<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________TO _______________.
COMMISSION FILE NUMBER 000-26797
--------------------------------------------------------------------------------
CONTINUUS SOFTWARE
CORPORATION
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
DELAWARE 43-1070080
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
</TABLE>
9401 Jeronimo Road
Irvine, California 92618
(Address of principal executive
offices)
(949) 830-8022
(Registrant's phone number,
including area code)
---------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT
(1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND(2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, was 10,608,492 as of June 30, 2000.
================================================================================
<PAGE> 2
CONTINUUS SOFTWARE CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited) and December
31, 1999...................................................................... 3
Consolidated Statements of Operations and Comprehensive Operations
for the Three and Six Months Ended June 30, 2000 and 1999 (unaudited)...... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (unaudited)......................................... 5
Notes to Consolidated Financial Statements (unaudited)........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk...................... 21
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......................... 21
Item 6. Exhibits and Reports on Form 8-K............................................ 22
Signatures ................................................................. 23
</TABLE>
2.
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 9,837 $ 11,570
Investments in securities, available for sale .................................. 802 9,125
Accounts receivable, net of allowance for doubtful accounts of $447 (2000)
and $430 (1999) .............................................................. 8,029 8,940
Prepaid expenses and other current assets ...................................... 1,315 1,321
-------- --------
Total current assets ......................................................... 19,983 30,956
Property, net .................................................................. 5,812 2,154
Intangible assets, net ......................................................... 10,264 107
Other assets ................................................................... 3,317 757
-------- --------
Total assets ................................................................. $ 39,376 $ 33,974
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 3,783 $ 1,662
Accrued liabilities ............................................................ 4,873 5,554
Deferred revenue ............................................................... 5,189 4,961
Current portion of capital lease obligations ................................... 273 488
-------- --------
Total current liabilities ................................................... 14,118 12,665
Capital lease obligations, net of current portion .............................. 156 261
Convertible note payable ....................................................... 6,000 6,000
Stockholders' equity :
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares
issued and outstanding ....................................................... -- --
Common stock $.001 par value; 30,000,000 shares authorized, 10,608,492 and
9,504,856 shares issued and outstanding at June 30, 2000 and December 31,
1999, respectively............................................................ 11 10
Additional paid-in capital...................................................... 48,884 38,137
Warrants to purchase common stock .............................................. 67 69
Accumulated other comprehensive loss ........................................... -- (5)
Accumulated deficit ............................................................ (29,860) (23,163)
-------- --------
Total stockholders' equity .................................................. 19,102 15,048
-------- --------
Total liabilities and stockholders' equity .................................. $ 39,376 $ 33,974
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3.
<PAGE> 4
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
License fees ........................................ $ 4,539 $ 4,827 $ 9,990 $ 8,999
Services ............................................ 4,492 3,985 8,924 8,052
-------- -------- -------- --------
Total revenues ............................... 9,031 8,812 18,914 17,051
Cost of revenues:
License fees ........................................ 271 162 576 318
Services ............................................ 3,029 2,201 5,646 4,146
Amortization of developed technology ................ 261 -- 347 --
-------- -------- -------- --------
Total cost of revenues ....................... 3,561 2,363 6,569 4,464
======== ======== ======== ========
Gross profit .......................................... 5,470 6,449 12,345 12,587
Operating expenses:
Sales and marketing ................................. 5,955 4,139 11,368 8,237
Research and development ............................ 2,419 1,335 4,361 2,568
General and administrative .......................... 1,202 814 2,413 1,518
Other compensation costs, goodwill
and other amortization ........................... 498 57 710 98
-------- -------- -------- --------
Total operating expenses ..................... 10,074 6,345 18,852 12,421
-------- -------- -------- --------
Income (loss) from operations ......................... (4,604) 104 (6,507) 166
Other expense, net .................................... (79) (283) (143) (579)
-------- -------- -------- --------
Net loss before income tax provision .................. (4,683) (179) (6,650) (413)
Income tax provision .................................. 22 2 47 7
-------- -------- -------- --------
Net loss .............................................. $ (4,705) $ (181) $ (6,697) $ (420)
======== ======== ======== ========
Other comprehensive income - Net
unrealized gain on available for sale securities .... 1 -- 5 --
-------- -------- -------- --------
Comprehensive loss .................................... $ (4,704) $ (181) $ (6,692) $ (420)
======== ======== ======== ========
Net loss per share - basic and diluted ................ $ (0.44) $ (0.11) $ (0.65) $ (0.25)
======== ======== ======== ========
Weighted average common shares -
basic and diluted ................................... 10,587 1,681 10,348 1,670
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4.
<PAGE> 5
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
Cash flows from operating activities: (unaudited)
<S> <C> <C>
Net loss .......................................................................... $ (6,697) $ (420)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provision for doubtful accounts ................................................. 62 154
Depreciation and amortization ................................................... 1,779 568
Loss on disposition of property ................................................. 6 2
Compensation expense related to stock option grants ............................. 113 98
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable ........................................................... 718 (1,792)
Prepaid expenses and other assets ............................................. (520) 42
Accounts payable .............................................................. 2,137 345
Accrued liabilities ........................................................... (848) 497
Deferred revenue .............................................................. 280 1,188
Net cash provided by (used in) operating activities ......................... (2,970) 682
Cash flows from investing activities:
Purchases of property ............................................................. (4,486) (77)
Purchase of investment securities ................................................. (1,580) --
Purchase of long-term investment .................................................. (2,000) --
Proceeds from disposition of property ............................................. 14 1
Proceeds from sale of investment securities ....................................... 9,909 --
(973) --
-------- --------
Cash paid for acquisition, net of cash acquired
Net cash provided by (used in) investing activities ......................... 884 (76)
Cash flows from financing activities:
Principal payments on obligations under capital leases ............................ (335) (441)
Proceeds from issuance of common stock, net ....................................... 681 94
-------- --------
Net cash provided by (used in) financing activities ......................... 346 (347)
Effect of exchange rate changes on cash balances .................................. 7 --
-------- --------
Net increase (decrease) in cash and cash equivalents .............................. (1,733) 259
Cash and cash equivalents, beginning of period .................................... 11,570 2,452
-------- --------
Cash and cash equivalents, end of period .......................................... $ 9,837 $ 2,711
======== ========
Supplementary disclosures of cash flow information
Cash paid during the year for:
Interest ...................................................................... $ 415 $ 421
======== ========
Income taxes .................................................................. $ 110 $ 7
======== ========
Noncash items:
Acquisition of property through capital lease ..................................... $-- $ 300
======== ========
Issuance of warrants to purchase common stock ..................................... $-- $ 65
======== ========
Net exercise of warrants to purchase common stock ................................. $ 2 $--
======== ========
Unrealized gain on investments in securities ...................................... $ 5 $--
======== ========
</TABLE>
See Note 4 for details of assets acquired and liabilities assumed in purchase
transaction.
The accompanying notes are an integral part of these financial statements.
5.
<PAGE> 6
CONTINUUS SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by
Continuus Software Corporation (the "Company") without audit (except for balance
sheet information as of December 31, 1999) in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The accompanying consolidated financial
statements do not include certain footnotes and financial presentations normally
required under generally accepted accounting principles and, therefore, should
be read in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. The accounting policies followed by the Company are set forth in Note
1 of the Notes to those Consolidated Financial Statements.
The results of operations for the interim periods ended June 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2000. For further information on additional factors that may
affect future results, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under Item 2 and the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
2. Net Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for the period.
3. Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective for the fourth quarter of fiscal year 2000. The Company is currently
evaluating the impact SAB 101 will have on its financial statements.
6.
<PAGE> 7
4. Pagoda Acquisition
On February 10, 2000, the Company completed the purchase of all the outstanding
common shares and options to purchase common shares of Pagoda Corporation in
exchange for approximately 820,000 shares of the Company's common stock valued
at $9,951 and $1,000 in cash, net of cash acquired of $27. The acquisition was
accounted for using the purchase method of accounting and the purchase price of
$11,072, which included $121 of direct acquisition costs, was allocated as
follows:
<TABLE>
<S> <C>
Current assets ............... $ 124
Notes receivable ............. 187
Property ..................... 26
Goodwill ..................... 8,720
Developed technology ......... 2,083
Other intangibles ............ 175
Liabilities assumed .......... (243)
--------
Total purchase price .... $ 11,072
========
</TABLE>
5. Segment Information (in thousands)
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance.
The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's eAsset management products. The services segment provides after-sale
support for software products and fee-based training and consulting services
related to the Company's products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of sales and gross profit.
7.
<PAGE> 8
Operating segment data for the three months and six months ended June 30, 2000
and 1999 was as follows:
<TABLE>
<CAPTION>
Software
Licenses Services Total
-------- -------- -------
<S> <C> <C> <C>
Three months ended June 30, 2000
Revenues ....................... $ 4,500 $ 4,500 $ 9,000
Cost of revenues ............... 500(1) 3,000 3,500
------- ------- -------
Gross profit ................ $ 4,000 $ 1,500 $ 5,500
======= ======= =======
Three months ended June 30, 1999
Revenues ....................... $ 4,800 $ 4,000 $ 8,800
Cost of revenues ............... 200 2,200 2,400
------- ------- -------
Gross profit ............... $ 4,600 $ 1,800 $ 6,400
======= ======= =======
Six months ended June 30, 2000
Revenues ....................... $10,000 $ 8,900 $18,900
Cost of revenues ............... 900(1) 5,700 6,600
------- ------- -------
Gross profit ................ $ 9,100 $ 3,200 $12,300
======= ======= =======
Six months ended June 30, 1999
Revenues ....................... $ 9,000 $ 8,000 $17,000
Cost of revenues ............... 300 4,100 4,400
------- ------- -------
Gross profit ................ $ 8,700 $ 3,900 $12,600
======= ======= =======
</TABLE>
(1) Includes amortization of developed technology of $261 and $347 for the three
and six months ended June 30, 2000, respectively, which is included in total
cost of revenue in the accompanying Consolidated Statements of Operations and
Comprehensive Operations.
Revenues are attributed to geographic areas based on the location of the entity
to which the products or services were sold. United States information is
derived from U.S. operations and includes revenues from sales to Canadian
entities for the three and six months ended June 30, 2000 of $498 and $631,
respectively, and for the three and six months ended June 30, 1999 of $800 and
$1,500, respectively. No single country had a material amount of long-lived
assets except for such assets in the United Kingdom of $477 and $547 for the
periods ended June 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
United States International Eliminations Total
------------- ------------- ------------ -----
<S> <C> <C> <C> <C>
Three months ended June 30, 2000
Revenues ........................... $ 5,200 $ 4,900 $ (1,100) $ 9,000
Gross profit ....................... 3,000 2,500 5,500
Long-lived assets .................. 19,600 1,200 (1,400) 19,400
Three months ended June 30, 1999
Revenues ........................... 6,000 4,200 (1,400) 8,800
Gross profit ....................... 4,800 1,600 6,400
Long-lived assets .................. 1,200 1,000 2,200
Six months ended June 30, 2000
Revenues ........................... 11,000 10,200 (2,300) 18,900
Gross profit ....................... 7,000 5,300 12,300
Long-lived assets .................. 19,600 1,200 (1,400) 19,400
Six months ended June 30, 1999
Revenues ........................... 11,200 8,500 (2,700) 17,000
Gross profit ....................... 9,100 3,500 12,600
Long-lived assets .................. 1,200 1,000 2,200
</TABLE>
8.
<PAGE> 9
During the three and six months ended June 30, 2000 and 1999, no single customer
accounted for 10% or more of total revenue.
6. Stock Option Plans
The following is a summary of stock option transactions under the Company's
stock option plans, including the Employee Stock Option Plan and 1997 Equity
Incentive Plan, for the three months ended June 30, 2000:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
---------- --------------
<S> <C> <C>
Outstanding, March 31, 2000 ............ 3,095,634 $ 3.62
Granted ................................ 89,750 5.52
Exercised .............................. (39,243) 3.48
Canceled ............................... (122,387) 3.65
---------- ----------
Balance, June 30, 2000 ................. 3,023,754 3.70
==========
Options exercisable at June 30, 2000 ... 1,329,724
==========
</TABLE>
7. Significant Agreement
On February 14, 2000, the Company signed a five year lease agreement for its new
headquarters. The total value to be paid over the life of the lease is $4,424.
Of this amount, $460 will be paid in 2000, $813 in 2001, $930 in 2002, $940 in
2003, $961 in 2004 and $320 in 2005.
On May 22, 2000, the Company invested $2,000 in Project 1918, Inc., a new
start-up company. In return for this investment, the Company received 2,000,000
shares of Series A-1 Preferred Stock.
8. Subsequent Event
On July 28, 2000, the Compensation Committee of the Company approved the grant
of stock options and restricted stock pursuant to the Company's 1997 Equity
Incentive Plan up to an aggregate of 850,000 shares of common stock to employees
of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. These forward-looking statements include, but
are not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained that are not historical facts. When
used in this Report, the words "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions are generally intended
to identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including to differ materially from those expressed
or implied by these forward-looking statements, including the factors discussed
under "Risk Factors."
OVERVIEW
We provide software products and services for eAsset management, an emerging
market segment that enables organizations to more effectively develop, enhance,
deploy and manage their Internet and enterprise software systems. We originally
incorporated in 1984 as a supplier of application software for the automotive
industry. In 1987, we sold our application software business to focus on the
development of a software change management product. In subsequent years, we
expanded our focus to encompass a
9.
<PAGE> 10
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. 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. 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 revenues include consulting, training and maintenance services. We
recognize consulting and training service revenues when earned and maintenance
revenues ratably over the term of the applicable 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 42.4% and 45.0% for
the three months ended June 30, 2000 and 1999, respectively.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Software Licenses. Software license revenues were $4.5 million and $10.0 million
for the three and six months ended June 30, 2000, respectively, and $4.8 million
and $9.0 million for the comparable periods in 1999. This represents a decrease
of 6.0% and an increase of 11.0% for the three and six month periods,
respectively. Software license revenues in North America were $2.4 million and
$5.6 million for the three and six months ended June 30, 2000, respectively, and
$2.8 and $5.0 million for the comparable periods in 1999. This represents a
decrease of 14.0% and an increase of 12.6% for the three and six months periods,
respectively. Software license revenues from international operations were $2.1
million and $4.4 million for the three and six months ended June 30, 2000,
respectively and $2.0 million and $4.0 million for the comparable periods in
1999. This represents increases of 5.5% and 9.0% for the three and six month
periods, respectively. The decrease in North American revenue for the three
months ended June 30, 2000 was due to a trend of downward pressure on deal sizes
and longer technical evaluations, particularly in the dot.com and e-business
markets. However, the increases in both North American and
10.
<PAGE> 11
international sales, for the six month periods, were a result of increased sales
volume primarily due to increased sales to internet-related customers.
Services. Service revenues were $4.5 million and $8.9 million for the three and
six months ended June 30, 2000, respectively, and $4.0 million and $8.1 million
for the comparable periods in 1999. This represents increases of 12.7% and 10.8%
for the three and six month periods, respectively. The increases were primarily
due to increased orders for maintenance services from new and existing
customers.
Cost of Software Licenses. The cost of software license revenues includes both
the royalty costs associated with third-party software, which is embedded in our
products, and the costs associated with product documentation, packaging and
shipping. The cost of software license revenues was $271,000 and $576,000 for
the three and six months ended June 30, 2000, respectively and $162,000 and
$318,000 for the comparable periods in 1999. This represents increases of 67.3%
and 81.1% for the three and six month periods, respectively. The increases were
primarily due to higher royalty costs associated with third party software.
Gross margins on software licenses were 94.0% and 94.2% for the three and six
months ended June 30, 2000, respectively, and 96.6% and 96.5% for the comparable
periods in 1999.
Cost of Services. The cost of service revenues consists primarily of salaries
and related expenses for consultants and technical support personnel. The cost
of service revenues was $3.0 million and $5.6 million for the three and six
months ended June 30, 2000, respectively, and $2.2 million and $4.1 million for
the comparable periods in 1999. This represents increases of 37.6% and 36.2% for
the three and six month periods, respectively. The increases were primarily due
to increases in the size of our professional services organization worldwide.
Gross margins on service revenues were 32.6% and 36.7% for the three and six
months ended June 30, 2000, respectively, and 44.8% and 48.5% for the comparable
periods in 1999. The decrease in gross margins on service revenues was primarily
due to increased utilization of third party consultants as well as decreased
utilization of employees as new employees train to become more productive in
future quarters.
Amortization of Developed Technology. Amortization of developed technology was
$261,000 and $347,000 for the three and six months ended June 30, 2000,
respectively, compared to none for the comparable periods in 1999. The increase
is due entirely to the developed technology purchased as part of the Pagoda
acquisition in February 2000.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses and travel and entertainment and promotional expenses. Sales and
marketing expenses were $6.0 million and $11.4 million for the three and six
months ended June 30, 2000, respectively, and $4.1 million and $8.2 million for
the comparable periods in 1999. This represents increases of 43.9% and 38.0% for
the three and six month periods. The higher sales and marketing expenses for the
three and six months ended June 30, 2000 were due to increased marketing
programs and increases in sales and marketing personnel expenses, including
commissions and compensation, resulting from new hires, a larger sales force and
increased sales. As a percentage of total revenues, sales and marketing expenses
were 65.9% and 60.1% for the three and six months ended June 30, 2000,
respectively, and 47.0% and 48.3% for the comparable periods in 1999..
Research and Development. Research and development expenses consist primarily of
expenses related to software development personnel and other costs associated
with product development. All costs incurred in the research and development of
software products and enhancements to existing software products have been
expensed as incurred. Research and development costs were $2.4 million and $4.4
million for the three and six months ended June 30, 2000, respectively, and $1.3
million and $2.6 million for the comparable periods in 1999. This represents
increases of 81.2% and 69.8% for the three and six month periods, respectively.
The increases were primarily due to staffing increases to support the
development
11.
<PAGE> 12
of new products and the enhancement of existing products. As a percentage of
total revenues, research and development expenses were 26.8% and 23.1% for the
three and six months ended June 30, 2000, respectively, and 15.1% for each of
the comparable periods in 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes and administrative costs,
including legal and accounting fees and bad debts. General and administrative
expenses were $1.2 million and $2.4 for the three and six months ended June 30,
2000, respectively, and $814,000 and $1.5 million for the comparable periods in
1999. This represents increases of 47.7% and 59.0% for the three and six month
periods, respectively. The increases were due to increased personnel expenses,
including salaries, bonuses and payroll taxes resulting from new hires and
increased legal and accounting fees and other costs as a result of being a
public company. As a percentage of revenue, general and administrative expenses
were 13.3% and 12.8% for the three and six months ended June 30, 2000,
respectively, and 9.2% and 8.9% for the comparable periods in 1999.
Other Compensation Costs, Goodwill and Other Amortizations. Other compensation
costs and amortization of goodwill and intangibles was $498,000 and $710,000 for
the three and six months ended June 30, 2000, respectively, and $57,000 and
$98,000 for the comparable periods in 1999. Compensation costs are related to
the grant of options to purchase shares of common stock at exercise prices below
the deemed fair market value of the Company's common stock. These costs were
$57,000 and $113,000 for the three and six months ended June 30, 2000,
respectively, and $57,000 and $98,000 for the comparable periods in 1999.
Goodwill and intangible amortization related to acquisitions was $441,000 and
$597,000 for the three and six months ended June 30, 2000, respectively.
Other Expenses, Net. Other expenses consist primarily of interest income,
interest expense and foreign currency translation losses. Other expenses were
$79,000 and $143,000 for the three and six months ended June 30, 2000,
respectively, and $283,000 and $579,000 for the comparable periods in 1999. The
decreases for the three and six month periods ended June 30, 2000, were 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. As a percentage of
total revenues, other expenses were less than 1 % for the three and six months
ended June 30, 2000, and 3.2% and 3.4% for the comparable periods in 1999.
Income Tax Provision. The income tax provision for the three and six months
ended June 30, 2000 and June 30, 1999, consisted solely of minimum state income
taxes due to our net loss on a year to date basis for the six months ended June
30, 2000 and June 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash and cash equivalents of approximately $9.8
million, a decrease of $1.7 million from December 31, 1999. Investments in
securities were $802,000 at June 30, 2000, down from $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. We also borrowed $6.0 million
through the issuance of a senior secured convertible debenture in 1997. As of
June 30, 2000, we had $429,000 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 used cash of $3.0 million for the six months ended June
30, 2000 and provided cash of $682,000 for the six months ended June 30, 1999.
The increase in cash used by operating activities is primarily due to the
increase in net loss. Net cash provided by investing activities was
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$884,000 for the six months ended June 30, 2000 and net cash used in investing
activities was $76,000 for the six months ended June 30, 1999. Cash paid for the
acquisition of Pagoda Corporation, net of cash acquired, was $973,000 for the
six months ended June 30, 2000. Cash paid for the investment in Project 1918,
Inc. was $2.0 million for the six months ended June 30, 2000. Our financing
activities provided cash of approximately $346,000 in the six months ended June
30, 2000 and used cash of approximately $347,000 for the six months ended June
30, 1999.
Expenditures for property and equipment were $4.5 million for the six months
ended June 30, 2000 and $377,000 for the six months ended June 30, 1999. Of the
property acquired during the six months ended June 30, 2000, $1.6 million was
related to the new facility costs and the remaining was for computer hardware
and software as well as furniture for our new facility. As of June 30, 2000 the
Company had outstanding the $6.0 million senior secured convertible debt.
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.
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.
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
A significant portion of our revenues have been derived from international
sources, with our international customers accounting for approximately 45.5% of
our fiscal 1999 revenues. We regularly pursue new customers in various domestic
and international locations. Changes in the value of the U.S. Dollar versus the
local currency in which our products are sold, along with the economic and
political conditions of such foreign countries, could adversely affect our
business, financial condition and results of operations. In addition, the
weakening of an international customer's local currency and banking market may
negatively impact such customer's ability to meet their payment obligations to
us. Although we currently believe that our international customers have the
ability to meet all of their obligations to us, there can be no assurance that
they will continue to be able to meet such obligations. We regularly monitor the
credit worthiness of our international customers and make credit decisions based
on both prior sales experience with such customers as well as current financial
performance and overall economic conditions. We may decide in the future to
offer certain foreign customers extended payment terms.
13.
<PAGE> 14
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.
WE MAY INCUR FUTURE LOSSES
We may not be able to achieve profitability. We incurred a net loss of $6.7
million for the six months ended June 30, 2000. As of June 30, 2000, we had an
accumulated deficit of $29.9 million. We expect to continue to increase our
sales and marketing, product development and administrative expenses. As a
result, we will need to generate significant additional revenues to achieve
profitability.
Although our revenues have grown in recent quarters, with the exception of the
three months ended June 30, 2000, 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;
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<PAGE> 15
- significant flaws in our software products or incompatibility with
third-party hardware or software products;
- negative publicity or evaluation; or
- obsolescence of the hardware platforms or software environments in which
our systems run.
SINCE OUR FUTURE REVENUES PARTIALLY DEPEND ON OUR NEW INTERNET PRODUCTS, OUR
REVENUES MAY SUFFER IF WE CANNOT SUCCESSFULLY MARKET THESE NEW PRODUCTS
A substantial portion of our revenues in the future may be derived from new
Internet products and related services. A decline in the price of, or demand
for, new Internet products, or our failure to achieve broad market acceptance of
new Internet products, may reduce our revenues.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO ACHIEVE
SIGNIFICANT REVENUE GROWTH
We may not be able to recruit and retain the personnel we need to achieve
significant revenue growth. Our future success depends upon our ability to
recruit, train and retain additional sales and technical support personnel. We
sell our products primarily through our direct sales force and we support our
customers with our internal technical support staff. In the past, we have had
difficulty recruiting and retaining qualified personnel, and we cannot guarantee
that we will not experience similar difficulties in the future. Factors that may
affect our ability to recruit and retain personnel include:
- our ability to effectively manage an expansion of our sales and
technical support personnel and retain this personnel; and
- competition for qualified personnel from larger, more established
companies who have greater financial resources than we do.
In 1996 and 1998, we suffered a material decline in sales growth due to turnover
in our sales force. If we experience turnover in our sales force in the future,
our operating results will suffer. Newly hired sales personnel generally do not
become fully productive until they have worked for at least two quarters.
Because of the time required to recruit new sales personnel and for them to
become fully productive, we cannot quickly and easily expand our sales force in
response to unanticipated events.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND MAY HARM OUR OPERATING RESULTS
The period of time between initial customer contact and an actual sales order
may span six months or more. This long sales cycle increases the risk that we
will not forecast our revenue accurately and adjust our expenditures
accordingly. The longer the sales cycle lasts, the more likely a customer is to
decide not to purchase our products or to scale down its order of our products
for various reasons, including:
- changes in our customers' budgets and purchasing priorities;
- 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.
15.
<PAGE> 16
IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS, OUR
REVENUE WILL SUFFER
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 are experiencing significant competition and expect to
experience increasing levels of competition in the future. Competition has
resulted in price reductions, reduced margins and may result in 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.
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.
16.
<PAGE> 17
THE COSTS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS MAY NEGATIVELY IMPACT OUR
OPERATING MARGINS
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. Consequently, any
gains and losses on the conversion to U.S. dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in our operating results. Although we may utilize some hedging in
the future, we currently do not utilize foreign currency hedging instruments.
Historically foreign currency gains and losses have not been material to our
financial performance. We cannot guarantee that fluctuations in currency rates
will not harm our business, operating results and financial condition in the
future.
FAILURE TO MANAGE OUR GROWING OPERATIONS COULD INCREASE COSTS AND CAUSE DELAYS
IN MEETING OUR BUSINESS OBJECTIVES
We plan to increase business opportunities through an expansion of our
distribution network in the United States and internationally. However, we
cannot guarantee that the efforts and funds directed towards
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<PAGE> 18
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
18.
<PAGE> 19
profits. We also attempt to limit our liability to the contract price or the
replacement cost of the software. However, we cannot guarantee that contractual
limitations of liability would be enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
products, or associated with the professional services we render. Although we
maintain insurance which covers damages arising from the implementation and use
of our products, we are not certain that our insurance would cover or be
sufficient to cover any product liability claims against us. Moreover, we incur
risks of professional and other liability stemming from our training and
consulting services. Any product liability or other claims against us, if
successful and of sufficient magnitude, could harm our profitability and future
sales.
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.
19.
<PAGE> 20
These broad market and industry factors may reduce our stock price, regardless
of our actual operating performance.
WE MAY BE SUBJECT TO LITIGATION DUE TO THE VOLATILITY OF OUR STOCK PRICE
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
volatile companies. Securities class-action litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our profitability.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
If our stockholders sell substantial amounts of our common stock in the public,
the market price of our common stock could fall. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
OUR INVESTMENT IN PROJECT 1918, INC. IS SUBJECT TO A HIGH DEGREE OF RISK
In April 2000, we purchased preferred stock of Project 1918, Inc., a newly
formed B2B e-commerce company, for $2.0 million. Project 1918, Inc. is a very
early stage company, and there is no market for its equity securities. Our
investment in Project 1918, Inc. is subject to all of the attendant risks and
uncertainties associated with investments in such companies. Under applicable
accounting principles, we must review the fair market value of our investment in
connection with the preparation of our own financial statements and account for
any diminution in value of our investment. If we determine that the fair market
value of our investment has declined since the last valuation, we will have to
accrue a loss on such investment equal to the decline in value and reflect such
loss on our statement of operations. Given the nature of Project 1918, Inc. and
the risk associated with it, we could determine that the investment has become
worthless and have to accrue a loss of up to the full amount of the investment,
$2.0 million. There can be no assurance that any loss accrued would not have a
material adverse effect on our operating results
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective for the fourth quarter of fiscal year 2000. The Company is currently
evaluating the impact SAB 101 will have on its financial statements, if any.
20.
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our financial instruments include cash and long-term debt. At June 30, 2000, the
carrying values of our financial instruments approximated their fair values
based on current market prices and our incremental borrowing rate.
We currently do not have any material debt with variable interest rates, so we
do not have interest rate risk from a liability perspective. We do have cash and
cash equivalents and short-term investments. This cash portfolio exposes us to
interest rate risk as short-term investment rates can be volatile. Given the
short-term maturity structure of our investment portfolio, and the high-grade
investment quality of our portfolio, we believe that we are not subject to
principal fluctuations and the effective interest rate of our portfolio tracks
closely to various short-term money market interest rate benchmarks.
We have not invested in derivative financial instruments. We have foreign
currency exposure since we transact business in foreign currencies. However,
foreign currency translation and transaction gains and losses have not been
significant. A significant change in foreign currency values could harm our
financial position and results of operations.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 28, 1999, the Company's Form S-1 registration statement (File
No. 333-76893) was declared effective by the Securities and Exchange Commission.
The registration statement, as amended, covered the offering of 2,523,642 shares
of common stock. The offering commenced on July 29, 1999 and the sale to the
public of 2,523,642 shares of common stock at $8.00 per share was completed on
August 3, 1999 for an aggregate price of approximately $20.2 million. The
registration statement covered an additional 378,546 shares of common stock that
the underwriters had the option to purchase solely to cover over-allotments.
These shares were not purchased and were withdrawn from registration. The
managing underwriters for the offering were U.S. Bancorp Piper Jaffray Inc. and
CIBC World Markets Corp. Expenses incurred through July 29, 1999 in connection
with the issuance and distribution of common stock in the offering included
underwriting discounts, commissions and allowances of approximately $1.41
million and other expenses of approximately $1.36 million. Total offering
expenses of approximately $2.77 million resulted in net offering proceeds to the
Company of approximately $17.4 million. No payments or expenses were paid to
directors, officers or affiliates of the Company or 10% owners of any class of
equity securities of the Company. Of the net offering proceeds, through June 30,
2000, we used approximately $3 million for capital expenditures, $3 million for
sales and marketing activities, and $1 million for product development and
support; the balance remains as working capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 23, 2000. At
the Annual Meeting, the Company's stockholders elected six directors to the
Company's Board of Directors and approved the proposals as more fully described
below.
At the Annual Meeting, 8,932,993 shares out of a total of 10,573,167
shares of Common Stock outstanding at the record date were represented in person
or by proxy.
The proposals considered at the Annual Meeting were voted on as follows:
21.
<PAGE> 22
1. Election of Directors
Proposal to elect six directors to hold office until the 2001 Annual
Meeting of Stockholders or his earlier resignation or removal.
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
John R. Wark 8,889,806 43,187
Fred B. Cox 8,889,445 43,548
Kevin G. Hall 8,889,215 43,778
A. Barry Patmore 8,893,843 39,150
Stewart A. Schuster 8,891,793 41,200
Sol Zechter 8,888,864 44,129
</TABLE>
2. Approve the Company's 1997 Equity Incentive Plan, as Amended.
Proposal to approve the Company's 1997 Equity Incentive Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,000,000 shares. The
proposal was approved by a vote of 5,089,753 shares in favor and 193,945
shares against; 19,541 shares abstained.
3. Appointment of Independent Auditors
Proposal to ratify the selection of Deloitte & Touche, LLP as
independent auditors of the Company for its fiscal year ending December
31, 2000. The proposal was approved by a vote of 8,909,123 shares in
favor and 16,220 shares against; 7,650 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
27.1 Financial Data Schedule
B) REPORTS ON FORM 8-K:
None.
22.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINUUS SOFTWARE CORPORATION
Date: August 14, 2000 By: /s/ Steven L. Johnson
--------------------------------------
Steven L. Johnson
Vice President, Finance, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
23.
