 $ (2.39) $ (1.00) $ (4.06) $ (2.34)
-------- -------- -------- -------- --------
Diluted earnings (loss) per share ......... $ .03 $ (2.39) $ (1.00) $ (4.06) $(2,34)
======== ======== ======== ======== ========
Basic weighted average common shares ...... 4,854 1,618 1,576 1,491 1,458
Diluted weighted average common shares .... 9,731 1,618 1,576 1,491 1,458
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ............... 11,570 2,452 6,175 1,189 3,018
Investment in securities ................ 9,125 -- -- -- --
Working capital (deficit) ............... 18,291 833 4,452 (2,385) 1,566
Total assets ............................ 33,974 12,748 17,653 8,563 9,166
Long-term liabilities ................... 6,261 6,440 6,723 848 717
Total stockholders' equity (deficit) .... 15,048 (3,155) 664 (458) 3,555
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
1998, we began expanding our focus to include eAsset management. Our revenues
were $23.3 million in 1997, $27.4 million in 1998 and $37.3 million in 1999.
Since 1995, we have licensed our products to over 500 customers worldwide.
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. In 1999, approximately
60% of our software license revenues resulted 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, the United Kingdom, Ireland and Australia. 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 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 45.5% in 1999, 51.8%
in 1998, and 47.2% in 1997.
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<PAGE> 21
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated the percentage of
revenues represented by certain items in our consolidated statements of
operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licenses ...................................... 54.7% 52.6% 59.4%
Services ............................................... 45.3 47.4 40.6
----- ----- -----
Total revenues ................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software licenses ...................................... 1.6 2.4 2.8
Services ............................................... 24.3 27.1 25.8
----- ----- -----
Total cost of revenues ........................ 25.9 29.5 28.6
----- ----- -----
Gross profit .............................................. 74.1 70.5 71.4
----- ----- -----
Operating expenses:
Sales and marketing .................................... 47.6 56.4 51.9
Research and development ............................... 14.8 16.4 15.4
General and administrative ............................. 8.8 9.1 8.2
Compensation expense related to stock option grants .... 0.6 -- --
----- ----- -----
Total operating expenses ...................... 71.8 81.9 75.5
----- ----- -----
Income (loss) from operations ............................. 2.3 (11.4) (4.1)
Other expense, net ........................................ 1.6 2.7 2.7
----- -----
Income (loss) before income tax provision ................. 0.7 (14.1) (6.8)
Income tax provision ...................................... 0.0 0.0 0.0
----- ----- -----
Net income (loss) ......................................... 0.7% (14.1)% (6.8)%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Software license revenues .... 100.0% 100.0% 100.0%
Cost of software licenses .... 2.9 4.5 4.7
----- ----- -----
Gross margin ................. 97.1% 95.5% 95.3%
===== ===== =====
Services revenue ............. 100.0% 100.0% 100.0%
Cost of services ............. 53.6 57.2 63.7
----- ----- -----
Gross margin ................. 46.4% 42.8% 36.3%
===== ===== =====
</TABLE>
19
<PAGE> 22
Comparison of Years Ended December 31, 1999, 1998 and 1997
REVENUES
Software Licenses. Software license revenues were $20.4 million in 1999, $14.4
million in 1998, and $13.8 million in 1997, representing increases of 41.5% from
1998 to 1999 and 4.3% from 1997 to 1998. The increase in revenues from 1998 to
1999 was 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. The
lower growth from 1997 to 1998 stemmed from a reduction in the sales force in
early 1998 which resulted from employment terminations initiated by us to
improve productivity as we targeted our sales effort at personnel at higher
organizational levels in our customers and prospects and removed
under-performing sales staff as well as a small number of voluntary
resignations. The reduction in the sales force slowed software license revenues,
particularly in North America, until replacements could be recruited and become
productive. Software license revenues in North America were $11.5 million in
1999, $6.6 million in 1998 and $6.7 million in 1997, representing an increase of
74.2% from 1998 to 1999 and a decrease of 1.5% from 1997 to 1998. The slight
decrease from 1997 to 1998 was due to decreased sales volume resulting from the
reduction in the North American sales force. Software license revenues from
international operations were $8.9 million in 1999, $7.8 million in 1998 and
$7.1 million in 1997, representing increases of 14.1% from 1998 to 1999 and 9.9%
from 1997 to 1998.
Services. Service revenues were $16.9 million in 1999, 13.0 million in 1998 and
$9.4 million in 1997, representing increases of 29.9% from 1998 to 1999 and
37.9% from 1997 to 1998. The increases in both periods were primarily due to
increases in consulting and training services for new customers, which reflects
the growth in software license revenues, as well as increased orders for
consulting, training and maintenance services from existing customers. Service
revenue as a percentage of total revenues was 45.3% in 1999, 47.4% in 1998 and
40.6% in 1997.
COST OF REVENUES
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. Cost of software license revenues was
$596,000 in 1999, $654,000 in 1998 and $650,000 in 1997, representing a decrease
of 8.9% from 1998 to 1999 and an increase of 0.6% from 1997 to 1998. The
decrease was primarily due to lower product documentation costs as the database
fees were fixed over the three years. Gross margins on software licenses were
97.1% in 1999, 95.5% in 1998 and 95.3% in 1997.
Cost of Services. Cost of service revenues consists primarily of salaries and
related expenses for consultants and technical support personnel. Cost of
service revenues was $9.1 million in 1999, $7.4 million in 1998 and $6.0 million
in 1997, representing increases of 21.8% from 1998 to 1999 and 24.0% from 1997
to 1998. The increases in both periods were primarily due to costs associated
with increasing the size of our professional services organization worldwide.
Gross margins on service revenue were 46.4% in 1999, 42.8% in 1998 and 36.3% in
1997. These year-to-year increases in gross margins on service revenue were
primarily due to price increases and from increased utilization as new employees
become more productive.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses, travel and entertainment and promotional expenses. Sales and marketing
expenses were $17.8 million in 1999, $15.5 million in 1998 and $12.1 million in
1997, representing increases of 14.9% from 1998 to 1999 and 28.1% from 1997 to
1998. The increase in sales and marketing expenses was primarily due to an
increase in sales personnel expenses, including commissions and compensation,
resulting from a larger sales force and increased sales. The increase in sales
and marketing expenses from 1997 to 1998 was primarily due to sales personnel
expenses associated with increased revenue growth. These expenses included a
$2.5 million increase in commissions, compensation, recruiting and training
costs. As a percentage of total revenues, sales and marketing expenses were
47.6% in 1999, 56.4% in 1998 and 51.9% in 1997. The decrease as a percentage of
revenue in 1999 was primarily due to increased productivity of the sales force.
We expect that sales and marketing expenses will continue to increase in
absolute dollars as we continue to hire additional sales and marketing
personnel, establish additional sales offices and increase promotional
activities.
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 expenses were $5.5 million in
1999, $4.5 million in 1998 and $3.6 million in 1997, representing an increase of
22.7% from 1998 to 1999 and 25.7% from 1997 to 1998. The increases from 1998 to
1999 and from 1997 to 1998 were primarily due to staffing increases made to
support the development of new
20
<PAGE> 23
products as well as the enhancement of existing products. As a percentage of
total revenues, research and development expenses were 14.8% in 1999, 16.4% in
1998 and 15.4% in 1997. We expect research and development expenditures will
continue to increase in absolute dollars as we continue to hire additional
engineering personnel.
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 $3.3 million in 1999, $2.5 million in 1998 and $1.9 million in
1997, representing an increase of 31.7% from 1998 to 1999 and 31.0% from 1997 to
1998. The increase from 1998 to 1999 was primarily 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. The increase from 1997 to 1998 was primarily due to a $300,000
increase in financing costs and a $300,000 increase in compensation, recruiting
and training costs resulting from increased staffing. As a percentage of total
revenues, general and administrative expenses were 8.8% in 1999, 9.1% in 1998
and 8.2% in 1997. We expect general and administrative expenses to continue to
increase in absolute dollars as we hire additional administrative personnel,
incur costs associated with being a public company and move to larger facilities
in 2000.
Compensation Expenses Related to Stock Option Grants. Compensation expense
related to the grant of options to purchase shares of common stock at exercise
prices below the deemed value of the company's common stock were $212,000 for
1999. There were no such expenses in either 1998 or 1997. Of the $212,000 for
1999, $106,000 was related to sales and marketing, $30,000 was related to
research and development and $76,000 was related to general and administrative.
Other Expenses, Net. Other expenses consist primarily of interest income,
interest expense and foreign currency translation. Other expenses were $584,000
in 1999, $750,000 in 1998 and $637,000 in 1997, representing a decrease of 22.1%
from 1998 to 1999 and an increase of 17.7% from 1997 to 1998. The decrease from
1998 to 1999 was due to the increased interest income earned on the investment
of the net proceeds of our initial public offering of common stock in August
1999. The increase from 1997 to 1998 was primarily due to higher interest
expense net of interest income. As a percentage of total revenues, other
expenses were 1.6% in 1999, 2.7% in 1998 and 2.7% in 1997.
Income Tax Provision. The income tax provision was $25,000 for 1999 and for 1998
and 1997 it consisted solely of minimum state income taxes due to our net loss
in each of those periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of
approximately $11.6 million, an increase of $9.1 million from December 31, 1998.
Investment in securities was $9.1 million at December 31, 1999. In July, 1999 we
received net proceeds of $17.4 million from our initial public offering. Prior
to our initial public offering, we financed our operations primarily through
private placements of our equity securities, which provided net proceeds
totaling $18.4 million as of March 31, 1999. We also borrowed $6.0 million
through the issuance of a senior secured convertible debenture in 1997. As of
December 31, 1999, we had $749,000 outstanding under capital equipment lease
lines of credit and no other outstanding lines of credit. In addition, we have
entered into a $2,000,000 revolving line of credit with a commercial bank, which
expires in April 2001. We currently have not made any draws on this line of
credit.
Our operating activities generated cash of $2.7 million in 1999 and used
cash of $2.2 million in 1998 and $450,000 in 1997. In 1999, the increase was
primarily due to the company achieving a net income. The increase in cash used
by operating activities in 1998 was primarily due to the increase in the net
loss from 1997 to 1998. Our investing activities used approximately $10.5
million in 1999, $439,000 in 1998 and $93,000 in 1997. The investing activity
for 1999 consisted primarily of $9.1 million in investments in available for
sale securities. Our financing activities provided $17.0 million in 1999, used
$1.1 million in 1998 and provided $5.5 million in 1997. The primary source of
funds in 1999 was our initial public offering and the primary source of funds in
1997 was the issuance of the $6.0 million senior secured convertible debenture.
We used $1.1 million in financing activities in 1998 primarily for capital lease
payments.
Expenditures for property and equipment were $1.6 million in 1999, $1.0
million in 1998 and $1.2 million in 1997. Most property acquired in 1999, 1998
and 1997 was computer hardware and software. In 1999, $381,000 of property was
financed through capital leases and most of the property acquired in 1998 and
1997 were financed through capital leases. We will be moving to larger
facilities in May 2000, which will increase our expenditures for new property
and EQUIPMENT. As of December 31, 1999, the Company has outstanding the $6.0
million senior secured convertible debenture.
In addition, on February 10, 2000, the Company purchased all the
outstanding shares and options of Pagoda Corporation in exchange for
approximately 820,000 shares of its common stock and $1 million in cash (See
Note 19 to the financial statements).
We believe that our existing cash balances and cash from operations will
be sufficient to finance our operations through at least the next 12 months.
IMPACT OF YEAR 2000 PROBLEMS
On January 1, 2000, many companies faced a potentially serious computer problem
because many software applications and operational programs written in the past
did not properly recognize calendar dates beginning in the Year 2000. This
problem could have forced computers or machines which utilize date dependent
software to either shut down or provide incorrect data or information. We
examined our computer and information systems and contacted our software and
hardware providers to determine whether our software applications and computer
and information systems were compliant with the Year 2000.
21
<PAGE> 24
We were assured by our vendors that our computer systems were fully compliant
with the Year 2000. We also performed our own internal tests of our software and
hardware to confirm that they were Year 2000 compliant.
At this time we have not experienced any material Year 2000 related problems
with our information systems and computer software, and we have not experienced
any material problems with our suppliers or customers related to Year 2000.
There has been no material impact on our business, financial condition or
results of operations related to the Year 2000.
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.
The total costs associated with year 2000 compliance, including costs of
completing required modifications, upgrades and replacements of our internal
systems did not exceed $50,000. We intend to continue to review our information
systems as well as monitor our key suppliers and customers for any undetected
Year 2000 problems which may not yet be apparent. However, we do not currently
believe that there are any undetected Year 2000 problems that could have a
material impact on our business, financial condition or results of operation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which we are
required to adopt effective in 2001. SFAS No. 133 will require us to record all
derivatives on the balance sheet at fair value. We do not currently engage in
hedging activities but will continue to evaluate the effects of adopting SFAS
No. 133. We will adopt SFAS No. 133 in 2001.
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.
On January 1, 1999, the participating countries adopted the euro as their local
currency, initially available for currency trading on currency exchanges and
non-cash transactions such as banking. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
Our transactions are recorded in both U.S. dollars and foreign currencies.
Future transactions may be recorded in the euro. We have not incurred and do not
expect to incur any significant costs from the continued implementation of the
euro. However, the currency risk of the euro could harm our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash, investments in securities and long-term
debt. At December 31, 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.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS/SCHEDULE:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .................................... 24
Consolidated Balance Sheets as of December 31, 1999 and 1998..... 25
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Years ended December 31, 1999, 1998 and 1997 ..... 26
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years ended December 31, 1999, 1998 and 1997 ............ 27
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997 ................................ 28
Notes to Consolidated Financial Statements ...................... 29
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Three Years ended December 31, 1999 ........................... 46
</TABLE>
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Continuus Software Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Continuus
Software Corporation and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in Item 8. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Continuus Software Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, California
January 26, 2000, except for
Note 19 as to which the date is
February 10, 2000.
24
<PAGE> 27
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 11,570 $ 2,452
Investments in securities, available for sale ...................... 9,125 --
Accounts receivable, less allowance for doubtful accounts
of $430 (1999) and $339 (1998) .................................. 8,940 7,067
Prepaid expenses and other current assets .......................... 1,266 777
Deferred tax asset ................................................. 55 --
-------- --------
Total current assets ............................................ 30,956 10,296
Property, net ...................................................... 2,154 1,691
Other assets ....................................................... 864 761
-------- --------
Total assets .................................................... $ 33,974 $ 12,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ................................................... $ 1,662 $ 796
Accrued liabilities ................................................ 5,554 3,568
Deferred revenue ................................................... 4,961 4,400
Current portion of capital lease obligations ....................... 488 699
-------- --------
Total current liabilities .............................. 12,665 9,463
Capital lease obligations, net of current portion .................. 261 440
Convertible Note Payable ........................................... 6,000 6,000
Commitments and Contingencies
Stockholders' Equity (Deficit):
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, no shares and 2,275,659
issued and outstanding at December 31, 1999 and 1998 ............ -- 7,900
Series B convertible preferred stock, no par value;
451,243 shares authorized, no shares and 451,243
issued and outstanding at December 31, 1999 and 1998 ............ -- 1,769
Series C convertible preferred stock, no par value;
804,667 shares authorized, no shares and 747,525
issued and outstanding at December 31, 1999 and 1998 ............ -- 4,118
Series D convertible preferred stock, no par value;
361,178 shares authorized, no shares and 361,178
issued and outstanding at December 31, 1999 and 1998 ............ -- 1,879
Series E convertible preferred stock, no par value;
783,019 shares authorized, no shares and 470,849
issued and outstanding at December 31, 1999 and 1998 ............ -- 2,352
Common stock $.001 par value;
30,000,000 shares authorized, 9,504,856 and 1,630,250 shares
issued and outstanding at December 31, 1999 and 1998 ............ 10 2
Additional paid-in capital ......................................... 38,137 1,898
Warrants to purchase common stock .................................. 69 114
Warrants to purchase Series E convertible preferred stock .......... -- 248
Accumulated other comprehensive loss ............................... (5) --
Accumulated deficit ................................................ (23,163) (23,435)
-------- --------
Total stockholders' equity (deficit) ................... 15,048 (3,155)
-------- --------
Total liabilities and stockholders' equity ............. $ 33,974 $ 12,748
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses ...................................... $ 20,420 $ 14,429 $ 13,829
Services ............................................... 16,898 13,007 9,434
-------- -------- --------
Total revenues ................................... 37,318 27,436 23,263
Cost of revenues:
Software licenses ...................................... 596 654 650
Services ............................................... 9,068 7,446 6,007
-------- -------- --------
Total cost of revenues ........................... 9,664 8,100 6,657
-------- -------- --------
Gross profit ................................................. 27,654 19,336 16,606
Operating expenses:
Sales and marketing .................................... 17,777 15,469 12,079
Research and development ............................... 5,513 4,493 3,574
General and administrative ............................. 3,271 2,483 1,896
Compensation expense related to stock option grants .... 212 -- --
-------- -------- --------
Total operating expenses ......................... 26,773 22,445 17,549
-------- -------- --------
Income (loss) from operations ................................ 881 (3,109) (943)
Other expense, net ........................................... (584) (750) (637)
-------- -------- --------
Income (loss) before income tax provision .................... 297 (3,859) (1,580)
Income tax provision ......................................... 25 7 3
-------- -------- --------
Net income (loss) ............................................ $ 272 $ (3,866) $ (1,583)
-------- -------- --------
Other comprehensive loss
net unrealized loss on available for sale securities ......... (5) -- --
-------- -------- --------
--------
Comprehensive income (loss) .................................. $ 267 $ (3,866) $ (1,583)
======== ======== ========
net income (loss) per share ======== ======== ========
Basic .................................................. $ .06 $ (2.39) $ (1.00)
======== ======== ========
Diluted ................................................ $ .03 $ (2.39) $ (1.00)
======== ======== ========
Weighted average shares outstanding ======== ======== ========
Basic .................................................. 4,854 1,618 1,576
======== ======== ========
Diluted ................................................ 9,731 1,618 1,576
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
CONVERTIBLE AND ADDITIONAL
PREFERRED STOCK PAID IN CAPITAL
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ................ 3,835,605 $ 15,666 1,513,759 $ 1,748
Issuance of preferred stock and warrants .. 93,190 415 -- --
Issuance of common stock .................. -- -- 90,443 105
Conversion of debt to equity .............. 377,659 1,937 -- --
Net Loss .................................. -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 .............. 4,306,454 18,018 1,604,202 1,853
Issuance of common stock .................. -- -- 26,048 47
Net loss .................................. -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1998 .............. 4,306,454 18,018 1,630,250 1,900
Issuance of common stock related to
the exercise of stock options and
warrants ............................... -- -- 148,858 243
Issuance of warrants to purchase
common stock ........................... -- -- -- --
Issuance of common stock related
to the IPO, net ........................ -- -- 2,523,642 17,416
Conversion of preferred stock and
warrants to common stock at IPO ........ (4,306,454) (18,018) 5,202,106 18,376
Compensation expense related to
stock option grants .................... -- -- -- 212
Unrealized loss on available for sale
securities ............................. -- -- -- --
Net income ................................ -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1999 .............. -- -- 9,504,856 $ 38,147
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
WARRANTS TO
PURCHASE
WARRANTS TO SERIES E ACCUMULATED
PURCHASE CONVERTIBLE OTHER
COMMON PREFERRED COMPREHENSIVE ACCUMULATED
STOCK STOCK LOSS DEFICIT TOTAL
----------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ................ $ 114 $ -- $ -- $ (17,986) $ (458)
Issuance of preferred stock and warrants .. -- 83 -- -- 498
Issuance of common stock .................. -- -- -- -- 105
Conversion of debt to equity .............. -- 165 -- -- 2,102
Net Loss .................................. -- -- -- (1,583) (1,583)
---------- ---------- ---------- ---------- --------
Balance at December 31, 1997 .............. 114 248 -- (19,569) 664
Issuance of common stock .................. -- -- -- -- 47
Net loss .................................. -- -- -- (3,866) (3,866)
---------- ---------- ---------- ---------- --------
Balance at December 31, 1998 .............. 114 248 -- (23,435) (3,155)
Issuance of common stock related to
the exercise of stock options and
warrants ............................... -- -- -- -- 243
Issuance of warrants to purchase
common stock ........................... 65 -- -- -- 65
Issuance of common stock related
to the IPO, net ........................ -- -- -- -- 17,416
Conversion of preferred stock and
warrants to common stock at IPO ........ (110) (248) -- -- 0
Compensation expense related to
stock option grants .................... -- -- -- -- 212
Unrealized loss on available for sale
securities ............................. -- -- (5) -- (5)
Net income ................................ -- -- -- 272 272
---------- ---------- ---------- ---------- --------
Balance at December 31, 1999 .............. $ 69 -- $ (5) $ (23,163) $ 15,048
========== ========== ========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ................................................................ $ 272 $ (3,866) $ (1,583)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for doubtful accounts ............................................ 114 205 62
Depreciation and amortization .............................................. 1,135 1,632 1,480
Loss (gain) on disposition of property ..................................... 1 (1) (2)
Compensation expense related to stock option grants ........................ 212 -- --
Compensation expense related to warrant issuances .......................... 65 -- --
Deferred income taxes ...................................................... (55) -- --
Changes in operating assets and liabilities (net of effects of acquisition): -- -- --
Accounts receivable ..................................................... (2,470) 395 (3,798)
Prepaid expenses and other assets ....................................... (428) (69) (672)
Accounts payable ........................................................ 885 (474) 94
Accrued liabilities ..................................................... 2,196 361 1,573
Deferred revenue ........................................................ 741 (409) 2,396
-------- -------- --------
Net cash provided by (used in) operating activities................... 2,668 (2,226) (450)
Cash Flows From Investing Activities:
Purchases of property ............................................................ (1,264) (452) (105)
Purchase of available for sale investment securities ............................. (12,096) -- --
Proceeds from available for sale investment securities ........................... 2,965 -- --
Proceeds from sale of property ................................................... 3 13 12
Cash paid for acquisition ........................................................ (158) -- --
-------- -------- --------
Net cash used in investing activities ................................ (10,550) (439) (93)
Cash Flows From Financing Activities:
Repayments on notes payable ...................................................... -- -- (100)
Net borrowings (payments) on line of credit ...................................... -- -- (1,043)
Principal payments on obligations under capital leases ........................... (646) (1,105) (961)
Proceeds from IPO, net............................................................ 17,416 -- --
Proceeds from issuance of convertible debt ....................................... -- -- 1,030
Proceeds from issuance of common stock, net ...................................... 243 47 105
Proceeds from issuance of preferred stock and warrants ........................... -- -- 498
Proceeds from issuance of convertible note payable ............................... -- -- 6,000
-------- -------- --------
Net cash provided by (used in) financing activities .................. 17,013 (1,058) 5,529
Effect of Exchange Rate .......................................................... (13) -- --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................. 9,118 (3,723) 4,986
Cash and cash equivalents, beginning of period ................................... 2,452 6,175 1,189
-------- -------- --------
Cash and Cash Equivalents, end of period ......................................... $ 11,570 $ 2,452 $ 6,175
======== ======== ========
Supplementary Disclosures of Cash Flow Information
Cash paid during the year for:
Interest ................................................................ $ 636 $ 880 $ 278
======== ======== ========
Income taxes ............................................................ $ 8 $ 18 $ 282
======== ======== ========
Noncash Items:
Acquisition of property through capital lease .................................... $ 381 $ 541 $ 1,080
Conversion of notes payable and accrued interest to preferred stock .............. $ -- $ -- $ 2,102
Issuance of warrants to purchase Series E convertible preferred stock ............ $ -- $ -- $ 248
Conversion of preferred stock to common stock .................................... $ 18,018 $ -- $ --
Net exercise of warrants to purchase common stock ................................ $ 110 $ -- $ --
Net exercise of warrants to purchase Series E convertible preferred stock ........ $ 248 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Continuus Software Corporation and subsidiaries (the
Company) is a leading provider of 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. The Company's product line simplifies the development of
complex and demanding Internet and software applications. Products are sold
direct, as well as through resellers, to both commercial and government markets.
The Company also offers Continuus Professional Services which include
consulting, training and maintenance services. The Company grants credit to its
customers in a variety of industries.
Initial Public Offering - On August 3, 1999, the Company completed the sale of
2,523,642 shares of common stock in an initial public offering at an offering
price of $8.00 per share, resulting in net proceeds of $17,416. In connection
with this offering, all outstanding shares of preferred stock were converted
into 4,306,454 shares of common stock, and 895,652 shares of common stock were
issued as a result of the net exercise of 1,187,765 warrants to purchase common
stock.
Stock Split -- On July 13, 1999, the Company effected a 1-for-2.65 reverse stock
split of its common stock. All share, per share and conversion amounts relating
to common stock, preferred stock, warrants and stock options included in the
accompanying consolidated financial statements and footnotes have been restated
to reflect the reverse stock split for all periods presented.
Reincorporation -- The Company reincorporated in the State of Delaware on July
21, 1999.
Principles of Consolidation -- The consolidated financial statements include the
accounts of Continuus Software Corporation (Continuus) and its wholly owned
subsidiaries, Continuus Software Limited (UK), Continuus Software GmbH
(Germany), Continuus Software SARL (France), Continuus Software Company Limited
(Ireland) and Continuus Software Pty Limited (Australia). All intercompany
balances and transactions have been eliminated in the accompanying consolidated
financial statements.
Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, and translation adjustments are included in the Company's
consolidated statements of operations. The Company recorded translation gains
(losses) of ($161), $5 and ($163) during the years ended December 31, 1999, 1998
and 1997, respectively which is included in other expense in the accompanying
consolidated financial statements.
Cash and Cash Equivalents -- Cash and cash equivalents represent highly liquid
securities consisting primarily of United States treasury bills, with original
maturities of less than 90 days.
Property -- Computer equipment, furniture and fixtures, and leasehold
improvements are stated at cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over
estimated useful lives of the related assets, generally ranging from three to
five years. Leasehold improvements are amortized using the straight-line method
over the life of the lease.
Investment in Securities, Available for Sale - The Company's investments in
corporate debt securities are classified as available-for-sale and stated at
fair value in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities.
Other Assets - Other assets consist primarily of the long-term portion of
financing costs, refundable deposits, and goodwill. The Company is amortizing
deferred financing costs using the effective interest method over the term of
the related financing agreements, which are two and five years. Goodwill arising
from the acquisition of Procentric Pty Limited is amortized over five years on a
straight-line basis. The company annually evaluates the carrying value of
goodwill for any impairment of value based on an undiscounted cash flow
analysis. At December 31, 1999, the Company believes there has been no
impairment of the value of goodwill.
29
<PAGE> 32
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Long-Lived Assets -- The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. In accordance with
SFAS No. 121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be recoverable.
There was no impairment of the value of such assets for the year ended December
31, 1999.
Revenue Recognition:
During October 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides
guidance in recognizing revenue on software transactions. SOP 97-2 is effective
for transactions entered into in fiscal years beginning after December 15, 1997,
and supersedes SOP 91-1. The Company adopted this statement, as amended, for the
years ended December 31, 1998 and 1999.
Software Licenses, Services and Post-Contract Customer Support -- Revenues from
sales of software licenses, which generally do not contain multiple elements,
are recognized upon shipment of the related product if the requirements of SOP
97-2, as amended, are met. If the requirements of SOP 97-2, including evidence
of an arrangement, client acceptance, a fixed or determinable fee,
collectibility or vendor specific objective evidence about the value of an
element, are not met at the date of shipment, revenue recognition is deferred
until such items are known or resolved. Revenues from sales to distributors are
recognized upon shipment when the distributor has a sales agreement with an
end-user. Revenue from service and post-contract customer support is deferred
and recognized ratably over the term of the contract.
License Agreements -- The Company's products include software licensed from
third parties. An initial five-year license agreement with a third party which
granted the Company the right to embed the licensor's database software into the
Company's products, expired on December 1999. The cost of the license has been
amortized on a straight-line basis and is fully amortized as of December 31,
1999. The license agreement was renewed for a period of three years and will
expire on January 31, 2003. The licensor shall receive royalty based payments
equal to a percentage of license fee revenue as defined under the renewed
agreement. Termination of this license agreement could have a material adverse
effect on the Company's ability to deliver its products and a material effect on
the Company's operating results and financial condition until alternative
database software is selected and integrated into the Company's products.
Software Development Costs -- Costs incurred in the research and development of
new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased or Otherwise Marketed. Because the Company believes that its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility, no software development
costs have been capitalized as of December 31, 1998 and 1999.
30
<PAGE> 33
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Income Taxes -- Income taxes are recorded in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement requires the recognition of deferred
tax assets and liabilities to reflect the future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and tax
bases of the Company's assets and liabilities result in a deferred tax asset,
SFAS No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
Stock-based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
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" earnings 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.
Concentration of Credit Risk -- The Company sells its products primarily to
large commercial companies. Credit is extended based on an evaluation of the
customer's financial condition, and collateral is generally not required. The
Company also evaluates its credit customers for potential credit losses.
31
<PAGE> 34
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Use of Estimates -- The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Comprehensive Income or Loss - The Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income. Comprehensive income is defined as all changes in a
company's net assets except changes resulting from transactions with
stockholders. It differs from net income or loss in that certain items currently
recorded through equity are included in comprehensive income or loss. At
December 31, 1999, the Company had accumulated other comprehensive losses
comprised of net unrealized losses on available-for-sale securities.
New Accounting Pronouncements:
In June 1998, 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 2001. 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 but will continue to evaluate the effects
of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its fiscal year
2001.
2. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Computer equipment ................................ $ 5,811 $ 4,732
Furniture and fixtures ............................ 602 498
Leasehold improvements ............................ 218 213
------- -------
6,631 5,443
Less accumulated depreciation and amortization .... (4,477) (3,752)
------- -------
Property, net ..................................... $ 2,154 $ 1,691
======= =======
</TABLE>
3. INVESTMENT IN SECURITIES
At December 31, 1999, all of the Company's investments are in debt securities
and classified as available for sale. At December 31, 1999, investments in debt
securities have an amortized cost of $9,130, gross unrealized gains of $0, gross
unrealized losses of $5 and an estimated fair value of $9,125. All of the
investments in debt securities are due in one year or less as of December 31,
1999.
Proceeds from the sales of investments in debt securities were approximately
$2,965 during the year ended December 31, 1999. Gross realized gains and losses
on these sales were $0 and $0.
32
<PAGE> 35
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Prepaid insurance costs ................. $113 $ --
Goodwill, net of accumulated amortization
of $1 at December 31, 1999 ............ 107 --
Refundable deposits ..................... 443 450
Deferred financing costs, net ........... 201 311
---- ----
$864 $761
==== ====
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Accrued compensation and related expense.. $3,581 $2,230
Other liabilities ........................ 1,973 1,338
------ ------
$5,554 $3,568
====== ======
</TABLE>
6. CONVERTIBLE NOTES PAYABLE
Convertible Note Payable Agreement -- During September 1997, the Company entered
into a note payable agreement with a third party. Under terms of this agreement,
the Company borrowed $6,000. The note bears interest at an annual rate of 12%.
Interest is due and payable on the first day of January, April, July, and
October, commencing on October 1, 1997. Any unpaid principal and interest shall
become due and payable at the earliest of the following circumstances: (1)
September 2002, (2) the closing of a public offering of the Company's common
stock at an aggregate valuation of not less than $15,000 and a public offering
price equal or exceeding $13.91 per share, or (3) merger or consolidation of the
Company with or into any other corporation. If either (2) or (3) occur prior to
September 2002, the holder of the note may convert the amount due into 1,078,167
shares of the Company's common stock at a conversion price of $5.57 per share.
As neither (2) or (3) has occurred as of December 31, 1999, the convertible note
has been classified as long-term. This agreement does not allow for prepayment
of the note and includes certain financial covenants including annual capital
expenditure limitations. The Company was in compliance with all financial
covenants as of December 31, 1999.
7. LINE OF CREDIT/LEASING 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. 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. There were no amounts outstanding under the revolving line of credit at
December 31, 1999. On the same date, the Company entered into a Contribution
Agreement, which requires that certain preferred stockholders 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 on the date of grant using the Black-Scholes
pricing model was $23. This amount is recorded as deferred financing costs and
is being amortized over the term of the revolving line of credit. As of December
31, 1999, $8 of this amount has been amortized. All warrants are outstanding at
December 31, 1999. 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. No additional warrants were granted as of December 31,
1999.
33
<PAGE> 36
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
On April 30, 1999, the Company entered into an agreement with a third party to
lease certain qualified capital equipment. The agreement expired on December 1,
1999. In connection with this lease agreement, the Company granted warrants to
purchase 20,753 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-Schules pricing model was $42. This amount was
recorded as deferred financing costs and was fully amortized as of December 31,
1999. All warrants were outstanding at December 31, 1999.
8. LEASES
Capital lease obligations have been recorded in the accompanying consolidated
financial statements at the present value of future minimum lease payments.
Assets financed under capital leases included in property are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Computer equipment ............ $ 2,180 $ 3,802
Less accumulated amortization.. (1,448) (2,675)
------- -------
$ 732 $ 1,127
======= =======
</TABLE>
Depreciation and amortization expense of property financed under capital leases
was $797, $1,094 and $883 for the years ended December 31, 1999, 1998 and 1997
respectively.
Future minimum lease payments under capital leases and the present value of
future minimum lease payments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
2000........................................ $ 557
2001........................................ 202
2002........................................ 86
2003........................................ 4
--
-----
Total future minimum lease payments.............. 849
Less amount representing interest................ (100)
-----
Present value of future minimum lease payments... 749
Less current portion............................. (488)
-----
$ 261
=====
</TABLE>
34
<PAGE> 37
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
The Company also leases office space and equipment under operating leases which
expire on various dates through June 2003. Future annual minimum lease payments
under non-cancelable operating lease arrangements at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000........................................................ $ 456
2001........................................................ 240
2002........................................................ 232
2003........................................................ 115
------
$1,043
======
</TABLE>
Rental expense under operating leases was approximately $1,223, $1,031 and $929
for the years ended December 31, 1999, 1998 and 1997 respectively.
9. COMMITMENTS AND CONTINGENCIES
In November 1991, the Company entered into an agreement with two former
stockholders of the Company, which required the Company to pay an aggregate of
1% of gross revenues subject to certain time limitations and maximum amounts.
Beginning June 1993, the Company began making quarterly payments and the last
payment was made in March 1998. The total amount paid in connection with the
agreement was $605. Expense related to this agreement was $78 and $179 for the
years ended December 31, 1998 and 1997, respectively.
10. STOCKHOLDERS' EQUITY
Preferred Stock -- Series A preferred stock (Series A) shares were convertible
at the holder's option into shares of common stock, on a share-for-share basis.
The conversion ratio could be adjusted from time to time in the event of certain
diluting events, as defined. Conversion was automatic in the event of a public
offering of the Company's common stock, meeting certain specified criteria.
Dividends on Series A were noncumulative and could be declared at the discretion
of the Board of Directors. The dividend rate was $.2777 per share per annum.
Series A stockholders had the right to elect one director and veto rights over
certain management decisions. In the event of liquidation, dissolution or merger
of the Company, each Series A shareholder had a liquidation preference equal to
$3.47 per share, an amount per share of Series A then held by them equal to
$.347 multiplied by the number of years between the date upon which the Series C
preferred stock shares were first issued by the Company and the date of the
distribution of any assets or surplus funds of the Company, plus an amount equal
to all declared but unpaid dividends. Such liquidation preference would not be
recognized upon the conversion of the preferred stock into common stock upon an
initial public offering. All shares of Series A were converted into 2,275,659
shares of common stock upon the completion of the Company's initial public
offering on August 3, 1999.
35
<PAGE> 38
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Series B preferred stock (Series B) shares were convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio could be adjusted from time to time in the event of certain diluting
events, as defined. Conversion was automatic in the event of a public offering
of the Company's common stock, meeting certain specified criteria. Dividends on
Series B were noncumulative and could be declared at the discretion of the Board
of Directors. The dividend rate was $.318 per share per annum. Series B
stockholders had the right to elect one director and veto rights over certain
management decisions. In the event of liquidation, dissolution or merger of the
Company, each Series B shareholder had a liquidation preference equal to $3.98
per share, an amount per share of Series B then held by them equal to $.398
multiplied by the number of years between the date upon which the Series B
shares were first issued by the Company and the date of the distribution of any
assets or surplus funds of the Company, plus an amount equal to all declared but
unpaid dividends. Such liquidation preference would not be recognized upon the
conversion of the preferred stock into common stock upon an initial public
offering. All shares of Series B were converted into 451,243 shares of common
stock upon the completion of the Company's initial public offering on August 3,
1999.
Series C preferred stock (Series C) shares were convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio could be adjusted from time to time in the event of certain diluting
events, as defined. Conversion was automatic in the event of a public offering
of the Company's common stock, meeting certain specified criteria. Dividends on
Series C were noncumulative and could be declared at the discretion of the Board
of Directors. The dividend rate was $.445 per share per annum. Series C
stockholders had veto rights over certain management decisions. In the event of
liquidation, dissolution or merger of the Company, each Series C shareholder had
a liquidation preference equal to $5.57 per share, an amount per share of Series
C then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series C shares were first issued by the Company and the
date of the distribution of any assets or surplus funds of the Company, plus an
amount equal to all declared but unpaid dividends. Such liquidation preference
would not be recognized upon the conversion of the preferred stock into common
stock upon an initial public offering. All shares of Series C were converted
into 747,525 shares of common stock upon the completion of the Company's initial
public offering on August 3, 1999.
Series D preferred stock (Series D) shares were convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio could be adjusted from time to time in the event of certain diluting
events, as defined. Conversion was automatic in the event of a public offering
of the Company's common stock, meeting certain specified criteria. Dividends on
Series D were noncumulative and could be declared at the discretion of the Board
of Directors. The dividend rate was $.445 per share per annum. Series D
stockholders had veto rights over certain management decisions. In the event of
liquidation, dissolution or merger of the Company, each Series D shareholder had
a liquidation preference equal to $5.57 per share, an amount per share of Series
D then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series D shares were first issued by the Company and the
date of the distribution of any assets or surplus funds of the Company, plus an
amount equal to all declared but unpaid dividends. Such liquidation preference
would
36
<PAGE> 39
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
not be recognized upon the conversion of the preferred stock into common stock
upon an initial public offering. All shares of Series D were converted into
361,178 shares of common stock upon the completion of the Company's initial
public offering on August 3, 1999.
Series E preferred stock (Series E) shares were convertible at the holder's
option into shares of common stock, on a share-for-share basis. The conversion
ratio could be adjusted from time to time in the event of certain diluting
events, as defined. Conversion was automatic in the event of a public offering
of the Company's common stock, meeting certain specified criteria. Dividends on
Series E were noncumulative and could be declared at the discretion of the Board
of Directors. The dividend rate was $.445 per share per annum. Series E
stockholders had veto rights over certain management decisions. In the event of
liquidation, dissolution or merger of the Company, each Series E shareholder had
a liquidation preference equal to $5.57 per share, an amount per share of Series
E then held by them equal to $.557 multiplied by the number of years between the
date upon which the Series E were first issued by the Company and the date of
the distribution of any assets or surplus funds of the Company, plus an amount
equal to all declared but unpaid dividends. Such liquidation preference would
not be recognized upon the conversion of the preferred stock into common stock
upon an initial public offering. All shares of Series E were converted into
470,849 shares of common stock upon the completion of the Company's initial
public offering on August 3, 1999.
Warrants To Purchase Common Stock -- In connection with the Series A financing,
the Company issued 720,148 warrants which can be used to purchase common stock
at an exercise price of $.66 per share. The warrants are exercisable immediately
and expire seven years from the date of grant. Upon exercise of the warrants,
the holders may elect a net exercise option. Such option allows the holders of
such warrants to receive an amount of common stock equal to the net gain on the
exercise of such warrants. The fair value of these warrants was determined to be
insignificant on the date of grant, using the Black-Scholes option-pricing
model, and no value was ascribed to these warrants. On August 3, 1999, the
holders of 696,528 warrants elected to net exercise and the holders received
639,099 shares of common stock. The remaining 23,620 warrants are outstanding at
December 31, 1999.
On May 30, 1996, in connection with Series D equity financing, the Company
granted warrants to the holders to purchase 221,736 common stock shares at $1.53
per share. The warrants are exercisable immediately and expire seven years from
the date of grant. Upon exercise of the warrants, the holders may elect a net
exercise option. Such option allows the holders of such warrants to receive an
amount of common stock equal to the net gain on the exercise of such warrants.
The warrants were allocated to the holders of the Series D on a pro rata basis
based on the consideration received by the Company. The fair value allocated to
the warrants at the date of grant, using the Black-Scholes
37
<PAGE> 40
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
option-pricing model, was estimated to be $114. On August 3, 1999, the holders
of 213,112 warrants elected to net exercise and the holders received 172,083
shares of common stock. The remaining 8,625 warrants are outstanding at December
31, 1999.
Warrants to Purchase Series C Preferred Stock -- During June 1996, the Company
granted warrants to a bank to purchase 37,735 shares of Series C preferred stock
at $5.57 per share. The fair value of these warrants were determined to be
insignificant, using the Black-Scholes option-pricing model, and no value was
ascribed to such warrants. These warrants expire on June 4, 2001. Upon the
closing of the initial public offering on August 3, 1999, all of these warrants
were converted into warrants to purchase 37,735 shares of common stock at $5.57
per share. All warrants remain outstanding at December 31, 1999.
Warrants to Purchase Series E Preferred Stock -- On January 22, 1997, the
Company granted warrants to the holders of the convertible promissory notes
issued on January 22, 1997, to purchase 184,938 Series E preferred stock shares
at $5.57 per share. The warrants expire three years from the date of grant or
immediately subsequent to an initial public offering. Upon exercise of the
warrants, the holders may elect a net exercise option. Such option allows the
holders of such warrants to receive an amount of common stock equal to the net
gain on the exercise of such warrants . The warrants were allocated to the
holders of the convertible promissory notes on a pro rata basis based on the
consideration received by the Company. The fair value allocated to the warrants
using the Black-Scholes pricing model at the date of grant was $165. Immediately
subsequent to the initial public offering on August 3, 1999, all of these
warrants were converted into 56,171 shares of common stock.
On May 19, 1997, in connection with the Series E equity financing, the Company
granted warrants to purchase 93,187 Series E preferred stock shares at $5.57 per
share to the Series E investors. The warrants expire three years from the date
of grant or immediately subsequent to an initial public offering. Upon exercise
of the warrants, the holders may elect a net exercise option. Such option allows
the holders of such warrants to receive an amount of common stock equal to the
net gain on the exercise of such warrants . The warrants were allocated to the
holders of the Series E preferred stock on a pro rata basis based on the
consideration received by the Company. The fair value allocated to the warrants
using the Black-Scholes pricing model at the date of grant was estimated to be
$83. Immediately subsequent to the initial public offering on August 3, 1999,
all of these warrants were converted into 28,299 shares of common stock.
The Company over the last several years granted warrants to a related party to
purchase 15,849 shares of Series A preferred stock at $3.47 per share, 19,402
shares of Series C preferred stock at $5.57 per share and 18,866 shares of
Series E preferred stock at $5.57 per share. These warrants are exercisable
immediately and expire ten years from the date of grant or five years after an
initial public offering, whichever is shorter. The fair value of these warrants
were determined to be insignificant, using the Black-Scholes option-pricing
model, and no value was ascribed to such warrants. Upon closing of the initial
public offering on August 3, 1999, all of these warrants were converted into
warrants to purchase 38,268 shares of common stock at $5.57 per share and 15,849
shares of common stock at $3.47 per share. All warrants remain outstanding at
December 31, 1999.
11. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ...................... $ 63 $ -- $ --
State ........................ 17 7 3
---- ---- ----
80 7 3
Deferred:
Federal ...................... (55) -- --
---- ---- ----
$ 25 $ 7 $ 3
</TABLE>
The reconciliation of income tax provision (benefit) computed at U.S. federal
statutory rates to income tax provision for the years ended December 31, 1999,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rates ..... 35.0% (35.0)% (35.0)%
State taxes, net of federal benefits .... 4.0 0.1 0.1
Change in valuation allowance ........... (228.3) 24.7 17.7
Foreign losses .......................... 186.9 8.9 14.6
Meals and Entertainment ................. 11.8 0.9 1.8
Other ................................... (1.0) 0.6 1.0
------ ----- -----
Income tax provision ...................... 8.4% 0.2% 0.2%
</TABLE>
38
<PAGE> 41
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
The Company's net deferred income taxes consist of the following as of December
31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ..... $ 4,813 $ 6,436
Depreciation and amortization ........ 673 270
Allowance for bad debts .............. 94 --
Vacation accrual ..................... 154 123
Unrealized foreign currency losses ... 351 --
Other ................................ 163 63
------- -------
Total deferred tax assets .............. 6,248 6,892
Valuation allowance .................... (6,193) (6,892)
------- -------
Net deferred income taxes .............. $ 55 $ --
======= =======
</TABLE>
The Company has reserved for net deferred tax assets whose realization depends
on future taxable income.
As of December 31, 1999, the Company has tax net operating loss carryforwards
available to offset income of approximately $7,437,000 and $2,820,000 for
federal and state purposes, respectively. The federal and state net operating
loss carryforwards begin expiring in 2007 and 2000, respectively. Additionally,
at December 31, 1999, the Company has foreign net operating loss carryforwards
totaling approximately $5,670,000 in the U.K., Germany, France and Australia.
Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net
operating loss and credit carryforwards may be limited if the Company
experiences a cumulative change in ownership of greater than 50% in a moving
three-year period. Ownership changes could impact the Company's ability to
utilize net operating losses and credit carryforwards remaining at the ownership
change date. The limitation will generally be determined by the fair market
value of common stock outstanding prior to the ownership change, multiplied by
the applicable federal rate.
12. EMPLOYEE STOCK PURCHASE PLAN
On April 16, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(The Plan) covering an aggregate of 250,000 shares of common stock. The Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code of 1986, as amended. Under The Plan,
the Board may authorize participation by eligible employees, including officers,
in periodic offerings following the commencement of the plan.
Unless otherwise determined by the Board, employees are eligible to participate
in the plan only if they are employed for at least 20 hours per week and for at
least five months per calendar year. Employees must also have been continuously
employed for 30 days prior to the beginning of the offering. Employees who
participate in an offering may have up to 15% of their earnings withheld
pursuant to the plan. The amount withheld will then be used to purchase shares
of the common stock on specified dates determined by the Board. The price of
common stock purchased under the plan will be equal to 85% of the lower of the
fair market value of the common stock at the commencement date of each offering
period or the relevant purchase date. Employees may end their participation in
this offering at any time during this offering period, and participation ends
automatically on termination of employment.
In the event of a merger, reorganization, consolidation or liquidation involving
Continuus, the Board has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the successor
corporation, or the Board may shorten this offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The Board has the authority to amend
or terminate the plan, however, the Board may not amend or terminate the plan if
it may adversely affect any outstanding rights to purchase common stock.
No shares of common stock were purchased under The Plan at December 31, 1999.
At December 31, 1999, $302 was recorded in accrued liabilities that employees
had deposited for purchases of common stock. In January 2000, 53,950 shares of
common stock were purchased under The Plan.
39
<PAGE> 42
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
13. STOCK OPTION PLANS
The Company's 1991 Stock Option Plan and 1997 Equity Incentive Plan (the Plans),
as amended, provide for the issuance to officers and key employees of up to a
total of 4,207,547 options to purchase common stock through the grant of
incentive stock or nonqualified stock options. Options expire no later than ten
years from the date of grant and generally become exercisable over a four-year
period.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has chosen to continue
to account for its employee stock-based compensation plans under APB Opinion No.
25 and provide the expanded disclosures specified in SFAS No. 123.
Had compensation cost been determined using the provisions of SFAS No. 123, the
Company's net income or net loss would have been changed to the amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported ......................... $ 272 $ (3,866) $ (1,583)
Pro forma ........................... (1,483) (4,104) (1,842)
Basic net income (loss) per share:
As reported ......................... $ 0.06 $ (2.39) $ (1.00)
========= ========= =========
Pro forma ........................... $ (0.31) $ (2.54) $ (1.17)
========= ========= =========
Diluted net income (loss) per share:
As reported ......................... $ 0.03 $ (2.39) $ (1.00)
Pro forma ........................... $ (0.31) $ (2.54) $ (1.17)
</TABLE>
For purposes of estimating the compensation cost of the Company's option grants
in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions used for grants in the years
1997 and 1998: expected volatility of zero; risk-free interest rates of 6%;
expected dividend yield of zero; and expected lives of ten years. Assumptions
used for 1999 were as follows: expected volatility of 144%; risk-free interest
rates of 6%; expected dividend yield of zero; and expected life of four years.
40
<PAGE> 43
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
A summary of the status of the Plans is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period ..... 2,151,778 $ 1.78 l,577,469 $ 1.62 1,120,218 $ 1.46
Granted .............................. 1,470,958 5.25 1,285,306 3.07 799,584 1.70
Exercised ............................ (148,499) 1.65 (26,048) 1.78 (90,443) 1.16
Canceled ............................. (273,470) 2.43 (684,949) 3.79 (251,890) 1.40
---------- ---------- ----------
Balance, end of period ............... 3,200,767 $ 3.32 2,151,778 $ 1.78 1,577,469 $ 1.62
========== ========== ==========
Weighted average fair value of options
granted during the year .............. $ 4.55 $ 0.64 $ 0.77
========== ========== ==========
Number of options exercisable at year
end.................................. 1,236,525 926,356 675,965
========== ========== ==========
</TABLE>
The following tables summarize information about stock options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------
Option outstanding Options exercisable
---------------------------------------- --------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
outstanding life price exercisable price
---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.33-0.49 ....................................... 4,150 1.87 $ .33 4,150 $ .33
.95-1.42 ....................................... 7,547 2.27 .95 7,547 .95
1.54-2.30 ....................................... 1,750,375 7.06 1.75 1,157,222 1.64
3.98-5.97 ....................................... 1,008,197 9.43 4.31 18,888 4.46
6.37-9.54 ....................................... 406,998 9.41 7.23 48,718 7.19
10.00-15.00 ...................................... 23,500 9.97 11.15 -- --
--------- ---------
3,200,767 1,236,525
========= =========
</TABLE>
On August 25, 1998, the Company's Board of Directors approved a proposal
allowing the Company's employees to reprice any existing stock option grants to
a new exercise price of $1.99 per
41
<PAGE> 44
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
share, which was the estimated fair market value of the Company's common stock
on August 25, 1998. A total of 363,639 options were repriced with exercise
prices ranging from $3.31 to $6.63 per share.
During December 1998 to March 1999, the Company granted a total of 544,633
options to purchase shares of common stock at exercise prices below the
estimated fair market value of the Company's common stock. As a result, the
Company will record a total of $906 in compensation expenses related to these
options over the related vesting periods. The Company has recorded $212 of
compensation expense related to these stock options for the year ended December
31, 1999.
14. EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Basic:
Basic weighted average common shares .......... 4,854 1,618 1,576
Net income (loss) ............................. $ 272 $(3,866) $(1,583)
Basic earnings (loss) per share ............... $ 0.06 $ (2.39) $ (1.00)
Diluted:
Basic weighted average common shares .......... 4,854 1,618 1,576
Conversion of preferred stock and warrants..... 3,101 -- --
Dilutive effect of stock options and warrants.. 1,776 -- --
Diluted weighted average common shares......... 9,731 1,618 1,576
Net income (loss) ............................. $ 272 $(3,866) $(1,583)
Diluted earnings (loss) per share ............. $ 0.03 $ (2.39) $ (1.00)
</TABLE>
15. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
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 operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
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 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.
42
<PAGE> 45
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Operating segment data for the three years in the period ended December 31, 1999
was as follows:
<TABLE>
SOFTWARE
LICENSES SERVICES TOTAL
------- ------- -------
<S> <C> <C> <C>
Year ended December 31, 1999:
Revenues $20,400 $16,900 $37,300
Cost of revenues 600 9,100 9,700
------- ------- -------
Gross profit $19,800 $ 7,800 $27,600
======= ======= =======
Year ended December 31, 1998:
Revenues $14,400 $13,000 $27,400
Cost of revenues 700 7,400 8,100
------- ------- -------
Gross profit $13,700 $ 5,600 $19,300
======= ======= =======
Year ended December 31, 1997:
Revenues $13,800 $ 9,500 $23,300
Cost of revenues 700 6,000 6,700
------- ------- -------
Gross profit $13,100 $ 3,500 $16,600
======= ======= =======
</TABLE>
43
<PAGE> 46
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
Revenues are attributed to geographic areas based on the location of the entity
to which the products or services were sold. North America information is
derived from U.S. operations and includes revenues from sales to Canadian
entities of $2,300, $1,400 and $400 for the years ended December 31, 1999, 1998
and 1997, respectively. No single country had a material amount of long-lived
assets except for such assets in the United Kingdom of $507 and $569 at December
31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
NORTH
AMERICA INTERNATIONAL ELIMINATIONS TOTAL
------------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues............................ 20,300 18,100 (1,100) 37,300
Gross profit........................ 15,600 8,400 3,600 27,600
Long-lived assets................... 3,300 1,100 (1,400) 3,000
Year ended December 31, 1998:
Revenues............................ 17,700 14,900 (5,200) 27,400
Gross profit........................ 13,400 5,900 19,300
Long-lived assets................... 1,400 1,100 2,500
Year ended December 31, 1997:
Revenues............................ 16,900 11,200 (4,800) 23,300
Gross profit........................ 12,900 3,700 16,600
Long-lived assets................... 2,400 500 2,900
</TABLE>
In fiscal 1999, 1998 and 1997, no single customer accounted for 10% or more of
total revenue. Sales to companies based in the U.K. were 11%, 15% and 17%
respectively, of total revenues for the years ended December 31, 1999, 1998
and 1997. Sales to companies based in Germany were 14%, 17% and 17%
respectively, of total revenues for the years ended December 31, 1999, 1998
and 1997. Sales to companies based in France were 12% and 11% respectively,
of total revenues for the years ended December 31, 1999 and 1998. Accounts
receivable due from customers of the Germany subsidiary and the France
subsidiary were 19% and 14%, respectively, of total accounts receivable at
December 31, 1999. At December 31, 1999 no single customer accounted for more
than 10% of total accounts receivable.
16. DEFINED CONTRIBUTION SAVINGS AND INVESTMENT PLAN
The Company has a defined contribution savings and investment plan which covers
substantially all employees. The plan provides for the deferral of up to 20% of
an employee's qualifying compensation under Section 401(k) of the Internal
Revenue Code. Company contributions may be made to the plan at the discretion of
the Company's Board of Directors. To date, no such contributions have been made.
44
<PAGE> 47
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth unaudited quarterly results for each of the
periods presented. In the opinion of management, this quarterly information has
been prepared on the same basis as the annual consolidated financial statements
presented elsewhere in this 10k and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the information for
the periods presented when read in conjunction with the consolidated financial
statements and the notes to the consolidated financial statements. The operating
results for any quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31
1999 1999 1999 1999 1998 1998 1998 1998
-------- ------- ------- -------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses ......................... $ 4,172 $ 4,827 $ 5,304 $ 6,117 $ 3,745 $ 3,565 $ 2,852 $ 4,267
Services .................................. 4,067 3,985 4,348 4,498 3,065 3,170 3,256 3,516
------- ------- ------- -------- ------- ------- ------- -------
Total revenues ......................... 8,239 8,812 9,652 10,615 6,810 6,735 6,108 7,783
Cost of revenues:
Software licenses ......................... 156 162 152 126 167 169 157 161
Services .................................. 1,945 2,201 2,230 2,692 1,681 1,930 1,935 1,900
------- ------- ------- -------- ------- ------- ------- -------
Total cost of revenues ................. 2,101 2,363 2,382 2,818 1,848 2,099 2,092 2,061
------- ------- ------- -------- ------- ------- ------- -------
Gross profit ................................. 6,138 6,449 7,270 7,797 4,962 4,636 4,016 5,722
------- ------- ------- -------- ------- ------- ------- -------
Operating expenses:
Sales and marketing ....................... 4,098 4,139 4,565 4,975 3,577 3,946 3,932 4,014
Research and development .................. 1,233 1,335 1,438 1,507 1,065 1,123 1,159 1,146
General and administrative ................ 704 814 895 858 749 548 679 507
Compensation expense related to stock
option grants .......................... 41 57 57 57 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Total operating expenses ............... 6,076 6,345 6,955 7,397 5,391 5,617 5,770 5,667
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from operations ................ 62 104 315 400 (429) (981) (1,754) 55
Other (income) expense, net ............... 296 283 34 (29) 207 142 138 263
------- ------- ------- -------- ------- ------- ------- -------
Loss before income Tax provision (benefit) ... (234) (179) 281 429 (636) (1,123) (1,892) (208)
Income tax provision (benefit) ............... 5 2 1 17 13 4 2 (12)
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss) ............................ $ (239) $ (181) $ 280 $ 412 $ (649) $(1,127) $(1,894) $ (196)
======= ======= ======= ======== ======= ======= ======= =======
Other comprehensive income (loss)-Net
unrealized gain (loss) on available
for sale securities ....................... -- -- 17 (22) -- -- -- --
Comprehensive Income (loss) .................. $ (239) $ (181) $ 297 $ 390 $ (649) $(1,127) $(1,894) $ (196)
======= ======= ======= ======== ======= ======= ======= =======
Basic earnings (loss) per share .............. $ (0.15) $ (0.11) $ 0.04 $ 0.05 $ (0.40) $ (0.70) $ (1.17) $ (0.12)
Diluted earnings (loss) per share ............ $ (0.15) $ (0.11) $ 0.03 $ 0.04 $ (0.40) $ (0.70) $ (1.17) $ (0.12)
Basic weighted average common shares ......... 1,637 1,681 6,888 9,167 1,605 1,613 1,624 1,630
Diluted weighted average common shares ....... 1,637 1,681 10,188 11,418 1,605 1,613 1,624 1,630
</TABLE>
18. PROCENTRIC PTY LIMITED ACQUISITION
The Company completed the purchase of Procentric Pty Limited on October 1, 1999
for a total purchase price of approximately $158, all of which was paid in cash.
The acquisition was accounted for as a purchase, and accordingly, the total
purchase price was allocated ot the assets acquired at there estimated fair
value in accordance with Accounting Principles Board Opinion No. 16. The
purchase price was allocated to tangible assets acquired of approximately $50
and goodwill of approximately $108. The historical results of Procentric Pty
Limited on a stand alone basis were not significant for the years ended December
31, 1999 and 1998.
19. SUBSEQUENT EVENTS
On February 10, 2000, the Company purchased all the outstanding shares and
options of Pagoda Corporation in exchange for approximately 820,000 shares of
its common stock valued at $12.50 per share and $1 million in cash. This
acquisition will be accounted for under the purchase method of accounting.
45
<PAGE> 48
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning Costs and End of
Year ended December 31, 1999: of Period Expenses Deductions Period
--------- -------- ---------- ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $339 $114 $(23) $430
Year ended December 31, 1998:
Allowance for doubtful accounts $134 $205 -- $339
Year ended December 31, 1997:
Allowance for doubtful accounts $111 $62 $(39) $134
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in our independent accountant during the two
most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to our
Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with our 2000 annual meeting of stockholders (the
"Proxy Statement") under the headings "Nominees" and "Background of Executive
Officers not Described Above." The Proxy Statement will be filed in accordance
with Regulation 14A of the Exchange Act no later than April 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
46
<PAGE> 49
(1) Reference is made to the Index to Consolidated Financial Statements
under Item 8 in Part II hereof, where these documents are listed.
(2) Financial Statement Schedules: All schedules have been omitted because
they are not applicable or required, or the information required to be
set forth therein is included in the Consolidated Financial Statements
or notes thereto included in Item 8 "Financial Statements and
Supplementary Data".
(3) Exhibits - See (c) below.
(b) There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1999.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
------- ------- -----------
<S> <C> <C>
(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant.
(2) 3.2 Certificate of Designation of the Series A Non-Voting Convertible Preferred Stock of the Registrant.
(1) 3.3 Bylaws of the Registrant.
(1) 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
*,(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers.
*,(1) 10.2 Registrant's Employee Stock Option Plan (the "1991 Plan").
*,(1) 10.3 Form of Incentive Stock Option Agreement under the 1991 Plan.
*,(1) 10.4 Form of Incentive Stock Option Certificate under the 1991 Plan.
*,(1) 10.5 Form of Non-Qualified Stock Option Agreement under the 1991 Plan.
*,(1) 10.6 Form of Non-Qualified Stock Option Certificate under the 1991 Plan.
*,(1) 10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan").
*,(1) 10.8 Form of Incentive Stock Option Grant Certificate under the 1997 Plan.
*,(1) 10.9 Registrant's 1998 Employee Stock Purchase Plan and related offering documents.
(1) 10.10 Investors' Rights Agreement, dated March 4, 1994, as last amended on December 30, 1997, among
Registrant and certain investors.
(1) 10.11 Co-Sale Agreement, dated March 4, 1994, as last amended on May 19, 1997, among Registrant and certain
investors.
*,(1) 10.12 President/CEO Change in Control Severance Benefits Agreement, dated May 31, 1997, among Registrant and
John R. Wark.
*,(1) 10.13 Form of Executive Change in Control Severance Benefits Agreement, dated May 31, 1997, between
Registrant and each of Steve L. Johnson, William A. Philbin. Geoffrey W. Haggart, James M. Carrigan,
and David McCann.
(1) 10.14 Stock Purchase Agreement, dated May 30, 1996, among Registrant and certain investors.
(1) 10.15 Stock Purchase Agreement, dated May 19, 1997, among Registrant and certain investors.
(1) 10.16 Master Lease Agreement, dated April 20, 1995, among Registrant and Comdisco, Inc.
(1) 10.17 Global Master Rental Agreement, dated September 1, 1995, among Registrant and Comdisco, Inc.
(1) 10.18 Warrant Agreement, dated April 20, 1995, among Registrant and Comdisco, Inc.
(1) 10.19 Warrant Agreement, dated November 8, 1995, among Registrant and Comdisco, Inc.
(1) 10.20 Warrant Agreement, dated February 14, 1996, among Registrant and Comdisco, Inc.
(1) 10.21 Warrant to Purchase Stock, dated June 4, 1996, among Registrant and Silicon Valley Bank.
(1) 10.22 Registration Rights Agreement, dated June 4, 1996, among Registrant and Silicon Valley Bank.
(1) 10.23 Antidilution Agreement, dated June 4, 1996, among Registrant and Silicon Valley Bank
(1) 10.24 Master Purchase Terms and Conditions, dated February 27, 1997, as amended March 27, 1997, among
Registrant and Royal Bank of Canada Europe Limited.
(1) 10.25 Form of Warrant to Purchase Shares of Common Stock, dated December 23, 1994
</TABLE>
47
<PAGE> 50
<TABLE>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- -------- ------- -----------
<S> <C> <C>
among Registrant and certain investors.
(1) 10.26 Form of Warrant to Purchase Shares of Common Stock, dated May 30, 1996, among
Registrant and certain investors.
(1) 10.27 Form of Warrant to Purchase Shares of Series E preferred stock, dated January 23, 1997, among
Registrant and certain investors.
(1) 10.28 Form of Warrant to Purchase Shares of Series E preferred stock, dated May 19, 1997, among Registrant
and certain investors.
(1) 10.29 Senior Secured Convertible Debenture Purchase Agreement, dated September 23, 1997, among Registrant
and London Pacific Life & Annuity Company.
(1) 10.30 Senior Secured Convertible Debenture, dated September 23, 1997, among Registrant and London Pacific
Life & Annuity Company.
(1) 10.31 Security Agreement, dated September 23, 1997, among Registrant and London Pacific Life & Annuity
Company.
(1) 10.32 Standard Office Lease -- Gross, dated March 5, 1992, as last amended September 15, 1998, among
Registrant, The French Company and certain individuals.
(1),(4) 10.33 Value Added Reseller License Agreement, dated September 24, 1992, as last amended March 31, 1995,
among Registrant and Informix Software, Inc.
+ 10.34 Amendments No. 5 and 6 to Value Added Reseller License Agreement, dated September 24, 1992, as last
amended March 31, 1995, among Registrant and Informix Software, Inc.
(1) 10.35 Warrant Agreement, dated May 20, 1997, among Registrant and Comdisco, Inc.
(1) 10.36 Warrant Agreement, dated July 22, 1997, among Registrant and Comdisco, Inc.
(1) 10.37 Warrant Agreement, dated December 10, 1997, among Registrant and Comdisco, Inc.
(1) 10.38 Warrant Agreement, dated February 20, 1998, among Registrant and Comdisco, Inc.
(1) 10.39 Master Lease Agreement, dated April 30, 1999, among Registrant and Transamerica Business Credit
Corporation.
(1) 10.40 Stock Subscription Warrant, dated April 30, 1999, among Registrant and TBCC Funding Trust I.
(1) 10.41 Stock Subscription Warrant, dated April 30, 1999, among Registrant and Priority Capital Resources.
(1) 10.42 Loan Agreement, dated April 22, 1999, among Registrant and Silicon Valley Bank.
(1) 10.43 Contribution Agreement, dated April 22, 1999, among Registrant and certain investors.
(1) 10.44 Form of Warrant to Purchase Shares of Common Stock, dated April 22, 1999, among Registrant and certain
investors.
(2) 10.45 Stock Exchange Agreement between the Registrant and U.S. Bancorp Piper Jaffray Inc.
*,(3) 10.46 Pagoda Corporation 1998 Stock Incentive Plan
*,(3) 10.47 Form of Incentive Stock Option Agreement under the 1998 Stock Incentive Plan
(1) 21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney. Reference is made to page 49.
27.1 Financial Data Schedule.
</TABLE>
- -----------
* Management contract or compensatory plan, contract or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Confidential Treatment Requested under the Securities Exchange Act of 1934
and Rule 24b-2 thereunder.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-76893) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
August 31, 1999 or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-31360) or amendments thereto and incorporated herein by reference.
(4) Certain confidential portions deleted pursuant to an Order Granting
Application Under Securities Act of 1933 and Rule 406 Thereunder Respecting
Confidential Treatment.
48
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ John R. Wark
_________________________
John R. Wark, President, Chief Executive Officer
and Chairman
Date: March 29, 2000
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John R. Wark and Steven L. Johnson, as his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming that all said attorneys-in-fact and agents, or any of
them or their or his substitute or substituted, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> /s/ John R. Wark <C> <C>
- ----------------------------------- President, Chief Executive and Director March 29, 2000
John R. Wark (Principal Executive Officer)
/s/ Steven L. Johnson
- ----------------------------------- Vice President, Finance and Chief March 29, 2000
Steven L. Johnson Financial Officer (Principal Financial
and Accounting Officer)
/s/ Fred B. Cox
- ----------------------------------- Director March 29, 2000
Fred B. Cox
/s/ Kevin G. Hall
- ----------------------------------- Director March 29, 2000
Kevin G. Hall
/s/ A. Barry Patmore
- ----------------------------------- Director March 29, 2000
A. Barry Patmore
/a/ Stewart A. Schuster
- ----------------------------------- Director March 29, 2000
Stewart A. Schuster
/s/ Sol Zechter
- ----------------------------------- Director March 29, 2000
Sol Zechter
</TABLE>
49
<PAGE> 52
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
------- ------- -----------
<S> <C> <C>
(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant.
(2) 3.2 Certificate of Designation of the Series A Non-Voting Convertible Preferred Stock of the Registrant.
(1) 3.3 Bylaws of the Registrant.
(1) 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers.
(1) 10.2 Registrant's Employee Stock Option Plan (the "1991 Plan").
(1) 10.3 Form of Incentive Stock Option Agreement under the 1991 Plan.
(1) 10.4 Form of Incentive Stock Option Certificate under the 1991 Plan.
(1) 10.5 Form of Non-Qualified Stock Option Agreement under the 1991 Plan.
(1) 10.6 Form of Non-Qualified Stock Option Certificate under the 1991 Plan.
(1) 10.7 Registrant's 1997 Equity Incentive Plan (the "1997 Plan").
(1) 10.8 Form of Incentive Stock Option Grant Certificate under the 1997 Plan.
(1) 10.9 Registrant's 1998 Employee Stock Purchase Plan and related offering documents.
(1) 10.10 Investors' Rights Agreement, dated March 4, 1994, as last amended on December 30, 1997, among
Registrant and certain investors.
(1) 10.11 Co-Sale Agreement, dated March 4, 1994, as last amended on May 19, 1997, among Registrant and certain
investors.
(1) 10.12 President/CEO Change in Control Severance Benefits Agreement, dated May 31, 1997, among Registrant and
John R. Wark.
(1) 10.13 Form of Executive Change in Control Severance Benefits Agreement, dated May 31, 1997, between
Registrant and each of Steve L. Johnson, William A. Philbin. Geoffrey W. Haggart, James M. Carrigan,
and David McCann.
(1) 10.14 Stock Purchase Agreement, dated May 30, 1996, among Registrant and certain investors.
(1) 10.15 Stock Purchase Agreement, dated May 19, 1997, among Registrant and certain investors.
(1) 10.16 Master Lease Agreement, dated April 20, 1995, among Registrant and Comdisco, Inc.
(1) 10.17 Global Master Rental Agreement, dated September 1, 1995, among Registrant and Comdisco, Inc.
(1) 10.18 Warrant Agreement, dated April 20, 1995, among Registrant and Comdisco, Inc.
(1) 10.19 Warrant Agreement, dated November 8, 1995, among Registrant and Comdisco, Inc.
(1) 10.20 Warrant Agreement, dated February 14, 1996, among Registrant and Comdisco, Inc.
(1) 10.21 Warrant to Purchase Stock, dated June 4, 1996, among Registrant and Silicon Valley Bank.
(1) 10.22 Registration Rights Agreement, dated June 4, 1996, among Registrant and Silicon Valley Bank.
(1) 10.23 Antidilution Agreement, dated June 4, 1996, among Registrant and Silicon Valley Bank
(1) 10.24 Master Purchase Terms and Conditions, dated February 27, 1997, as amended March 27, 1997, among
Registrant and Royal Bank of Canada Europe Limited.
(1) 10.25 Form of Warrant to Purchase Shares of Common Stock, dated December 23, 1994
among Registrant and certain investors.
(1) 10.26 Form of Warrant to Purchase Shares of Common Stock, dated May 30, 1996, among
Registrant and certain investors.
(1) 10.27 Form of Warrant to Purchase Shares of Series E preferred stock, dated January 23, 1997, among
Registrant and certain investors.
(1) 10.28 Form of Warrant to Purchase Shares of Series E preferred stock, dated May 19, 1997, among Registrant
and certain investors.
(1) 10.29 Senior Secured Convertible Debenture Purchase Agreement, dated September 23, 1997, among Registrant
and London Pacific Life & Annuity Company.
(1) 10.30 Senior Secured Convertible Debenture, dated September 23, 1997, among Registrant
</TABLE>
50
<PAGE> 53
<TABLE>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
------- ------- -----------
<S> <C> <C>
and London Pacific Life & Annuity Company.
(1) 10.31 Security Agreement, dated September 23, 1997, among Registrant and London Pacific Life & Annuity
Company.
(1) 10.32 Standard Office Lease -- Gross, dated March 5, 1992, as last amended September 15, 1998, among
Registrant, The French Company and certain individuals.
(1) 10.33 Value Added Reseller License Agreement, dated September 24, 1992, as last amended March 31, 1995,
among Registrant and Informix Software, Inc.
+ 10.34 Amendments No. 5 and 6 to Value Added Reseller License Agreement, dated September 24, 1992, as last
amended March 31, 1995, among Registrant and Informix Software, Inc.
(1) 10.35 Warrant Agreement, dated May 20, 1997, among Registrant and Comdisco, Inc.
(1) 10.36 Warrant Agreement, dated July 22, 1997, among Registrant and Comdisco, Inc.
(1) 10.37 Warrant Agreement, dated December 10, 1997, among Registrant and Comdisco, Inc.
(1) 10.38 Warrant Agreement, dated February 20, 1998, among Registrant and Comdisco, Inc.
(1) 10.39 Master Lease Agreement, dated April 30, 1999, among Registrant and Transamerica Business Credit
Corporation.
(1) 10.40 Stock Subscription Warrant, dated April 30, 1999, among Registrant and TBCC Funding Trust I.
(1) 10.41 Stock Subscription Warrant, dated April 30, 1999, among Registrant and Priority Capital Resources.
(1) 10.42 Loan Agreement, dated April 22, 1999, among Registrant and Silicon Valley Bank.
(1) 10.43 Contribution Agreement, dated April 22, 1999, among Registrant and certain investors.
(1) 10.44 Form of Warrant to Purchase Shares of Common Stock, dated April 22, 1999, among Registrant and certain
investors.
(2) 10.45 Stock Exchange Agreement between the Registrant and U.S. Bancorp Piper Jaffray Inc.
(3) 10.46 Pagoda Corporation 1998 Stock Incentive Plan
(3) 10.47 Form of Incentive Stock Option Agreement under the 1998 Stock Incentive Plan
(1) 21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney. Reference is made to page 49.
27.1 Financial Data Schedule.
</TABLE>
- -----------
* Management contract or compensatory plan, contract or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Confidential Treatment Requested under the Securities Exchange Act of 1934
and Rule 24b-2 thereunder.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-76893) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
August 31, 1999 or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-31360) or amendments thereto and incorporated herein by reference.
(4) Certain confidential portions deleted pursuant to an Order Granting
Application Under Securities Act of 1933 and Rule 406 Thereunder Respecting
Confidential Treatment.
51
<PAGE> 1
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2
EXHIBIT 10.34
AMENDMENT #6
This Amendment #6 ("Amendment #6) to the Value-Added Reseller License
Agreement effective September 24, 1992, between Informix Software, Inc.
("Informix") and Continuus Software, previously known as Caseware, Inc.
("Licensee"), as amended by Amendment #1 effective September 24, 1992, Amendment
#2 effective March 5, 1993, Amendment #3 effective August 26, 1993, Amendment #4
effective August 2, 1994, and Amendment #5 effective January 31, 1995
(collectively, the "Agreement"), each of them having respective principal places
of business as set forth in the signature block below, is made as of the
Amendment #6 Effective Date hereinafter set forth.
This Amendment #6 is made with reference to Section 8.5 of the Agreement
which provides that modifications of any of the provisions of the Agreement are
binding provided they are contained in a writing signed by a duly authorized
representative of Informix and Licensee which expressly refers to the Agreement.
When signed below by Informix and Licensee, this Amendment #6 shall constitute
such a writing. All unmodified and remaining terms and conditions of the
Agreement shall remain in full force and effect.
WHEREAS, Informix and Licensee desire to amend the Agreement, as more
fully described below.
NOW THEREFORE, in consideration of the mutual promises and obligations
herein contained, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
1. This Agreement is hereby amended by adding Exhibit F attached hereto.
2. This Amendment #6 shall be effective as of the date set forth in the
signature block below (Amendment #6 Effective Date).
3. In the event of a conflict between the terms and conditions of the
Agreement, inclusive of Amendment #1, Amendment #2, Amendment #3,
Amendment #4 and Amendment #5, and the terms and conditions of this
Amendment #6, the terms and conditions of this Amendment #6 shall
prevail.
LICENSEE: INFORMIX:
CONTINUUS SOFTWARE INFORMIX SOFTWARE, INC.
108 Pacifica 4100 Bohannon Drive
Irvine, California 92618 Menlo Park, California 94025
Attn: David McCann, VP & GM Attn.: General Counsel
Phone: (949) 453-2200 Phone: (650) 926-6300
/s/ David McCann /s/ Scott Harlan
- ---------------------------------- -----------------------------------------
Signature Signature
David McCann Scott Harlan
- ---------------------------------- -----------------------------------------
Printed Name/Title Printed Name/Title
- ---------------------------------- -----------------------------------------
Date 12/21/1999 Date 12/23/1999
1.
<PAGE> 2
Order Agreement #: 6458-06
EXHIBIT F
MAINTENANCE ORDER
This Maintenance Order ("Order") incorporates the Informix maintenance
program(s) specified below. There shall be no force or effect to any different
or additional terms of any related purchase order, confirmation or similar form
even if signed by the parties after the date hereof. Each party's acceptance of
this Order (as indicated by execution hereof) was and is limited to and
expressly conditional upon the other's acceptance of the terms contained in the
Order to the exclusion of other terms. After execution of this Order, Licensee
will return this Order and a purchase order to Informix to the attention of
Maintenance Support at 4100 Bohannon Drive, Menlo Park, California 94025.
By signing below, each party agrees to be bound by all the terms and conditions
of this Order. Each individual signing this on behalf of an identified party
below represents that he or she has the authority and power to execute this
Order on behalf of the party so identified.
LICENSEE INFORMATION:
Client Name: Continuus Software Corporation
Client Contact:
Address: __108 Pacifica_______________________
Address: __Irvine, CA 92618___________________
Address: _____________________________________
Phone: _____949-453-2200______________________
Fax: _______949-453-2276______________________
INSTALLED AT:
Client Name: ____Various Sites._______________
Client Contact: ______________________________
Address: _____________________________________
Address: _____________________________________
Address: _____________________________________
Phone: _______________________________________
Fax: _________________________________________
BILL TO:
Client Name: Continuus Software Corporation
Client Contact:
Address: __108 Pacifica_______________________
Address: __Irvine, CA 92618___________________
Address: _____________________________________
Phone: _____949-453-2200______________________
Fax: _______949-453-2276______________________
<TABLE>
<CAPTION>
Part Hardware Maint. # of # of Maintenance Unit Extended
No. Software Description Platform Type CPUs Users Term Price Qty Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Informix OnLine Dynamic Server versions: DEC/ALPHA, HP/UX, Other See Attch. A 6/15/1999- $[*****]
5.02.UC6, 5.02.UC7, 5.03.UC1, 5.03.UC2, IBM/AIX, SGI/IRIX, 6/15/2000
5.05.UCI, 5.05 UCIP1, 5.05.UC2, 5.05.UC4, SOLARIS, SUN/OS
5.05.UC4, 5.06.UC1, 5.02.UC6X1 (collectively,
"Covered Products")
</TABLE>
TOTAL BEFORE TAXES__[*****]_____________________________________________________
SALES TAX __%_______[*****]_____________________________________________________
Total Order [******]
________________________________________________________________________________
Terms: Net thirty (30) days from the Amendment #6 Effective Date.
This Order may be renewed for one twelve month period for $[******] usd before
tax.
Continuus Software
- --------------------------------------------
Name of Licensee
/s/ David McCannn
- --------------------------------------------
Signature of Authorized Individual
David McCann
- --------------------------------------------
Name (Please Print)
VP & GM Americas 12/21/1999
- ---------------------------------------------
Title Date
Informix Software, Inc.
/s/ Scott Harlan
- ---------------------------------------------
Signature of Authorized Individual
Scott Harlan
- --------------------------------------------
Name (Please Print)
12/23/1999
- ---------------------------------------------
Title Date
PROGRAM DESCRIPTION(S):
___ OpenLine ____ Assurance ____ 24x7
___ Enterprise ____ Regency ____x_Other See Attachment A
PURCHASING INFORMATION:
Sales Rep: __________________________________
Support Rep: ________________________________
Order Date: _________________________________
Purchase Order #_____________________________
Sales & Use Tax Rate: ______________________ (if applicable)
Quote Num/Expiration: _______________________
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2.
<PAGE> 3
ATTACHMENT A
TO
EXHIBIT F
(NON-STANDARD SUPPORT)
The terms and conditions of the non-standard support to be provided on the
Covered Products follow.
1. DEFINITIONS.
"PRODUCT PROBLEMS" means a Covered Product, which is not functioning according
to the specifications in the user manual.
"PROBLEM DIAGNOSIS" means INFORMIX's investigation of Product Problems reported
by Covered Client Developers. INFORMIX requires detailed Product Problem
descriptions from Covered Client Developers. Product Problem resolution may be,
but is not limited to, a description of the Covered Products functional
operation, suggested alternative uses of the Covered Products, a temporary
method of circumventing the Product Problem, or a recommendation of the
installation of a patch. When requested to resolve a Product Problem, INFORMIX
may require access to your computer system via modem and telephone lines.
"ROOT CAUSE ANALYSIS" is defined as continued research beyond diagnostic work to
identify the exact cause of the problem the customer has encountered. In the
context of a down system, Informix would perform the work necessary to return
the system to operational status. Informix would not be required to ascertain
the reason the system became inoperable.
2. RESPONSIBILITIES OF INFORMIX.
TELEPHONE SUPPORT. INFORMIX will provide telephone support for up to: (i) ten
(10) Client developers who are located in Client's Irvine, CA office, (ii) up to
six (6) Client developers who are located in Client's Dublin, Ireland office,
and (iii) one (1) Client developer who is located in Client's Australia office
(collectively "Covered Client Developers"). Telephone support shall consist of
the Covered Client Developers access to Informix's technical support engineers
to assist Client on down-systems recovery and Problem Diagnosis, with Informix
providing reasonable efforts toward providing workarounds to resolve such
issues. At no time will Informix be required to provide Root-Cause analysis in
support of Client's use of the Covered Products.
PATCHES. In the event that Client requests INFORMIX to provide a patch to
correct a Product Problem in the Covered Products, Client must provide the
hardware and software operating environment to INFORMIX in addition to paying a
fee of $[******] per patch.
3. LIMITATIONS OF COVERED PRODUCT SUPPORT.
INFORMIX has no obligation to provide support services for:
A. Altered or modified products;
B. Derivative works;
C. Third party software or application being used in conjunction with the
products;
D. Product Problems which arise as a result of your negligence or fault, or from
malfunctions of your computer or its operating system;
E. Product Problems that result from changes to your operating environment which
make it incompatible with the operating environment for the products when they
were originally licensed. This could include, but is not limited to, additions
or changes to hardware, operating system, compilers, or co-resident software.
4. GENERAL
EXTRAORDINARY CIRCUMSTANCES. INFORMIX shall not be responsible for failure to
fulfill, or delay in fulfilling its obligations under this Attachment A due to
causes beyond its control.
LIMITATION OF LIABILITY. INFORMIX's liability to you or any other third party,
for a claim of any kind arising as a result of, or related to, any Covered
Product or service provided under this Attachment A, whether in contract, in
tort (including negligence or strict liability), under any warranty, or
otherwise, shall be limited to monetary damages, and the aggregate amount of
such damages for all claims relating to any particular Covered Product or
service shall in no event exceed the amount paid to Informix under this program
for the Covered Product or service which gave rise to the claim. Under no
circumstances shall Informix be liable to you or any third party for indirect,
special or consequential damages (including lost profits), even if INFORMIX has
been advised of the possibility of such damages.
GOVERNING LAW. This support is governed by and interpreted in accordance with
the laws of the State of California without regard to its conflict of law
provisions.
ACKNOWLEDGMENT. BY YOUR PAYMENT FOR THE SERVICES TO BE PROVIDED UNDER THIS
SUPPORT PROGRAM, YOU ACKNOWLEDGE YOU HAVE READ AND UNDERSTAND THE TERMS AND
CONDITIONS OF THIS PROGRAM AND AGREE TO BE BOUND BY THEM.
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2.
<PAGE> 4
AMENDMENT #7
This Amendment #7 ("Amendment #7) to the Value-Added Reseller License
Agreement effective September 24, 1992, between Informix Software, Inc.
("Informix") and Continuus Software Corporation, previously known as Caseware,
Inc. ("Licensee"), as amended by Amendment #1 effective September 24, 1992,
Amendment #2 effective March 5, 1993, Amendment #3 effective August 26, 1993,
Amendment #4 effective August 2, 1994, Amendment #5 effective January 31, 1995,
and Amendment #6 effective January 30, 2000 (collectively, the "Agreement"),
each of them having respective principal places of business as set forth in the
signature block below, is made as of the Amendment #7 Effective Date hereinafter
set forth.
This Amendment #7 is made with reference to Section 8.5 of the Agreement
which provides that modifications of any of the provisions of the Agreement are
binding provided they are contained in a writing signed by a duly authorized
representative of Informix and Licensee which expressly refers to the Agreement.
When signed below by Informix and Licensee, this Amendment #6 shall constitute
such a writing. All unmodified and remaining terms and conditions of the
Agreement shall remain in full force and effect.
WHEREAS, Informix and Licensee desire to amend the Agreement, as more
fully described below.
NOW THEREFORE, in consideration of the mutual promises and obligations
herein contained, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
1. Third sentence of Section 4.2 of the Agreement is hereby deleted in its
entirety and restated as follows:
"Within net thirty (30) days of the end of every calendar quarter,
Licensee shall deliver to Informix the Copy Records applicable to the
previous quarter accompanied by any payment due to Informix relating to
such Records."
2. Exhibit A of the Agreement is hereby amended by adding the following
Section 1.3:
1.3 Additional Authorized Products: Informix hereby grants to
Licensee, subject to Section 1.1 of the Agreement, the right to
acquire licenses of the following Informix Products which are to
be used only on the platforms within the Unix and NT operating
systems supported by Informix (the "Amendment #7 Products"):
- - Informix-OnLine 5.1
- - Informix-SE 7.x
- - Informix-Dynamic Server 7.2
- - Informix-Dynamic Server 7.3
- - Informix-Dynamic Server.2000 9.2
- - Client SDK 2.x
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2.
<PAGE> 5
3. This Agreement is hereby amended by adding the following Amendment #7
Schedule:
AMENDMENT #7 SCHEDULE
1. Prepayment. (a)Upon the Amendment #7 Effective Date, Licensee
shall pay to Informix the irrevocable, nonrefundable amount of
$[*******] as a prepayment of Licensee's Royalty Payments as
defined herein ("Prepayment") which Informix shall apply to
license fees for the Amendment #7 Products and Informix-Assurance
fees for such Amendment #7 Products.
(b) Royalty Payments due to Informix, as defined herein, will be
deducted from the Prepayment until the exhaustion of the
Prepayment. Notwithstanding the foregoing, in the event that
there are still funds remaining in the Prepayment upon the second
anniversary of the Amendment #7 Effective Date, Licensee shall
provide to Informix a written waiver of its rights to the
remaining balance of the Prepayment. Upon the second anniversary
of the Amendment #7 Effective Date, the Prepayment shall be
deemed fully exhausted, regardless of any remaining balance in
the Prepayment.
(c) Upon the exhaustion of the Prepayment, Licensee shall pay to
Informix any and all Royalty Payments due to Informix, as defined
herein and subject to Section 4.2 of the Agreement.
2. Ongoing Maintenance.
(a) In addition to any Royalty Payments paid or due, upon the
first anniversary of the Amendment #7 Effective Date, Licensee
shall pay [**] of the total Royalty Payments from the previous
[**] months as Informix-Assurance fees for the Amendment #7
Products for a [**] month service period commencing on the first
anniversary of the Amendment #7 Effective Date.
(b) In addition to any Royalty Payments paid or due, upon the
second anniversary of the Amendment #7 Effective Date, Licensee
shall pay [**]of the total Royalty Payments from the previous
[**] months as Informix-Assurance fees for the Amendment #7
Products for a [**] month service period commencing on the second
anniversary of the Amendment #7 Effective Date.
3. Informix-OpenLine Option. During the term of this Amendment #7,
Licensee can purchase Informix-OpenLine for the Amendment #7
Products at the service fee for Informix-OpenLine set forth in
the then current Price List less a discount of [**]. Informix
agrees to grant to Licensee licenses of the development versions
of the Amendment #7 Products to be used solely for Licensee's
internal development purposes at no additional charge, provided
Licensee purchases Informix-OpenLine for such Amendment #7
Products.
4. Definitions.
"Informix-Assurance" means the Informix maintenance program which
offers new releases (other than those designated as New Products)
for certain Informix Products during a [**] month or specified
service period for an annual fee.
"Informix-OpenLine" means the Informix support program that
provides telephone support during Informix's normal business
hours and new releases for certain Informix Products during a
[**] month or specified service period for an annual fee.
Licensee shall designate up to (i) ten (10) contacts who are
located in Licensee's Irvine, CA office, (ii) up to six (6)
contacts who are located in Licensee's Dublin, Ireland office,
and (iii) one (1) contact who is located in Licensee's Australia
office within Licensee's organization to be the sole contacts
with Informix for provision of Informix-OpenLine. In addition,
Licensee shall provide first level support from its development
license site and manufacture, distribute and install releases of
the Products for which such services are being provided.
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2.
<PAGE> 6
"Royalty Payments" means [**] of Licensee's total license revenue
derived from any and all of Licensee's products which embed
Informix Product(s) and any and all updates or upgrades to a
newer version of Licensee's products that embed Informix
Product(s).
5. This Amendment #7 shall be effective as of January 31, 2000
(Amendment #7 Effective Date).
6. The first term of this Amendment #7 shall be [********] from the
Amendment #7 Effective Date and then shall be renewed
automatically for [************************] unless terminated in
accordance with Section 7 of the Agreement.
7. In the event of a conflict between the terms and conditions of
the Agreement, inclusive of Amendment #1, Amendment #2, Amendment
#3, Amendment #4, Amendment #5, Amendment #6 and the terms and
conditions of this Amendment #7, the terms and conditions of this
Amendment #7 shall prevail.
LICENSEE: INFORMIX:
CONTINUUS SOFTWARE CORPORATION INFORMIX SOFTWARE, INC.
108 Pacifica 4100 Bohannon Drive
Irvine, California 92618 Menlo Park, California 94025
Attn: David McCann, VP & GM Attn.: General Counsel
Phone: (949) 453-2200 Phone: (650) 926-6300
/s/ David McCann /s/ Scott Harlan
- ---------------------------------- ------------------------------------------
Signature Signature
David McCann Scott Harlan
- ---------------------------------- ------------------------------------------
Printed Name/Title Printed Name/Title
12/21/99 12/23/99
- ---------------------------------- ------------------------------------------
Date Date
*** Text Omitted and Filed Separately. Confidential Treatment
Requested Under 17 C.F.R. Sections 200.80, 200.83 and 240.24b-2.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-85839 and No. 333-31360 of Continuus Software Corporation on Form S-8 of our
report dated January 26, 2000, except for Note 19 as to which the date is
February 10, 2000, appearing in this Annual Report on Form 10-K of Continuus
Software Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 2000
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