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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1998
REGISTRATION NO. 333-62299
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONCUR TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 91-1608052
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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6222 185TH AVENUE NE
REDMOND, WASHINGTON 98052
(425) 702-8808
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
S. STEVEN SINGH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6222 185TH AVENUE NE
REDMOND, WASHINGTON 98052
(425) 702-8808
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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MATTHEW P. QUILTER, ESQ. THOMAS A. BEVILACQUA, ESQ.
HORACE L. NASH, ESQ. CURTIS L. MO, ESQ.
KRISTINA R. WILKEN, ESQ. PATRICIA MONTALVO TIMM, ESQ.
KEVIN S. CHOU, ESQ. BROBECK, PHLEGER & HARRISON LLP
FENWICK & WEST LLP TWO EMBARCADERO PLACE
TWO PALO ALTO SQUARE 2200 GENG ROAD
PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94303
(650) 494-0600 (650) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 13, 1998
LOGO
SHARES
COMMON STOCK
Of the shares of Common Stock offered hereby, shares
are being sold by Concur Technologies, Inc. ("Concur" or the "Company") and
shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. Prior to the Offering, there has
been no public market for the Common Stock of the Company. See "Underwriting"
for information relating to the method of determining the initial public
offering price. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "CNQR."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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UNDERWRITING
DISCOUNTS AND PROCEEDS TO PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS COMPANY(1) SELLING STOCKHOLDERS
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Per Share.................... $ $ $ $
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Total(2)..................... $ $ $ $
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(1) Before deducting expenses payable by the Company, estimated at $ .
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that the delivery of such shares will be
made through the offices of BancBoston Robertson Stephens Inc., San Francisco,
California, on or about , 1998.
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
THE DATE OF THIS PROSPECTUS IS , 1998
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CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with the Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, by any Selling Stockholder or by any Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any securities other than the registered securities to which it relates,
or an offer to, or the solicitation of, any person in any jurisdiction where
such an offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
time subsequent to the date hereof.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER
OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 6
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 36
Management.................................................. 52
Certain Transactions........................................ 62
Principal and Selling Stockholders.......................... 64
Description of Capital Stock................................ 67
Shares Eligible for Future Sale............................. 70
Underwriting................................................ 72
Legal Matters............................................... 73
Experts..................................................... 73
Additional Information...................................... 74
Index to Financial Statements............................... F-1
</TABLE>
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements examined by its independent
auditors. Quarterly reports containing unaudited consolidated financial
statements for the first three quarters of each fiscal year will be available
upon request.
Concur, Concur Technologies, Xpense Management Solution, XMS, CompanyStore,
Employee Desktop and the Company's logo are trademarks of the Company.
QuickXpense(R) is a registered trademark of the Company. Trade names, service
marks or trademarks of other companies appearing in this Prospectus are the
property of their respective holders. Information contained on the Company's Web
site does not constitute a prospectus or part of this Prospectus.
The Company was incorporated in Washington in August 1993 under the name
Moorea Software Corporation and commenced operations in 1994. The Company
changed its name to Portable Software Corporation in 1994 and to Concur
Technologies, Inc. in 1998, and is expected to be reincorporated in Delaware in
October 1998. Unless the context otherwise requires, references in this
Prospectus to "Concur," "Concur Technologies" and the "Company" refer to Concur
Technologies, Inc., a Delaware corporation, its predecessors, 7Software, Inc.,
its wholly-owned California subsidiary, and XMS (UK) Ltd., its wholly-owned
subsidiary located in the United Kingdom, collectively. The Company's principal
executive offices are located at 6222 185th Avenue NE, Redmond, Washington 98052
and its telephone number is (425) 702-8808.
3
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed in the
forward-looking statements. Factors that might cause a difference include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Concur is a leading provider of Intranet-based employee-facing applications
that extend automation to employees throughout the enterprise and to partners,
vendors and service providers in the extended enterprise. The Company's Xpense
Management Solution ("XMS") and CompanyStore products automate the preparation,
approval, processing and data analysis of travel and entertainment ("T&E")
expense reports and front-office procurement requisitions. Concur believes it is
the leading provider of T&E expense management solutions based on a combination
of the number of customers it serves and the features its solutions provide.
Since the introduction of XMS in 1996, the Company has licensed its products to
over 150 enterprise customers with over 650,000 end users. Through its June 1998
acquisition of 7Software, Inc., the Company added the CompanyStore front-office
procurement application to its product suite. By automating manual, paper-based
processes, the Company's products reduce processing costs and enable customers
to consolidate purchases with preferred vendors and negotiate vendor discounts.
In response to increasingly competitive conditions worldwide, businesses
are seeking cost savings and productivity gains by using enterprise applications
to automate business processes. While these applications have traditionally
targeted discrete functional or department level business processes involving
relatively few employees, businesses are now seeking similar applications for
"employee-facing" business processes including T&E expense management,
front-office procurement, human resources self-service, time and billing, and
facilities management. The emergence of the Internet and corporate Intranets has
made it possible to deploy applications that reach all employees in the
enterprise and connect the enterprise to corporate partners, vendors and service
providers. In addition, in contrast to traditional client-server applications,
Intranet-based applications can be deployed rapidly throughout the enterprise
and on a cost-effective basis.
Customers employing the Company's products can realize significant
operating cost savings through reduced processing costs, consolidated purchases
with preferred vendors and negotiated vendor discounts. Based on the results of
the 1997 American Express T&E Management Process Study, businesses using
best-in-class automation that process 1,000 to 5,000 T&E expense reports per
month can achieve savings from $300,000 to $1.5 million per year in processing
costs alone. The Company believes its customers can achieve these cost savings
rapidly because the products are designed to minimize burdens on IT
professionals and to maximize employees' ease of use. Because the Company's
Intranet-based products are designed to deploy rapidly, scale enterprise-wide
and integrate easily with an organization's existing IT infrastructure, a
customer's IT personnel can deliver and support solutions quickly and
cost-effectively. For example, one Concur customer recently deployed XMS to over
25,000 employees within 90 days after the customer began its rollout, and has
since deployed XMS to a total of over 50,000 employees. Employees readily adopt
the Company's solutions because they are easy to use, reduce time spent
preparing expense reports and supply requisitions, and accelerate reimbursement
and fulfillment process cycles. The Company believes that as a result of the
substantial potential savings from processing cost reductions and vendor
management, coupled with the emergence of Intranet technologies, strong demand
exists for employee-facing applications.
Concur's objective is to be the leading provider of Intranet-based
employee-facing applications. In order to meet this goal, the Company's strategy
is to extend and leverage its leadership in T&E expense management and
front-office procurement applications, expand and integrate its product suite,
enhance the functionality of its products, increase its international presence,
develop new relationships with strategic third-parties, and offer its solutions
as an outsourced enterprise service provider.
The Company sells its products primarily through its direct sales
organization and has developed a number of strategic referral relationships such
as its relationship with American Express. Under this relationship, American
Express can refer some of its corporate charge card customers that seek a T&E
expense management solution to Concur. American Express also recently completed
a minority equity investment in the Company. In addition to its Intranet-based
product lines in T&E expense management and front-office procurement, the
Company offers a client-server based T&E expense management solution for those
clients who lack an Intranet infrastructure. Given the broad applicability of
its products, Concur has licensed its applications to numerous customers in a
wide range of industries. The Company's customers include American Airlines,
Anheuser-Busch, Case Corporation, Computer Sciences Corporation, DuPont, Eastman
Kodak, Exxon, Gillette, Guardian Industries, Hewlett-Packard, J.C. Penney,
Lehman Brothers, Levi Strauss, Monsanto, The New York Times, Northrop Grumman,
Pfizer, Pharmacia & Upjohn, Seagate Technology, Solutia, Sprint, Texaco, Texas
Instruments and Visio.
4
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THE OFFERING
Common Stock offered by the Company......... shares
Common Stock offered by the Selling
Stockholders................................ shares
Common Stock to be outstanding after the
Offering(1)................................. shares
Use of Proceeds............................. For working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol...... CNQR
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------ -------------------
1994 1995 1996 1997 1997 1998
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues, net........................................ $ -- $ 2,128 $ 1,959 $ 8,270 $ 5,205 $ 11,715
Loss from operations(2).............................. (602) (2,895) (4,958) (5,505) (3,695) (12,781)
Net loss............................................. (602) (2,890) (4,953) (5,524) (3,681) (13,095)
Pro forma basic and diluted net loss per share(3).... $ (0.23) $ (0.48)
Shares used in calculation of pro forma basic and
diluted net loss per share(3)...................... 24,462 27,509
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JUNE 30, 1998
------------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ 9,469 $ 9,469 $
Total assets.............................................. 23,319 23,319
Long-term obligations, net of current portion............. 8,652 8,652 8,652
Redeemable convertible preferred stock and warrants....... 25,113 -- --
Total stockholders' equity (deficit)...................... (21,360) 3,753
</TABLE>
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(1) Based on shares outstanding as of September 30, 1998. Does not include: (i)
3,573,035 shares of Common Stock issuable upon the exercise of outstanding
options granted under the Company's 1994 Stock Option Plan (the "1994 Plan")
with a weighted average per share exercise price of $0.41; (ii) 886,922
shares of Common Stock available for future grant as of September 30, 1998
under the 1994 Plan; (iii) 275,764 shares of Common Stock issuable upon
exercise of outstanding options granted under the 1997 Stock Option Plan
(the "7Software Plan") of 7Software, Inc. ("7Software") assumed by the
Company in connection with the Company's June 1998 acquisition of 7Software,
with a weighted average per share exercise price of $0.01; (iv) 5,823,949
shares of Common Stock issuable upon the exercise of warrants to purchase
shares of preferred stock; and (v) 9,500,000 shares of Common Stock reserved
immediately after the Offering for future grant or issuance under the
Company's 1998 Equity Incentive Plan (the "1998 Plan"), 1998 Directors Stock
Option Plan (the "Directors Plan") and 1998 Employee Stock Purchase Plan
(the "Purchase Plan"). See "Management--Employee Benefit Plans" and Notes 3,
9, 11 and 17 of Notes to Consolidated Financial Statements.
(2) In June 1998, the Company acquired 7Software, resulting in a charge for
acquired in-process technology. See Note 3 of Notes to Consolidated
Financial Statements. The Financial Statements of 7Software are included
elsewhere herein.
(3) See Note 13 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing pro forma net
loss per share.
(4) Pro forma to give effect to (i) the conversion of all outstanding shares of
preferred stock into 23,921,023 shares of Common Stock and (ii) the
conversion of all outstanding warrants to purchase preferred stock into
warrants to purchase 448,949 shares of Common Stock. Excludes 1,612,903
shares of preferred stock and a warrant held by an affiliate of American
Express Company to purchase 5,375,000 shares of preferred stock (the "TRS
Warrant") issued by the Company after June 30, 1998. See "Certain
Transactions."
(5) Pro forma amounts as adjusted to reflect: (i) the sale of the shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price per share of $ and the receipt of the net proceeds
therefrom, after deducting the estimated underwriting discounts and
commissions and offering expenses; (ii) the issuance of 1,612,903 shares of
redeemable convertible preferred stock in August 1998 for $4,999,999 and the
conversion of all such shares of redeemable convertible preferred stock into
1,612,903 shares of Common Stock; (iii) the exercise of warrants to purchase
448,949 shares of Common Stock with an average exercise price of $1.99 per
share; and (iv) the exercise of a warrant to purchase 562,500 shares of
Common Stock (representing a portion of the TRS Warrant) at an assumed
exercise price of $ per share. See "Capitalization," "Use of Proceeds"
and "Certain Transactions."
------------------------
Unless otherwise indicated or the context otherwise requires, all
information in this Prospectus (i) reflects the conversion of all outstanding
shares of preferred stock of the Company into shares of Common Stock upon the
consummation of the Offering, (ii) assumes that the Underwriters' over-allotment
option will not be exercised and (iii) gives effect to the Company's
reincorporation in Delaware, which will occur prior to the completion of the
Offering. The Company anticipates that it will effect a reverse split of its
Common Stock of an undetermined magnitude prior to the Offering; the numbers
included in this Prospectus do not reflect such reverse split of the Company's
Common Stock.
5
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered by this Prospectus.
LIMITED OPERATING HISTORY; FUTURE OPERATING RESULTS UNCERTAIN; HISTORY OF LOSSES
An investment in the Company should be viewed in light of the risks and
uncertainties inherent in a software company in the early stages of development,
particularly in light of the evolving and highly competitive market in which the
Company competes. Concur was incorporated in 1993 and has incurred net losses in
each quarter since its incorporation. The Company shipped its first product in
fiscal 1995, and since fiscal 1997 has derived substantially all of its revenues
from licenses of XMS -- the Company's T&E expense management product -- and
related services. To compete effectively, the Company believes that it will be
necessary to devote substantial resources to expanding its sales and marketing,
professional services and research and development organizations and that it
will make significant investments in these areas without assurance of any
related income. For example, the Company's professional services organization is
newly established, and has been unprofitable since it was organized, and there
can be no assurance that it will ever become profitable. Further, there can be
no assurance that any of the Company's business strategies will be successful or
that the Company's revenues will increase in future periods, or that the Company
will become or remain profitable on a quarterly or annual basis in the future.
The Company incurred net losses of $2.9 million, $5.0 million and $5.5 million
for fiscal 1995, 1996 and 1997, respectively, and $13.1 million for the nine
months ended June 30, 1998. As of June 30, 1998, the Company had an accumulated
deficit of $27.1 million. The Company anticipates that it will incur net losses
for the foreseeable future. Although the Company had substantial NOL
carryforwards as of June 30, 1998, the Internal Revenue Code of 1986, as amended
(the "Code"), contains provisions that may limit the use in any future period of
net operating loss carryforwards upon the occurrence of certain events,
including a significant change in ownership interests. See "--Unpredictable
Fluctuations and Seasonal Patterns in Quarterly Results," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Business--Competition."
UNPREDICTABLE FLUCTUATIONS AND SEASONAL PATTERNS IN QUARTERLY RESULTS
The Company's quarterly operating results have fluctuated significantly in
the past, and will continue to fluctuate in the future, as a result of a number
of factors, many of which are outside the Company's control. Many of these
factors are listed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations." In
addition, the Company's software products are typically shipped when orders are
received, and consequently, license backlog at the beginning of any quarter has
in the past represented only a small portion of that quarter's expected license
revenues. As a result, license revenues in any quarter are difficult to forecast
because they are substantially dependent on orders booked and shipped in that
quarter. Moreover, the Company typically recognizes a substantial amount of its
revenues in the last month of the quarter, frequently in the last week or even
days of the quarter. Since the Company's expenses are generally relatively fixed
in the near term, any shortfall from anticipated revenues or any delay in the
recognition of revenues could result in significant variations in operating
results from quarter to quarter. Quarterly license revenues are also difficult
to forecast because the Company's sales cycle, from initial evaluation to
delivery of software, are generally lengthy and vary substantially from customer
to customer. If revenues fall below the Company's expectations in a particular
quarter, the Company's business, results of operations and financial condition
would be materially adversely affected. See "--Lengthy Sales Cycle."
The Company has experienced, and expects to continue to experience, a high
degree of seasonality, as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of Operations."
Concur's products involve relatively large expenditures by enterprise customers,
and XMS tends to be more expensive than competing applications. In addition, the
purchase of the
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Company's products is typically a discretionary matter for such customers and
from time to time customers' priorities may shift to other investments, such as
correcting Year 2000 problems associated with their other systems. Accordingly,
demand for the Company's products may be particularly volatile and
unpredictable.
Based on the foregoing and the other risk factors identified herein, the
Company believes that future revenues, expenses and operating results are likely
to vary significantly from quarter to quarter. In particular, as the Company
expands its sales force, professional services personnel and research and
development staff, operating expenses will continue to rise. As a result,
quarter-to-quarter comparisons of operating results are not necessarily
meaningful or indicative of future performance. Further, the Company believes it
is likely that in some future quarter the Company's operating results will not
meet or exceed the expectations of public market analysts or investors. In such
event, or in the event that adverse conditions prevail, or are perceived to
prevail, with respect to the Company's business or generally, the market price
of the Company's Common Stock would be materially adversely affected. See
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
EMERGING MARKET FOR EMPLOYEE-FACING APPLICATIONS; MARKET ACCEPTANCE
The market for employee-facing applications is newly emerging. Enterprises
have historically performed the processes addressed by employee-facing
applications themselves, whether through manual processes or internal
development of applications. Accordingly, the Company's future success will
depend upon, among other factors, the extent to which companies adopt
third-party employee-facing applications, particularly T&E expense management
and front-office procurement solutions, and the extent to which companies
purchase products or utilize the services of third-party providers, such as the
Company, for such solutions. In addition, companies that have already invested
substantial resources in other methods of automating enterprise processes may be
reluctant to adopt a new strategy that may limit or compete with their existing
investments. Even if companies implement employee-facing applications, they may
still choose to design, develop or manage all or part of their process
automation internally. There can be no assurance that the use of employee-
facing applications will increase significantly in the future or that the
Company's products or services will achieve commercial success. Any failure of
employee-facing applications, and in particular T&E expense management and
front-office procurement applications, to gain market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Industry Background."
PRODUCT CONCENTRATION
Since 1997, the Company has generated substantially all of its revenues
from licenses and services related to XMS, and the Company believes that such
revenues will continue to account for a substantial majority of its revenues for
the foreseeable future. The Company's future financial performance will depend,
in significant part, upon the successful development, introduction and customer
acceptance of new and enhanced versions of XMS, and of CompanyStore and any new
products or services that the Company may develop or acquire. There can be no
assurance that the Company will be successful in upgrading and continuing to
market XMS or CompanyStore, or that any new products or services the Company may
develop or acquire will achieve market acceptance. Any such lack of success or
failure to achieve market acceptance could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH EXPANSION INTO NEW MARKET
The Company recently added the CompanyStore front-office procurement
application to its product line. This initial version of CompanyStore has been
licensed to only two customers. The Company's future revenue growth is
substantially dependent upon current development efforts to integrate this
recently acquired technology with the Company's current technology platform,
market acceptance of CompanyStore, and the Company's ability to license
CompanyStore to new customers and its existing base of XMS customers. Potential
and existing customers may not purchase CompanyStore for a number of reasons,
including: an absence of required or desired functionality; the cost and length
of implementation; the failure of
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CompanyStore to be competitive with other front-office procurement applications;
possible software defects; a customer's lack of the necessary hardware, software
or Intranet infrastructure; and any failure by the Company or its products to
meet customer expectations for other reasons. In addition, the Company plans to
target its existing and potential XMS customers as potential customers for the
enhanced version of CompanyStore that is currently under development, but there
can be no assurance that such customers will purchase CompanyStore. Further, the
Company must overcome certain significant obstacles in its expansion into the
front-office procurement automation market, including: competitors that have
more experience and better name recognition than the Company; the limited
experience of the Company's sales and consulting personnel in the front-office
procurement automation market; and the Company's limited existing reference
accounts in the front-office procurement automation market. If, for any reason,
the Company is unable to complete the development efforts necessary to integrate
the recently acquired CompanyStore technology with its technology platform and
to market CompanyStore successfully, such failure would have a material adverse
effect on the Company's business, results of operations and financial condition.
Moreover, if the Company fails to meet the expectations of market analysts or
investors with regard to sales of CompanyStore, the market price of its Common
Stock would be materially adversely affected. See "--Risks Associated with
Unproven Enterprise Service Provider Model," "--Risks Associated with the
Internet," "--No Prior Public Market for Common Stock; Possible Volatility of
Stock Price" and "Business--Competition."
RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW VERSIONS OF EXISTING PRODUCTS
The Company expects to add new employee-facing applications to its product
suite by acquisition or internal development. The Company has in the past
experienced delays in the planned release dates of new software products and
upgrades, and has discovered software defects in new products after their
introduction. There can be no assurance that new products or upgrades will be
released according to schedule, or that when released they will not contain
defects. Either of these situations could result in adverse publicity, loss of
revenues, delay in market acceptance or claims by customers brought against the
Company, all of which could have a material adverse effect on the Company's
business, results of operations and financial condition. If the Company is
unable to develop, license or acquire new software products or enhancements to
existing products on a timely and cost-effective basis, or if such new products
or enhancements do not achieve market acceptance, the Company's business,
results of operations and financial condition will be materially adversely
affected.
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. As a result, the Company's future success
will depend, in significant part, upon its ability to develop and introduce new
products and to enhance existing products to keep pace with technological
developments, satisfy customer requirements and achieve market acceptance. There
can be no assurance that the Company will successfully identify new product
opportunities, develop or bring to market new products, or adopt or incorporate
new technologies in a timely and cost-effective manner. Nor can there be any
assurance that products, capabilities or technologies developed by others will
not render the Company's products or technologies obsolete or noncompetitive or
shorten the life cycles of the Company's products. See "Business--Competition"
and "--Product Development."
RISKS ASSOCIATED WITH UNPROVEN ENTERPRISE SERVICE PROVIDER MODEL
In addition to licensing its software, the Company plans to offer its
solutions as an Internet-based enterprise service provider ("ESP"), pricing its
solutions on a per-transaction basis, to companies seeking to outsource their
employee-facing business applications. This business model is unproven and
represents a significant departure from the strategies traditionally employed by
enterprise software vendors and the Company. The Company has no experience
selling products or services as an ESP, and any such ESP business
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may significantly divert Company revenues and management time and attention from
its existing business. The Company may at any time discontinue its plans to
provide products or services as an ESP. In connection with its planned ESP
business model, the Company will engage, for an indeterminate period,
third-party service providers to perform many of the services related to such
business as independent contractors, and will be responsible for monitoring
their performance. The Company has not outsourced any of its services or other
important business functions in the past, and there can be no assurance that
independent contractors will perform those services adequately. In the event
that any service provider provides inadequate support or service to the
Company's customers, the Company's reputation could be seriously damaged. There
can be no assurance that the Company's ESP strategy will be implemented
effectively, or, even if it is implemented effectively, that it will not have a
material adverse effect on the Company's business, results of operations and
financial condition. If customers determine that the Company's products are not
scalable, do not provide adequate security for the dissemination of information
over the Internet, or are otherwise inadequate for Internet-based use, or if for
any other reason customers fail to accept the Company's products for use on the
Internet or on a per-transaction basis, the Company's business, results of
operations and financial condition will be materially adversely affected. In
particular, as an outsourced ESP provider, the Company will regularly receive
large amounts of confidential information (including credit card, travel booking
and other financial and accounting data) and, particularly in light of the
Company's lack of experience administering this information as an ESP, there can
be no assurance that this information will not be subject to computer break-ins
and other disruptions that jeopardize the security of information for which the
Company is responsible. Even if the Company's strategy of offering its products
to customers over the Internet is successful, certain customers or potential
customers that would otherwise acquire software and services through the
Company's licensing arrangements may elect to utilize the Company's applications
through the Internet-based ESP. Any such shift in potential license revenues to
the ESP model, which is an unproven and potentially less profitable or
unprofitable business model, could have a material adverse effect on the
Company's business, results of operations and financial condition. See "--Risks
Associated with New Products and New Versions of Existing Products," "--Risks of
Software Defects or Security Breaches; Possible Product Liability Issues" and
"Business--Products and Technology."
RISKS ASSOCIATED WITH THE INTERNET
The success of the Company's products will depend, in large part, on the
continued broad acceptance of the Internet itself as a viable commercial
marketplace. It is difficult to predict with any assurance whether the Internet
will continue to be considered a viable commercial marketplace or whether the
demand for Internet-related products and services will increase or decrease in
the future. The Internet may cease to be considered a viable commercial
marketplace for several reasons, including potentially inadequate development of
necessary infrastructure as use of the Internet grows, such as a reliable
network backbone with the necessary speed, data capability and security, or
failure of enabling technologies to be developed in a timely manner. There can
be no assurance that the Internet infrastructure will be able to support the
demands placed on it by growth in use and bandwidth requirements of users. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased levels of
Internet activity or due to increased governmental regulation. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, data corruption, cost, ease of use, accessibility and
quality of service) remain unresolved and may negatively affect commerce and
communication on the Internet. Changes in, or insufficient availability of,
telecommunications services to support the Internet could also result in slower
response times and could adversely affect the use of the Internet generally. If
critical issues concerning the commercial use of the Internet are not favorably
resolved, if the necessary infrastructure and complementary products are not
developed on a timely basis, or if use of the Internet experiences a significant
decline, the Company's business, results of operations and financial condition
will be materially and adversely affected.
LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENT
Although the Company believes that XMS and CompanyStore can accommodate
thousands of users, to date a limited number of customers have deployed XMS in
such environments, and no customer has deployed CompanyStore on such a large
scale. If the Company's customers cannot successfully implement large-scale
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deployments, or they determine for any other reason that the Company's products
cannot accommodate large-scale deployments or that such products are not
appropriate for such widespread use, the Company's business, results of
operations and financial condition would be materially adversely affected.
MANAGEMENT OF GROWTH
The Company's historical growth has placed, and any further growth is
likely to continue to place, a significant strain on the Company's managerial,
operational, financial and other resources. The Company has grown from 43
full-time employees as of September 30, 1995 to 222 full-time employees as of
September 30, 1998, and the Company recently expanded its operations through the
acquisition of 7Software. The Company's future success will depend, in part,
upon the ability of its senior management to manage growth effectively. This
will require the Company to implement additional management information systems,
to develop further its operating, administrative, financial and accounting
systems and controls, to hire additional personnel, to develop additional levels
of management within the Company, to locate additional office space in the
United States and internationally, and to maintain close coordination among its
development, accounting, finance, marketing, sales, customer support and
professional services organizations. In particular, the Company expects to need
additional office space as soon as the first half of calendar 1999. The real
estate market in the Seattle area, where the Company's headquarters is located,
is extremely competitive, and the Company may find it difficult to locate
suitable space on terms acceptable to the Company. In addition, each customer
for the Company's products generally purchases consulting and implementation
services in connection with licenses of those products. The Company believes
that it is currently the only provider of such services for its products. It is
difficult and expensive to recruit, train and retain qualified personnel to
perform such services, and the Company may from time to time have inadequate
levels of staffing to perform required services. As a result, the Company's
growth could be limited due to its lack of capacity to provide such services, or
the Company could experience deterioration in service levels or decreased
customer satisfaction, any of which would have a material adverse effect on the
Company's business, results of operations and financial condition. The failure
of the Company to manage its historic and future growth successfully would have
a material adverse effect on the Company's business, results of operations and
financial condition. See "--Risks Associated with Acquisitions Generally,"
"--Need to Attract and Retain Qualified Personnel," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Services."
COMPETITION
The market for the Company's products is intensely competitive and rapidly
changing. The Company's primary sources of direct competition come from
independent software vendors of T&E expense management and front-office
procurement applications, and enterprise resource planning ("ERP") providers
that have or may be developing T&E expense management and front-office
procurement products. The Company also faces indirect competition from potential
customers' internal development efforts and from potential customers' reluctance
to move away from existing paper-based systems. See "Business--Competition."
NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS
An important business strategy of the Company is to enter into strategic
relationships to offer products and services to a larger customer base than can
be reached through direct sales, telesales and internal marketing efforts. The
Company has established a significant strategic marketing relationship with
American Express Company ("American Express") and American Express Travel
Related Services Company, Inc. ("TRS"), a subsidiary of American Express, under
which American Express and TRS can refer to the Company (on a non-exclusive
basis) their corporate charge card customers that seek a T&E expense management
solution, and TRS will market a co-branded ESP version of XMS containing special
features. Since entering into this relationship, a significant number of the
Company's new sales have come through referrals from American Express and TRS.
In August 1998, TRS purchased 1,612,903 shares of the Company's Series E
Preferred Stock and a warrant to purchase additional shares of Series E
Preferred Stock. The Company also has established other strategic referral
relationships. There can be no assurance that the
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Company will be able to enter into additional strategic relationships or to
maintain its existing strategic relationships on commercially reasonable terms,
if at all. If the Company were unable to maintain its existing strategic
relationships or enter into additional strategic relationships, it would be
required to devote substantially more resources to the distribution, sale and
marketing of its products and services than it plans to do and would not receive
the customer introductions and co-marketing benefits that it anticipates
receiving from such strategic relationships. As a result of the Company's
emphasis on strategic relationships, the Company's success will depend both on
the ultimate success of the other parties to such relationships and on the
ability of these parties to market the Company's products and services
successfully. Failure of one or more of the entities with which the Company has
a strategic relationship to promote the Company's products or services could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Certain Transactions."
The Company's existing strategic relationships do not, and any future
strategic relationships may not, afford the Company any exclusive marketing or
distribution rights. Many of the Company's strategic partners have multiple
strategic relationships, and there can be no assurance that the Company's
strategic partners regard their relationships with the Company as significant
for their own businesses or that they will regard it as significant in the
future. In addition, there can be no assurance that such parties will not pursue
other partnerships or relationships, or attempt to develop or acquire products
or services that compete with the Company's products or services either on their
own or in collaboration with others, including the Company's competitors.
Further, the Company's existing strategic relationships may interfere with its
ability to enter into other desirable strategic relationships. Any future
inability of the Company to maintain its strategic relationships or to enter
into additional strategic relationships will have a material adverse effect on
the Company's business, results of operations and financial condition. See
"--Competition," "Business--Strategy," "--Sales" and "--Marketing."
RISKS ASSOCIATED WITH 7SOFTWARE ACQUISITION
In June 1998, the Company acquired 7Software, a privately-held front-office
procurement software development company and the developer of CompanyStore. The
Company is currently in the process of integrating the 7Software business with
the Company's business, including product development efforts focused on
integrating CompanyStore with XMS in a suite of employee-facing applications.
Such integration is subject to risks commonly encountered in making such
acquisitions, including, among others, risk of loss of key personnel of the
acquired company, difficulties associated with assimilating the personnel and
operations of the acquired company, potential disruption of the Company's
ongoing business, and the ability of the Company's sales force, consultants and
development staff to adapt to the new product line. There can be no assurance
that the Company will be successful in overcoming these risks or any other
problems encountered in connection with its acquisition of 7Software.
RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY
In order to remain competitive in the future, the Company may find it
necessary to acquire additional businesses, products or technologies that could
complement or expand the Company's business. In the event that the Company
identifies an appropriate acquisition candidate, there can be no assurance that
the Company would be able to negotiate the terms of any such acquisition
successfully, finance such acquisition, or integrate such acquired business,
products or technologies into the Company's existing business and operations.
The Company has completed only one acquisition to date, the acquisition of
7Software. There can be no assurance that the Company will be able to manage or
absorb any future acquisitions successfully, particularly acquisitions of
companies larger than 7Software or publicly held companies. Further, the
negotiation of potential acquisitions, as well as the integration of an acquired
business, would cause significant diversions of management time and resources.
There can be no assurance that a given acquisition, whether or not consummated,
will not materially adversely affect the Company's business, results of
operations and financial condition. If the Company were to proceed with one or
more significant acquisitions in which the consideration included cash, the
Company could be required to use a substantial portion of the Company's
available cash (including proceeds of the Offering) to consummate any such
acquisition. If the Company
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consummates one or more significant acquisitions in which the consideration
consists of stock or other securities, stockholders of the Company could suffer
significant dilution of their interests in the Company. See "--Management of
Growth," "-- Broad Discretion Over Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LENGTHY SALES CYCLE
Sales of the Company's software products generally require the Company to
engage in a lengthy sales effort. Because of the costs involved, customers for
enterprise products such as the Company's typically commit significant resources
to an evaluation of available software applications and require the Company to
expend substantial time, effort and money educating them about the value of the
Company's products and services. The Company's sales cycle typically ranges
between six and nine months. Sales of the Company's products require an
extensive sales effort throughout a customer's organization because decisions to
license and deploy such software generally involve the evaluation of the
software by a significant number of employees in various functional areas, each
often having specific and conflicting requirements. A variety of factors,
including many over which the Company has little or no control, such as
customers' investments in Year 2000 systems compliance, may cause potential
customers to favor competing products or to delay or forego a purchase. As a
result of the length of its sales cycle, the Company has a limited ability to
forecast the timing and amount of specific sales. The delay or failure to
complete one or more sales in a particular quarter or fiscal year could have a
material adverse effect on the Company's business, results of operations and
financial condition and could cause the Company's operating results to vary
significantly from quarter to quarter. See "--Unpredictable Fluctuations and
Seasonal Patterns in Quarterly Results" and "--Year 2000 Compliance."
DEPENDENCE ON KEY EMPLOYEES
The Company's success depends on the performance of the Company's senior
management, particularly S. Steven Singh, who is not bound by an employment
agreement. Although the Company maintains key person life insurance on Mr. Singh
in the amount of $1 million, the loss of the services of Mr. Singh would have a
material adverse effect on the Company's business, results of operations and
financial condition. If one or more members of the Company's senior management
or any of the Company's key employees were to resign from the Company,
particularly to join a competitor or to form a competitor of the Company, the
loss of such personnel and any resulting loss of existing or potential customers
to any such competitor would have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, there can
be no assurance that, in such an event, the Company would be able to recruit
personnel to replace such senior management on terms that are acceptable to the
Company. In the event of the loss of any key personnel, there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its technical knowledge, practices, procedures or customer lists by a
former employee or that such disclosure or use would not have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business--Competition," "--Employees" and "Management."
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's success depends to a significant degree on its ability to
attract and retain qualified, experienced employees. There is currently, and the
Company expects there will continue to be, substantial competition for
experienced engineering, sales and consulting personnel, particularly in the
market segments in which the Company competes. Many of the companies with which
the Company competes for experienced personnel have greater financial and other
resources than the Company. In particular, the Company competes for product
development personnel with Microsoft Corporation, which is located in the same
geographic area as the Company's headquarters and which hires significant
numbers of software engineers each year. The Company also competes for personnel
with major ERP and other independent software vendors that hire substantial
numbers of sales and consulting personnel, and with consulting and professional
services companies (such as Andersen Consulting and other systems integration
and consulting divisions of major accounting firms), which recruit a significant
portion of the pool of available and qualified consulting personnel. In
addition, customers for the Company's products generally purchase consulting and
implementa-
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tion services in connection with licenses of those products. The Company
believes that it is currently the only provider of such services for its
products. It is difficult and expensive to recruit, train and retain qualified
personnel to perform such services, and the Company may from time to time have
inadequate levels of staffing to perform such services. As a result, the
Company's growth could be limited due to its lack of capacity to provide such
services, or the Company could experience deterioration in service levels or
decreased customer satisfaction, any of which would have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company may in the future experience difficulty in recruiting and retaining
sufficient numbers of qualified individuals to meet its needs, and the costs
associated with such hirings, such as bonuses and recruiting expenses, may have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Employees."
DEPENDENCE ON DIRECT SALES MODEL
The Company has sold, and intends to continue to sell, its products
primarily through its direct sales force. The Company's financial success will
depend in large part on the ability of the Company's direct sales force to
increase sales to levels necessary to attain and sustain profitability. As a
consequence of this strategy, the Company's ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting, training and retaining additional direct sales personnel and on the
continued success of the direct sales force. The Company believes that there is
a shortage of, and significant competition for, direct sales personnel with the
advanced sales skills and technical knowledge necessary to sell the Company's
products. The Company's inability to hire competent sales personnel, or its
failure to retain them, would have a material adverse effect on the Company's
business, results of operations and financial condition. See "--Dependence on
Key Employees" and "--Need to Attract and Retain Qualified Personnel."
In addition, by relying primarily on a direct sales model, the Company may
miss sales opportunities that might be available through other sales
distribution channels, such as domestic and international resellers and
value-added resellers. In the future, the Company intends to develop indirect
distribution channels through third-party distribution arrangements, but there
can be no assurance that the Company will be successful in establishing such
arrangements, or that any such expansion of the Company's indirect distribution
channels will result in increased revenues. The failure to develop such indirect
channels may place the Company at a significant competitive disadvantage. See
"Business--Competition" and "--Sales."
DEPENDENCE ON SERVICE REVENUES
The Company licenses software and provides related consulting, customer
support and training services. The Company's total revenues have increased from
year to year, and service revenues have increased each year as a percentage of
total revenues. Service revenues represented 1.1%, 12.4% and 23.3% of total
revenues for fiscal 1995, 1996 and 1997, respectively, and 21.5% and 31.4% for
the nine months ended June 30, 1997 and 1998, respectively. Maintenance
constitutes a significant proportion of service revenues. The Company
anticipates that service revenues will continue to represent a significant
percentage of total revenues. To a large extent, the level of service revenues
is dependent upon the ongoing renewals of customer support contracts by the
Company's growing installed customer base, and there can be no assurance that
such customer support contracts will be renewed. In addition, if third-party
organizations such as systems integrators become proficient in installing or
servicing the Company's products, consulting revenues as a percentage of total
revenues could decline. If service revenues are lower than anticipated, the
Company's business, results of operations and financial condition could be
materially adversely affected. The Company's ability to increase its service
revenues will depend in large part on its ability to increase the scale of its
services organization, including its ability to successfully recruit and train a
sufficient number of qualified services personnel. There can be no assurance
that the Company will be able to successfully expand its professional services
organization in this way. See "--Management of Growth," "--Dependence on Key
Employees," "--Need to Attract and Retain Qualified Personnel" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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INTERNATIONAL OPERATIONS
The Company's international operations are generally subject to a number of
risks, including costs of customizing products for foreign countries, laws and
business practices favoring local competition, dependence on local vendors,
compliance with multiple, conflicting and changing governmental laws and
regulations, longer sales cycles, greater difficulty or delay in accounts
receivable collection, import and export restrictions and tariffs, difficulties
in staffing and managing foreign operations, multiple and conflicting tax laws
and regulations, and political and economic instability. In recent months the
level of worldwide economic instability has increased significantly. The Company
is unable to predict what effect this instability will have on its efforts to
expand internationally or sell domestically. It is possible that the spreading
economic uncertainty in the world will have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's international operations also face foreign currency-related
risks. To date a significant majority of the Company's revenues have been
denominated in U.S. dollars, but the Company believes that in the future, an
increasing portion of the Company's revenues will be denominated in foreign
currencies. In particular, the Company expects that following the introduction
of the Euro in 1999, an increasing portion of the Company's international sales
may be Euro-denominated. The Euro is an untested currency and may be subject to
economic risks that are not currently contemplated. There can be no assurance
that fluctuations in the value of the Euro or other foreign currencies will not
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company currently does not engage in foreign
exchange hedging activities, and therefore its international revenues are
currently subject to the risks of foreign currency fluctuations. In addition,
the Company expects that its products will not support Euro-denominated
transactions until at least the second half of 1999, which could materially
adversely affect demand for such products and, as a result, the Company's
business, results of operations and financial condition. See "--Unpredictable
Fluctuations and Seasonal Patterns in Quarterly Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Revenues from licenses and services to customers outside the United States,
primarily in the United Kingdom, Canada and Australia, were insignificant prior
to fiscal 1997, and represented approximately $1.3 million and $455,000 in
fiscal 1997 and the nine months ended June 30, 1998, respectively. As a key
component of its business strategy, the Company intends to expand its sales and
support operations internationally. The Company employs sales professionals in
London, Toronto and Sydney and intends to establish additional international
sales offices, expand its international management, sales and support
organizations, and enter into relationships with additional international
remarketers where appropriate. The Company is in the early stages of developing
its indirect distribution channels in certain markets outside the United States.
There can be no assurance that the Company will be able to attract remarketers
that will be able to market the Company's products effectively or will be
qualified to provide timely and cost-effective customer support and service.
The Company must also customize its products for local markets. For
example, the Company's ability to expand into the European market will depend on
the Company's ability to develop a T&E expense management solution that
incorporates the tax laws and accounting practices followed in Germany and other
European countries, and to develop employee-facing applications that support the
Euro, the new currency expected to be introduced for certain members of the
European Community in January 1999. Further, the differing employment policies
of countries outside the United States potentially reduce the Company's
flexibility in managing staffing levels and, in turn, managing personnel-related
expenses. To the extent that the Company is unable to address the risks
associated with these international sales in a timely and cost-effective manner,
the Company's sales growth internationally, if any, will be limited, operating
margins could be reduced by increases in personnel-related expenses without
corresponding increases in revenues, and the Company's business, results of
operations and financial condition could be materially adversely affected. Even
if the Company is able to expand its international operations successfully,
there can be no assurance that the Company will be able to maintain or increase
international market demand for its products. See "Business--Sales."
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LIMITED INTEROPERABILITY
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers. The Company must continually
modify and enhance its products to keep pace with changes in hardware and
software platforms and database technology. As a result, uncertainties related
to the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems (particularly Microsoft), by
vendors of back-office applications (particularly SAP, Oracle and PeopleSoft)
and by vendors of browsers and other Internet-related applications (particularly
Netscape and Microsoft) could materially adversely affect the Company's
business, results of operations and financial condition. In addition, the
Company's products are not currently based upon the Java programming language
("Java"), an increasingly widely-used language for developing Internet
applications. The Company has made a strategic decision not to develop a fully
Java-based product at this time. There can be no assurance that future versions
of the Company's products will be developed in Java. Accordingly, certain
features available to products written in Java may not be available in the
Company's products. The failure of the Company's products to operate effectively
across the various existing and evolving versions of hardware and software
platforms, programming languages, database environments, and ERP and accounting
systems employed by customers would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Products and Technology."
RELIANCE ON THIRD-PARTY SOFTWARE
The Company relies upon the licensing of certain software from third
parties, including security technologies from RSA Data Security, Inc. (a
subsidiary of Security Dynamics), ODBC drivers from Intersolv, Inc., and
Internet translation applications from Chili!Soft, Inc. There can be no
assurance that the Company's third-party technology licenses will continue to be
available to the Company on commercially reasonable terms, if at all. The loss
or inability to maintain any of these technology licenses could result in delays
in the sale of the Company's products and services until equivalent technology,
if available, is identified, licensed and integrated, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS OF SOFTWARE DEFECTS OR SECURITY BREACHES; POSSIBLE PRODUCT LIABILITY
ISSUES
Products as complex as those offered by the Company frequently contain
defects or errors that may be detected at any point in the product's life. There
can be no assurance that defects or errors will not occur in existing or new
products. Further, the Company often renders implementation, consulting and
other technical services in connection with licensing of the Company's products.
The performance of these services typically involves working with sophisticated
software, computing and networking systems, and the Company could fail to meet
project milestones in a timely manner or to meet customer expectations for
services as a result of any such defects. Although the Company's products
contain security features, the Company's software products may be vulnerable to
break-ins and similar disruptive problems. Such computer break-ins and other
disruptions may jeopardize the security of information stored in and transmitted
through the computer systems of the Company's customers. Break-ins often involve
hackers bypassing fire walls and misappropriating confidential information.
Problems caused by product defects, security breaches or failure to meet project
milestones for services could result in loss of or delay in revenues, loss of
market share, failure to achieve market acceptance, diversion of development
resources, harm to the Company's reputation, increased insurance costs or
increased service and warranty costs. Addressing these problems may require
significant expenditures of capital and resources by the Company, which would
have a material adverse effect on the Company's business, results of operations
and financial condition.
Because customers rely on the Company's products for certain
business-critical processes, any significant defects or errors in the Company's
products or services, or in the products of third parties that are embedded in
or bundled with the Company's products, might discourage utilization of the
Company's products and services or result in tort or warranty claims against the
Company, which could have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential liability for damages arising out of use of or
defects in the Company's products, it is possible that
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such limitation of liability provisions may not be effective as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. Although the Company has not experienced any such product
liability claims to date, there can be no assurance that the Company will not be
subject to such claims in the future. Further, although the Company maintains
errors and omissions insurance, there can be no assurance that such insurance
coverage will adequately cover the Company for such claims. A successful product
liability claim brought against the Company could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, defending such a suit, regardless of its merits, could entail
substantial expense and require the time and attention of key management
personnel, either of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company is dependent upon its proprietary technology. The Company
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary information. The Company has also taken steps to avoid disclosure of
its proprietary technology, including contractually restricting customer access
to the Company's source code and requiring all employees to enter into
confidentiality and invention assignment agreements; however, the Company
believes that this latter requirement has not been strictly followed. Further,
the Company only recently began requiring contractors and temporary employees to
execute the Company's confidentiality agreement rather than executing the
confidentiality agreements maintained by temporary agencies or not executing any
such agreements. The Company presently has no patents or patent applications
pending. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as do the laws of the United States, and the
Company expects that it will become more difficult to monitor use of the
Company's products as the Company increases its international presence. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate, nor that the Company's competitors will not
independently develop similar technology. In addition, there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. Any such claims could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business--Intellectual Property Rights."
RISK RELATED TO REVENUE RECOGNITION POLICY
The Company recognizes software license revenues when a non-cancelable
license agreement has been signed with a customer, the software is shipped, no
significant post-delivery vendor obligations remain and collection is deemed
probable. The Company recognizes customer support revenues ratably over the
contract term--typically one year--and recognizes revenues for consulting
services as such services are performed. The Company believes its current
revenue recognition policies and practices are consistent with applicable
accounting standards in all material respects. It is not anticipated that there
will be a material change to the Company's accounting for revenues as a result
of the adoption of SOP 97-2 and related amendments and interpretations. However,
full implementation guidelines for this standard have not yet been issued. Once
available, such implementation guidance could lead to unanticipated changes in
the Company's current revenue accounting practices, and such changes could
materially adversely affect the Company's future revenues and earnings, and
require significant changes in the Company's business practices in order for the
Company to continue to recognize license revenues upon delivery of its software
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Overview."
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in little more than one
year, computer systems and software used by many companies and organizations in
a wide variety of industries will experience operating difficulties unless they
16
<PAGE> 18
are modified or upgraded to process information related to the century change.
Significant uncertainty exists in the software and other industries concerning
the scope and magnitude of problems associated with the century change. Based on
the Company's assessment to date, the Company believes the current versions of
its software products are "Year 2000 compliant"-- that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
the Company's products are generally integrated into enterprise systems
involving sophisticated hardware and complex software products, which may not be
Year 2000 compliant. The Company may in the future be subject to claims based on
Year 2000 problems in others' products, or issues arising from the integration
of multiple products within an overall system. Other Year 2000 compliance issues
facing the Company include the need to ensure Year 2000 compliance of its own
internal computer systems, and the possibility of reduced sales of the Company's
products as potential customers increase their investment in Year 2000
compliance. The total cost of Year 2000 compliance issues, based on management's
estimates, has not been, and is not anticipated to be, material to the Company's
business, results of operations and financial condition. However, there can be
no assurance that the Company and its customers and suppliers will identify and
remediate all significant Year 2000 problems on a timely basis, that remediation
efforts will not involve significant time and expense, or that unremediated
problems will not have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
RISKS ASSOCIATED WITH NAME CHANGE
In August 1998, the Company changed its name from Portable Software
Corporation to Concur Technologies, Inc. The Company believes that developing
and strengthening the Concur brand is important to its marketing efforts,
particularly to convey the fact that the Company's business strategy involves
products beyond its original T&E expense management applications. Concur
believes that it had developed significant market identification between its T&E
expense management applications and its former name. There can be no assurance
that the change of name will not have a material adverse effect on the Company's
name recognition within its existing target market. Moreover, while the Company
has expended substantial resources in establishing brand recognition of its new
name, there can be no assurance that such efforts will be successful or that the
Company will be able to enforce rights related to the Concur name, that it will
be free to use that name in all jurisdictions, or that it will not be required
to expend significant resources in defending the use of that name.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering there has been no public market for the Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price will be determined by negotiation among the Company and the
representatives of the underwriters based upon a number of factors and may not
be indicative of the market price of the Common Stock following the Offering.
The market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, market conditions in the enterprise software
industry, changes in financial estimates by securities analysts, failure of the
Company to meet or exceed analyst estimates, and other events or factors, many
of which are beyond the Company's control. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many software companies and
that often have been unrelated or disproportionate to the operating performance
of such companies, and a number of publicly-traded software companies have
current market prices below their initial public offering price. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the marketplace
for a company's securities, securities class action litigation often has been
instituted. Any such litigation against the Company could result in substantial
costs and a diversion of management attention and resources, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.
17
<PAGE> 19
CONTROL BY EXISTING STOCKHOLDERS
Immediately after the closing of the Offering (based on shares outstanding
as of September 30, 1998), % of the outstanding Common Stock ( % if the
underwriters' over-allotment option is exercised in full) will be beneficially
owned by the directors and executive officers of the Company, together with the
entities affiliated with them, assuming no exercise of outstanding stock
options. If all options owned by the directors and executive officers of the
Company as of September 30, 1998 were to be exercised, the directors and
executive officers of the Company, together with the entities affiliated with
them, would own 26,477,659 shares of Common Stock, or % of the outstanding
Common Stock of the Company following the Offering. As a result, these
stockholders, if acting together, would be able to control substantially all
matters requiring approval by the stockholders of the Company, including the
election of all directors and approval of significant corporate transactions. In
addition, upon completion of the Offering, TRS will hold a warrant to purchase
up to 5,375,000 shares of the Company's Common Stock at prices ranging from the
price to public in the Offering less 7% to $34.00, and expiring in four tranches
through January 2002. See "Principal and Selling Stockholders" and "Certain
Transactions."
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and certain provisions of Delaware law could delay or make difficult a merger,
tender offer or proxy contest involving the Company. The authorized but unissued
capital stock of the Company immediately following the Offering will include
5,000,000 shares of preferred stock. The Board of Directors is authorized,
subject to any limitations prescribed by Delaware law, to issue the preferred
stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and to designate any
qualifications, limitations or restrictions thereon, and to decrease the number
of shares of any such series (but not below the number of shares of such series
then outstanding), without any further vote or action by the stockholders.
Accordingly, the Company may in the future issue a series of preferred stock,
without further stockholder approval, that will have preference over the Common
Stock with respect to the payment of dividends and upon liquidation, dissolution
or winding-up of the Company. Certain other provisions of the Company's
Certification of Incorporation and Bylaws, including provisions that divide the
Board of Directors into three classes to serve staggered three-year terms,
prohibit the stockholders from taking action by written consent and restrict the
ability of stockholders to call special meetings, may also make it more
difficult for a third party to acquire a majority of the Company's voting stock
or effect a change in control of the Company. In addition, Section 203 of the
General Corporation Law of the State of Delaware, which is applicable to the
Company, prohibits certain business combinations with certain stockholders for a
period of three years after they acquire 15% or more of the outstanding voting
stock of a corporation. Any of the foregoing could adversely affect holders of
the Common Stock or discourage or make difficult any attempt to obtain control
of the Company. See "Management--Executive Officers and Directors" and
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE OF THE COMMON STOCK
Sales of a substantial number of shares of Common Stock after the Offering
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through the sale of equity securities. Upon
completion of the Offering, the Company will have outstanding shares
of Common Stock ( shares if the underwriters' over-allotment option is
exercised in full), assuming no exercise of options after September 30, 1998. Of
these shares, the shares offered hereby ( shares if the
underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144"). The remaining 33,280,316 shares of Common Stock outstanding upon
completion of the Offering are "restricted securities" as that term is defined
in Rule 144.
Upon the expiration of lock-up agreements between certain of the Company's
stockholders and the underwriters (the "Lock-Up Agreements") beginning 180 days
after the date of this Prospectus, 524,018
18
<PAGE> 20
shares will become eligible for sale pursuant to Rule 701 under the Securities
Act ("Rule 701") and 26,862,320 shares held by certain affiliates of the Company
will become eligible for sale pursuant to the volume, manner of sale and notice
requirements of Rule 144. The remaining 5,893,978 shares outstanding will become
eligible for sale from time to time more than 180 days after the date of this
Prospectus. In addition to the foregoing, as of September 30, 1998, there were
outstanding options to purchase an aggregate of 3,848,799 shares of Common Stock
which will be eligible for sale in the public market from time to time, subject
to vesting and the expiration of Lock-Up Agreements. The Company intends to file
a registration statement on Form S-8 under the Securities Act within 180 days
after the completion of the Offering to register 13,348,799 shares of Common
Stock subject to outstanding stock options (3,848,799) or reserved for issuance
under the Company's 1998 Plan, the Directors Plan and the Purchase Plan
(9,500,000), thus permitting the resale of such shares by nonaffiliates in the
public market without restriction under the Securities Act. The representatives
of the underwriters have informed the Company that the underwriters reserve the
right without announcement to release shares from the Lock-Up Agreements prior
to expiration of the 180-day term of such agreements. Any request for release
would be evaluated by the representatives of the underwriters, and the decision
whether or not to permit early release of shares would be made dependent upon
the facts and circumstances existing at the time of the request. See "Shares
Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience an immediate
dilution of $ per share in the pro forma net tangible book value of their
Common Stock from the assumed initial public offering price of $ per share.
To the extent outstanding warrants or options are exercised, there may be
further dilution. See "Dilution."
BROAD DISCRETION OVER USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes. These will include increased domestic
and international sales and marketing expenditures, increased research and
development expenditures, and capital expenditures made in the ordinary course
of business. The Company may also use a portion of the net proceeds for possible
acquisitions of additional businesses, products and technologies or the
establishment of joint ventures that are complementary to the current or future
business of the Company, as determined by management in its sole discretion. The
Company has not determined the specific allocation of net proceeds among the
various uses described above. Accordingly, investors in the Offering will rely
upon the judgment of the Company's management with respect to the use of
proceeds, with only limited information concerning management's specific
intentions. See "Use of Proceeds."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be approximately
$ ($ million if the Underwriters' over-allotment option is exercised
in full), at an assumed initial public offering price of $ and after
deducting estimated underwriting discounts and commissions and offering expenses
payable by the Company. The Company will not receive any proceeds from the sale
of Common Stock by the Selling Stockholders. The primary purposes of the
Offering are to increase the Company's equity capital, to create a public market
for the Company's Common Stock and to facilitate future access by the Company to
public equity markets.
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes. These will include increased domestic
and international sales and marketing expenditures, increased research and
development expenditures and capital expenditures made in the ordinary course of
business. The Company may also use a portion of the net proceeds for possible
acquisitions of businesses, products and technologies or the establishment of
joint ventures that are complementary to the current and future business of the
Company. Although the Company has not identified any specific businesses,
products or technologies that it may acquire, and there are no current
agreements or understandings with respect to any such transactions, the Company
does from time to time evaluate such opportunities. Pending such uses, the net
proceeds of the Offering will be invested in short-term, investment-grade,
interest-bearing instruments. None of the net proceeds of the Offering will be
paid to NASD members, affiliates, or associated or related persons thereof.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not expect to do so in the foreseeable future. The Company
anticipates that any future earnings will be retained by the Company to develop
and expand its business. Any future determination with respect to the payment of
dividends will be at the discretion of the Board of Directors and will depend
upon, among other things, the Company's operating results, financial condition
and capital requirements, the terms of then-existing indebtedness, general
business conditions and such other factors as the Board of Directors deems
relevant. In addition, the terms of certain of the Company's credit facilities
prohibit the payment of cash dividends without the lender's consent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
20
<PAGE> 22
CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the conversion of all outstanding shares of redeemable
convertible preferred stock into Common Stock and the conversion of all
preferred stock warrants into warrants to purchase Common Stock, and (iii) the
pro forma capitalization as adjusted to give effect to (a) the sale of the
shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share (after deducting estimated
underwriting discounts and commissions and offering expenses) and the receipt of
the estimated net proceeds therefrom, (b) the exercise of warrants to purchase
448,949 shares of Common Stock with an average exercise price of $1.99 per
share, (c) the exercise of a portion of the TRS Warrant to purchase 562,500
shares of Common Stock at an assumed exercise price of $ per share, and (d)
the sale of redeemable convertible preferred stock in August 1998 for $4,999,999
and related conversion of such preferred stock into 1,612,903 shares of Common
Stock.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, net of current portion............... $ 8,652 $ 8,652 $ 8,652
Redeemable convertible preferred stock, 23,921,023 shares
authorized, issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma or as
adjusted.................................................. 25,041 -- --
Redeemable convertible preferred stock warrants............. 72 -- --
Stockholders' equity (deficit):
Preferred Stock, $.001 par value, no shares authorized,
issued and outstanding, actual or pro forma; 5,000,000
shares authorized, no shares issued or outstanding, as
adjusted............................................... -- -- --
Common Stock, $.001 par value; 60,000,000 shares
authorized; 7,601,251 shares issued and outstanding,
actual; 31,522,274 shares issued and outstanding, pro
forma; and shares issued and outstanding, as
adjusted(1)............................................ 6,268 31,381
Deferred stock compensation............................... (564) (564) (564)
Accumulated deficit....................................... (27,064) (27,064) (27,064)
-------- -------- --------
Total stockholders' equity (deficit)................... (21,360) 3,753
-------- -------- --------
Total capitalization.............................. $ 12,405 $ 12,405 $
======== ======== ========
</TABLE>
- ---------------
(1) Excludes: (i) 3,597,714 shares of Common Stock issuable upon the exercise of
stock options outstanding (of which options to purchase 1,175,599 shares
were exercisable) under the 1994 Plan at a weighted average exercise price
of $0.30 per share; (ii) 9,500,000 shares of Common Stock reserved for
issuance under the 1998 Plan, the Directors Plan and the Purchase Plan;
(iii) 973,337 shares of Common Stock available for future grant under the
1994 Plan; (iv) 275,764 shares of Common Stock issuable upon exercise of
outstanding options (of which options to purchase 65,432 shares were
exercisable) granted under the 7Software Plan and 34,045 shares of Common
Stock issuable upon exercise of outstanding options granted by 7Software
outside the 7Software Plan, in each case assumed by the Company in
connection with the acquisition of 7Software, at a weighted average exercise
price of $0.01 per share; and (v) 4,812,500 shares of Common Stock issuable
upon the exercise of the TRS Warrant at prices ranging from $13.50 to
$34.00, expiring in three tranches through January 2002. No further options
will be granted under the 7Software Plan. Upon effectiveness of the
Offering, no further options will be granted under the 1994 Plan. See
"Management--Director Compensation," "--Employee Benefit Plans," "Certain
Transactions" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial
Statements.
21
<PAGE> 23
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998,
giving effect to the conversion of all outstanding shares of preferred stock
into Common Stock, the conversion of outstanding warrants to purchase preferred
stock into warrants to purchase Common Stock with an average exercise price of
$1.99 per share and the exercise of such warrants to purchase 448,949 shares of
Common Stock upon or prior to the completion of the Offering, the conversion of
the TRS Warrant to purchase preferred stock into a warrant to purchase 5,375,000
shares of Common Stock and the exercise of a portion of such warrant to purchase
562,500 shares of Common Stock at an assumed exercise price of $ per share
upon or prior to the completion of the Offering, and the sale of redeemable
convertible preferred stock in August 1998 for $4,999,999 and the related
conversion of such preferred stock into 1,612,903 shares of Common Stock was
$ , or approximately $ per share. Pro forma net tangible book
value per share represents the amount of total tangible assets of the Company
less total liabilities, divided by the number of shares of Common Stock
outstanding on an as-if-converted basis as adjusted for the proceeds and
incremental shares from the exercise of warrants referred to above and the sale
of redeemable convertible preferred stock in August 1998. Dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after the Offering.
After giving effect to the sale of shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share (after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company) and the receipt of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
June 30, 1998 would have been $ , or $ per share. This represents
an immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to purchasers
of Common Stock in the Offering. The following table illustrates the per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
1998................................................... $
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after the
Offering..................................................
-----
Dilution per share to new investors......................... $
=====
</TABLE>
The following table summarizes, as of June 30, 1998 on the pro forma basis
described above, the differences between the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and by the new investors pursuant to the
Offering, before deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company at an assumed initial public
offering price of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................................ % $ % $
New investors(1)(2).....................................
------ ----- ----- ------
Total......................................... 100.0% $ 100.0%
====== ===== ===== ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in the Offering will reduce the number of
shares held by existing stockholders to , or % ( %
if the Underwriters' over-allotment option is exercised in full), and will
increase the number of shares held by new investors to , or %
( % if the Underwriters' over-allotment option is exercised in
full), of the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Stockholders."
(2) Excludes (i) 3,907,523 shares subject to outstanding options as of June 30,
1998 at a weighted average exercise price of $0.27 per share and (ii)
973,337 shares reserved for issuance under the 1994 Plan. Also excludes (i)
9,500,000 shares reserved for issuance under the 1998 Plan, the Directors
Plan and the Purchase Plan and (ii) 4,812,500 shares issuable upon exercise
of the TRS Warrant at prices ranging from $13.50 to $34.00, expiring in
three tranches through January 2002. To the extent outstanding options or
warrants are exercised, there may be further dilution to new investors. See
"Management--Director Compensation," "--Employee Benefit Plans," "Certain
Transactions" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial
Statements.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to and should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus. The consolidated statement of operations data for the years
ended September 30, 1995, 1996 and 1997, and for the nine months ended June 30,
1998, and the consolidated balance sheet data as of September 30, 1996 and 1997,
and June 30, 1998, are derived from consolidated financial statements of the
Company that have been audited by Ernst & Young LLP, independent auditors, which
are included elsewhere in this Prospectus. The consolidated balance sheet data
as of September 30, 1995 are derived from audited consolidated financial
statements that are not included in this Prospectus. The consolidated statement
of operations data for the year ended September 30, 1994, and the consolidated
balance sheet data as of September 30, 1994, are derived from unaudited
consolidated financial statements not included in this Prospectus. The
consolidated statement of operations data for the nine months ended June 30,
1997 are derived from unaudited consolidated financial statements included in
this Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position and
results of operations for these periods. Operating results for the nine months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year. Historical results are not necessarily indicative
of future results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
-------------------------------------- -----------------------
1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues, net:
Licenses................................................. $ -- $ 2,104 $ 1,717 $ 6,347 $ 4,087 $ 8,039
Services................................................. -- 24 242 1,923 1,118 3,676
------- ------- ------- -------- -------- --------
Total revenues..................................... -- 2,128 1,959 8,270 5,205 11,715
------- ------- ------- -------- -------- --------
Cost of revenues:
Licenses................................................. -- 728 386 394 219 318
Services................................................. -- 673 839 2,269 1,370 3,702
------- ------- ------- -------- -------- --------
Total cost of revenues............................. -- 1,401 1,225 2,663 1,589 4,020
------- ------- ------- -------- -------- --------
Gross profit............................................... -- 727 734 5,607 3,616 7,695
------- ------- ------- -------- -------- --------
Operating expenses:
Sales and marketing...................................... 111 2,363 2,936 5,896 3,873 7,886
Research and development................................. 425 744 1,793 3,401 2,226 4,162
General and administrative............................... 66 515 963 1,815 1,212 3,225
Acquired in-process technology(1)........................ -- -- -- -- -- 5,203
------- ------- ------- -------- -------- --------
Total operating expenses........................... 602 3,622 5,692 11,112 7,311 20,476
------- ------- ------- -------- -------- --------
Loss from operations....................................... (602) (2,895) (4,958) (5,505) (3,695) (12,781)
Other income (expense), net................................ -- 5 5 (19) 14 (314)
------- ------- ------- -------- -------- --------
Net loss................................................... $ (602) $(2,890) $(4,953) $ (5,524) $ (3,681) $(13,095)
======= ======= ======= ======== ======== ========
Pro forma basic and diluted net loss per share(2).......... $ (0.23) $ (0.48)
======== ========
Shares used in calculation of pro forma basic and diluted
net loss per share(2).................................... 24,462 27,509
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, 1998
-------------------------------------- -----------------------
1994 1995 1996 1997 ACTUAL PRO FORMA(3)
------- ------- ------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents.................................. $ 277 $ 2,541 $ 5,685 $ 6,695 $ 15,604 $ 15,604
Working capital (deficit).................................. (175) 1,839 4,073 6,183 9,469 9,469
Total assets............................................... 345 3,058 6,759 13,330 23,319 23,319
Long-term obligations, net of current portion.............. 233 125 215 3,687 8,652 8,652
Redeemable convertible preferred stock and warrants........ -- 4,903 12,386 17,322 25,113 --
Total stockholders' equity (deficit)....................... (353) (3,234) (8,186) (13,710) (21,360) 3,753
</TABLE>
- ---------------
(1) In June 1998, the Company acquired 7Software, resulting in a charge for
acquired in-process technology. See Note 3 of Notes to Consolidated
Financial Statements. The Financial Statements of 7Software are included
elsewhere herein.
(2) See Note 13 of Notes to Consolidated Financial Statements for information
concerning the calculation of pro forma basic and diluted net loss per
share.
(3) Pro forma to give effect to (i) the conversion of all outstanding shares of
preferred stock into 23,921,023 shares of Common Stock and (ii) the
conversion of all outstanding warrants to purchase preferred stock into
warrants to purchase 448,949 shares of Common Stock. Excludes 1,612,903
shares of preferred stock and a warrant held by an affiliate of American
Express Company to purchase 5,375,000 shares of preferred stock (the "TRS
Warrant") issued by the Company after June 30, 1998 in exchange for $5.0
million. See "Certain Transactions."
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Concur is a leading provider of Intranet-based employee-facing applications
that extend automation to employees throughout the enterprise and to partners,
vendors and service providers in the extended enterprise. The Company's Xpense
Management Solution ("XMS") and CompanyStore products automate the preparation,
approval, processing and data analysis of travel and entertainment ("T&E")
expense reports and front-office procurement requisitions. Concur believes it is
the leading provider of T&E expense management solutions based on a combination
of the number of customers it serves and the features its solutions provide.
Since the introduction of XMS in 1996, the Company has licensed its products to
over 150 enterprise customers with over 650,000 end users. Through its June 1998
acquisition of 7Software, Inc., the Company added the CompanyStore front-office
procurement application to its product suite. By automating manual, paper-based
processes, the Company's products reduce processing costs and enable customers
to consolidate purchases with preferred vendors and negotiate vendor discounts.
Concur was incorporated in 1993 and commenced operations in fiscal 1994,
initially developing QuickXpense, a retail, shrink-wrapped application that
automated T&E expense reporting for individuals. Concur first shipped
QuickXpense in fiscal 1995 and sold QuickXpense through a combination of retail
channels and direct marketing, utilizing a small sales force and no consulting
or implementation staff. In response to inquiries from businesses seeking to
automate the entire T&E expense reporting process, including back-office
processing and integration to financial systems, the Company significantly
expanded its product development efforts and released XMS, a client-server based
enterprise T&E expense management solution in July 1996. In connection with that
transition, the Company also replaced its retail and direct marketing programs
with a direct sales force including sales representatives and sales engineers,
built consulting services and customer training staffs, and redirected its
marketing efforts to focus on enterprise sales. In March 1998, the Company
shipped an Intranet-based version of XMS. While the Company continues to sell
the client-server version of XMS, since its release the Intranet-based version
has accounted for a majority of XMS license revenues and the Company expects to
continue to focus its product development efforts on the Intranet-based versions
of its products.
On June 30, 1998, the Company acquired 7Software, a privately-held software
company and the developer of CompanyStore. 7Software was incorporated in May
1997. 7Software was selling the initial version of its product through a single
sales representative at the time Concur acquired it. Concur's existing sales
force and consulting services group sells and services both XMS and
CompanyStore, and the Company's research and development activities will be
expanded to develop a common technology platform, the Concur Common Platform,
for both XMS and CompanyStore. In connection with the acquisition, the Company
issued 1,772,302 shares of its Common Stock in exchange for all the outstanding
shares of 7Software, converted all of 7Software's outstanding options into
options to purchase up to 309,809 shares of the Company's Common Stock, paid
$130,000 to 7Software, and agreed to pay $500,000 to certain shareholders of
7Software, resulting in a total purchase price valued at $6.2 million, including
direct costs of the acquisition. In determining the purchase price value,
management estimated the fair value of the Company's Common Stock and the
Company's stock options issued in the transaction. The Company also entered into
employment and bonus agreements with certain officers of 7Software. The
acquisition was recorded under the purchase method of accounting and the results
of operations of 7Software and the fair value of the assets acquired and
liabilities assumed were included in Concur's consolidated financial statements
beginning on the acquisition date. In connection with this acquisition, the
Company recorded $5.2 million for in-process technology as an expense in the
quarter ended June 30, 1998. In addition, the Company recorded capitalized
technology and
24
<PAGE> 26
other intangible assets of $960,000 that will be amortized on a straight-line
basis over the three years following the acquisition.
The Company expects that for the foreseeable future the significant
majority of its revenues will continue to be derived from its XMS product line
and related services. See "Risk Factors--Product Concentration," "--Risks
Associated with Expansion into New Market" and "--Risks Associated with
Acquisitions Generally."
The Company's revenues, which consist of software license revenues and
service revenues, totaled $2.1 million, $2.0 million and $8.3 million in fiscal
1995, 1996 and 1997, respectively, and were $5.2 million and $11.7 million for
the nine months ended June 30, 1997 and 1998, respectively. In fiscal 1995 and
the first nine months of fiscal 1996, the Company's revenues were derived from
licenses of QuickXpense and related services. In July 1996, the Company released
XMS, and substantially all of the Company's revenues in the fourth quarter of
fiscal 1996 as well as in fiscal 1997 and the nine months ended June 30, 1998
were derived from licenses of XMS and related services. The Company's pricing is
based on the number of users or employees of the purchasing enterprise. Service
revenues consist of consulting, customer support and training. See "Risk
Factors--Limited Operating History; Future Operating Results Uncertain; History
of Losses" and "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly
Results."
Concur markets its software and services primarily through its direct sales
organization in the United States, Canada, the United Kingdom and Australia.
Revenues from XMS licenses and services to customers outside the United States
were insignificant prior to fiscal 1997, and represented approximately $1.3
million and $455,000 in fiscal 1997 and the nine months ended June 30, 1998,
respectively. Historically, as a result of the relatively small amount of
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on the Company's business, results of operations and
financial condition. See "Risk Factors--International Operations" and Note 15 of
Notes to Consolidated Financial Statements.
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 91-1 ("SOP
91-1"). Software license revenues are recognized when a non-cancelable license
agreement has been signed with a customer, the software is shipped, no
significant post delivery vendor obligations remain and collection is deemed
probable. Maintenance revenues are recognized ratably over the contract term,
typically one year. Revenues for consulting services are recognized as such
services are performed. Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition" was issued in October 1997 by the American Institute of
Certified Public Accountants and amended by Statement of Position 98-4 ("SOP
98-4"). The Company will adopt SOP 97-2 beginning in fiscal 1999. Based upon its
interpretation of SOP 97-2 and SOP 98-4, the Company believes its current
revenue recognition policies and practices are materially consistent with SOP
97-2 and SOP 98-4. It is not anticipated that there will be a material change to
the Company's accounting for revenues as a result of the adoption of SOP 97-2.
However, full implementation guidelines for this standard have not yet been
issued. Once available, such implementation guidance could lead to unanticipated
changes in the Company's current revenue accounting practices, and such changes
could materially adversely affect the Company's future revenues and earnings.
Such implementation guidance may necessitate significant changes in the
Company's business practices in order for the Company to continue to recognize
license revenues upon delivery of its software products.
Since its inception, the Company has incurred substantial research and
development costs and has invested heavily in the expansion of its sales,
marketing and professional services organizations to build an infrastructure to
support its long-term growth strategy. The number of the Company's full-time
employees increased from 43 as of September 30, 1995 to 65 as of September 30,
1996 and 133 as of September 30, 1997, representing increases of 51% and 105%,
respectively. The number of employees increased from 108 as of June 30, 1997 to
179 as of June 30, 1998, an increase of 66%. As a result of investments in the
Company's infrastructure, the Company has incurred net losses in each fiscal
quarter since inception and, as of June 30, 1998, had an accumulated deficit of
$27.1 million. The Company anticipates that its operating expenses will increase
substantially for the foreseeable future as it expands its product development,
sales and marketing, and professional services staff. Accordingly, the Company
expects to incur net losses for the foreseeable future.
25
<PAGE> 27
The Company has recorded aggregate deferred stock compensation of $861,000.
Deferred stock compensation is amortized over the life of the options, generally
four years. The Company recorded amortization of deferred stock compensation of
$297,000 in the nine months ended June 30, 1998.
The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as indicative of future
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. There
can be no assurance the Company will be successful in addressing such risks and
difficulties. In addition, although Concur has experienced significant revenue
growth recently, there can be no assurance that such revenue growth will
continue or that the Company will achieve or maintain profitability in the
future. See "Risk Factors --Limited Operating History; Future Operating Results
Uncertain; History of Losses" and "--Unpredictable Fluctuations and Seasonal
Patterns in Quarterly Results."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues, net:
Licenses.................................... 98.9% 87.6% 76.7% 78.5% 68.6%
Services.................................... 1.1 12.4 23.3 21.5 31.4
------ ------ ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of revenues:
Licenses.................................... 34.2 19.7 4.8 4.2 2.7
Services.................................... 31.6 42.8 27.4 26.3 31.6
------ ------ ------ ------ ------
Total cost of revenues.............. 65.8 62.5 32.2 30.5 34.3
------ ------ ------ ------ ------
Gross margin.................................. 34.2 37.5 67.8 69.5 65.7
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing......................... 111.0 149.9 71.3 74.4 67.3
Research and development.................... 35.0 91.5 41.1 42.8 35.5
General and administrative.................. 24.2 49.2 21.9 23.3 27.5
Acquired in-process technology.............. -- -- -- -- 44.4
------ ------ ------ ------ ------
Total operating expenses............ 170.2 290.6 134.3 140.5 174.7
------ ------ ------ ------ ------
Loss from operations.......................... (136.0) (253.1) (66.5) (71.0) (109.0)
Other income (expense), net................... 0.2 0.3 (0.2) 0.3 (2.7)
------ ------ ------ ------ ------
Net loss...................................... (135.8)% (252.8)% (66.7)% (70.7)% (111.7)%
====== ====== ====== ====== ======
</TABLE>
Revenues
The Company's revenues are derived from software licenses and related
services. The Company's revenues were $2.1 million, $2.0 million and $8.3
million in fiscal 1995, 1996 and 1997, respectively, representing a decrease of
$169,000, or 8%, from fiscal 1995 to fiscal 1996 and an increase of $6.3
million, or 322%, from fiscal 1996 to fiscal 1997. The Company's revenues were
$5.2 million and $11.7 million for the nine months ended June 30, 1997 and 1998,
respectively, representing an increase of $6.5 million, or 125%. The Company had
no customer that accounted for more than 10% of its revenues in fiscal 1995,
1996 or 1997 or in the nine months ended June 30, 1998.
The Company's license revenues were $2.1 million, $1.7 million and $6.3
million in fiscal 1995, 1996 and 1997, respectively, representing a decrease of
$387,000, or 18%, from fiscal 1995 to fiscal 1996 and an increase
26
<PAGE> 28
of $4.6 million, or 271%, from fiscal 1996 to fiscal 1997. The Company's license
revenues were $4.1 million and $8.0 million for the nine months ended June 30,
1997 and 1998, respectively, representing an increase of $4.0 million, or 97%.
The increase in the Company's license revenues from fiscal 1996 to fiscal 1997
was due to increased market acceptance of the client-server version of XMS and
increases in both the size and productivity of the sales force. The increase in
license revenues for the nine months ended June 30, 1998 compared to the nine
months ended June 30, 1997 was a result of the continued impact of those same
factors, as well as the release of the intranet version of XMS, which has the
same list price as the client-server version, and the strategic marketing
alliance agreement signed with American Express in December 1997. Virtually none
of the increase in revenues was attributable to increased prices. The Company
has never changed the list price of XMS. The decrease in license revenues from
fiscal 1995 to fiscal 1996 resulted from the Company's redirection of its sales
efforts from QuickXpense to XMS.
The Company's service revenues were $24,000, $242,000 and $1.9 million in
fiscal 1995, 1996 and 1997, respectively, representing increases of $218,000
from fiscal 1995 to fiscal 1996 and $1.7 million from fiscal 1996 to fiscal
1997. The Company's service revenues were $1.1 million and $3.7 million for the
nine months ended June 30, 1997 and 1998, respectively, representing an increase
of $2.6 million, or 229%. Prior to fiscal 1997, service revenues consisted
primarily of customizing electronic versions of expense report forms in
connection with sales of QuickXpense. In fiscal 1997 and the nine months ended
June 30, 1998, service revenues consisted primarily of consulting service fees,
customer support and, to a lesser extent, training services, associated with the
increasing license revenues during these periods. Service revenues represented
1.1%, 12.4% and 23.3% of the Company's total revenues in fiscal 1995, 1996 and
1997, respectively, and 21.5% and 31.4% of total revenues for the nine months
ended June 30, 1997 and 1998, respectively. The increase in absolute service
revenues from the nine months ended June 30, 1997 to the nine months ended June
30, 1998, reflects increasing licenses of XMS as well as service revenues
recognized with respect to licenses entered into in prior periods. The Company
believes that the percentage of total revenues represented by service revenues
in prior fiscal years is not indicative of levels to be expected in future
periods. Due to its limited experience selling CompanyStore, the Company is
uncertain how recognition of service revenues associated with such sales will
affect its results of operations in the future. In addition, the Company expects
that its proportion of service revenues to total revenues will fluctuate in the
future, depending in part on the Company's use of third-party consulting and
implementation service providers as well as on the market's acceptance of the
Company's outsourced ESP solution.
Cost of Revenues
Cost of License Revenues. Cost of license revenues includes license fees
for third-party software, product media, product duplication and manuals. Cost
of license revenues was $728,000, $386,000 and $394,000, in fiscal 1995, 1996
and 1997, respectively, representing a decrease of $342,000, or 47%, from fiscal
1995 to fiscal 1996 and an increase of $8,000, or 2%, from fiscal 1996 to fiscal
1997. Cost of license revenues was $219,000 and $318,000 for the nine months
ended June 30, 1997 and 1998, respectively, representing an increase of $99,000,
or 45%. The decrease from fiscal 1995 to fiscal 1996 occurred because
QuickXpense, a shrink-wrapped application, had a higher cost of sales than XMS.
In fiscal 1995, all license revenues were attributable to QuickXpense whereas in
fiscal 1996, the Company sold a mix of XMS and QuickXpense. Cost of license
revenues remained relatively constant from fiscal 1996 to fiscal 1997 as a
result of a shift in the mix of revenues from QuickXpense and XMS. The increase
for the nine months ended June 30, 1997 to the nine months ended June 30, 1998
was a result of increased expenses associated with sub-licensing of third party
software due to increased sales of XMS and the costs of production, manuals and
other media associated with the release of the Intranet version of XMS in March
1998. Cost of license revenues as a percentage of license revenues was 34.6%,
22.5% and 6.2% for fiscal 1995, 1996 and 1997, respectively, and 5.4% and 4.0%
for the nine months ended June 30, 1997 and 1998, respectively. A portion of the
capitalized technology and other intangible assets recorded in connection with
the acquisition of 7Software will be amortized on a straight-line basis over
three years as cost of license revenues. The Company expects that the cost of
license revenues as a percentage of total revenues and license revenues may
increase significantly upon the introduction of the Company's outsourced
enterprise service provider ("ESP") solution and will fluctuate in the future
depending in part on the demand for the Company's current products and its
outsourced ESP solution.
27
<PAGE> 29
Cost of Service Revenues. Cost of service revenues includes personnel and
other costs related to consulting services, technical support, expense report
forms development and training. Cost of service revenues was $673,000, $839,000
and $2.3 million, in fiscal 1995, 1996 and 1997, respectively, representing an
increase of $166,000, or 24.7%, from fiscal 1995 to fiscal 1996 and an increase
of $1.4 million, or 170%, from fiscal 1996 to fiscal 1997. Cost of service
revenues were $1.4 million and $3.7 million for the nine months ended June 30,
1997 and 1998, respectively, representing an increase of $2.3 million, or 170%.
The increase from fiscal 1995 to fiscal 1997 was a result of hiring and training
a consulting organization to implement XMS and retraining existing personnel, in
connection with the shift in the Company's product line from QuickXpense to XMS.
The increase from the nine months ended June 30, 1997 to the nine months ended
June 30, 1998 was primarily due to an increase in professional services
personnel to support the Company's growing XMS customer base. Cost of service
revenues as a percentage of service revenues was 2,804.0%, 346.7% and 118.0% for
fiscal 1995, 1996 and 1997, respectively, and 122.5% and 100.7% for the nine
months ended June 30, 1997 and 1998, respectively. The decrease in cost of
service revenues as a percentage of service revenues from fiscal 1995 through
the nine months ended June 30, 1998, was primarily due to economies of scale
realized as a result of higher levels of consulting services activity and
increased experience of the professional services personnel. Cost of service
revenues as a percentage of service revenues may vary between periods due to the
mix of services provided by the Company and the resources used to provide such
services.
Costs and Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, lead
referral fees, and travel, entertainment and promotional expenses. Sales and
marketing expenses were $2.4 million, $2.9 million and $5.9 million in fiscal
1995, 1996 and 1997, respectively, representing an increase of $573,000, or 24%,
from fiscal 1995 to fiscal 1996 and $3.0 million, or 101%, from fiscal 1996 to
fiscal 1997. Sales and marketing expenses were $3.9 million and $7.9 million for
the nine months ended June 30, 1997 and 1998, respectively, representing an
increase of $4.0 million, or 104%. The increases from fiscal 1995 through the
nine months ended June 30, 1998 primarily reflect the Company's investment in
its sales and marketing infrastructure, which included significant
personnel-related expenses such as salaries, benefits and commissions,
recruiting fees, travel and entertainment expenses, and related costs of hiring
sales management, sales representatives, sales engineers and marketing
personnel. Sales and marketing employees totaled 11, 21 and 42 as of September
30, 1995, 1996 and 1997, respectively, representing increases of 91% and 100%,
respectively, and totaled 36 and 54 as of June 30, 1997 and 1998, respectively,
representing an increase of 50%. The increase in sales and marketing costs from
the nine months ended June 30, 1997 to the nine months ended June 30, 1998, also
reflected increased hiring rates to replace and support promoted regional sales
managers, public relations and trade show expenses, and sales referral fees made
under the Company's agreement with its referral partners, principally American
Express. Sales and marketing expenses represented 111.0%, 149.9% and 71.3% of
the Company's total revenues for fiscal 1995, 1996 and 1997, respectively, and
74.4% and 67.3% of total revenues for the nine months ended June 30, 1997 and
1998, respectively. The decrease in sales and marketing expenses as a percentage
of total revenues from fiscal 1996 to the nine months ended June 30, 1998
primarily reflects the more rapid growth of revenues compared to the growth of
sales and marketing expenses in this period due to the increase in service
revenues as a percentage of total revenues and a maturing sales force. The
Company believes that a significant increase in its sales and marketing efforts
is essential for it to maintain its market position and further increase
acceptance of its products. Accordingly, the Company anticipates it will
continue to invest heavily in sales and marketing for the foreseeable future,
and sales and marketing expenses will increase in future periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside contractors. Research and
development expenses were $744,000, $1.8 million and $3.4 million in fiscal
1995, 1996 and 1997, respectively, representing increases of $1.0 million, or
141%, from fiscal 1995 to fiscal 1996 and $1.6 million, or 90%, from fiscal 1996
to fiscal 1997. Research and development expenses were $2.2 million and $4.2
million for the nine months ended June 30, 1997 and 1998, respectively,
representing an increase of $2.0 million, or 87%. The increases from fiscal 1995
through the nine months ended June 30, 1998 were
28
<PAGE> 30
primarily related to the increase in the number of software developers and
quality assurance personnel and outside contractors to support the Company's
product development and testing activities related to the development and
release of both the client-server and Intranet versions of XMS. The Company's
research and development employees totaled 12, 22 and 38 as of September 30,
1995, 1996 and 1997, respectively, representing increases of 83% and 73%,
respectively, and totaled 34 and 51 as of June 30, 1997 and 1998, respectively,
representing an increase of 50%. Research and development costs represented
35.0%, 91.5% and 41.1% of the Company's total revenues in fiscal 1995, 1996 and
1997, respectively, and 42.8% and 35.5% of total revenues for the nine months
ended June 30, 1997 and 1998, respectively. The Company believes that a
significant increase in its research and development investment is essential for
it to maintain its market position, to continue to expand its product line and
to develop a common technology platform for its suite of products. Accordingly,
the Company anticipates that it will continue to invest heavily in product
research and development for the foreseeable future, and research and
development expenses are likely to increase in future periods. In the
development of the Company's new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Accordingly, software
development costs eligible for capitalization were insignificant, and all costs
related to internal research and development have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for the Company's executive,
finance, administrative and information services personnel. General and
administrative expenses were $515,000, $963,000 and $1.8 million in fiscal 1995,
1996 and 1997, respectively, representing increases of $448,000, or 87%, from
fiscal 1995 to fiscal 1996 and an increase of $852,000, or 88%, from fiscal 1996
to 1997. General and administrative expenses were $1.2 million and $3.2 million
for the nine months ended June 30, 1997 and 1998, respectively, representing an
increase of $2.0 million, or 166%. The increases from fiscal 1995 through the
nine months ended June 30, 1998, were primarily the result of additional
finance, executive and administrative personnel to support the growth of the
Company's business during these periods. In addition to increased compensation
and related expenses, the increase in general and administrative expenses from
the nine months ended June 30, 1997 to the nine months ended June 30, 1998
reflects an increase in the allowance for doubtful accounts related to the
Company's increase in revenues, and stock compensation expense, during the
period. During the nine months ended June 30, 1998, the Company recorded
deferred stock compensation for the differences between the exercise prices and
the deemed fair values of the Company's Common Stock with respect to certain
options, and recorded amortization of deferred stock compensation of $297,000.
General and administrative costs represented 24.2%, 49.2% and 21.9% of the
Company's total revenues in fiscal 1995, 1996 and 1997, respectively, and 23.3%
and 27.5% of total revenues for the nine months ended June 30, 1997 and 1998,
respectively. The Company believes that its general and administrative expenses
will continue to increase as a result of the continued expansion of the
Company's administrative staff and the expenses associated with becoming a
public company, including but not limited to annual and other public reporting
costs, directors' and officers' liability insurance, investor relations programs
and professional services fees.
Income Taxes. As of June 30, 1998, the Company had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $15.7 million, which expire at various dates from 2009 to 2013. In
addition, as of June 30, 1998, the Company had tax credit carryforwards of
approximately $262,000 which expire at various dates from 2009 to 2013. The Code
contains provisions that limit the use in any future period of net operating
loss and credit carryforwards upon the occurrence of certain events, including a
significant change in ownership interests. The Company had deferred tax assets,
including its net operating loss carryforwards and tax credits, totaling
approximately $7.3 million as of June 30, 1998. A valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance. See Note 8 of Notes to
Consolidated Financial Statements.
29
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data for the seven quarters in the 21-month period ended June 30,
1998, as well as such data expressed as a percentage of the Company's total
revenues for the respective periods indicated. This data has been derived from
unaudited Consolidated Financial Statements that have been prepared on the same
basis as the audited Consolidated Financial Statements and, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the information when read in conjunction
with the Consolidated Financial Statements and Notes thereto. The Company's
quarterly results have been in the past and may in the future be subject to
significant fluctuations. As a result, the Company believes that results of
operations for interim periods should not be relied upon as any indication of
the results to be expected in any future period. See "Risk
Factors--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results."
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1997 1997 1997 1997 1998 1998
------------ --------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues net:
Licenses......................... $ 923 $ 1,335 $ 1,829 $ 2,260 $ 2,036 $ 2,818 $ 3,185
Services......................... 218 336 564 805 1,079 1,141 1,456
------- ------- ------- ------- ------- ------- -------
Total revenues............. 1,141 1,671 2,393 3,065 3,115 3,959 4,641
Cost of revenues:
Licenses......................... 40 80 99 175 82 90 146
Services......................... 317 468 585 899 1,097 1,115 1,490
------- ------- ------- ------- ------- ------- -------
Total cost of revenues..... 357 548 684 1,074 1,179 1,205 1,636
------- ------- ------- ------- ------- ------- -------
Gross profit....................... 784 1,123 1,709 1,991 1,936 2,754 3,005
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.............. 1,061 1,378 1,434 2,023 2,206 2,400 3,280
Research and development......... 603 787 836 1,175 1,083 1,195 1,884
General and administrative....... 322 450 440 603 837 836 1,552
Acquired in-process technology... -- -- -- -- -- -- 5,203
------- ------- ------- ------- ------- ------- -------
Total operating expenses... 1,986 2,615 2,710 3,801 4,126 4,431 11,919
------- ------- ------- ------- ------- ------- -------
Loss from operations............... (1,202) (1,492) (1,001) (1,810) (2,190) (1,677) (8,914)
Other income (expense), net........ 17 11 (14) (33) (93) (103) (118)
------- ------- ------- ------- ------- ------- -------
Net loss........................... $(1,185) $(1,481) $(1,015) $(1,843) $(2,283) $(1,780) $(9,032)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues net:
Licenses......................... 80.9% 79.9% 76.4% 73.7% 65.4% 71.2% 68.6%
Services......................... 19.1 20.1 23.6 26.3 34.6 28.8 31.4
------- ------- ------- ------- ------- ------- -------
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses......................... 3.5 4.8 4.1 5.7 2.6 2.3 3.1
Services......................... 27.8 28.0 24.4 29.3 35.3 28.2 32.1
------- ------- ------- ------- ------- ------- -------
Total cost of revenues..... 31.3 32.8 28.5 35.0 37.9 30.5 35.2
------- ------- ------- ------- ------- ------- -------
Gross margin....................... 68.7 67.2 71.5 65.0 62.1 69.5 64.8
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.............. 93.0 82.4 59.9 66.0 70.8 60.6 70.6
Research and development......... 52.8 47.1 34.9 38.3 34.8 30.2 40.6
General and administrative....... 28.2 26.9 18.4 19.7 26.9 21.1 33.4
Acquired in-process technology... -- -- -- -- -- -- 112.1
------- ------- ------- ------- ------- ------- -------
Total operating expenses... 174.0 156.4 113.2 124.0 132.5 111.9 256.7
------- ------- ------- ------- ------- ------- -------
Loss from operations............... (105.3) (89.2) (41.7) (59.0) (70.4) (42.4) (191.9)
Other income (expense), net........ 1.4 0.7 (0.6) (1.1) (2.9) (2.6) (2.5)
------- ------- ------- ------- ------- ------- -------
Net loss........................... (103.9)% (88.5)% (42.3)% (60.1)% (73.3)% (45.0)% (194.4)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
The trends discussed in the annual comparisons of operating results from
fiscal 1995 through fiscal 1997, and the nine months ended June 30, 1997 to the
nine months ended June 30, 1998, are generally applicable to the comparison of
results of operations for the seven quarters in the 21-month period ended June
30, 1998,
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adjusted for the seasonality the Company has experienced as referred to below.
In addition, the Company's operating expenses for the three months ended June
30, 1998 exceeded levels that the Company has historically experienced due to
acquired in-process technology expense recorded in connection with the
acquisition of 7Software, and increased (i) T&E expenses associated with higher
personnel levels, (ii) use of independent contractors and other outside services
for continued development and localization of XMS, (iii) recruiting and related
hiring expenses for additional senior management in the professional services,
research and development, administrative, marketing and sales organizations,
(iv) increased allowances for doubtful accounts due to the Company's revenue
growth in fiscal 1998 and (v) amortization of deferred stock compensation.
The Company's quarterly operating results have fluctuated significantly in
the past, and will continue to fluctuate in the future, as a result of a number
of factors, many of which are outside the Company's control. These factors
include: demand for the Company's products and services; size and timing of
specific sales; level of product and price competition; timing and market
acceptance of new product introductions and product enhancements by Concur and
its competitors; changes in pricing policies by Concur or its competitors;
Concur's ability to hire, train and retain sales and consulting personnel to
meet the demand, if any, for XMS and CompanyStore; the length of sales cycles;
Concur's ability to establish and maintain relationships with third-party
implementation services providers and strategic partners; delay of customer
purchases caused by announcement of new hardware or enterprise resource planning
("ERP") platforms or otherwise; the mix of products and services sold, including
an anticipated shift to providing its solutions as an ESP; mix of distribution
channels through which products are sold; mix of international and domestic
revenues; changes in the Company's sales force incentives; software defects and
other product quality problems; personnel changes; changes in the Company's
strategy, including the anticipated development of an ESP strategy; general
domestic and international economic and political conditions; and budgeting
cycles of the Company's customers. The Company has in the past experienced
delays in the planned release dates of new software products or upgrades, and
has discovered software defects in new products after their introduction. There
can be no assurance that new products or upgrades will be released according to
schedule, or that when released they will not contain defects. Either of these
situations could result in adverse publicity, loss of revenues, delay in market
acceptance or claims by customers brought against the Company, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the timing of individual sales
has been difficult for the Company to predict, and large individual sales have,
in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales will not have a material adverse effect on the Company's
quarterly operating results.
The Company has experienced, and expects to continue to experience, a high
degree of seasonality, with a disproportionately greater amount of the Company's
license revenues for any fiscal year being recognized in its fourth fiscal
quarter. For example, in fiscal 1997, 37% of total revenues, 36% of license
revenues and 42% of service revenues were recognized in the fourth fiscal
quarter. The Company believes that such seasonality is primarily the result of
the efforts of the Company's direct sales force to meet or exceed fiscal year
end sales quotas. In addition, the Company's license revenues in its first
fiscal quarter have historically been lower than those of the immediately
preceding fourth quarter. For example, license revenues in the first quarter of
fiscal 1998 decreased 10% from the fourth quarter of fiscal 1997. In future
periods, the Company expects these seasonal trends may cause first quarter
revenues to be lower than the level achieved in the preceding fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
private sales of equity securities and the use of long-term debt and equipment
leases. As of June 30, 1998, the Company had raised approximately $24.8 million,
net of offering costs from the issuance of preferred stock, and approximately
$7.5 million from the issuance of long-term debt, and had financed equipment
purchases totaling approximately $3.1 million. The Company's sources of
liquidity as of June 30, 1998 consisted principally of cash and
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<PAGE> 33
cash equivalents of $15.6 million, and approximately $1.5 million of available
borrowings under a line of credit.
Net cash used in operating activities was $2.3 million, $4.1 million and
$6.6 million in fiscal 1995, 1996 and 1997, respectively, and $4.0 million for
the nine months ended June 30, 1998. For such periods, net cash used by
operating activities was primarily a result of funding ongoing operations.
Since 1995, the Company's investing activities have consisted of purchases
of property and equipment. Capital expenditures, including those under capital
leases, totaled $220,000, $420,000 and $1.0 million in 1995, 1996, and 1997,
respectively, and $1.1 million for the nine months ended June 30, 1998. Capital
leases are used to finance the acquisition of property and equipment, primarily
computer hardware and software, for the Company's increasing employee base, as
well as for the Company's management information systems. Management anticipates
that it will experience an increase in its capital expenditures and lease
commitments consistent with its anticipated growth in operations, infrastructure
and personnel. As of June 30, 1998, the Company had commitments for capital
expenditures totaling approximately $333,000 that will be financed through
leasing arrangements not to exceed five years. The Company does not expect to
incur significant costs to make its products or internal information systems
Year 2000 compliant because it believes such products and information systems
are designed to function properly through and beyond the year 2000. See "Risk
Factors--Year 2000 Compliance."
The Company's financing activities provided $4.8 million, $7.7 million and
$8.6 million in fiscal 1995, 1996 and 1997, respectively, and $12.9 million for
the nine months ended June 30, 1998. In 1995, cash provided by financing
activities was comprised primarily of $4.9 million received in connection with
the sale of Series A and Series B Redeemable Convertible Preferred Stock and
$187,000 in proceeds from line of credit borrowings partially offset by
principal payments totaling $300,000. In fiscal 1996, cash provided by financing
activities was comprised primarily of $7.5 million received in connection with
the sale of Series C Redeemable Convertible Preferred Stock and $563,000 in
proceeds from long-term debt borrowings partially offset by principal payments
on long-term debt totaling $380,000. In fiscal 1997, cash provided by financing
activities was comprised primarily of $4.6 million received in connection with
the sale of Series D Redeemable Convertible Preferred Stock, $3.1 million in
proceeds from long-term debt, and $1.9 million in proceeds from sales leaseback
transactions and capital lease financing offset by principal payments on
long-term debt of $925,000. For the nine months ended June 30, 1998, cash
provided by financing activities consisted primarily of $7.8 million received in
connection with the sale of Series E Redeemable Convertible Preferred Stock and
$5.5 million in proceeds from long-term borrowings offset by $248,000 in
principal payments on long-term debt and $308,000 in payments on capital lease
obligations.
The Company has a line of credit with a bank for $2.0 million, which bears
interest at the lending bank's prime rate plus 1.5%. Borrowings are limited to
the lesser of 80% of eligible accounts receivable or $2.0 million and are
secured by substantially all of the Company's non-leased assets. As of June 30,
1998, the Company had not borrowed under the line of credit, however, there were
$455,000 in standby letters of credit outstanding. Total borrowings available
under this line were approximately $1.5 million as of June 30, 1998. This credit
facility expires in November 1998 and the Company expects to extend or replace
such credit facility under substantially similar terms. This credit facility
contains the same restrictions and covenants as the Security and Loan Agreement
described below.
In September 1997, the Company entered into a $1.0 million senior term loan
facility with the same bank with which the Company has the line of credit
pursuant to the terms of a Security and Loan Agreement (the "Loan Agreement").
In April 1998, the Loan Agreement was amended to allow for additional borrowings
up to a total of $3.0 million. The facility, which bears interest at the lending
bank's prime rate less 1.0%, matures on February 15, 2001. Payments are interest
only through February 1999, at which time the facility will be repaid in 24
equal monthly principal payments plus interest. The Company's Loan Agreement
contains certain financial restrictions and covenants that include a minimum
liquidity ratio of 1.5 to 1, minimum quarterly net sales covenants that have
increased each quarter from $3.0 million in the quarter ended March 31, 1998 to
$5.0 million in the quarter ended September 30, 1998, and restrictions on
dividend payments. The Company is currently in compliance with such covenants
and restrictions. The Company has granted a perfected senior
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<PAGE> 34
security interest in all non-leased assets of the Company as security for its
obligations under the Loan Agreement. As of June 30, 1998, the outstanding
indebtedness under the Loan Agreement was $3.0 million.
In July 1997, the Company entered into a Subordinated Loan and Security
Agreement with an equipment lessor in the principal amount of $1.5 million which
bears interest at an annual rate of 8.5% (the "Subordinated Loan Agreement"). In
May 1998, the Subordinated Loan Agreement was amended to allow for borrowings of
$5.0 million bearing interest at an annual rate of 11% on the first $3.5 million
and 12.5% on the remaining $1.5 million. The notes are due in varying monthly
installments through April 2002. The Subordinated Loan Agreement contains
certain restrictions and covenants, including restrictions on dividend payments,
restrictions on extending or settling receivables and on relocating collateral.
As of June 30, 1998, the outstanding indebtedness under the Subordinated Loan
Agreement was $4.8 million.
On August 11, 1998, the Company issued a warrant to TRS to purchase an
additional 6,000,000 shares of Series E Preferred Stock (the "TRS Warrant").
Upon the conversion of all of the shares of Series E Preferred Stock into shares
of Common Stock in connection with a registration of the Company's Common Stock
under the Securities Act, this warrant will automatically become exercisable for
6,000,000 shares of the Company's Common Stock. The warrant is exercisable in
four tranches as follows: 750,000 shares may be acquired at the time of the
Offering at a cash purchase price equal to the price to the public in the
Offering less 7%; 1,750,000 shares may be acquired at any time on or before
October 15, 1999 at a cash purchase price of $13.50 per share; 1,750,000 shares
may be acquired at any time on or before January 15, 2001 at a cash purchase
price of $20.25 per share; and the remaining 1,750,000 shares may be acquired at
any time on or before January 15, 2002 at a cash purchase price of $34.00 per
share. As was permitted by the warrant, the Board of Directors determined,
within 60 days of the date of the warrant, to cancel 25% of the shares that
could have been acquired under the warrant at the time of the Offering or on or
before October 15, 1999. Thus, 562,500 shares may be acquired at the time of the
Offering, and 1,312,500 shares may be acquired on or before October 15, 1999.
The Company intends to use the net proceeds of the Offering for working
capital and general corporate purposes, including increased domestic and
international sales and marketing expenditures, increased research and
development expenditures and capital expenditures made in the ordinary course of
business, as well as possible acquisitions of businesses, products and
technologies that are complementary to those of the Company. Although the
Company has not identified any specific businesses, products or technologies
that it may acquire, and there are no current agreements or understandings with
respect to any such transactions, the Company does from time to time evaluate
such opportunities. Pending such uses, the net proceeds of the Offering will be
invested in short-term, investment-grade, interest-bearing instruments. See
"Risk Factors--Broad Discretion Over Use of Proceeds."
The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future related
to entering new markets for the Company's products and services, increasing
research and development spending, increasing its sales and marketing
operations, developing new distribution channels, improving its operational and
financial systems and broadening its professional service capabilities. Such
operating expenses will be a material use of the Company's cash resources,
including a portion of the net proceeds of the Offering. The Company believes
that the net proceeds of the Offering, together with its existing cash and cash
equivalents and available bank borrowings, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. Thereafter, the Company may require additional funds to
support its working capital requirements or for other purposes and may seek to
raise such additional funds through public or private equity financing or from
other sources. There can be no assurance that such sources will be adequate,
will be obtainable on terms favorable to the Company or will not be dilutive.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in little more than a
year, computer systems and software used by many companies
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<PAGE> 35
and organizations in a wide variety of industries (including technology,
transportation, utilities, finance and telecommunications) will experience
operating difficulties unless they are modified or upgraded to process
information related to the century change. Significant uncertainty exists in the
software and other industries concerning the scope and magnitude of problems
associated with the century change. The Company recognizes the need to ensure
its operations will not be adversely affected by Year 2000 software failures.
The Company is assessing the potential overall impact of the impending century
change on the Company's business, results of operations and financial condition.
Based on the Company's assessment to date, the Company believes the current
versions of its software products are "Year 2000 compliant"--that is, they are
capable of adequately distinguishing 21st century dates from 20th century dates.
However, the Company's products are generally integrated into enterprise systems
involving sophisticated hardware and complex software products, which may not be
Year 2000 compliant. The Company may in the future be subject to claims based on
Year 2000 problems in others' products, or issues arising from the integration
of multiple products within an overall system. Although the Company has not been
a party to any litigation or arbitration proceeding to date involving its
products or services and related to Year 2000 compliance issues, there can be no
assurance that the Company will not in the future be required to defend its
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
liability of the Company for Year 2000-related damages, including consequential
damages, could have a material adverse effect on the Company's business, results
of operations and financial condition. In addition, the Company believes that
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or upgrade
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. To the extent Year 2000 issues cause significant delay
in, or cancellation of, decisions to purchase the Company's products or
services, the Company's business, results of operations and financial condition
would be materially adversely affected.
The Company is reviewing its internal management information and other
systems in order to identify any products, services or systems that are not Year
2000 compliant, and take corrective action. To date, the Company has not
encountered any material Year 2000 problems with its computer systems or any
other equipment that might be subject to such problems. The Company's plan for
the Year 2000 calls for compliance verification of external vendors supplying
software and information systems to the Company and communication with
significant suppliers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of its assessment, the Company is
evaluating the level of validation it will require of third parties to ensure
their Year 2000 readiness. In the event that any such third parties cannot
provide the Company with products, services or systems that meet the Year 2000
requirements on a timely basis, the Company's business, results of operations
and financial condition could be materially adversely affected. The total cost
of these Year 2000 compliance activities has not been, and is not anticipated to
be, material to the Company's business, results of operations and financial
condition. These costs and the timing in which the Company plans to complete its
Year 2000 modifications and testing processes are based on management's
estimates. However, there can be no assurance that the Company will identify and
remediate all significant Year 2000 problems on a timely basis, that remediation
efforts will not involve significant time and expense, or that unremediated
problems will not have a material adverse effect on the Company's business,
results of operations and financial condition.
ACQUISITION OF 7SOFTWARE
On June 30, 1998, the Company acquired 7Software, a privately-held software
company and the developer of CompanyStore. As of the date of acquisition, the
CompanyStore developmental project consisted of ongoing research and development
efforts in the following areas: (i) compatibility with additional databases,
(ii) compatibility with additional enterprise resource planning platforms, (iii)
multiple catalog support, (iv) fundamental redesign of the user interface and
(v) redesign and rewriting of the administrative functionality.
Based on management's estimates, the remaining research and development
efforts relating to the completion of the CompanyStore technology were expected
to continue into the first quarter of fiscal 1999, the anticipated
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product release date. Accordingly, the cost to complete the in-process
technology was estimated based on the number of man-months required to reach
technological feasibility for the CompanyStore technology, the type of
professional and engineering staff involved in the completion process and their
fully burdened monthly salaries. Management estimated the direct costs to
achieve technological feasibility to be approximately $300,000. Beyond this
period, management estimated significantly less expense in supporting and
maintaining active products identified at the acquisition date to be in-process
technology. If the in-process projects contemplated in management's forecast are
not successfully developed, future revenue and profitability might be adversely
affected. Additionally, the value of other intangible assets acquired may become
impaired.
An independent valuation of 7Software's technology was performed and used
as an aid in determining the fair value of the technology assets for purposes of
allocating the purchase price among the acquired assets, including the portion
of the purchase price properly attributed to incomplete research and development
projects that should be expensed according to the requirements of Interpretation
4 of SFAS No. 2.
To determine the value of the acquired in-process research and development,
the expected future cash flows of the in-process technology were based on
forecasts of future results that management believes are likely to occur. The
future cash flows were discounted taking into account the state of development
of the in-process project, the cost to complete that project, the expected
income stream, the life cycle of the product ultimately developed, and the
associated risks. Such risks include, but are not limited to, the inherent
difficulties and uncertainties in completing the project and thereby achieving
technological feasibility, and the risks related to the viability of and
potential changes to future markets. This analysis resulted in amounts assigned
to the acquired in-process research and development projects that have not yet
reached technological feasibility (as defined and utilized by the Company in
assessing software capitalization) and do not have alternative future uses.
Revenues and related expenses for the in-process technology were estimated
from the acquisition date through the end of Concur's fiscal 2002. Management's
analysis considered the anticipated product release date for the acquired
CompanyStore developmental project. The overall life of the in-process
technology was estimated to be approximately four years for the CompanyStore
technology. Management's aggregate projections reflect revenue growth in earlier
periods resulting from an expanding market for procurement software products.
Operating expenses, including general and administrative, marketing and sales,
were based on anticipated costs after the 7Software operations were merged into
Concur's operating structure.
Management discounted the net cash flows of the in-process technology to
their present value using a discount rate of 35%. This was determined to be
higher than Concur's weighted average cost of capital ("WACC") due to the fact
that the technology had not yet reached technological feasibility as of the date
of valuation. In utilizing a discount rate greater than WACC, management has
reflected the risk premium associated with achieving the forecasted cash flows
associated with these projects.
The CompanyStore developmental project, as of the acquisition date, was
estimated to be developed during the fourth quarter of 7Software's fiscal 1998
and fiscal 1999 and released during Concur's fiscal 1999. The Company continues
to expect to achieve the forecasted revenue attributable to the in-process
project, as set forth in the valuation, when it is released. Because the Company
believes that it will achieve revenue levels and incur product development costs
similar to those originally estimated, it expects only slight variations between
assumptions and actual results. Therefore, management does not anticipate any
material impact on operations or financial position unless the in-process
project is not completed.
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BUSINESS
The following description contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that may
cause such results to differ include but are not limited to those discussed in
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
OVERVIEW
Concur is a leading provider of Intranet-based employee-facing applications
that extend automation to employees throughout the enterprise and to partners,
vendors and service providers in the extended enterprise. The Company's Xpense
Management Solution ("XMS") and CompanyStore products automate the preparation,
approval, processing and data analysis of travel and entertainment ("T&E")
expense reports and front-office procurement requisitions. Concur believes it is
the leading provider of T&E expense management solutions based on a combination
of the number of customers it serves and the features its solutions provide.
Since the introduction of XMS in 1996, the Company has licensed its products to
over 150 enterprise customers with over 650,000 end users. Through its June 1998
acquisition of 7Software, Inc., the Company added the CompanyStore front-office
procurement application to its product suite. By automating manual, paper-based
processes, the Company's products reduce processing costs and enable customers
to consolidate purchases with preferred vendors and negotiate vendor discounts.
INDUSTRY BACKGROUND
In response to increasingly competitive conditions worldwide, businesses
are seeking cost savings and productivity gains through business process
automation. Rather than internally developing applications to automate business
processes, companies are increasingly turning to independent software vendors
for solutions in areas such as finance and accounting, manufacturing, human
resources, supply chain management, customer support and sales force automation.
These solutions have traditionally targeted discrete functional or department
level business processes involving relatively few employees.
Businesses are now seeking similar applications to replace manual,
paper-based processes involving the vast majority of employees throughout the
enterprise. Such "employee-facing" business processes include T&E expense
management, front-office procurement, human resources self-service, time and
billing, and facilities management. Typically, these processes are characterized
by extensive corporate policies, detailed forms, manual data entry, multiple
approvals, manual review and audit, manual financial system posting and
cumbersome interactions with third-party suppliers and service providers.
The emergence of the Internet and corporate Intranets has made it possible
to deploy applications that reach all employees in the enterprise and to connect
the enterprise to corporate partners, vendors and service providers. In
addition, in contrast to traditional client-server applications, Intranet-based
applications can be deployed rapidly and cost-effectively throughout the
enterprise. The Internet also allows a software vendor to act as an outsourced
enterprise service provider ("ESP"), delivering employee-facing applications
through the Internet to reduce customers' up-front costs and IT infrastructure
commitments.
Companies automating employee-facing business processes can realize
significant operating cost savings through reduced processing costs,
consolidated purchases with preferred vendors and negotiated vendor discounts.
For example, according to the 1997 American Express T&E Management Process Study
(the "American Express Study") published by the American Express Company, a
subsidiary of which became a stockholder of the Company in August 1998,
corporations on average spend $36 per T&E expense report processed, but can
reduce such costs to as little as $8 through best-in-class automation. Savings
of this magnitude on a per transaction basis are significant for enterprises
with large numbers of similar transactions. Based on the savings suggested by
the American Express Study, businesses that process from 1,000 to 5,000 T&E
expense reports per month might achieve savings ranging from $300,000 to $1.5
million per year. Similar savings can be achieved by automating front-office
procurement. According to industry estimates, companies typically spend in
excess of $100 to process each requisition, which the Company believes is
typical and can be reduced to approximately $25 using best-in-class automation.
Automation not only can lower the cost of processing expense reports and
procurement requisitions, but also can provide information that can be used to
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negotiate discounts from vendors and service providers. Based on the amounts
spent on T&E and front-office procurement, even a small percentage reduction in
vendor charges can result in significant savings. For example, the American
Express Study reported that U.S. businesses spent $156 billion in 1996 on direct
T&E expenses such as airfare, hotel stays and car rentals.
The Company believes that the substantial potential savings from processing
cost reductions and vendor discounts, coupled with the emergence of Intranet
technologies have created a significant demand for employee-facing applications.
The Company further believes that the most successful employee-facing
applications will improve the efficiency of T&E expense management, front-office
procurement and other similar business processes and will be (i) based on
Internet technologies, (ii) rapidly deployable and highly scalable, (iii)
offered as part of an integrated suite of related applications, (iv) integrated
with enterprises' existing IT infrastructures and (v) capable of linking
businesses with their corporate partners, vendors and service providers through
the Internet. Successful providers of such employee-facing applications will be
able to deliver cost savings and other tangible benefits to corporate
management, meet the needs of enterprise IT professionals and reduce burdens on
employees.
THE CONCUR SOLUTION
Concur is a leading provider of Intranet-based employee-facing applications
that extend automation to employees throughout an enterprise and to partners,
vendors and service providers in the extended enterprise. The Company's XMS and
CompanyStore products automate the preparation, approval, processing and data
analysis of T&E expense reports and front-office procurement requisitions.
Concur believes that it is the leading provider of T&E expense management
solutions based on a combination of the number of customers it serves and the
features its solutions provide. Since the introduction of XMS in 1996, the
Company has licensed its products to over 150 enterprise customers with over
650,000 end users. By acquiring 7Software in June 1998, the Company added the
CompanyStore front-office procurement application to its product suite. The
Company's products benefit a number of constituencies within the enterprise,
including corporate management, IT professionals and employees, in the following
ways.
Benefits for Corporate Management
Reduced Processing Costs. XMS and CompanyStore can significantly reduce the
amount of labor associated with manual, paper-based T&E expense management and
front-office procurement systems, by automating the process of preparation,
approval, processing and data analysis. Concur believes that companies using its
solutions as part of best-in-class processes can achieve significant cost
savings. According to the American Express Study, corporations on average spend
$36 per T&E expense report processed, but can reduce such costs to as little as
$8 through best-in-class automation. Similarly, industry estimates indicate that
companies typically spend in excess of $100 to process each requisition for
front-office goods and services. The Company believes that this estimate is
typical and that enterprises using best-in-class automation for such processes
can reduce that cost to approximately $25.
Improved Supplier Management. Concur's products enable customers to collect
and analyze data on T&E expenses and front-office procurement. Customers can use
this data to help consolidate purchases with preferred vendors, negotiate vendor
discounts and monitor compliance with pre-negotiated rates. The Company believes
that the savings from improved supplier management can be substantial. For
example, one XMS customer informed the Company that, after implementing XMS, it
was able to reduce its annual spending on air travel by 5% to 10%.
Improved Cash Management. Concur's products enable customers to improve
their cash management positions and cash forecasting abilities by controlling
the timing of payments to T&E and front-office suppliers and vendors.
Improved Policy-Making and Monitoring. Concur's products facilitate
budgeting, policy-making and trend analysis, and monitoring of compliance with
corporate policy.
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Benefits for IT Professionals
Rapid Deployment. Concur's Intranet-based products are designed to be
deployed rapidly within today's existing corporate IT infrastructures without
requiring modifications to customer systems. Concur offers applications
configured to customer requirements rather than solutions customized on a
customer-by-customer basis. Once installed on a customer's Intranet servers,
Concur's products can reach employees enterprise-wide. For example, one Concur
customer recently deployed XMS to over 25,000 employees within 90 days after the
customer began its rollout, and another customer deployed CompanyStore within
five weeks.
Enterprise-Wide Scalability. Concur's Intranet-based products are designed
to reach employees throughout the enterprise, regardless of the organization's
size. The Company has licensed its products to customers seeking to deploy to as
few as 100 employees and as many as 80,000 employees, with the largest
installation to date being a site with over 50,000 employees.
Leverage of Existing IT Infrastructure. Because most businesses operate in
a heterogeneous computing environment, XMS is designed to interact and
interoperate with a broad range of software platforms and products, including
multiple operating systems, browsers, databases, accounting packages and major
ERP programs such as SAP, PeopleSoft and Oracle. CompanyStore currently supports
SAP R/3 and Microsoft SQL server, and the Company intends to enhance
CompanyStore to support other major platforms.
Connectivity to Third Parties. The Company's Intranet-based products are
designed to enable enterprises to link their systems with those of their
corporate partners, vendors and service providers, including corporate charge
card providers such as American Express, travel booking applications and
suppliers such as Corporate Express, Inc.
Benefits for Employees
Faster Reimbursement and Order Fulfillment. Concur's solutions enable
businesses to reduce the time required to reimburse employees for their T&E
expenses and to fulfill front-office requisitions. Features that expedite the
process include automated electronic approval routing, links to automatic
deposit systems, links with approved vendors, on-line status updates and
automatic posting to ERP and financial programs. The American Express Study
reported that the time from submission of an expense report to reimbursement
could be reduced from an average of 22 days to as few as three days using
best-in-class automation processes.
Ease of Use. Concur's products contain easy-to-use features and functions
that reduce the time users spend preparing T&E expense reports and front-office
requisitions. XMS uses corporate credit card information to "prepopulate" a
user's expense report automatically. Both XMS and CompanyStore also
"prepopulate" expense reports and requisition forms based on past experience and
preferences. In addition, corporate policies and preferred vendors can be
integrated into the applications, and detailed explanations of corporate
policies are available on-line. These features reduce errors, save user time and
effort, and improve expense reconciliation.
STRATEGY
Concur's objective is to be the leading provider of Intranet-based
employee-facing applications that extend automation to employees throughout the
enterprise and to partners, vendors and service providers in the extended
enterprise. Key elements of the Company's strategy include:
Extend Leadership Position. Concur intends to extend its leadership
position in T&E expense management solutions and to leverage that position to
sell CompanyStore, its recently acquired front-office procurement product. In
order to accommodate anticipated future demand for its products, the Company
intends to increase the size of its direct sales and telesales organizations
significantly. Concur believes that expanding its sales and marketing
organization will enhance its ability to sell its products to new customers
globally. The Company also believes that an expanded sales force will allow it
to sell CompanyStore and future applications to its current customers.
Expand Product Functionality. Concur plans to continue its innovation and
development of advanced features and functionality for its T&E expense
management and front-office procurement solutions. The Company plans to add
functionality to XMS, including features such as localized versions for
additional
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<PAGE> 40
foreign countries and enhanced integration with on-line travel booking
applications such as American Express Interactive. Concur also plans to enhance
CompanyStore by expanding its features and functionality, adding support for
additional databases and ERP platforms, enhancing catalog support and
integrating CompanyStore into its product suite through the Concur Common
Platform, the common technology platform being built by the Company to
standardize all of the software architecture in its application suite.
Extend and Integrate Product Suite. The Company plans to extend its
employee-facing application suite by acquisition and internal development.
Concur expects to target additional employee-facing applications that can offer
compelling benefits to the enterprise such as human resources self-service, time
and billing, and facilities management applications. To create an integrated
suite of applications, the Company is pursuing development of a common user
interface and a common technology platform. The common user interface, known as
Employee Desktop, is a personalized Web page on the corporate Intranet that
provides a centralized location for all employee-facing applications. The
technology platform, known as the Concur Common Platform, will standardize the
software architecture underlying all applications in the suite. The Company
believes that the benefits of an integrated suite include ease of use and
reduced IT burden as a result of common technology.
Expand International Presence. Concur believes that considerable untapped
demand exists for its products outside of the United States. For the nine months
ended June 30, 1998, the Company's international revenues accounted for less
than five percent of its total revenues. The Company intends to accelerate its
investment in international sales and marketing in an effort to increase sales
of its employee-facing applications worldwide. It also plans to add new features
and functionality to XMS and CompanyStore to accommodate accounting, customs,
currency and tax requirements of foreign jurisdictions.
Extend Relationships With Strategic Third Parties. Concur intends to expand
its relationships with existing strategic referral partners and to develop
additional relationships with providers of complementary third-party
applications and products. The Company has developed strong lead generation
relationships with leading corporate charge card providers such as American
Express, Diners Club and Citibank, N.A., and intends to establish similar
relationships with purchasing card providers and systems integration and
consulting firms. The Company intends to integrate XMS with automated travel
booking applications to provide its customers with an end-to-end travel booking
solution that encompasses booking, reporting and analysis, and to integrate
CompanyStore with leading front-office supply vendors to provide its customers
with greater access to those vendors.
Offer Enterprise Service Provider Solutions. In addition to licensing its
software, Concur plans to offer its solutions as an Internet-based ESP on a
per-transaction pricing basis to companies seeking to outsource their
employee-facing business applications. The Company expects that this opportunity
will be particularly attractive to middle-market customers (100-750 licensed end
users), which typically have limited IT staffing and budgets. Concur's ESP
services are currently expected to be available in the second half of calendar
1999.
The Company's strategy involves substantial risk. There can be no assurance
that the Company will be successful in implementing its strategy or that it will
lead to achievement of the Company's objectives. If the Company is unable to
implement its strategy effectively, the Company's business, results of
operations and financial condition would be materially adversely affected.
PRODUCTS AND TECHNOLOGY
The Company's current product line consists of XMS, its market-leading T&E
expense management application, and CompanyStore, its newly-acquired
front-office procurement application. Substantially all revenues to date have
been derived from XMS and related services. The Company shipped an
enterprise-wide, client-server based version of XMS in July 1996, and shipped
the Intranet-based version of XMS in March 1998. For customers without corporate
Intranets or for users not connected to the Internet, the Company provides a
disconnected Windows-based version of XMS, which is interoperable with the
Intranet version of XMS. Concur has licensed XMS to over 650,000 end users in
over 150 companies. By acquiring 7Software in June 1998, the Company added
CompanyStore to its product suite. The Company generally offers licenses for its
software based on the number of users or employees at a given enterprise. The
typical order size for the
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<PAGE> 41
Company's products and services ranges from $50,000 to $500,000, with certain
transactions that have been greater than $1 million.
Xpense Management Solution
XMS automates the T&E expense management process, including report
preparation, approval, processing and data analysis.
Report Preparation. XMS includes a number of features that facilitate
report preparation for the end-user. The application uses corporate credit card
information to prepopulate a user's expense report with transaction data
covering a variety of the information required for the expense report, including
transaction date, type of expense, vendor, location, method of payment, currency
amount and foreign currency conversion. Using a graphical user interface, the
employee supplies additional expense-related information by using pull-down
menus. To eliminate the task of sorting receipts, XMS allows the user to enter
data in any order. The HotelXpert feature of the program automates the
complicated process of itemizing hotel receipts. With each use of XMS, the
application retains commonly incurred expense information and uses this
information to help complete the next expense report. Other ease-of-use features
include simple "checkbook" style input screens, the ability to create
"attendees" lists, mileage reimbursement tracking and automatic flagging of non-
compliant and incomplete entries.
Report Approval. XMS allows each enterprise to determine how expense
reports should be processed, whether by submission to a manager for approval
before processing or by submission to the accounting department for immediate
review and payment. Once the report is submitted, the approver receives an
e-mail message containing an Intranet link to XMS, where all reports awaiting
approval are listed. XMS can be configured to route the report for approval
based on cost center, dollar limit or other criteria. Items that do not comply
with corporate policy can be automatically flagged for review, allowing
approvers to focus on problematic items. Approvers can reject individual line
items, while allowing the rest of the report to continue in the approval
process. Once approved, the report is automatically forwarded to the next phase
in the process or to the enterprise's accounting department, and the user is
notified of the action.
Report Processing. XMS streamlines back-office processing of expense
reports in a number of ways. Because all expense reports are prepared
electronically, the processing department no longer needs to check the
arithmetic of each report manually. Moreover, businesses can greatly reduce the
time spent auditing reports by choosing to audit only those reports flagged by
XMS as not compliant with corporate T&E expense policies. In addition, XMS
reduces the number of status inquiries between employees and processing
departments by automatically updating the status of reports in the database, and
alerting employees via e-mail to the status of their reports. XMS allows
significant time savings by automatically posting expense report information to
the enterprise's ERP or accounting package, eliminating the manual re-entry of
these data. XMS further simplifies processing by producing bar-coded receipt
submission cover pages to validate delivery of receipts associated with expense
reports. XMS also helps companies claim reimbursement of tax credits by tracking
VAT, GST and other international taxes.
Data Analysis. XMS utilizes business intelligence software to analyze
expense data. This information can be presented graphically in various display
formats and allows travel managers to determine total spending according to
vendor, location or other user-defined criteria. Informed by this data, managers
can analyze trends and determine methods for controlling costs or negotiating
more favorable terms with vendors. Managers can also analyze the data to monitor
compliance with corporate travel policies and determine if policy modifications
are appropriate.
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The following table describes significant features and potential benefits
of XMS:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
REPORT PREPARATION
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Prepopulates report with corporate credit Speeds report preparation time
card transactions
Reduces input mistakes
Retains commonly incurred expense
information Reduces queries and dependence on accounting
department
Simplifies receipt entry
Ensures submission of all applicable expenses
Itemizes hotel receipts automatically
Increases employee use of corporate credit
Prevents submission of incomplete reports card
Built-in attendee lists, mileage
reimbursement tracking, foreign currency
translation
- --------------------------------------------------------------------------------------------
REPORT APPROVAL
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Automatic routing of reports Speeds approval time
Flags non-compliant expenses Increases compliance with corporate policies
Line-item approval of reimbursement data Facilitates more efficient use of management
resources
Approver notification
- --------------------------------------------------------------------------------------------
REPORT PROCESSING
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Integrates travel expense data with Facilitates more efficient use of processing
back-office systems resources
Flags non-compliant expenses Speeds report processing and employee
reimbursement
Provides automatic status updates
Reduces human error
Bar-codes receipt submissions
Reduces queries and dependence on accounting
Tracks VAT, GST and other foreign taxes department
Verifies arithmetic Identifies tax credits
- --------------------------------------------------------------------------------------------
DATA ANALYSIS
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Presents travel expense data graphically Supplies data needed for vendor rate
negotiation
Allows customer to sort data by employee,
vendor and type of expense Facilitates vendor consolidation
Drill-down capability Identifies trends and problem areas
Allows monitoring of compliance with vendor
commitments and corporate travel policies
- --------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 43
CompanyStore
CompanyStore automates the front-office procurement process, including
order preparation, approval, processing and data analysis. CompanyStore, which
was acquired by the Company in its June 1998 acquisition of 7Software, has been
licensed to two customers. The Company is currently developing version 2.0 of
CompanyStore. See "Risk Factors--Risk Associated with Acquisitions Generally"
and "--Risks Associated with Expansion into New Market."
Order Preparation. CompanyStore utilizes a customer-specific electronic
catalog of preferred vendors and commonly requested goods and services such as
office supplies, computers and other equipment. Using a graphical user
interface, requisitioners browse the catalog to select and order items and place
them in an electronic "shopping basket." Catalog materials can be updated by
either the enterprise or the vendor. CompanyStore contains links to vendor Web
sites, allowing the requisitioner to obtain detailed product information. To
make the ordering process easier, CompanyStore retains information about the
user, including name, employee identification, shipping address, accounting
information and frequently ordered products. To reduce delays and unnecessary
processing iterations, CompanyStore prevents submission of incomplete orders.
Order Approval. CompanyStore allows an enterprise to determine how
requisitions should be processed, whether by submission to a manager for
approval before processing or by submission to the purchasing department for
immediate processing. Once the order is submitted, an e-mail notification of the
order is automatically sent to the specified approver. The e-mail contains a
link to a personalized "approval" Web page, which lists all purchase
requisitions that are awaiting approval by the particular approver. Using the
Web page, the approver specifies which requisitions to approve in each order.
CompanyStore enables the customer to configure approval rules based on cost
center, dollar limit, material type or other criteria. CompanyStore enables
authorization of orders based on digital signatures and prohibits the release of
orders without required approval.
Order Processing. CompanyStore streamlines processing of front-office
requisitions in a number of ways. The customer's purchasing department selects
the items and vendors to be included in the CompanyStore electronic catalog.
After approval, orders are sent to the purchasing department to be processed and
progress reports are delivered to the requisitioner automatically, reducing the
number of status inquiries between the requisitioner and the purchasing
department. CompanyStore can be integrated into the customer's accounting
package so that the order can be entered into the purchasing system
automatically, allowing significant time savings. CompanyStore allows approved
requisitions to be sent directly to vendors via fax, e-mail or electronic data
interchange.
Data Analysis. CompanyStore consolidates purchasing data, allowing managers
to determine spending according to cost center, time period, employee and
supplier. This data allows managers to determine how best to control costs,
negotiate more favorable supplier arrangements and consolidate vendors. Managers
can analyze the data to monitor compliance with corporate purchasing policies
and vendor commitments.
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<PAGE> 44
The following table describes significant features and potential benefits
of CompanyStore:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
ORDER PREPARATION
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Simple point-and-click ordering Speeds order time
Customer-specific electronic catalog stores Directs orders to preferred vendors
preferred vendors and commonly requested
goods and services Reduces errors
Retains user information, including shipping Detailed product descriptions available
information, frequently ordered products and
purchasing card information Reduces queries and dependence on purchasing
department
Prevents submission of incomplete orders
Internet links to vendor Web sites
- --------------------------------------------------------------------------------------------
ORDER APPROVAL
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Automatically e-mails order to designated Speeds approval time
approver
Reduces errors
Digital signatures for order authorization
Decreases purchasing in violation of company
Automated approval controls based on user procedures
signing authority
Facilitates more efficient use of management
resources
Increases compliance with corporate policies
- --------------------------------------------------------------------------------------------
ORDER PROCESSING
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Integrates purchasing data with back-office Speeds fulfillment time
systems
Reduces lost orders
Sends approved requisitions directly to
vendor or to enterprise's purchasing system Facilitates more efficient use of processing
resources
Updates requisitioner on order progress
Improves consistency of items ordered
Purchasing department determines items
available in catalog Allows vendor consolidation
Prohibits release of orders without required
approval
- --------------------------------------------------------------------------------------------
DATA ANALYSIS
- --------------------------------------------------------------------------------------------
FEATURES BENEFITS
Allows customers to track spending by Identifies trends and problem areas
multiple factors, including cost center,
time period, employee and supplier Supplies data needed for vendor rate
negotiation
Allows monitoring of compliance with vendor
commitments
Facilitates vendor consolidation
- --------------------------------------------------------------------------------------------
</TABLE>
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Product Architecture
The following diagram illustrates the key features of the Company's product
architecture:
PRODARCH CHART
- ---------------
* The Concur Technology Platform shown is currently in place in XMS. The Company
is integrating CompanyStore and intends to integrate future applications into
an enhanced version of this platform, which will be known as the Concur Common
Platform.
The Company's two applications, XMS and CompanyStore, operate on advanced
IT platforms and are scalable and configurable. XMS and CompanyStore are built
on a multi-tiered architecture. XMS has a separate client, application server
and database server built using a COM-based architecture. CompanyStore currently
has separate client and server layers and is migrating to the COM model. In
addition, a common application server model, the Concur Common Platform, is
being built for both applications which will contain all common business logic,
including workflow, user management, security, business rules, business
intelligence and messaging. See "Risk Factors--Limited Experience with Large
Scale Deployment."
The XMS application server contains all of the business logic, is COM based
and is built using Microsoft Visual C++. The CompanyStore application is being
adapted to the Concur Common Platform, which is currently under development. The
application server layer can be extended using off-the-shelf tools such as
Microsoft Visual Basic. The application server operates on Windows NT 4.0 and,
for browser-based clients, supports both the Microsoft Internet Information
Server and the Netscape Enterprise Server.
The XMS application server supports Oracle, Sybase and Microsoft SQL server
databases and integrates with multiple ERP systems, including SAP, PeopleSoft,
Oracle and existing legacy systems. The CompanyStore application server supports
the Microsoft SQL server database and integrates with SAP R/3, and the Company
intends to integrate the CompanyStore application server with other database and
ERP systems in the future.
Browser-based clients run on versions of Microsoft Internet Explorer 3.02
and above and Netscape Navigator 3.0 and above, utilizing primarily HTML and
JavaScript via Microsoft's Active Server Pages technology. Operating systems
supported include Microsoft Windows 3.11, Windows 95, Windows 98 and Windows NT
4.0. The Windows-based XMS client is written utilizing Microsoft Visual C++, and
is fully functional in a disconnected environment.
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SERVICES
The Company's professional services organization was formed in 1996 to
offer consulting, customer support and training in connection with licenses of
XMS. The Company believes that services are an important part of its success and
consequently the Company has expanded its professional services organization to
offer similar services in connection with licenses of CompanyStore. See "Risk
Factors -- Dependence on Service Revenues."
Consulting. The Company offers a variety of consulting services in
connection with licenses of XMS and CompanyStore. Concur's consulting staff
meets with customers prior to product implementation to review the customer's
existing business processes and IT infrastructure, and to provide advice on ways
to improve these processes using industry best practices. Thereafter, Concur's
consultants install, configure and test the application and integrate it with
the customer's existing ERP and employee reimbursement systems. Concur's
consultants also help customers implement bar-coding processes and develop a
strategy for the customers' enterprise-wide deployment of the application.
Customer Support. The Company provides product upgrades and customer
support through its "CustomerOne" customer support program. Customers generally
purchase the first year of the CustomerOne program at the time they license an
application; thereafter, support may be renewed on an annual basis. Customer
support personnel are available 24 hours a day, seven days a week. The Company
also offers Internet-based support that features an on-line knowledge base.
Training. The Company offers a variety of training programs for XMS and
CompanyStore. These classes are tailored to particular user groups, such as end
users, help desk personnel and trainers. Training classes are offered at
customer sites and also at the Company's headquarters in Redmond, Washington.
The Company plans to begin providing training classes for third-party service
providers, such as systems integrators, as it expands its relationships with
such parties.
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<PAGE> 47
CUSTOMERS
The Company has licensed its applications to over 150 enterprise customers
in a wide range of industries. The following table lists certain of the
Company's significant customers in fiscal 1996, 1997 and 1998:
<TABLE>
<S> <C>
CONSUMER PHARMACEUTICAL/HEALTH CARE
Anheuser-Busch Companies Inc. Columbia/HCA Healthcare Corporation
Avon Products, Inc. Merck, Sharpe & Dohme Limited
Eastman Kodak Company Pfizer Inc.
The Gillette Company Pharmacia & Upjohn & Co.
J.C. Penney Company, Inc. Tenet Healthcare Corporation
Levi Strauss & Co. TECHNOLOGY/TELECOMMUNICATIONS/MEDIA
Maytag Corporation American Management Systems, Inc.
FINANCIAL SERVICES Computer Sciences Corporation
ABN Amro Holding N.V. Hewlett-Packard Company
Bear Stearns & Co. Inc. The New York Times Company
Comdisco, Inc. Quantum Corporation
Dresdner Kleinwort Benson Reuters Limited
J & H Marsh & McLennan, Inc. Seagate Technology, Inc.
Lehman Brothers Inc. Sprint Corporation
Royal Insurance Texas Instruments Incorporated
INDUSTRIAL/MANUFACTURING The Times Mirror Company
Case Corporation Tivoli Systems, Inc.
E.I. du Pont de Nemours and Company Visio Corporation
Guardian Industries Corporation OTHER
Northrop Grumman Corporation American Airlines, Inc.
Monsanto Company Battelle Memorial Institute
Solutia, Inc. Broken Hill Proprietary Company Limited
J. Walter Thompson
Harvard College
Ontario Ministry of Labour
Exxon Corporation
Texaco Inc.
</TABLE>
In fiscal 1996, 1997 and 1998, no customer accounted for 10% or more of the
Company's total revenues.
The following case studies, which are based solely on information supplied
by the respective subject companies and which the Company believes to be
accurate in all material respects, illustrate how selected companies have used
Concur products and services to address their T&E expense management and front-
office procurement needs:
Guardian Industries Corporation ("Guardian"). A leading manufacturer and
fabricator of architectural and automotive glass and plastics, Guardian operates
over 40 production facilities around the world and has approximately 1,000
employees travelling at any one time. Historically, Guardian's business
travelers filed expense reports manually after each business trip. This
paper-based process led to processing delays, significant employee time invested
in filling out expense reports, and a lack of visibility into enterprise-wide
T&E spending. Guardian implemented Concur's XMS application to address these
issues, and realized significant advantages and cost savings as a result. For
example, XMS saves employee time by decreasing time spent completing reports and
allows management to analyze enterprise-wide T&E spending to formulate more
effective travel policies, evaluate the performance of travel vendors and
negotiate reduced costs with vendors. In fact, Guardian reduced its annual
spending on air travel by 5% to 10% after implementing XMS.
Case Corporation ("Case"). A leading designer, manufacturer and distributor
of agricultural and construction equipment and provider of a broad array of
financial services, Case has over 13,000 employees worldwide with 4,000 business
travelers. Before implementing XMS, Case received as many as 5,000 T&E expense
reports per month in a variety of formats, from handwritten reports to
spreadsheets. This practice resulted in costly delivery methods (such as
overnight delivery or facsimile), high processing costs, delays in
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<PAGE> 48
reimbursement, and reports not in compliance with corporate policies. To address
these problems, Case automated its T&E expense reporting process with XMS.
Within nine months after deploying XMS on an enterprise-wide basis, the vast
majority of Case's travelers were using XMS and receiving reimbursements through
their regular paychecks. As a result, Case has significantly reduced travel
expense reimbursement related costs. In addition, Case now reimburses employees
and analyzes spending more effectively.
Solutia, Inc. ("Solutia"). Solutia is a global company that applies its
expertise in chemistry to the consumer, household, automotive and industrial
products industries through 24 manufacturing sites worldwide. Solutia's nearly
9,000 employees include approximately 3,000 who are business travelers. At the
time Solutia decided to reengineer its T&E expense management processes, it had
15 processing centers handling approximately 25,000 expense reports per year.
Using XMS as the cornerstone of its reengineering effort, Solutia streamlined
the preparation, approval and processing of expense reports, consolidated its 15
processing centers into one shared services center, and cut processing costs by
over 50%.
Visio Corporation ("Visio"). Through a worldwide network of offices, Visio
develops, markets and sells drawing and diagramming software for PCs. After
implementing SAP R/3, Visio sought an Intranet front-office procurement system
to eliminate inefficiencies in its paper-based ordering and manual routing of
front-office procurement requisitions. Visio required a system that was easy to
use and would seamlessly integrate with SAP. After selecting CompanyStore, Visio
implemented the application in only five weeks and immediately realized
efficiencies in purchase order processing and product delivery. CompanyStore
allows purchasing and procurement personnel to spend less time processing
transactions and more time evaluating vendors and pricing strategies. Visio
estimates that it will achieve approximately $1 million in savings in the first
year of implementation, from such improvements as decreased requisition
processing costs, decreased non-compliant spending, decreased time needed to
process payables, and decreased time spent by budget managers gathering
financial data.
SALES
The Company sells its software primarily through its domestic direct sales
organization, with sales professionals located in the metropolitan areas of Ann
Arbor, Atlanta, Boston, Chicago, Columbus, Dallas, Detroit, Los Angeles, New
York, Redmond, San Francisco and Washington, D.C. The Company also has sales
professionals in Toronto, London, and Sydney. The field sales force is
complemented by direct telesales and telemarketing representatives based at the
Company's headquarters in Redmond, Washington. Technical sales support is
provided by sales engineers located in several of the field offices. The Company
currently intends to add a significant number of sales representatives and sales
engineers in other domestic and international locations. The Company uses a
remarketer in New Zealand and plans to expand its remarketing channel to other
international markets. The remarketer receives a referral fee from the Company
for marketing the Company's products, and provides post-sale implementation and
support of the Company's products. See "Risk Factors--Dependence on Direct Sales
Model."
The Company's direct sales force sells both XMS and CompanyStore. Since
Concur's products affect employees throughout the enterprise, the sales effort
involves multiple decision makers and frequently includes the chief financial
officer, vice president of finance, controller and vice president of purchasing.
While the average sales cycle varies substantially from customer to customer,
for initial sales it has generally ranged from six to nine months. See "Risk
Factors--Lengthy Sales Cycle."
Strategic Marketing and Referral Relationships
The Company has developed a number of strategic referral relationships.
Under arrangements with American Express, the largest corporate charge card
issuer in the United States, and its subsidiary American Express Travel Related
Services ("TRS"), American Express and TRS may, at their sole discretion, refer
corporate charge card customers that seek a T&E expense management software
solution to Concur. In addition, TRS recently agreed to be a strategic marketer
for the ESP version of XMS. Other key referral relationships include Citibank,
N.A., Citicorp Diners Club Inc., and Geac Computer Corporation Ltd.
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The Company's existing strategic relationships do not, and any future
strategic relationships may not, afford the Company any exclusive marketing or
distribution rights. Many of the Company's strategic partners have multiple
strategic relationships, and there can be no assurance that the Company's
strategic partners regard their relationships with the Company as significant
for their own businesses or that they will regard it as significant in the
future. In addition, there can be no assurance that such parties will not pursue
other partnerships or relationships or attempt to develop or acquire products or
services that compete with the Company's products or services either on their
own or in collaboration with others, including the Company's competitors.
Further, the Company's existing strategic relationships may interfere with its
ability to enter into other desirable strategic relationships. Any future
inability of the Company to maintain its strategic relationships or to enter
into additional strategic relationships will have a material adverse effect on
the Company's business, results of operations and financial condition. See "Risk
Factors--Need to Establish and Maintain Strategic Relationships" and "Certain
Transactions."
MARKETING
The Company's marketing efforts are directed at extending the Company's
leadership position in T&E expense management applications and increasing its
market share for CompanyStore. The Company's marketing programs are targeted at
accounting, finance, purchasing and travel executives, and are focused on
creating awareness of, and generating interest in, the Company's products.
Concur engages in a variety of marketing activities, including developing
and executing co-advertising and co-marketing strategies designed to leverage
its existing strategic relationships, targeting additional strategic
relationships, managing and maintaining the Company's Web site, issuing
newsletters and direct mailings, creating and placing advertisements, conducting
public relations campaigns, and establishing and maintaining close relationships
with recognized industry analysts. The Company is an active participant in
technology-related conferences and demonstrates its products at trade shows
targeted at accounting, finance, purchasing and travel executives.
The Company believes that demand is increasing, and will continue to
increase, for employee-facing applications such as those sold by the Company.
There can be no assurance that the Company will be able to expand its sales and
marketing staff, either domestically or internationally, to take advantage of
any increase in demand for employee-facing applications. The failure of the
Company to expand its sales and marketing organization or other distribution
channels could materially and adversely affect the Company's business, results
of operations and financial condition. See "Risk Factors--Management of Growth,"
"--Dependence on Key Employees" and "--Need to Attract and Retain Qualified
Personnel."
PRODUCT DEVELOPMENT
The Company has been an innovator and leader in the development of
employee-facing enterprise applications. The Company believes that it was one of
the first to introduce a commercially successful T&E expense reporting
application and that it pioneered a number of features that are now common
throughout the T&E expense reporting field, such as prepopulation with corporate
credit card transactions and automatic itemization of hotel bills. Concur's
software development staff is responsible for enhancing the Company's existing
products and expanding its product line. The Company believes that a technically
skilled, quality oriented and highly productive software development
organization will be a key component of the continued success of new product
offerings. The Company expects that it will increase its product development
expenditures substantially in the future.
Concur's current product development activities focus on product
enhancements to XMS and CompanyStore, development of the Concur Common Platform
technology that will standardize the software architecture underlying all
applications in the suite, and development of Employee Desktop, a personalized
Web page on the corporate Intranet that will provide a centralized location for
all employee-facing applications. Concur expects XMS enhancements to include
features such as localized versions of XMS for foreign countries, and enhanced
integration of XMS with on-line travel booking applications. Concur plans to
enhance CompanyStore by expanding its features and functionality, adding support
for additional databases
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<PAGE> 50
and ERP platforms, enhancing catalog support and integrating CompanyStore into
its product suite through the Concur Common Platform, which is currently under
development. The Company plans to offer its applications through the Internet as
an outsourced ESP starting with XMS in the second half of calendar 1999 and to
provide CompanyStore as an ESP offering in fiscal 2000.
There can be no assurance that these development efforts will be completed
within the Company's anticipated schedules or that, if completed, they will have
the features necessary to make them successful in the marketplace. Future delays
or problems in the development or marketing of product enhancements or new
products could result in a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors--Risks
Associated with New Products and New Versions of Existing Products," "--Risks
Associated with Unproven Enterprise Service Provider Model" and "--Risks
Associated with the Internet."
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's primary source of
direct competition comes from independent software vendors of T&E expense
management and front-office procurement applications. The Company also faces
indirect competition from potential customers' internal development efforts and
has to overcome potential customers' reluctance to move away from existing
paper-based systems.
The Company's major competitors in the T&E expense management field include
Captura Software, Inc., Extensity, Inc., International Business Machine
Corporation and Necho Systems Corporation. In addition, several major ERP
vendors such as SAP AG, Oracle Corporation, and PeopleSoft, Inc. have already
developed T&E expense management products, and Oracle Corporation has developed
a front-office procurement product. These companies have begun to sell these
products along with their application suites. The Company's major competitors in
the front-office procurement field include Ariba Technologies, Inc., Commerce
One, Inc., ELEKOM Corporation, Harbinger Corporation, Netscape Communications
Corporation and TRADE'ex Electronic Commerce Systems, Inc. In addition to its
current competitors, the Company expects to face competition from new entrants
including those ERP providers that do not already market a T&E expense
management product. Most of the major ERP providers have a significant installed
customer base and have the opportunity to offer additional products to those
customers as additional components of their respective application suites.
The Company believes that the principal competitive factors considered in
selecting T&E expense management and front-office procurement applications are
functionality, interoperability with existing IT infrastructure, price and an
installed referenceable base of customers. The Company has learned from its
customers that XMS tends to be 20% to 200% more expensive than other competing
solutions, depending on the size and the nature of the transaction. Despite the
disparity in price, the Company believes that it has a competitive advantage
relative to competing solutions. With respect to functionality, the Company
believes that it offers a product with more features than other competing
products, and that it has often been the first to offer new and innovative
features, such as prepopulation of transaction reports based on credit card
information. Significantly, the Company believes it was the first provider of an
Intranet-based T&E expense management solution. In addition, XMS was designed
and built to interoperate with existing IT systems and can often be deployed on
an enterprise customer's existing IT infrastructure. Many of the Company's
competitors have chosen to develop their Intranet-based applications using Java,
which the Company believes is difficult to deploy on a large scale within
today's corporate IT infrastructure. With respect to price, the Company
positions XMS as the premium product compared to the competition. The Company
believes that this positioning does cause the Company to lose some potential
transactions to competitors based on price. Finally, the Company believes that
it has a larger customer base, spread across a wider variety of industries, than
the Company's primary competitors. The Company believes that this large
installed customer base helps the Company to secure additional customers.
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<PAGE> 51
Many of the Company's competitors in both the T&E expense management and
front-office procurement markets have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than the
Company. Moreover, a number of the Company's competitors, particularly major ERP
vendors, have well-established relationships with current and potential
customers of the Company as well as with systems integrators and other vendors
and service providers. In addition, these competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products, than can the Company.
It is also possible that new competitors or alliances among competitors or
other third parties may emerge and rapidly acquire significant market share. The
Company expects that competition in its markets will increase as a result of
consolidation and the formation of alliances in the industry. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially and adversely affect its business, results of operations and
financial condition. See "Risk Factors--Risks Associated with Expansion into New
Market," "--Competition" and "--Need to Establish and Maintain Strategic
Relationships."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends upon its proprietary technology. The Company
relies primarily on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures to
protect its proprietary information. For example, the Company licenses rather
than sells its software to customers and requires licensees to enter into
license agreements that impose certain restrictions on licensees' ability to
utilize the software. The Company currently holds no patents and does not have
any patent applications pending. There can be no assurance that any copyrights
or trademarks held by the Company will not be challenged and invalidated.
As part of its confidentiality procedures, the Company enters into
non-disclosure agreements with certain of its employees, consultants, corporate
partners, customers and prospective customers. The Company also enters into
license agreements with respect to its technology, documentation and other
proprietary information. Such licenses are generally non-transferable and have a
perpetual term. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology that the Company considers proprietary and
third parties may attempt to develop similar technology independently. In
particular, the Company provides its licensees with access to object code
versions of its software, and to other proprietary information underlying the
Company's licensed software. Policing unauthorized use of the Company's products
is difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted and, while the Company is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. The laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the Company's protection of its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology.
The Company is not aware that its products, trademarks, copyrights or other
proprietary rights infringe the proprietary rights of third parties. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future with respect to current or future products Further,
the Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in different
industry segments overlaps. From time to time, the Company hires or retains
employees or consultants (including through acquisition) who have worked for
independent software vendors or other companies developing products similar to
those offered by the Company. There can be no assurance that such prior
employers will not claim that the Company's products are based on their products
and that the Company
50
<PAGE> 52
has misappropriated their intellectual property. Any such claims, with or
without merit, could cause a significant diversion of management attention,
result in costly and protracted litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which would have a material adverse effect upon the
Company's business, results of operations and financial condition.
EMPLOYEES
As of September 30, 1998, the Company had approximately 222 full-time
employees, five of whom were based in the United Kingdom, one in Canada and one
in Australia. These included 64 engaged in research and development, 66 in sales
and marketing, 63 in consulting, training and technical support and 29 in
administration and finance. No employees are known by the Company to be
represented by a collective bargaining agreement and the Company has never
experienced a strike or similar work stoppage. The Company considers its
relations with its employees to be good. The Company's ability to achieve its
financial and operational objectives depends in large part upon its continuing
ability to attract, integrate, retain and motivate highly qualified sales,
technical and managerial personnel. Competition for such qualified personnel in
the Company's industry is intense, particularly in the Seattle area in which the
Company's headquarters is located and particularly with respect to software
development and management personnel. In addition, competitors may attempt to
recruit the Company's key employees. There can be no assurance that the Company
will be able to attract or retain employees in the future. The Company is a
party to employment agreements with certain of its employees. See "Risk
Factors--Dependence on Key Employees," "--Need to Attract and Retain Qualified
Personnel" and "Management--Employment Agreements."
FACILITIES
The Company's principal administrative, sales, marketing and research and
development facility is located in Redmond, Washington and consists of
approximately 43,000 square feet of office space held under a lease that expires
in January 2003. As of September 30, 1998, the Company also leased sales offices
in Ann Arbor, Atlanta, Chicago, Dallas, Detroit, Los Angeles, New York, San
Francisco and London. For a discussion of certain risks associated with the
Company's anticipated need for additional office space, see "Risk
Factors--Management of Growth."
LEGAL PROCEEDINGS
There are no material legal proceedings currently pending to which the
Company is a party.
51
<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. Steven Singh............... 37 President, Chief Executive Officer and
Director
Michael W. Hilton............. 34 Chairman of the Board and Chief Technical
Officer
Jon T. Matsuo................. 39 Executive Vice President of Worldwide Sales
Sterling R. Wilson............ 40 Chief Financial Officer and Vice President
of
Operations
Rajeev Singh.................. 30 Vice President of Products
Frederick L. Ingham........... 31 Vice President of Business Development
John P. Russo, Jr............. 38 Vice President of Internet Application
Services
Michael Watson................ 51 Vice President of Professional Services
John A. Prumatico............. 50 Vice President of Human Resources
Jeffrey D. Brody(1)........... 38 Director
Norman A. Fogelsong(1)........ 48 Director
Michael J. Levinthal(2)....... 43 Director
James D. Robinson III(2)...... 62 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
S. Steven Singh has served as the Company's President and Chief Executive
Officer since February 1996. Mr. Singh served as the Chairman of the Board of
Directors from the Company's inception until February 1996. Prior to joining the
Company as an officer, Mr. Singh was General Manager of the Contact Management
Division at Symantec Corporation ("Symantec") from June 1993 to February 1996.
From February 1992 to June 1993, when it was acquired by Symantec, Mr. Singh was
Vice President of Development for Contact Software International ("CSI"), a
personal computer software publisher. Prior to joining CSI, Mr. Singh co-founded
Eshani Corporation ("Eshani"), where he was President and Chief Executive
Officer. Mr. Singh holds a B.S. in Electrical Engineering from the University of
Michigan. Mr. Singh is the brother of Rajeev Singh, the Company's Vice President
of Products.
Michael W. Hilton co-founded the Company in August 1993 and has served as
the Company's Chief Technical Officer since 1996. Mr. Hilton has served as a
member of the Company's Board of Directors since its founding, and as Chairman
of the Board since February 1996. Before co-founding the Company, Mr. Hilton
served as Senior Development Manager at Symantec during 1993. Prior to his
employment at Symantec, Mr. Hilton served as Director of Product Development for
CSI's California office. Mr. Hilton also was a co-founder of Eshani, where he
was Vice President of Product Development. Mr. Hilton holds a B.A. in Computer
and Information Sciences and a B.S. in Mathematics from the University of
California at Santa Cruz.
Jon T. Matsuo joined the Company in July 1994 and currently serves as the
Company's Executive Vice President of Worldwide Sales. Prior to joining the
Company, Mr. Matsuo served as General Manager, Consumer Software Division of
Delrina Corporation from June 1993 to July 1994. Mr. Matsuo's experience also
includes senior marketing positions with CSI and Bluebird Systems, as well as
eight years of experience with Deloitte Haskins & Sells in auditing, consulting
and product management. Mr. Matsuo holds a B.B.A. in Accounting from the
University of San Diego and is a Certified Public Accountant.
Sterling R. Wilson joined the Company in May 1994 and currently serves as
the Company's Chief Financial Officer and Vice President of Operations. Prior to
joining the Company, Mr. Wilson served as Vice
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<PAGE> 54
President of Operations and Chief Financial Officer at IntelliQuest, Inc., a
leading provider of market research information, from July 1993 to May 1994. Mr.
Wilson also served as Chief Financial Officer at CSI from 1992 to 1993. Mr.
Wilson holds a B.B.A. in Accounting from California State University at
Bakersfield (formerly California State College at Bakersfield) and is a
Certified Public Accountant.
Rajeev Singh co-founded the Company in August 1993 and currently serves as
the Company's Vice President of Products. Previously, Mr. Singh acted as
Director of Product Management of the Company. Prior to co-founding the Company,
Mr. Singh served as a Software and Manufacturing Engineer at General Motors
Corporation from July 1986 to January 1990 and he served as a Software Project
Manager for the development of complex computer simulations at Ford Motor
Company from January 1991 to March 1993. Mr. Singh holds a B.S. in Mechanical
Engineering from Kettering University (formerly GMI Engineering and Management
Institute). Mr. Singh is the brother of S. Steven Singh, the Company's President
and Chief Executive Officer.
Frederick L. Ingham joined the Company in January 1997 and currently serves
as the Company's Vice President of Business Development. Prior to joining the
Company, Mr. Ingham was Director of Business Development at Symantec from
January 1995 to December 1996. From September 1992 to December 1994, Mr. Ingham
worked as a Product Manager and Product Planner at Xerox Corporation. Mr. Ingham
holds a B.A. in Economics from Yale University and an M.B.A. from the Wharton
School of the University of Pennsylvania.
John P. Russo, Jr. joined the Company in April 1996 and currently serves as
the Company's Vice President of Internet Application Services. From September
1988 to April 1996, Mr. Russo was employed by Symantec, including as Director of
Product Management from September 1994 to April 1996, and assisted with the
integration of company acquisitions for Symantec's Productivity Applications
Group. Mr. Russo holds a B.S. in Marketing from San Jose State University.
Michael Watson joined the Company in August 1998 and currently serves as
the Company's Vice President of Professional Services. Prior to joining the
Company, Mr. Watson was Vice President of Consulting Services from June 1995 to
August 1998 at Hyperion Software, where he also held various roles in the sales
organization from October 1990 to June 1995. Mr. Watson also served as the
National Director of Price Waterhouse's Applied Technology Center from 1986 to
1990. Mr. Watson holds a B.A. in Business Studies from Lanchester University
(U.K.) and an M.B.A. from the Babcock Graduate School of Management at Wake
Forest University.
John A. Prumatico joined the Company in July 1998 and currently serves as
the Company's Vice President of Human Resources. Prior to joining the Company,
Mr. Prumatico was managing principal for John Prumatico & Associates, a
consulting firm specializing in human resources leadership and organization
development, which he founded in 1992. From April 1987 to October 1992, Mr.
Prumatico was employed by Microsoft Corporation as the Director of Human
Resources Development and Administration. Mr. Prumatico holds a B.S. in
Management and Organization Development from the University of West Florida.
Jeffrey D. Brody has served as a member of the Company's Board of Directors
since October 1994. Since April 1994, Mr. Brody has been employed by Brentwood
Venture Capital ("Brentwood"), a venture capital firm, where he has been a
General Partner of Brentwood since October 1995. From 1988 to April 1994, Mr.
Brody was Senior Vice President of Comdisco Ventures, a venture leasing company.
Mr. Brody holds a B.S. in Engineering from the University of California at
Berkeley and an M.B.A. from the Graduate School of Business at Stanford
University. Mr. Brody is a member of the boards of directors of several private
technology companies.
Norman A. Fogelsong has served as a member of the Company's Board of
Directors since July 1996. Since March 1989, Mr. Fogelsong has been a General
Partner of Institutional Venture Partners, a venture capital firm. Between March
1980 and February 1989, Mr. Fogelsong was a General Partner of Mayfield Fund, a
venture capital firm. Mr. Fogelsong holds a B.S. in Industrial Engineering from
Stanford University, an M.B.A. from Harvard Business School and a J.D. from
Harvard Law School. Mr. Fogelsong is a member
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<PAGE> 55
of the boards of directors of Aspect Telecommunications Corporation as well as
several private technology companies.
Michael J. Levinthal has served as a member of the Company's Board of
Directors since April 1998. Since 1984, Mr. Levinthal has been a General Partner
or managing director of various entities associated with Mayfield Fund, a
venture capital firm. Mr. Levinthal holds a B.S. in Engineering, an M.S. in
Industrial Engineering and an M.B.A. from the Graduate School of Business at
Stanford University. Mr. Levinthal is a member of the boards of directors of
Focal, Inc., InControl, Inc. and Symphonix Devices, Inc. as well as several
private technology companies.
James D. Robinson III has served as a member of the Company's Board of
Directors since July 1998. Since 1994, Mr. Robinson has been the Chairman and
Chief Executive Officer of RRE Investors, LLC, a private information technology
venture investment firm. From 1977 to 1993, Mr. Robinson served as Chairman and
Chief Executive Officer of American Express Company. Mr. Robinson holds a B.S.
in Industrial Management from the Georgia Institute of Technology and an M.B.A.
from Harvard Business School. Mr. Robinson is a member of the boards of
directors of The Coca-Cola Company, Bristol-Myers Squibb Company, Cambridge
Technology Partners and First Data Corporation as well as several private
companies.
The Company's Bylaws, which will be in effect upon the completion of the
Offering, provides for the division of the Board of Directors into three classes
as nearly equal in size as possible with staggered three-year terms. The
classification of the Board of Directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors consists of Mr. Brody
and Mr. Fogelsong. The Compensation Committee makes decisions regarding all
forms of salary, bonus and stock compensation provided to executive officers of
the Company, the long-term strategy of employee compensation, the types of stock
and other compensation plans to be used by the Company and the shares and
amounts reserved thereunder, and any other compensation matters as from time to
time directed by the Board.
The Audit Committee of the Board of Directors consists of Mr. Levinthal and
Mr. Robinson. The Audit Committee meets with the Company's independent auditors
to review the adequacy of the Company's internal control systems and financial
reporting procedures, reviews the general scope of annual audits and the fees
charged by the independent accountants, as well as the performance of non-audit
services by the Company's auditors, and reviews and makes recommendations to the
Board of Directors regarding the fairness of any proposed transaction between
the Company and any officer, director or other affiliate of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
was at any time since the formation of the Company an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on the Board of Directors of the Company or the Compensation
Committee of the Board of Directors.
Mr. Brody is the Managing Member of Brentwood VIII Ventures LLC, the
General Partner of Brentwood Associates VI, L.P. and Brentwood Affiliates Fund
II, L.P. Between October 1, 1994 and September 30, 1998, Brentwood Associates
VI, L.P. and Brentwood Affiliates Fund II, L.P. purchased in the aggregate
3,824,092 shares of the Company's Series A Preferred Stock at a price of $0.523
per share, 781,250 shares of the Company's Series B Preferred Stock at a price
of $0.64 per share, 625,000 shares of the Company's Series C Preferred Stock at
a price of $0.80 per share, 338,447 shares of the Company's Series D Preferred
Stock at a price of $1.46 per share and 186,762 shares of the Company's Series E
Preferred Stock at a price of $3.10 per share. In addition, The Schuster
Revocable Trust dated February 10, 1995, Eric Chiu and James Mongiello,
affiliates of Brentwood VIII Ventures LLC, purchased in the aggregate
54
<PAGE> 56
31,250 shares of the Company's Series C Preferred Stock at a price of $0.523 per
share and 6,452 shares of the Company's Series E Preferred Stock at a price of
$3.10 per share. Mr. Brody also purchased 9,678 shares of the Company's Series E
Preferred Stock at $3.10 per share.
Mr. Fogelsong is a General Partner of Institutional Venture Management VII,
L.P., the General Partner of Institutional Venture Partners VII, L.P. and IVP
Founders Fund I, L.P. Between October 1, 1994 and September 30, 1997,
Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P. purchased
in the aggregate 5,000,000 shares of the Company's Series C Preferred Stock at a
price of $0.80 per share, 325,486 shares of the Company's Series D Preferred
Stock at a price of $1.46 per share and 180,228 shares of the Company's Series E
Preferred stock at a price of $3.10 per share.
DIRECTOR COMPENSATION
Directors of the Company do not receive any cash compensation for their
services as directors but are reimbursed for their reasonable travel expenses in
attending meetings of the Board of Directors.
The Company's Board of Directors adopted the Directors Plan in August 1998
(to be effective upon the effective date of the Registration Statement for this
Offering (the "Effective Date") and reserved a total of 600,000 shares of the
Company's Common Stock for issuance thereunder. The Directors Plan was approved
by the Company's stockholders in September 1998. Members of the Board of
Directors who are not employees of the Company or any parent, subsidiary or
affiliate of the Company are eligible to participate in the Directors Plan. The
option grants under the Directors Plan are automatic and the exercise price of
the options must be 100% of the fair market value of the Common Stock on the
date of grant. Each eligible director who is or becomes a member of the Board of
Directors on or after the Effective Date will automatically be granted an option
for 50,000 shares of the Company's Common Stock on the later of the Effective
Date and the date such director first becomes a member of the Board of Directors
(an "Initial Grant"). The Initial Grants made on the Effective Date will have
exercise prices equal to the initial public offering price. On the date of each
Annual Meeting of Stockholders following the Effective Date, each eligible
director who has served continuously as a member of the Board of Directors since
the date of such director's Initial Grant will automatically be granted an
option for 20,000 shares of the Company's Common Stock (a "Succeeding Grant").
Options granted under the Directors Plan generally will become exercisable as
they vest, although the Compensation Committee may provide that options are
exercisable immediately subject to repurchase. Initial Grants and Succeeding
Grants will vest as to 25% of the shares on the first anniversary of the date of
grant and as to an additional 2.0833% of the shares each month thereafter.
Options will cease to vest if the individual ceases to provide services to the
Company, or any parent or subsidiary of the Company, as a director or a
consultant. Once the individual ceases providing such services, he or she will
have seven months in which to exercise his or her vested options, or his or her
estate will have 12 months if the cessation of services resulted from the
individual's death or disability. In the event of a merger or consolidation in
which the Company is not the surviving corporation, the sale of all or
substantially all of the Company's assets, or certain other corporate
transactions as set forth in the Directors Plan, the vesting of all options
granted under the Directors Plan will accelerate and the options will become
exercisable in full upon such terms as the Compensation Committee determines,
and must be exercisable within seven months following such event. Any options
not exercised within seven months of the corporate transaction will expire.
Options may be granted pursuant to the Directors Plan from time to time within a
period of ten years from the Effective Date. The Board of Directors may at any
time terminate or amend the Directors Plan or any outstanding option, provided
that the Board of Directors may not terminate or amend the terms of any
outstanding option or without the consent of the optionee amend the Directors
Plan so as to adversely affect any then outstanding options or any unexercised
portions thereof. The Directors Plan may be administered by the full Board of
Directors or by the Compensation Committee.
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<PAGE> 57
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
awarded to, earned by or paid for services rendered to the Company in all
capacities during the years ended September 30, 1997 and September 30, 1998 by
(i) the Company's Chief Executive Officer and (ii) the Company's four other most
highly compensated executive officers who were serving as executive officers as
of September 30, 1998 and whose compensation was in excess of $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ ------------------
FISCAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
--------------------------- ------ -------- -------- ------------------
<S> <C> <C> <C> <C>
S. Steven Singh.............................. 1997 $200,000 $ 66,950 --
President and Chief Executive Officer 1998 200,000 140,529 500,000
Sterling R. Wilson........................... 1997 140,874 52,354 26,000
Chief Financial Officer and Vice President 1998 150,000 83,459 130,000
of Operations
Jon T. Matsuo................................ 1997 131,566 91,700 26,000
Executive Vice President of Worldwide Sales 1998 150,000 157,989 130,000
Michael W. Hilton............................ 1997 133,000 49,700 --
Chairman of the Board and Chief Technical 1998 132,000 95,330 130,000
Officer
Rajeev Singh................................. 1997 92,282 44,169 25,000
Vice President of Products 1998 115,000 108,027 130,000
</TABLE>
OPTION GRANTS IN FISCAL 1997 AND FISCAL 1998
The following table sets forth information regarding stock option grants
during fiscal 1997 and fiscal 1998 to each of the Named Executive Officers. No
stock appreciation rights ("SARs") were granted to these individuals during
either year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENTAGE OF APPRECIATION FOR OPTION
UNDERLYING TOTAL OPTIONS TERM(4)
FISCAL OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION -----------------------
NAME YEAR GRANTED(1) EMPLOYEES(2) PER SHARE(3) DATE 5% 10%
---- ------ ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Steven Singh......... 1997 -- --% $ -- -- $ -- $ --
1998 500,000 26.8 0.15 10/22/07
Sterling R. Wilson...... 1997 26,000 5.3 0.08 10/23/06
1998 130,000 7.0 0.15 10/22/07
Jon T. Matsuo........... 1997 26,000 5.3 0.08 10/23/06
1998 130,000 7.0 0.15 10/22/07
Michael W. Hilton....... 1997 -- -- -- --
1998 130,000 7.0 0.15 10/22/07
Rajeev Singh............ 1997 25,000 5.1 0.08 10/23/06
1998 130,000 7.0 0.15 10/22/07
</TABLE>
- ---------------
(1) Unless otherwise indicated below, all options granted in fiscal 1997 and
fiscal 1998 were granted pursuant to the 1994 Plan and become exercisable
with respect to 25% of the shares subject to the option on the first
anniversary of the date of grant and with respect to an additional 2.0833%
of these shares each month thereafter, subject to acceleration upon certain
changes in control of the Company. See "--Employee Benefit Plans."
(2) Based on a total of 491,450 options granted to all employees during fiscal
1997 and 1,866,035 options granted to all employees during fiscal 1998.
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<PAGE> 58
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock at the time of grant.
(4) The potential realizable value is calculated based upon the term of the
option at its time of grant and is calculated by assuming that the aggregate
exercise price (assuming that the options were granted at an exercise price
equal to the midpoint of the price range set forth on the cover page of the
Prospectus) appreciates at the indicated annual rate compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated price. The 5% and 10% assumed
annual compound rates of stock price appreciation are mandated by the rules
of the Securities and Exchange Commission (the "Commission") and do not
represent the Company's estimates or projection of future Common Stock
prices. There can be no assurance that the Common Stock will appreciate at
any particular rate or at all in future years.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND 1998 AND FISCAL YEAR-END VALUES
The following table sets forth information concerning unexercised options
held at September 30, 1997 and at September 30, 1998 with respect to each of the
Named Executive Officers. No options or SARs were exercised by the Named
Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED AT EXERCISE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(2)
FISCAL ON LESS EXERCISE ---------------------------- ----------------------------
NAME YEAR EXERCISE PRICE)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------ -------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Steven Singh...... 1997 -- $ -- 178,125 271,875 $ $
1998 -- -- 290,625 659,375
Sterling R. Wilson... 1997 -- -- -- 26,000 --
1998 -- -- 12,458 143,542
Jon T. Matsuo........ 1997 -- -- 450,000 26,000
1998 20,000 48,800 442,458 143,542
Michael W. Hilton.... 1997 -- -- -- -- -- --
1998 -- -- -- 130,000 --
Rajeev Singh......... 1997 -- -- -- 25,000 --
1998 -- -- 11,979 143,021
</TABLE>
- ---------------
(1) Mr. Matsuo exercised options to purchase 20,000 shares of the Company's
Common Stock at $0.04 per share in June 1998. The fair market value of the
Company's Common Stock at the time of such exercise was $2.48, as determined
by the Board of Directors.
(2) Based on the fair market value of the Company's Common Stock at September
30, 1998 ($ as determined by the Board of Directors based on the
midpoint of the price range set forth on the cover page of the Prospectus)
less the exercise price.
EMPLOYMENT AGREEMENTS
The Company and Mr. Wilson are parties to a letter agreement dated April
21, 1994 governing his employment with the Company. Under the agreement, the
Company paid to Mr. Wilson an annual initial salary of $90,000, which was to be
increased to $105,600 following the Company's initial equity financing, with
possible bonuses of up to $36,000 per year. The compensation for Mr. Wilson was
subsequently increased. In addition, Mr. Wilson was given benefits that the
Company makes available to employees in comparable positions, and was granted an
option to purchase 500,000 shares of Common Stock. The Company also agreed to
pay Mr. Wilson's reasonable costs to relocate to Seattle. Mr. Wilson's
employment is voluntary and may be terminated by the Company or Mr. Wilson at
any time with or without cause or notice.
The Company and Mr. Matsuo are parties to a letter agreement dated June 20,
1994 governing his employment with the Company. Under the agreement, the Company
paid to Mr. Matsuo an initial annual salary of $90,000, which was to be
increased to $105,000 following the Company's initial equity financing, with
possible bonuses of up to $50,000 per year. The compensation for Mr. Matsuo was
subsequently increased. In
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<PAGE> 59
addition, Mr. Matsuo was given benefits that the Company makes available to
employees in comparable positions, and was granted an option to purchase 650,000
shares of Common Stock. Mr. Matsuo's employment is voluntary and may be
terminated by the Company or Mr. Matsuo at any time with or without cause or
notice.
EMPLOYEE BENEFIT PLANS
1994 Stock Option Plan
The Company's 1994 Plan was adopted by the Board of Directors and approved
by the Company's stockholders in April 1994. Initially, 375,000 shares of Common
Stock were reserved for issuance under the 1994 Plan. This reserve has been
increased several times, and there are currently 6,900,000 shares reserved for
issuance under the 1994 Plan. The 1994 Plan provides for the grant of both
incentive stock options ("ISOs") that may qualify under Section 422 of the Code
and non-qualified stock options ("NQSOs") on terms determined by the Board of
Directors, subject to certain statutory and other limitations in the 1994 Plan
(including limitations on the vesting schedule thereof and the exercise price,
which for ISOs to comply with Section 422 of the Code may not be less than 100%
of the fair market value of the Company's Common Stock on the date of grant and
for NQSOs may not be less than 85% of the fair market value of the Company's
Common Stock on the date of grant). The 1994 Plan will terminate upon the
Effective Date, when the 1998 Plan will become effective. As a result, no
further options may be granted under the 1994 Plan following the Effective Date.
However, termination will not affect any options outstanding as of such date,
which options will remain effective until exercised or until they terminate or
expire in accordance with their terms. As of September 30, 1998, options to
purchase 3,573,035 shares of Common Stock were outstanding under the 1994 Plan
and 886,922 shares were available for future option grants.
1997 Stock Option Plan of 7Software
In connection with the Company's June 1998 acquisition of 7Software, the
Company assumed the 7Software Plan and all options outstanding under the
7Software Plan at the closing of the Company's acquisition of 7Software, which
options will remain effective until exercised for the Company's Common Stock or
until they terminate or expire in accordance with their terms. The 7Software
Plan provided for the grant of both ISOs that may qualify under Section 422 of
the Code and NQSOs on terms determined by the board of directors, subject to
certain statutory and other limitations in the 7Software Plan (including
limitations on the vesting schedule thereof and the exercise price, which for
ISOs to comply with Section 422 of the Code may not be less than 100% of the
fair market value of the Company's Common Stock on the date of grant and for
NQSOs may not be less than 85% of the fair market value of the company's common
stock on the date of grant). No options will be granted in the future under the
7Software Plan. As of September 30, 1998, options to purchase 275,764 shares of
Common Stock were outstanding under the 7Software Plan.
1998 Equity Incentive Plan
In August 1998, the Board of Directors adopted the 1998 Plan and reserved
8,100,000 shares of the Company's Common Stock for issuance thereunder. The
Company's stockholders approved the 1998 Plan in September 1998. The 1998 Plan
will become effective on the Effective Date and will serve as the successor to
the 1994 Plan. Shares that (a) are subject to issuance upon exercise of an
option granted under the 1998 Plan that cease to be subject to such option for
any reason other than exercise of such option, (b) have been issued pursuant to
the exercise of an option granted under the 1998 Plan that are subsequently
forfeited or repurchased by the Company at the original purchase price, (c) are
subject to an award granted pursuant to restricted stock purchase agreement
under the 1998 Plan that are subsequently forfeited or repurchased by the
Company at the original issue price or (d) are subject to stock bonuses granted
under the 1998 Plan that otherwise terminate without shares being issued will
again be available for grant and issuance under the 1998 Plan. In addition, any
authorized shares not issued or subject to outstanding grants under the 1994
Plan on the Effective Date and any shares issued under the 1994 Plan that are
forfeited or repurchased by the Company or that are issuable upon exercise of
options granted pursuant to the 1994 Plan that expire or become
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<PAGE> 60
unexercisable for any reason without having been exercised in full, will be
available for grant and issuance under the 1998 Plan. The 1998 Plan will
terminate in August 2008, unless sooner terminated in accordance with the terms
of the 1998 Plan.
The 1998 Plan authorizes the award of options, restricted stock awards and
stock bonuses (each an "Award"). No person will be eligible to receive more than
2,400,000 shares in any calendar year pursuant to Awards under the 1998 Plan
other than a new employee of the Company, who will be eligible to receive no
more than 3,000,000 shares in the calendar year in which such employee commences
employment. Over the term of the 1998 Plan, no more than 25,000,000 shares may
be issued under the 1998 Plan upon exercise of incentive stock options. The 1998
Plan will be administered by the Compensation Committee, which currently
consists of Mr. Brody and Mr. Fogelsong, both of whom are "non-employee
directors" under applicable federal securities laws and "outside directors" as
defined under applicable federal tax laws. The Compensation Committee has the
authority to construe and interpret the 1998 Plan and any agreement made
thereunder, grant Awards and make all other determinations necessary or
advisable for the administration of the 1998 Plan.
The 1998 Plan provides for the grant of both ISOs that qualify under
Section 422 of the Code and NQSOs. ISOs may be granted only to employees of the
Company or of a parent or subsidiary of the Company. NQSOs (and all other Awards
other than ISOs) may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any parent or subsidiary
of the Company, provided such consultants, independent contractors and advisors
render to the Company bona fide services not in connection with the offer and
sale of securities in a capital-raising transaction. The exercise price of ISOs
must be at least equal to the fair market value of the Company's Common Stock on
the date of grant. (The exercise price of ISOs granted to 10% stockholders must
be at least equal to 110% of that value.) The exercise price of NQSOs must be at
least equal to 85% of the fair market value of the Company's Common Stock on the
date of grant. The maximum term of options granted under the 1998 Plan is ten
years. In addition to, or in tandem with, awards of stock options, the
Compensation Committee may grant participants restricted stock awards to
purchase the Company's Common Stock at terms to be determined by the
Compensation Committee. The Compensation Committee may also grant stock bonus
awards of the Company's Common Stock either in addition to, or in tandem with,
other awards under the 1998 Plan under such terms, conditions and restrictions
as the Compensation Committee may determine. Under the 1998 Plan, stock bonuses
may be awarded for the satisfaction of performance goals established in advance.
The Compensation Committee may, with the consent of the respective Award
recipient, issue new Awards in exchange for the surrender and cancellation of
any or all outstanding Awards. The Compensation Committee may also buy from an
Award recipient an award previously granted based on such terms and conditions
as the Committee and participant may agree. At the discretion of the
Compensation Committee, payment for Awards may be made: in cash; by cancellation
of indebtedness of the Company to the participant; by surrender of shares that
either have been owned by the participant for more than six months and have been
paid for within the meaning of Rule 144 or were obtained by the participant in
the public market; by tender of a full recourse promissory note; by waiver of
compensation due or accrued to the participant for services rendered; or, with
respect only to purchases upon exercise of an option, through a "same day sale"
or a "margin" commitment. Awards granted under the 1998 Plan may not be
transferred in any manner other than by will or by the laws of descent and
distribution and may be exercised during the lifetime of the optionee only by
the optionee (unless otherwise determined by the Compensation Committee and set
forth in the Award agreement with respect to Awards that are not ISOs). Options
granted under the 1998 Plan generally expire three months after the termination
of the optionee's service to the Company or a parent or subsidiary of the
Company, except in the case of death or disability, in which case the options
generally may be exercised up to 12 months following the date of death or
termination of service. Options will generally terminate ten days after
termination for cause. In the event of the Company's dissolution or liquidation
or a "change in control" transaction, outstanding Awards may be assumed or
substituted by the successor corporation (if any). In the discretion of the
Compensation Committee, the vesting of such Awards may accelerate upon such
transaction.
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<PAGE> 61
1998 Employee Stock Purchase Plan
In August 1998, the Board adopted the Purchase Plan and reserved a total of
800,000 shares of the Company's Common Stock for issuance thereunder. The
Company's stockholders approved the Purchase Plan in September 1998. On each
January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will increase automatically by a number of shares equal to 1% of
the total outstanding shares of the Company as of the immediately preceding
December 31. Such annual increase may not exceed 800,000 shares per year. The
Purchase Plan will be administered by the Compensation Committee. The
Compensation Committee will have the authority to construe and interpret the
Purchase Plan and its decision in such capacity will be final and binding. The
Purchase Plan will become effective on the first business day on which price
quotations for the Company's Common Stock are available on the Nasdaq National
Market. Employees generally will be eligible to participate in the Purchase Plan
if they are customarily employed by the Company (or its parent or any
subsidiaries that the Company designates) for more than 20 hours per week and
more than five months in a calendar year and are not (and would not become as a
result of being granted an option under the Purchase Plan) 5% stockholders of
the Company (or its designated parent or subsidiaries).
Under the Purchase Plan, eligible employees will be permitted to acquire
shares of the Company's Common Stock through payroll deductions. Eligible
employees may select a rate of payroll deduction between 2% and 15% of their W-2
cash compensation and are subject to certain maximum purchase limitations
described in the Purchase Plan. A participant may change the rate of payroll
deductions or withdraw from an Offering Period by notifying the Company in
writing. Participation in the Purchase Plan will end automatically upon
termination of employment for any reason.
Except for the First Offering Period, each Offering Period under the
Purchase Plan will be for two years and consist of four six-month Purchase
Periods. The first Offering Period is expected to begin on the first business
day on which price quotations for the Company's Common Stock are available on
the Nasdaq National Market. The First Offering Period shall consist of no more
than five and no fewer than three Purchase Periods, any of which may be greater
or less than six months as determined by the Compensation Committee. Offering
Periods and Purchase Periods thereafter will begin on May 1 and November 1. The
purchase price for the Company's Common Stock purchased under the Purchase Plan
is 85% of the lesser of the fair market value of the Company's Common Stock on
the first day of the applicable Offering Period or the last day of each Purchase
Period. The Compensation Committee will have the power to change the duration of
Offering Periods without stockholder approval, if such change is announced at
least 15 days prior to the beginning of the Offering Period to be affected. The
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. Rights granted under the Purchase Plan will not be
transferable by a participant other than by will or the laws of descent and
distribution. The Purchase Plan provides that in the event of the proposed
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the proposed action, unless otherwise provided by the
Compensation Committee. The Compensation Committee may, in the exercise of its
sole discretion in such instances, declare that the Purchase Plan will terminate
as of a date fixed by the Compensation Committee and give each participant the
right to purchase shares prior to such termination. In the event of a "change in
control" transaction, the Purchase Plan will continue for the duration of each
Offering Period that commenced prior to the closing of such proposed transaction
and stock will be purchased on the purchase dates based on the fair market value
of the surviving corporation's stock; unless otherwise provided by the
Compensation Committee consistent with pooling of interests accounting
treatment.
The Purchase Plan will terminate in August 2008 unless earlier terminated
pursuant to its terms. The Board of Directors will have the authority to amend,
terminate or extend the term of the Purchase Plan, except that no such action
may adversely affect any outstanding options previously granted under the
Purchase Plan and stockholder approval is required to increase the number of
shares that may be issued or to change the terms of eligibility under the
Purchase Plan. Notwithstanding the foregoing, the Board of Directors may make
such amendments to the Purchase Plan as the Board of Directors determines to be
advisable if the financial accounting treatment for the Purchase Plan is
different than the financial accounting treatment in effect on the date the
Purchase Plan was adopted by the Board of Directors.
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<PAGE> 62
401(k) Plan
The Company maintains the Concur Technologies, Inc. 401(k) Profit Sharing
and Trust Plan (the "401(k) Plan"), a defined contribution plan intended to
qualify under Section 401 of the Code. All employees are eligible to participate
in the 401(k) Plan. An eligible employee of the Company may begin to participate
in the 401(k) Plan on the first day of January, April, July or October of the
plan year following the date on which such employee meets the eligibility
requirements. A participating employee may make pre-tax contributions of a
percentage of his or her eligible compensation, subject to limitations under the
federal tax laws. Employee contributions and the investment earnings thereon are
fully vested at all times. The Company does not make matching or profit-sharing
contributions.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Bylaws of the Company provide that (i) the Company is required to
indemnify its directors and executive officers to the fullest extent permitted
by the DGCL, (ii) the Company may indemnify its other officers, employees and
agents as set forth in the DGCL, (iii) to the fullest extent permitted by the
DGCL, the Company is required to advance expenses, as incurred, to its directors
and executive officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents.
The Company intends to enter into Indemnity Agreements with each of its
current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification set
forth in the Company's Bylaws and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company regarding which indemnification is sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification.
As permitted by the DGCL, the Company's Certificate of Incorporation
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit.
As authorized by the Company's Bylaws, the Company, with approval of the
Board of Directors, has applied for, and expects to obtain, directors and
officers liability insurance with a per claim and annual aggregate coverage
limit of $5 million.
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<PAGE> 63
CERTAIN TRANSACTIONS
Since October 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any of
its subsidiaries was or is to be a party in which the amount involved exceeded
or will exceed $60,000 and in which any director, executive officer, holder of
more than 5% of the Common Stock of the Company or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect
material interest other than (i) compensation agreements and other arrangements,
which are described where required in "Management" and (ii) the transactions
described below.
Loan Repayment. On September 21, 1994, the Company entered into a Repayment
Agreement with S. Steven Singh, the Company's President, Chief Executive Officer
and a director, and Michael W. Hilton, the Company's Chairman of the Board and
Chief Technical Officer. Pursuant to the Repayment Agreement, the Company agreed
to repay loans previously made to the Company by Mr. Singh and Mr. Hilton in the
amounts of $111,500 and $121,500, respectively. Under the terms of the Repayment
Agreement, the Company agreed to repay the loans on the date two years following
the Commencement Date (as defined in the Repayment Agreement) together with
interest at the rate of 7% per annum. In December 1996, the Company agreed to
issue 161,326 shares of its Series C Preferred Stock to Mr. Singh and 175,975
shares of its Series C Preferred Stock to Mr. Hilton in consideration for the
cancellation of indebtedness under the Repayment Agreement at a purchase price
of $0.80 per share.
Preferred Stock Financings. From October 1, 1994 through August 15, 1998,
the Company sold 3,824,092 shares of its Series A Preferred Stock at a price of
$0.523 per share, 4,687,500 shares of its Series B Preferred Stock at a price of
$0.64 per share, 9,712,301 shares of its Series C Preferred Stock at a price of
$0.80 per share (which includes the 337,301 shares of Series C Preferred Stock
issued to Mr. Singh and Mr. Hilton in consideration for the cancellation of
indebtedness under the Repayment Agreement), 3,188,357 shares of its Series D
Preferred Stock at a price of $1.46 per share, and 4,121,676 shares of its
Series E Preferred Stock at a price of $3.10 per share, in a series of private
financings. The Company sold these securities pursuant to preferred stock
purchase agreements and an investors' rights agreement on substantially similar
terms (except for terms relating to date and price), under which the Company
made standard representations, warranties and covenants, and which provided the
purchasers thereunder with registration rights, information rights, and rights
of first refusal, among other provisions, standard in venture capital
financings. Each share of preferred stock will convert into one share of Common
Stock upon the completion of the Offering. The purchasers of the preferred stock
included, among others, the following holders of 5% or more of the Company's
Common Stock, directors and entities associated with directors:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK PURCHASED
---------------------------------------------------------
INVESTOR SERIES A SERIES B SERIES C SERIES D SERIES E
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
American Express Travel Related Services
Company, Inc............................ -- -- -- -- 1,612,903
Brentwood Associates VI, L.P. and
affiliates(1)........................... 3,824,092 781,250 625,000 338,447 186,762
Institutional Venture Partners VII, L.P.
and affiliates(2)....................... -- -- 5,000,000 325,486 180,228
Mayfield VIII and affiliates(3)........... -- -- 3,125,000 2,018,273 174,683
RRE Investors, L.P. and affiliates(4)..... -- -- -- -- 1,612,903
US Venture Partners IV L.P. and
affiliates(5)........................... -- 3,906,250 625,000 399,986 --
Michael W. Hilton(6)...................... -- -- 175,975 -- 9,678
S. Steven Singh(7)........................ -- -- 161,326 -- 9,678
</TABLE>
- ---------------
(1) Jeffrey D. Brody, a director of the Company, is the Managing Member of
Brentwood VIII Ventures, LLC, the General Partner of Brentwood Associates
VI, L.P. and Brentwood Affiliates Fund II, L.P.
(2) Norman A. Fogelsong, a director of the Company, is a General Partner of
Institutional Venture Management VII, L.P., the General Partner of
Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P.
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<PAGE> 64
(3) Michael J. Levinthal, a director of the Company, is the Managing Member of
Mayfield VIII Management, L.L.C., the General Partner of Mayfield VIII and
Mayfield Associates Fund III.
(4) James D. Robinson III, a director of the Company, is a member of RRE
Investors II, LLC, which indirectly exercises exclusive control over RRE
Investors, L.P. and RRE Investors Fund, L.P.
(5) US Venture Partners IV L.P.'s affiliates that are holders of the Company's
Preferred Stock are USVP Entrepreneur Partners II, L.P. and Second Ventures
II, L.P.
(6) Michael W. Hilton is Chairman of the Board and Chief Technical Officer of
the Company.
(7) S. Steven Singh is the President, Chief Executive Officer and a director of
the Company.
Transactions with American Express. In August 1998, the Company sold an
aggregate of 1,612,903 shares of its Series E Preferred Stock to TRS, an
affiliate of American Express, at a cash purchase price of $3.10 per share, and
issued a warrant to TRS exercisable for an aggregate of 6,000,000 shares of the
Company's Series E Preferred Stock (the "TRS Warrant"). If all of the shares of
the Company's Series E Preferred Stock are converted into shares of Common Stock
in connection with a registration of the Company's Common Stock under the
Securities Act, then the TRS Warrant will automatically become exercisable for
6,000,000 shares of the Company's Common Stock instead of Series E Preferred
Stock (such shares underlying the TRS Warrant are referred to as the "Warrant
Shares"). 750,000 of the Warrant Shares may be acquired at the time of the
Offering at a cash purchase price equal to the Offering price less 7%; 1,750,000
of the Warrant Shares may be acquired at any time on or before October 15, 1999
at a cash purchase price of $13.50 per share; 1,750,000 of the Warrant Shares
may be acquired at any time on or before January 15, 2001 at a cash purchase
price of $20.25 per share; and the remaining 1,750,000 of the Warrant Shares may
be acquired at any time on or before January 15, 2002 at a cash purchase price
of $34.00 per share. As was permitted by the warrant, the Board of Directors
determined, within 60 days of the date of the warrant, to cancel 25% of the
shares that could have been acquired under the warrant at the time of the
Offering or on or before October 15, 1999. Thus, 562,500 of the Warrant Shares
may be acquired at the time of the Offering, and only 1,312,500 additional
Warrant Shares may be acquired on or before October 15, 1999. In connection with
the purchase of Series E Preferred Stock by TRS, the Company and the other
holders of its Series E Preferred Stock entered into an amended Voting
Agreement, pursuant to which TRS was given the right to designate Edward
Gilligan, or some other person reasonably acceptable to the Company's Board of
Directors, as a member of the Company's Board of Directors. The Voting
Agreement, as amended, will terminate upon the completion of the Offering.
The Company's agreements with TRS prohibit TRS, together with its
majority-owned subsidiaries, from purchasing additional shares of the Company's
capital stock if such purchase would result in TRS owning more than 17% of the
Company's capital stock (including Warrant Shares issuable upon exercise of the
TRS Warrant).
In December 1997, the Company entered into a Strategic Marketing Alliance
Agreement with American Express. Under the Strategic Marketing Alliance
Agreement, American Express can refer to the Company its corporate charge card
customers that seek a T&E expense management software solution. American Express
receives a fee for referring to the Company clients of American Express who
become XMS customers. The fee varies based upon licensing revenue realized from
referred customers. Except for the referral, the Company is responsible for the
entire sales effort and also for customer support and warranty service. Under
the Strategic Marketing Alliance Agreement, the Company and American Express
have also agreed to develop certain product features enabling a higher level of
integration between XMS and certain American Express services and products. In
August 1998, the Company entered into a Co-Branded XMS Service Marketing
Agreement (the "TRS Agreement") with TRS. Under the TRS Agreement, TRS will
receive a fee for marketing to TRS's clients a co-branded ESP version of XMS
containing special features. The marketing fee is based on the amount of revenue
received. The Company is responsible for providing warranty and customer support
services to these customers. In addition, under the TRS Agreement, the Company
and TRS have agreed to jointly develop certain product features for integration
into the co-branded ESP version of XMS.
Employment Agreements. The Company has entered into employment agreements
with Messrs. Wilson and Matsuo. See "Management--Employment Agreements."
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<PAGE> 65
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
September 30, 1998, and as adjusted to reflect the sale of the shares offered
hereby, by (i) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director of the
Company, (iii) each of the Named Executive Officers, (iv) each Selling
Stockholder and (v) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
-------------------------- SHARES BEING -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- --------------------------------------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
American Express Travel Related
Services ("TRS")(3)................. 6,987,903 18.1% -- 6,987,903 %
Jeffrey D. Brody
Brentwood Associates VI, L.P. and
affiliates(4)....................... 5,755,551 17.3 -- 5,755,551
Norman A. Fogelsong
Institutional Venture Partners VII,
L.P. and affiliates(5).............. 5,505,714 16.5 -- 5,505,714
Michael J. Levinthal
Mayfield VIII and affiliates(6)..... 5,317,956 16.0 -- 5,317,956
US Venture Partners IV, L.P. and
affiliates(7)....................... 4,931,236 14.8 -- 4,931,236
S. Steven Singh(8).................... 2,615,796 7.8 160,000 2,455,796
Michael W. Hilton(9).................. 2,470,861 7.4 100,000 2,370,861
James D. Robinson III
RRE Investors, L.P. and
affiliates(10)...................... 1,612,903 4.9 -- 1,612,903
Jon T. Matsuo(11)..................... 705,202 2.1 66,000 639,202
Sterling R. Wilson(12)................ 605,272 1.8 56,000 549,272
Rajeev Singh(13)...................... 504,681 1.5 46,000 458,681
Imperial Bank(14)..................... 138,281 * --
Timothy Y. Fitzgerald (15)............ 120,937 * 10,000 110,937 *
All current executive officers and
directors as a group(16)............ 25,191,597 73.2% 428,000 24,763,597 %
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Unless otherwise indicated, the address for each listed stockholder is c/o
Concur Technologies, Inc., 6222 185th Avenue NE, Redmond, Washington 98052.
(2) Percentage ownership is based on 33,280,316 shares outstanding as of
September 30, 1998 and shares outstanding after the Offering.
Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of September 30, 1998 are deemed
to be outstanding and to be beneficially owned by the person holding such
options or warrants for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Represents (i) 1,612,903 shares held of record by TRS, a subsidiary of
American Express, and (ii) 5,375,000 shares subject to a warrant held by
TRS that is exercisable within 60 days of September 30, 1998, expiring in
four tranches through January 2002, at cash purchase prices equal to the
price to public in the Offering less 7%, $13.50, $20.25 and $34.00,
respectively. The address for American Express and TRS is American Express
Tower, World Financial Center, New York, New York 10285. See "Certain
Transactions."
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<PAGE> 66
(4) Represents (i) 5,537,539 shares held of record by Brentwood Associates VI,
L.P., (ii) 170,632 shares held of record by Brentwood Affiliates Fund II,
L.P., (iii) 9,678 shares held of record by Jeffrey D. Brody, (iv) 31,250
shares held of record by The Schuster Revocable Trust dated February 10,
1995, (v) 3,226 shares held of record by Eric Chiu and (vi) 3,226 shares
held of record by James Mongiello. Mr. Brody, a director of the Company, is
the Managing Member of Brentwood VIII Ventures, LLC, the General Partner of
Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. Mr.
Brody disclaims beneficial ownership of the shares held by Brentwood
Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. The address for
Mr. Brody, Brentwood Associates VI, L.P., Brentwood Affiliates Fund II,
L.P., The Schuster Revocable Trust dated February 10, 1995, Mr. Chiu and
Mr. Mongiello is c/o Brentwood Venture Capital, 3000 Sand Hill Road,
Building 1, Suite 260, Menlo Park, California 94025.
(5) Represents (i) 5,232,405 shares held of record by Institutional Venture
Partners VII, L.P., (ii) 188,194 shares held of record by IVP Founders Fund
I, L.P. and (iii) 85,115 shares held of record by Institutional Venture
Management VII, L.P. Norman A. Fogelsong, a director of the Company, is the
General Partner of Institutional Venture Management VII, L.P., the General
Partner of Institutional Venture Partners VII, L.P. and IVP Founders Fund
I, L.P. Mr. Fogelsong disclaims beneficial ownership of the shares held by
Institutional Venture Partners VII, L.P., IVP Founders Fund I, L.P. and
Institutional Venture Management VII, L.P. The address for Mr. Fogelsong,
Institutional Venture Partners VII, L.P., IVP Founders Fund I, L.P. and
Institutional Venture Management VII, L.P. is c/o Institutional Venture
Management VII, L.P., 3000 Sand Hill Road, Building 2, Suite 290, Menlo
Park, California 94025.
(6) Represents (i) 5,052,058 shares held of record by Mayfield VIII and (ii)
265,898 shares held of record by Mayfield Associates Fund III. Michael J.
Levinthal, a director of the Company, is the Managing Member of Mayfield
VIII Management, L.L.C., the General Partner of Mayfield VIII and Mayfield
Associates Fund III. Mr. Levinthal disclaims beneficial ownership of the
shares held by Mayfield VIII and Mayfield Associates Fund III. The address
for Mr. Levinthal, Mayfield VIII and Mayfield Associates Fund III is c/o
Mayfield Fund, 2800 Sand Hill Road, Suite 250, Menlo Park, California
94025.
(7) Represents (i) 4,265,518 shares held of record by U.S. Venture Partners IV,
L.P., (ii) 147,938 shares held of record by USVP Entrepreneur Partners II,
L.P. and (iii) 517,780 shares held of record by Second Ventures II, L.P.
William K. Bowes, Jr., Irwin Federman, Steven Krausz, Lucio Lanza and
Philip Young are the General Partners of Presidio Management Group IV,
L.P., the General Partner of each of U.S. Venture Partners IV, L.P. USVP
Entrepreneur Partners II, L.P. and Second Ventures II, L.P. Messrs. Bowes,
Federman, Krausz, Lanza and Young disclaim beneficial ownership of the
shares held by U.S. Venture Partners IV, L.P., USVP Entrepreneur Partners
II, L.P. and Second Ventures II, L.P. The address for U.S. Venture Partners
IV, L.P., USVP Entrepreneur Partners II, L.P. and Second Ventures II, L.P.
is c/o Presidio Management Group IV, L.P., 2180 Sand Hill Road, Suite 300,
Menlo Park, California 94025.
(8) Represents (i) 2,171,004 shares held of record by S. Steven Singh and (ii)
444,792 shares subject to options exercisable within 60 days of September
30, 1998 held by Mr. Singh. Mr. Singh is the President, Chief Executive
Officer and a director of the Company.
(9) Represents (i) 2,435,653 shares held of record by Michael W. Hilton and
(ii) 35,208 shares subject to options exercisable within 60 days of
September 30, 1998 held by Mr. Hilton. Mr. Hilton is the Chairman of the
Board and Chief Technical Officer of the Company.
(10) Represents (i) 1,040,218 shares held of record by RRE Investors, L.P. and
(ii) 572,685 shares held of record by RRE Investors Fund, L.P. James D.
Robinson III, a director of the Company, is a member of RRE Investors II,
LLC, which indirectly exercises exclusive control over RRE Investors, L.P.
and RRE Investors Fund, L.P. Mr. Robinson disclaims beneficial ownership of
the shares held by RRE Investors, L.P. and RRE Investors Fund, L.P. The
address for Mr. Robinson, RRE Investors, L.P. and RRE Investors Fund, L.P.
is 126 East 56th Street, 22nd Floor, New York, New York 10022.
(11) Represents (i) 226,452 shares held of record by Jon T. Matsuo and (ii)
478,750 shares subject to options exercisable within 60 days of September
30, 1998 held by Mr. Matsuo. Mr. Matsuo is the Executive Vice President of
Worldwide Sales of the Company.
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<PAGE> 67
(12) Represents (i) 556,522 shares held of record by Sterling R. Wilson and (ii)
48,750 shares subject to options exercisable within 60 days of September
30, 1998 held by Mr. Wilson. Mr. Wilson is the Chief Financial Officer and
Vice President of Operations of the Company.
(13) Represents (i) 456,452 shares held of record by Rajeev Singh and (ii)
48,229 shares subject to options exercisable within 60 days of September
30, 1998 held by Mr. Singh. Mr. Singh is the Vice President of Products of
the Company.
(14) Represents 138,281 shares subject to warrants exercisable within 60 days of
September 30, 1998 held by Imperial Bank. Imperial Bank has notified the
Company that it will exercise such warrants and acquire shares
on a net exercise basis at an assumed exercise price of $ per share,
all of which will be offered in the Offering. The address for Imperial Bank
is Emerging Growth Industries Group -- Menlo Park, 226 Airport Parkway, San
Jose, California 95110-1024.
(15) Represents (i) 40,000 shares held of record by Timothy Y. Fitzgerald and
(ii) 80,937 shares subject to options exercisable within 60 days of
September 30, 1998 held by Mr. Fitzgerald. Mr. Fitzgerald is the Vice
President of U.S. Large Account Sales of the Company.
(16) Represents (i) 24,044,659 shares held of record by current executive
officers and directors as a group and (ii) 1,146,938 shares subject to
options exercisable within 60 days of September 30, 1998 held by current
executive officers and directors as a group. After Edward Gilligan,
President, Corporate Services of American Express, joins the Board of
Directors of the Company, as is contemplated, there will be 31,032,562
shares held of record by current officers and directors as a group, or
% of shares outstanding after the Offering.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
As of September 30, 1998, assuming the conversion of all outstanding shares
of preferred stock into Common Stock, there were 33,280,316 shares of Common
Stock outstanding, held of record by 77 stockholders. Subject to preferences
that may be applicable to any preferred stock outstanding at the time, the
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the Board of Directors may from time to time determine. See "Dividend Policy."
Each stockholder is entitled to one vote for each share of Common Stock held on
all matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in the Company's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders would be distributable
ratably among the holders of the Common Stock and any participating preferred
stock outstanding at that time after payment of liquidation preferences, if any,
on any outstanding preferred stock and payment of other claims of creditors.
Each outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of the Offering, there will be no shares of preferred
stock outstanding. The Board of Directors is authorized, subject to any
limitations prescribed by Delaware law, to issue the preferred stock in one or
more series, to establish from time to time the number of shares to be included
in each such series, to fix the rights, preferences and privileges of the shares
of each wholly unissued series and to designate any qualifications, limitations
or restrictions thereon, and to decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding), without
any further vote or action by the stockholders. The Board of Directors may
authorize the issuance of preferred stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of Common
Stock. Thus, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
current plan to issue any shares of preferred stock.
WARRANTS
As of September 30, 1998, the Company had outstanding warrants to purchase
an aggregate of 70,313 shares of Series C Preferred Stock, 204,539 shares of
Series D Preferred Stock, and 5,549,097 shares of Series E Preferred Stock.
Imperial Bank, the holder of outstanding warrants to purchase 138,281 shares of
preferred stock, has indicated that immediately prior to the Offering it will
exercise in full its warrants to purchase shares, assuming the net
exercise of its warrants at an assumed exercise price of $
per share. Any warrants to purchase shares of Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock that are not exercised prior to the
closing of the Offering will automatically be converted into warrants to
purchase a like number of shares of Common Stock. Warrants to purchase 5,685,668
shares of Common Stock are expected to be outstanding following the closing of
the Offering.
ANTI-TAKEOVER PROVISIONS
Section 203 ("Section 203") of the DGCL is applicable to corporate
takeovers of Delaware corporations. Subject to certain exceptions set forth
therein, Section 203 provides that a corporation may not engage in any business
combination with any "interested stockholder" for a three-year period following
the date that such stockholder becomes an interested stockholder unless (a)
prior to such date, the board of directors of the
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<PAGE> 69
corporation approved either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder, (b) upon
consummation of the transaction that resulted in the stockholder's becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (i) persons who are directors and also
officers and (ii) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (c) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, and by the affirmative votes of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder. Except as
specified in Section 203, an interested stockholder is generally defined to
include any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the corporation and
was the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation any time within three
years immediately prior to the relevant date, and the affiliates and associates
of such person. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section, effective 12 months after adoption. The
Company's Certificate of Incorporation and Bylaws do not exclude the Company
from the restrictions imposed under Section 203. It is anticipated that the
provisions of Section 203 may encourage companies interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which resulted in the stockholder's becoming an interested
stockholder. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control of the Company, which could depress the market
price of the Common Stock and which could deprive the stockholders of
opportunities to realize a premium on shares of the Common Stock held by them.
Certain other provisions of the Company's Certification of Incorporation
and Bylaws, including provisions that divide the Board of Directors into three
classes to serve staggered three-year terms, prohibit the stockholders from
taking action by written consent and restrict the ability of stockholders to
call special meetings, may also make it more difficult for a third party to
acquire a majority of the Company's voting stock or effect a change in control
of the Company. The Company's Bylaws, which will be in effect upon the
completion of the Offering, provide for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. The classification of the Board of Directors could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, control of the Company. See "Risk
Factors--Anti-Takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
REGISTRATION RIGHTS
Beginning one year after the date of the Offering, the holders of
30,791,594 shares of Common Stock (assuming the exercise of warrants to purchase
5,823,949 shares of Common Stock held by holders of registration rights and the
sales by certain of the Selling Stockholders of shares of Common Stock in
the Offering) (the "Registrable Securities") will have certain rights with
respect to the registration of such shares under the Securities Act. If
requested by holders of 40% or more of the Registrable Securities, the Company
must file a registration statement under the Securities Act on a form other than
Form S-3 covering all Registrable Securities requested to be included by all
holders of such Registrable Securities, provided that at least 25% of the then
outstanding Registrable Securities (or any lesser percent if the reasonably
anticipated aggregate proceeds of such offering exceeds $10,000,000) will be
offered in such offering. In addition, if requested by a holder or holders of
outstanding Registrable Securities, the Company must file a registration
statement under the Securities Act on Form S-3 covering such Registrable
Securities, provided that the reasonably anticipated aggregate proceeds of such
offering, net of underwriting discounts and commissions, exceeds $2,000,000. The
Company may be required to effect two such registrations. In addition to the
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<PAGE> 70
foregoing, if the Company proposes to register any of its Common Stock, the
holders of the Registrable Securities may include all or a portion of their
shares in such registration, subject to certain rights of the underwriter's
representatives in an underwritten offering to limit the number of shares in any
such offering. All expenses incurred in connection with such registrations
(including underwriting discounts and commissions) will be borne by the Company.
Such registration rights terminate following the expiration of five years
following the closing of the Offering or in the event that the Registrable
Securities held by the rights holder is less than 1% of the outstanding
Registrable Securities.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, National Association.
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<PAGE> 71
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding. Of this amount, the shares offered hereby
will be available for immediate sale in the public market as of the date of this
Prospectus. An additional 504,018 shares are not subject to an 180-day lockup
and will be available for sale in the public market 90 days following the date
of this Prospectus pursuant to Rule 701. Approximately 26,882,320 additional
shares will be available for sale in the public market following the expiration
of 180-day lockup agreements with the Representatives of the Underwriters or the
Company, subject in some cases to compliance with the volume and other
limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER THE DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
---------------------- ------------------------ -----------------------------------
<S> <C> <C>
Upon Effectiveness................. Freely tradable shares sold in
Offering and shares salable under
Rule 144(k) that are not subject
to 180-day lockup
90 days............................ 504,018(1) Shares salable under Rule 144,
144(k) or 701 that are not subject
to 180-day lockup.
180 days........................... 26,882,320 Lockup released; shares salable
under Rule 144, 144(k) or 701
Over 180 days...................... 5,893,978 Restricted securities held for one
year or less
</TABLE>
- ---------------
(1) If the Underwriters waive the 180-day lockup agreements within the first 90
days after the date of the Prospectus, an additional 26,882,320 shares will
be available for sale in the public market, subject in some cases to
compliance with the volume and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock (approximately
shares immediately after the Offering) or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell pursuant to
Rule 144, even after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders and optionholders have agreed
pursuant to the Underwriting Agreement and other agreements that they will not
sell any Common Stock without the prior written consent of BancBoston Robertson
Stephens Inc. for a period of 180 days from the date of this Prospectus (the
"180-day Lockup Period") except that the Company may, without such consent,
grant options and sell shares pursuant to the Company's stock plans.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares
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<PAGE> 72
without having to comply with the Rule 144 holding period restrictions, in each
case commencing 90 days after the date of this Prospectus. As of September 30,
1998, the holders of options to purchase approximately 3,848,799 shares of
Common Stock will be eligible to sell their shares upon the expiration of the
180-day Lockup Period, subject in certain cases to vesting of such options.
The Company intends to file a registration statement on Form S-8 under the
Securities Act within 180 days after the completion of the Offering to register
13,348,799 shares of Common Stock subject to outstanding stock options or
reserved for issuance under the 1998 Plan, the Directors Plan and the Purchase
Plan, thus permitting the resale of such shares by nonaffiliates in the public
market without restriction under the Securities Act.
In addition, beginning one year after the date of the Offering, the holders
of 30,791,594 shares of Common Stock (assuming the exercise of warrants to
purchase 5,823,949 shares of Common Stock held by holders of registration rights
and the sales by certain of the Selling Stockholders of shares of Common
Stock in the Offering) (the "Registrable Securities") will have certain rights
with respect to the registration of such shares under the Securities Act. If
requested by holders of 40% or more of the Registrable Securities, the Company
must file a registration statement under the Securities Act on a form other than
Form S-3 covering all Registrable Securities requested to be included by all
holders of such Registrable Securities, provided that at least 25% of the then
outstanding Registrable Securities (or any lesser percent if the reasonably
anticipated aggregate proceeds of such offering exceeds $10,000,000) will be
offered in such offering. In addition, if requested by a holder or holders of
outstanding Registrable Securities, the Company must file a registration
statement under the Securities Act on Form S-3 covering such Registrable
Securities, provided that the reasonably anticipated aggregate proceeds of such
offering, net of underwriting discounts and commissions, exceeds $2,000,000. The
Company may be required to effect two such registrations. In addition to the
foregoing, if the Company proposes to register any of its Common Stock, the
holders of the Registrable Securities may include all or a portion of their
shares in such registration, subject to certain rights of the underwriters'
representatives in an underwritten offering to limit the number of shares in any
such offering. All expenses incurred in connection with such registrations
(including underwriting discounts and commissions) will be borne by the Company.
Such registration rights terminate following the expiration of five years
following the closing of the Offering or in the event that the Registrable
Securities held by the rights holders is less than 1% of the outstanding
Registrable Securities. Registration of the Registrable Securities under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act.
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<PAGE> 73
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and Piper Jaffray Inc.
(the "Representatives"), have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase the number of shares of Common Stock set forth opposite their
respective names below. The underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Hambrecht & Quist LLC.......................................
Piper Jaffray Inc...........................................
---------
Total.............................................
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession of not in excess of $
per share, of which $ may be reallowed to other dealers. After the
Offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company and the Selling Stockholders as set forth
on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus for the Offering, to
purchase up to additional shares of Common Stock at the same price per
share as the Company and the Selling Stockholders will receive for the
shares that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a percentage
of the shares offered hereby. If purchased, such additional shares
will be sold by the Underwriters on the same terms as those on which the
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representation and warranties contained in the
Underwriting Agreement.
Each officer and director and certain security holders of the Company have
agreed with the Representatives for a period of 180 days after the effective
date of this Prospectus that they will not, subject to certain exceptions,
directly or indirectly offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to, any shares of
Common Stock, or any securities convertible into or exchangeable for shares of
Common Stock, now owned or hereafter acquired directly by such holders or with
respect to which they have the power of disposition, without the prior written
consent of BancBoston Robertson Stephens Inc., which may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. In addition, the Company has agreed that during
the 180 days following the effective date of this Prospectus, the Company will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
subject to certain exceptions, offer, issue, sell, contract to sell, or
otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than (i) the
Company's sales of shares in the Offering, (ii) the issuance of Common Stock
upon the exercise of outstanding options or warrants or (iii) the Company's
issuance of options or shares under the 1998 Plan, the Directors Plan and the
Purchase Plan. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
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<PAGE> 74
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the Company
and the Representatives. Among the factors to be considered in such negotiations
were prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development and other factors deemed relevant.
Certain persons and entities affiliated with Hambrecht & Quist LLC own an
aggregate of 63,066 shares of the Company's Series E Preferred Stock. Such
affiliates are subject to the 180-day lock-up that applies to other stockholders
as described above. Hambrecht & Quist LLC and its affiliates (other than such
holders described above) will be permitted to engage in stabilization, brokerage
and ordinary course of business transactions. See "Shares Eligible for Future
Sale."
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids that may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The Representatives have advised the Company that such transitions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Stock offered hereby for certain individuals
designated by the Company who have expressed an interest in purchasing such
shares of Common Stock in the Offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. Matthew P. Quilter, a member of Fenwick & West LLP, owns an
aggregate of 3,226 shares of Series E Preferred Stock of the Company and is the
Secretary of the Company.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of Concur as of September 30, 1996 and 1997, and June 30, 1998 and for
each of the three years in the period ended September 30, 1997 and for the nine
months ended June 30, 1998 and the financial statements of 7Software as of
December 31, 1997 and for the period then ended appearing in this Prospectus and
the Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports
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<PAGE> 75
thereon appearing elsewhere herein, and are included in reliance upon such
reports, given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedule thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedule
thereto. Statements contained in this Prospectus regarding the contents of any
contract or any other document to which reference is made are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified by such reference. A copy of the Registration
Statement and the exhibits and schedule thereto may be inspected without charge
at the public reference facilities maintained by the Commission located at Room
1024, 450 Fifth Street, Washington, D.C. 20549 and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. The Commission maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission.
74
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION)
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of September 30, 1996,
September 30, 1997, and June 30, 1998..................... F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1995, 1996, and 1997 and the Nine Months
Ended June 30, 1997 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1995, 1996, and 1997 and
the Nine Months Ended June 30, 1998....................... F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996, and 1997 and the Nine Months
Ended June 30, 1997 and 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY)
Report of Ernst & Young LLP, Independent Auditors........... F-24
Balance Sheet as of December 31, 1997 and June 30, 1998..... F-25
Statement of Income for the Period May 30, 1997 (Date of
Incorporation) to December 31, 1997 and the Six Months
Ended June 30, 1998....................................... F-26
Statement of Shareholders' Equity for the Period May 30,
1997 (Date of Incorporation) to December 31, 1997 and the
Six Months Ended June 30, 1998............................ F-27
Statement of Cash Flows for the Period May 30, 1997 (Date of
Incorporation) to December 31, 1997 and the Six Months
Ended June 30, 1998....................................... F-28
Notes to Financial Statements............................... F-29
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Financial Statements (Unaudited)..... F-32
Pro Forma Consolidated Statements of Operations for the Nine
Months Ended June 30, 1998 (Unaudited).................... F-33
Pro Forma Consolidated Statements of Operations for the Year
Ended September 30, 1997 (Unaudited)...................... F-34
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)............................................... F-35
</TABLE>
F-1
<PAGE> 77
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Concur Technologies, Inc.
(Formerly Portable Software Corporation)
We have audited the accompanying consolidated balance sheets of Concur
Technologies, Inc. (the Company) as of September 30, 1996 and 1997, and June 30,
1998 and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 30, 1997 and the nine months ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Concur
Technologies, Inc. at September 30, 1996 and 1997 and June 30, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997 and the nine months ended
June 30, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
August 14, 1998, except for Note 17,
as to which the date is August 21, 1998
F-2
<PAGE> 78
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
SEPTEMBER 30, EQUITY
------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998
------- -------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 5,685 $ 6,695 $ 15,604
Accounts receivable, net of allowance for
doubtful accounts of $125, $170, and $473 in
1996, 1997, and 1998, respectively............. 509 4,365 3,572
Prepaid expenses and other current assets........ 90 165 398
------- -------- --------
Total current assets...................... 6,284 11,225 19,574
Equipment and furniture, net....................... 455 2,077 2,652
Deposits........................................... 20 28 133
Capitalized technology and other intangible
assets........................................... -- -- 960
------- -------- --------
Total assets.............................. $ 6,759 $ 13,330 $ 23,319
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 628 $ 1,082 $ 705
Accrued liabilities.............................. 777 1,294 3,500
Accrued commissions.............................. 99 509 750
Current portion of accrued payment to
stockholders................................... -- -- 167
Current portion of long-term debt................ 123 329 1,427
Current portion of capital lease obligations..... -- 351 819
Current portion of notes payable to
stockholders................................... 133 -- --
Deferred revenues................................ 451 1,477 2,737
------- -------- --------
Total current liabilities................. 2,211 5,042 10,105
Accrued payment to stockholders, net of current
portion.......................................... -- -- 333
Long-term debt, net of current portion............. 215 2,171 6,325
Capital lease obligations, net of current
portion.......................................... -- 1,516 1,994
Notes payable to stockholders, net of current
portion.......................................... 133 -- --
Deferred gain on leased equipment.................. -- 989 809
Redeemable convertible preferred stock:
Authorized shares--23,921,023
Issued and outstanding shares --
17,886,592, 21,412,250, and 23,921,023 in 1996,
1997, and 1998, respectively, liquidation
value of $25,202 (Note 11).................. 12,381 17,264 25,041
Redeemable convertible preferred stock warrants.... 5 58 72
Commitments
Stockholders' equity (deficit):
Common stock, no par value:
Authorized shares -- 60,000,000
Issued and outstanding shares -- 5,720,617,
5,723,741, and 7,601,251 in 1996, 1997, and
1998, respectively; 31,522,274 shares pro
forma....................................... 259 259 6,268 $ 31,381
Deferred stock compensation...................... -- -- (564) (564)
Accumulated deficit.............................. (8,445) (13,969) (27,064) (27,064)
------- -------- -------- --------
Total stockholders' equity (deficit)...... (8,186) (13,710) (21,360) $ 3,753
------- -------- -------- ========
Total liabilities and stockholders' equity
(deficit)............................... $ 6,759 $ 13,330 $ 23,319
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 79
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1995 1996 1997 1997 1998
------- ------- ------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Licenses................................. $ 2,104 $ 1,717 $ 6,347 $ 4,087 $ 8,039
Services................................. 24 242 1,923 1,118 3,676
------- ------- ------- ------- --------
2,128 1,959 8,270 5,205 11,715
Cost of revenues:
Licenses................................. 728 386 394 219 318
Services................................. 673 839 2,269 1,370 3,702
------- ------- ------- ------- --------
1,401 1,225 2,663 1,589 4,020
Gross profit............................... 727 734 5,607 3,616 7,695
Operating expenses:
Sales and marketing...................... 2,363 2,936 5,896 3,873 7,886
Research and development................. 744 1,793 3,401 2,226 4,162
General and administrative............... 515 963 1,815 1,212 3,225
Acquired in-process technology (Note
3).................................... -- -- -- -- 5,203
------- ------- ------- ------- --------
Total operating expenses......... 3,622 5,692 11,112 7,311 20,476
------- ------- ------- ------- --------
Loss from operations....................... (2,895) (4,958) (5,505) (3,695) (12,781)
Interest income............................ 68 92 130 92 134
Interest expense........................... (34) (43) (88) (44) (327)
Other expense, net......................... (29) (44) (61) (34) (121)
------- ------- ------- ------- --------
Net loss................................... $(2,890) $(4,953) $(5,524) $(3,681) $(13,095)
======= ======= ======= ======= ========
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (0.23) $ (0.48)
======= ========
Shares used in calculation of pro forma
basic and diluted net loss per share
(unaudited).............................. 24,462 27,509
======= ========
Historical basic and diluted net loss per
share.................................... $ (0.52) $ (0.87) $ (0.97) $ (0.64) $ (2.26)
======= ======= ======= ======= ========
Shares used in calculation of historical
basic and diluted net loss per share..... 5,586 5,706 5,721 5,721 5,802
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 80
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DEFERRED STOCKHOLDERS'
-------------------- STOCK ACCUMULATED EQUITY
SHARES AMOUNT COMPENSATION DEFICIT (DEFICIT)
---------- ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1994......... 5,500,070 $ 250 $ -- $ (602) $ (352)
Issuance of Common Stock from
exercise of stock options..... 200,000 8 -- -- 8
Net loss......................... -- -- -- (2,890) (2,890)
---------- ------- ----- -------- --------
Balance at September 30, 1995...... 5,700,070 258 -- (3,492) (3,234)
Issuance of common stock from
exercise of stock options..... 20,547 1 -- -- 1
Net loss......................... -- -- -- (4,953) (4,953)
---------- ------- ----- -------- --------
Balance at September 30, 1996...... 5,720,617 259 -- (8,445) (8,186)
Issuance of common stock from
exercise of stock options..... 3,124 -- -- -- --
Net loss......................... -- -- -- (5,524) (5,524)
---------- ------- ----- -------- --------
Balance at September 30, 1997...... 5,723,741 259 -- (13,969) (13,710)
Issuance of common stock from
exercise of stock options..... 105,208 5 -- -- 5
Deferred stock compensation...... -- 861 (861) -- --
Amortization of deferred stock
compensation.................. -- -- 297 -- 297
Issuance of common stock in
connection with acquisition
(Note 3)...................... 1,772,302 4,378 -- -- 4,378
Assumption of stock options in
connection with acquisition
(Note 3)...................... -- 765 -- -- 765
Net loss......................... -- -- -- (13,095) (13,095)
---------- ------- ----- -------- --------
Balance at June 30, 1998........... 7,601,251 $ 6,268 $(564) $(27,064) $(21,360)
========== ======= ===== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 81
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
----------------------------- --------------------------
1995 1996 1997 1997 1998
------- ------- ------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $(2,890) $(4,953) $(5,524) $(3,681) $(13,095)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquired in-process technology............ -- -- -- -- 5,203
Amortization of deferred stock
compensation............................ -- -- -- -- 297
Warrant expense........................... -- 5 53 -- 14
Depreciation and amortization............. 71 144 415 275 533
Amortization of deferred gain recognized
on sale leaseback transaction........... -- -- (22) -- (192)
Provisions for bad debts.................. -- 91 45 54 379
Other..................................... -- 17 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable..................... (149) (451) (3,901) (1,435) 450
Prepaid expenses and other current
assets............................... (150) 63 (84) (73) (361)
Accounts payable........................ 553 (24) 454 (151) (377)
Accrued liabilities..................... 214 597 927 569 2,033
Deferred revenues....................... 37 412 1,026 156 1,260
------- ------- ------- ------- --------
Net cash used in operating activities......... (2,314) (4,099) (6,611) (4,286) (3,856)
------- ------- ------- ------- --------
INVESTING ACTIVITIES
Purchases of equipment and furniture.......... (220) (420) (1,020) (737) (23)
Payment in connection with acquisition of
7Software................................... -- -- -- -- (130)
------- ------- ------- ------- --------
Net cash used in investing activities......... (220) (420) (1,020) (737) (153)
------- ------- ------- ------- --------
FINANCING ACTIVITIES
Proceeds from sales leaseback transaction..... -- -- 1,800 -- 192
Proceeds from capital lease financing......... -- -- 67 -- --
Proceeds from borrowings...................... 187 563 3,087 587 5,500
Payments on borrowings........................ (300) (380) (925) (87) (248)
Payment on capital leases..................... -- -- -- -- (308)
Issuance of common stock...................... 8 1 -- -- 5
Issuance of redeemable convertible preferred
stock....................................... 4,903 7,479 4,612 -- 7,777
------- ------- ------- ------- --------
Net cash provided by financing activities..... 4,798 7,663 8,641 500 12,918
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 2,264 3,144 1,010 (4,523) 8,909
Cash and cash equivalents at beginning of
year........................................ 277 2,541 5,685 5,685 6,695
------- ------- ------- ------- --------
Cash and cash equivalents at end of year...... $ 2,541 $ 5,685 $ 6,695 $ 1,162 $ 15,604
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest........................ $ -- $ 27 $ 76 $ 40 $ 258
======= ======= ======= ======= ========
Issuance of redeemable convertible preferred
stock in exchange for cancellation of notes
payable..................................... -- -- $ 267 $ 267 $ --
Equipment and furniture obtained through
capital leases.............................. -- -- -- -- 1,062
Assets and liabilities recorded in connection
with acquisition of 7Software:
Operating assets.......................... -- -- -- -- 85
Accounts payable and accrued expenses..... -- -- -- -- (15)
Intangible assets......................... -- -- -- -- 960
</TABLE>
See accompanying notes.
F-6
<PAGE> 82
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Concur Technologies, Inc. (the "Company," formerly Portable Software
Corporation) is a leading provider of Intranet-based employee-facing
applications that extend automation to employees throughout the enterprise and
to partners, vendors and service providers in the extended enterprise. The
Company's Xpense Management Solution ("XMS") and CompanyStore products automate
the preparation, approval, processing and data analysis of travel and
entertainment ("T&E") expense reports and front-office procurement requisitions.
The Company was originally incorporated in the State of Washington on August 19,
1993. Operations commenced during 1994.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, XMS (UK) Ltd. and 7Software, Inc.
("7Software"). All significant intercompany accounts and transactions are
eliminated in consolidation.
Unaudited Interim Financial Information
The financial information for the nine months ended June 30, 1997 is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of its
financial position at such date and its operating results and cash flows for
that period. Operating results for the nine months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the entire year.
Revenue Recognition Policy
The Company generates revenues from licensing the rights to use its
software products directly to end users. The Company also generates revenues
from sales of customer support contracts and integration services performed for
customers who license the software.
The Company recognizes revenue in accordance with Statement of Position No.
91-1, "Software Revenue Recognition." Software license revenues are recognized
when a non-cancelable license agreement has been signed with a customer, the
software is shipped, no significant post-delivery vendor obligations remain, and
collection is deemed probable. Customer support revenues are recognized ratably
over the term of the customer support contract, typically one year. Revenues for
consulting services and other post-sales revenues are recognized when the
services are performed.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
The Company will adopt SOP 97-2 beginning in fiscal 1999. SOP 97-2 generally
requires revenues earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, postcontract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. Evidence of the fair value of each
element is based on the price charged when the element is sold separately or, if
the element is not being sold separately, the price for each element established
by management having relevant authority. The revenues allocated to software
products, including specified upgrades or enhancements, generally are recognized
upon delivery of the products. The revenues allocated to unspecified upgrades,
updates and other postcontract customer support generally are recognized ratably
over the term of the contract. If evidence of the fair value for all elements of
F-7
<PAGE> 83
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the arrangement does not exist, all revenues from the arrangement are deferred
until such evidence exists or until all elements are delivered. It is not
anticipated that there will be a material change to the Company's accounting for
revenues as a result of the adoption of SOP 97-2. However, full implementation
guidelines for this standard have not yet been issued. Once available, such
implementation guidance could lead to unanticipated changes in the Company's
current revenue accounting practices, and such changes could materially
adversely affect the Company's future revenues and earnings. Such implementation
guidance may necessitate significant changes in the Company's business practices
in order for the Company to continue to recognize license revenues upon delivery
of its software products.
Cash and Cash Equivalents
All highly liquid financial instruments purchased with an original maturity
of three months or less are reported as cash equivalents.
Fair Values of Financial Instruments
At June 30, 1998, the Company has the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, accrued commissions, long-term debt and capital lease obligations,
bank line of credit ("LOC"), and standby letters of credit. The carrying value
of cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and accrued commissions approximates fair value based on the
liquidity of these financial instruments or based on their short-term nature.
The carrying value of long-term debt, LOC, standby letters of credit, and
capital lease obligations approximates carrying value based on the market
interest rates available to the Company for debt of similar risk and maturities.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of software development costs. Financial accounting standards require
the capitalization of certain software development costs after technological
feasibility of the software is established. In the development of the Company's
new products and enhancements to existing products, the technological
feasibility of the software is not established until substantially all product
development is complete, including the development of a working model. Internal
software development costs that were eligible for capitalization were
insignificant and were charged to research and development expense in the
accompanying statements of operations.
Advertising and Marketing Costs
Costs of marketing materials and advertising expenditures are charged to
operations when the materials are used or the advertising is first released.
Advertising costs were $1,400,000, $711,000, and $569,000 in fiscal 1995, 1996,
and 1997, respectively, and $491,000 and $894,000 for the nine months ended June
30, 1997 and 1998, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
utilizes the liability method of accounting for income taxes. A deferred tax
asset or liability is recorded for all temporary differences between financial
and
F-8
<PAGE> 84
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
tax reporting. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts expected to be realized.
Stock-Based Compensation
In fiscal 1997, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the
Company has elected to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's common stock at the date of grant over
the stock option exercise price.
Equipment and Furniture
Equipment and furniture are carried at cost. The Company provides for
depreciation and amortization using the straight-line method for financial
reporting purposes over estimated useful lives ranging from two to five years.
Depreciation expense includes amounts amortized for assets recorded under
capital leases.
Net Loss per Share
Upon the completion of the Company's proposed initial public offering, all
redeemable convertible preferred stock will automatically convert to common
stock. Basic and diluted net loss per share is calculated using the average
number of shares of common stock outstanding. Other common stock equivalents,
including stock options and warrants, are excluded from the computation as their
effect is antidilutive. See Note 13.
Upon the completion of the Company's proposed initial public offering, all
redeemable convertible preferred stock will automatically convert into common
stock. Accordingly, pro forma net loss per share is computed using the weighted
average number of shares of common stock outstanding and the weighted average
redeemable convertible preferred stock outstanding as if such shares were
converted to common stock at the time of issuance.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
Concentrations of Credit Risk
The Company's customer base is dispersed across many different geographic
areas throughout the world in a variety of industries. No single customer
accounted for more than 10% of the Company's sales in any of the periods
presented. The Company does not require collateral or other security to support
credit sales, but provides an allowance for bad debts based on historical
experience and specific identification.
The Company is subject to concentrations of credit risk from its cash and
cash equivalents. Under terms of certain of its debt agreements, the Company is
required to maintain its cash and cash equivalents primarily at one financial
institution.
F-9
<PAGE> 85
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Recently Issued Accounting Standards
In 1997, the following accounting standards were issued: SFAS No. 129,
"Disclosure of Information About Capital Structure," requiring supplemental
disclosure of capital structure: SFAS No. 130, "Reporting Comprehensive Income"
(this statement establishes standards for reporting and disclosure of
comprehensive income and its components, including revenues, expenses, gains,
and losses, in a full set of general-purpose financial statements): SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information;" and
SOP 97-2, "Software Revenue Recognition." Each of these standards will become
effective for the Company on October 1, 1998. The adoption of these standards is
not expected to have a significant impact upon the Company's financial
statements or disclosures. Also, in June 1998, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities was issued and is required to be
adopted by the Company in fiscal 2000. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
2. EQUIPMENT AND FURNITURE
Equipment and furniture consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------- JUNE 30,
1996 1997 1998
----- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer hardware and software................... $ 587 $ 319 $ 51
Furniture and equipment.......................... 88 33 61
Leased equipment................................. -- 1,800 3,122
----- ------ ------
675 2,152 3,234
Less accumulated depreciation and amortization... (220) (75) (582)
----- ------ ------
$ 455 $2,077 $2,652
===== ====== ======
</TABLE>
In July 1997, the Company entered into a Master Lease Agreement with
Comdisco, Inc. ("Comdisco"), a preferred stockholder, under which Comdisco
agreed to provide the Company lease financing, up to an aggregate purchase price
of $2.5 million. In February 1998, the Company entered into a second Master
Lease Agreement, whereby the total financing commitment extended by Comdisco was
increased by an additional $1.0 million, to a total of $3.5 million. As of June
30, 1998, approximately $380,000 was available under this agreement. The Company
accounts for its obligations under these Master Lease Agreements as capital
leases.
In connection with the Master Lease Agreements, the Company entered into
sale leaseback transactions with Comdisco totaling $1.8 million and $237,000 in
September and October of 1997, respectively. The related loan agreements provide
for equal monthly payments over a four-year term with an imputed interest rate
of 8.2%. The equipment that was sold and subsequently leased back had a net book
value of $970,000. The resulting deferred gain of $1,067,000 is being amortized
over the four-year life of the leases. The gain recognized on the sale leaseback
transactions during the nine months ended June 30, 1998 was $192,000. The gain
was recorded against depreciation expense in the accompanying financial
statements. The leased equipment is amortized over the lease term.
F-10
<PAGE> 86
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
3. ACQUISITION
On June 30, 1998, the Company acquired 7Software, a privately-held software
company and the developer of CompanyStore. The Company issued 1,772,302 shares
of its common stock in exchange for all outstanding shares of 7Software and also
assumed all outstanding 7Software options, which were converted to options to
purchase approximately 309,809 shares of the Company's common stock. The total
7Software purchase price of $6,233,000 includes the estimated fair value of the
common stock ($4,378,000), the estimated fair value of converted options issued
($765,000), $500,000 payable to certain former 7Software shareholders, cash
payments of $130,000 and other direct acquisition costs of $460,000. The amount
due to former 7Software shareholders is payable in the amount of $167,000 per
year for three years. The acquisition was accounted for as a purchase.
Therefore, the results of operations of 7Software and the fair value of the
assets acquired and liabilities assumed were included in the Company's financial
statements beginning on the acquisition date.
In connection with the purchase of 7Software, the Company assumed
7Software's 1997 stock option plan. All outstanding options to purchase the
stock of 7Software on the acquisition date were converted into options to
purchase 309,809 shares of common stock of the Company. The outstanding options
can be exercised at a price of approximately $0.01 per share, vest over four
years, and are exercisable for a period not to exceed ten years.
The allocation of the purchase price resulted in intangible assets
(primarily developed software and the value of an acquired workforce) of
$960,000, which has been capitalized and is being amortized on a straight line
basis over three years. Acquired in-process technology has been valued using the
income approach, resulting in a charge of $5,203,000.
Values assigned to acquired in-process research and development, developed
technology, and trademarks and the acquired workforce were determined by
independent appraisals using discounted cash flow analysis. To determine the
value of the in-process research and development, the Company considered, among
other factors, the state of development of each project, the time and cost
needed to complete each project, expected income, and associated risks, which
included the inherent difficulties and uncertainties in completing the project
and thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. This analysis
resulted in amounts assigned to in-process research and development projects
that had not yet reached technological feasibility or do not have alternative
future uses. To determine the value of the developed technology, the expected
future cash flows of the existing technology product were discounted taking into
account risks related to the characteristics and applications of each product,
existing and future markets, and assessments of the life cycle stage of each
product. Based on this analysis, the existing technology that had reached
technological feasibility was capitalized.
As of the date of acquisition, the CompanyStore development project
consisted of ongoing research and development efforts in the following areas:
(i) compatibility with additional databases, (ii) compatibility with additional
enterprise resource planning platforms, (iii) multiple catalog support, (iv)
fundamental redesign of the user interface, and (v) redesign and rewriting of
the administrative functionality. Based on management's estimates, the remaining
research and development efforts relating to the completion of the CompanyStore
technology were expected to continue into the first quarter of fiscal 1999, the
anticipated product release date. Accordingly, the cost to complete the
in-process technology was estimated based on the number of man-months required
to reach technological feasibility for the CompanyStore technology, the type of
professional and engineering staff involved in the completion process and their
fully burdened monthly salaries. Management estimated the direct costs to
achieve technological feasibility to be approximately $307,000. Beyond this
period, management estimated significantly less expense in supporting and
maintaining active products identified at the acquisition date to be in-process
technology. If the in-process projects contemplated
F-11
<PAGE> 87
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
3. ACQUISITION (CONTINUED)
in management's forecast are not successfully developed, future revenue and
profitability might be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
The unaudited pro forma combined historical results, as if 7Software had
been acquired on October 1, 1996, excluding the non-recurring one-time charge
for acquired in-process technology, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, 1997 ENDED JUNE 30, 1998
----------------------- ------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------- ------------- -------- ------------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues, net.............. $ 8,270 $ 8,336 $ 11,715 $ 11,885
Net loss......................... (5,524) (5,840) (13,095) (8,374)
Pro forma net loss per share..... (0.23) (0.22) (0.48) (0.29)
</TABLE>
The pro forma information does not purport to be indicative of the results
that would have been attained had these events occurred at the beginning of the
period presented and is not necessarily indicative of future results.
In connection with the purchase of 7Software, the Company also entered into
separate employment agreements with certain former 7Software officers and
shareholders. Under the terms of these arrangements, the Company is committed to
loan $500,000 to these officers and shareholders. The notes receivable will be
payable in aggregate annual installments of $167,000 plus interest at variable
rates and will be secured by second mortgages on real property.
Approximately 310,000 shares of the Company's common stock issued in
connection with the purchase of 7Software will be held in escrow until June 30,
1999 subject to resolution of any unresolved claims by the Company. The value of
these shares was included in the 7Software purchase price, as no such unresolved
claims are known. In addition, as of June 30, 1998, 851,131 shares of Common
Stock issued to the founders in connection with the acquisition included
restrictions entitling the Company to repurchase such shares in the event of
termination. These restrictions lapse at various rates through June 2000. The
estimated fair value of these shares has been included in the purchase price
referred to above.
4. LINE OF CREDIT
The Company has a $2.0 million line of credit for operating needs that
expires in November 1998. Borrowings under the credit line bear interest at the
lending bank's prime interest rate plus 1.5%, which can be reduced to the bank's
prime rate plus 1.0% following the achievement and maintenance of after-tax
operating profitability for two consecutive quarters. The line is limited to
$500,000 for the issuance of standby and commercial letters of credit. The
borrowing base for the line is to be monitored on a monthly basis and is to
consist of the sum of up to 80% of eligible domestic accounts receivable and any
letter of credit backed or insured by foreign accounts receivable; and up to 80%
of approved eligible foreign accounts receivable with a limit of the aggregate
funds advanced against such accounts, not to exceed $300,000. Interest is due
monthly and principal is due upon maturity.
There were no outstanding borrowings under this line at June 30, 1998. The
bank had issued standby letters of credit on behalf of the Company at June 30,
1998 in the amount of $455,000, and the amount available under the line of
credit on that date was $1,545,000. The line is secured by all non-leased assets
of the Company, including intellectual property. The line of credit agreement
requires the Company to meet
F-12
<PAGE> 88
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
4. LINE OF CREDIT (CONTINUED)
certain financial covenants, including limitations on the Company's ability to
pay dividends. See Notes 11 and 17 for a discussion of warrants issued in
conjunction with the line of credit and other debt.
5. LONG-TERM DEBT
Long-term debt at June 30, 1998 consisted of: (i) a $3.0 million senior
term loan facility; (ii) a $1.5 million subordinated promissory note; and (iii)
a $3.5 million subordinated promissory note. The subordinated promissory notes
are held by Comdisco. The proceeds from these obligations may be used for
equipment purchases and general corporate purposes.
The senior term loan facility bears interest at the lending bank's prime
rate less 1.0% (7.5% at June 30, 1998) and matures on February 15, 2001.
Payments are interest only through February 15, 1999. At February 15, 1999, the
outstanding balance under the facility may be termed out with 24 equal monthly
principal payments, plus applicable interest. The loan is secured by a perfected
senior security interest in all non-leased assets of the Company with specific
filings for intellectual property (both the line of credit and senior term loan
were issued by the same lender and include the same financial covenants and
restrictions discussed above).
The subordinated promissory notes (which are subordinated to both the line
of credit and senior term loan) are secured by the Company's receivables,
equipment, general intangibles, inventory, and all other goods and personal
property of the Company. The $1.5 million note bears interest at 8.5%, has
principal and interest payments of approximately $38,000 due monthly, and
matures in August 2001. The $3.5 million note bears interest at 11.0%, has
monthly principal and interest payments of approximately $101,000 beginning in
November 1998, and matures in April 2002. The underlying debt agreement allows
the Company to obtain additional long-term borrowings of up to $1.5 million, at
an interest rate of 12.5%. This commitment by the lending institution will
expire on December 31, 1998.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Three months ending September 30, 1998......... $ 87
Fiscal year ending September 30:
1999......................................... 1,658
2000......................................... 3,232
2001......................................... 2,094
2002......................................... 681
------
$7,752
======
</TABLE>
6. NOTES PAYABLE TO STOCKHOLDERS
In December 1996, the Company agreed to exchange two notes payable to
stockholders totaling $233,000, plus accrued interest, for 337,301 shares of
Series C Preferred Stock. At the time of the conversion to Series C Preferred
Stock, the outstanding balance of the notes plus accrued interest was $267,000.
7. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases and capital leases. In October 1997, the Company signed a five-year lease
for a new corporate headquarters in Redmond,
F-13
<PAGE> 89
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
7. COMMITMENTS (CONTINUED)
Washington, which commenced February 1998. The Company has the option to extend
the lease for one additional five-year term. The Company is required to provide
a $450,000 letter of credit as security for the lease. The letter of credit may
be reduced by specified amounts in the lease agreement after 36 months or upon
the Company's achieving certain economic goals. In January and February 1998,
the Company signed two-year subleases for its former corporate headquarters.
Future minimum rental payments under noncancelable leases, adjusted to
include the new lease dated August 1998 and net of the future minimum rentals of
$325,000 to be received under the subleases are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Three months ending September 30, 1998................... $ 248 $ 223
Fiscal year ending September 30:
1999................................................... 1,033 761
2000................................................... 1,033 684
2001................................................... 861 732
2002................................................... 31 754
2003................................................... -- 277
------ ------
3,206 $3,431
======
Less amount representing interest........................ (393)
------
Present value of net minimum capital lease obligations... 2,813
Less current portion..................................... (819)
------
Capital lease obligations, less current portion.......... $1,994
======
</TABLE>
Total rent expense for the years ended September 30, 1995, 1996, and 1997
was $105,000, $162,000, and $254,000, respectively, and $170,000 and $558,000
for the nine months ended June 30, 1997 and 1998, respectively.
8. INCOME TAXES
The Company did not provide an income tax benefit for any period presented
because it has experienced operating losses since inception. At June 30, 1998,
the Company has net operating loss carryforwards of $15,739,000 and tax credit
carryforwards of $262,000, all of which expire between 2009 and 2013.
As a result of prior equity financings, the Company has incurred and will
incur "ownership changes" pursuant to applicable regulations in effect under the
Internal Revenue Code of 1986, as amended. Accordingly, the Company's use of net
operating loss carryforwards incurred through the date of these ownership
changes will be limited during the carryforward period. To the extent that any
single year loss is not utilized to the full amount of the limitation, such
unused loss is carried over to subsequent years until the earlier of its
utilization or the expiration of the relevant carryforward period.
F-14
<PAGE> 90
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ JUNE 30,
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 2,315 $ 3,410 $ 5,351
Tax credit carryforwards............................ 23 152 262
Deferred revenues................................... 219 502 930
Expenses not currently deductible and other......... 131 630 786
------- ------- -------
Total deferred tax assets................... 2,688 4,694 7,329
Valuation allowance................................... (2,688) (4,694) (7,329)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
Since the Company's utilization of these deferred tax assets is dependent
on future profits, which are not assured, a valuation allowance equal to the net
deferred tax assets has been provided. The valuation allowance for deferred tax
assets increased approximately $1,673,000, $2,006,000, and $2,635,000 during the
years ended September 30, 1996 and 1997 and the nine months ended June 30, 1998.
9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the
issuance of options to acquire 6,900,000 shares of common stock. The 1994 Plan
provides for the granting of incentive stock options to employees and
nonqualified stock options to employees, directors and other eligible
participants. Options granted under the 1994 Plan vest at variable rates,
typically four years, determined by the Board of Directors, and remain
exercisable for a period not to exceed ten years. At June 30, 1998, 973,337
shares were available for future grant.
A summary of the Company's stock option activity and related weighted
average exercise prices is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 JUNE 30, 1998
---------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period... 2,854,070 $0.04 810,250 $ 0.04 1,557,500 $ 0.06 1,986,443 $0.06
Granted........................ 157,750 0.04 901,000 0.08 490,450 0.09 1,771,335 0.54
Exercised...................... (2,200,070) 0.04 (20,547) 0.05 (3,124) 0.07 (105,208) 0.05
Canceled....................... (1,500) 0.05 (133,203) 0.06 (58,383) 0.15 (54,856) 0.09
----------- ---------- ---------- ----------
Balance at end of year........... 810,250 0.04 1,557,500 0.06 1,986,443 0.06 3,597,714 0.30
=========== ========== ========== ==========
Exercisable at end of period..... 147,639 0.04 497,886 0.04 980,242 0.05 1,175,599 0.05
=========== ========== ========== ==========
Weighted average fair value of
options granted during the
period
Granted at fair value........ $ 0.04 $ 0.08 $ 0.09 $ --
Granted at below fair
value...................... -- -- -- 1.03
</TABLE>
F-15
<PAGE> 91
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
Information regarding the weighted average remaining contractual life and
weighted average exercise price of options outstanding and options exercisable
at June 30, 1998 for selected exercise price ranges is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE
EXERCISE PRICES LIFE (IN YEARS) SHARES SHARES PRICE
--------------- --------------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.04 - 0.08 7.22 1,782,879 1,175,599 $0.05
0.15 9.32 1,466,735 -- --
0.16 - 2.25 9.97 348,100 -- --
------------ ---- --------- --------- -----
$0.04 - 2.25 8.34 3,597,714 1,175,599 $0.05
========= =========
</TABLE>
The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying consolidated
financial statements because the fair value of the underlying common stock
equals or exceeds the exercise price of the stock options at the date of grant,
except with respect to certain options granted during the nine months ended June
30, 1998. The Company has recorded deferred stock compensation expense of
$861,000 relating to options granted in the nine months ended June 30, 1998.
This amount represents the difference between the exercise price and the fair
value of the Company's common stock during the periods in which such options
were granted. Amortization of deferred stock compensation of $297,000 was
recognized during the nine months ended June 30, 1998.
The following pro forma information regarding stock-based compensation has
been determined as if the Company had accounted for its employee stock options
under the fair market value method of SFAS 123. The fair value of these options
was estimated at the date of grant using a minimum value option pricing model
with the following weighted average assumptions: risk-free interest rates range
from 5.5% to 6.5% in 1996, 1997, and 1998; a dividend yield rate of 0% for all
periods; and the options will be exercised one year after they vest.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------ JUNE 30,
1996 1997 1998
--------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss as reported.................................... $(4,953) $(5,524) $(13,095)
Incremental pro forma compensation expense under SFAS
123................................................... (2) (7) (2)
------- ------- --------
Pro forma net loss...................................... $(4,955) $(5,531) $(13,097)
======= ======= ========
Pro forma loss per share................................ $ (0.87) $ (0.97) $ (2.26)
======= ======= ========
</TABLE>
Under SFAS 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The initial impact on pro
forma net loss may not be representative of compensation expense in future
years, when the effect of amortization of multiple awards would be reflected in
pro forma earnings.
F-16
<PAGE> 92
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
10. STOCKHOLDER NOTES RECEIVABLE
In October 1994, certain stockholders exercised options to purchase shares
of common stock. In connection with the issuance, the Company accepted
promissory notes totaling $80,000. These notes, which have been charged to
common stock for financial statement presentation, are due in October 1999 and
bear interest at 5%, payable annually. These notes are full recourse and are
secured by the common stock purchased with the proceeds thereof.
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
Redeemable Convertible Preferred Stock
In October 1994, the Company designated and issued 3,824,092 shares of
Series A redeemable convertible preferred stock ("Series A Preferred Stock")
through a private offering. Net proceeds from the financing amounted to
$1,963,000.
In July 1995, the Company designated and issued 4,687,500 shares of Series
B redeemable convertible preferred stock ("Series B Preferred Stock") through a
private offering. Net proceeds from the financing amounted to $2,939,000.
In July 1996, the Company designated 9,774,801 shares and issued 9,375,000
shares of Series C redeemable convertible preferred stock ("Series C Preferred
Stock") through a private offering. Net proceeds from the financing amounted to
$7,478,000. In December 1996, the Company agreed to issue an additional 337,301
shares of Series C Preferred Stock in exchange for the cancellation of notes
payable totaling $267,000.
In July 1997, the Company designated 3,357,897 shares and issued 3,188,357
shares of Series D redeemable convertible preferred stock ("Series D Preferred
Stock") through a private offering. Net proceeds from the offering amounted to
$4,615,000.
In June 1998, the Company designated 4,500,000 shares and issued 2,508,773
shares of Series E redeemable convertible preferred stock ("Series E Preferred
Stock") through a private offering. Net proceeds from the financing amounted to
$7,777,000.
Redeemable convertible preferred stock is convertible into common stock, at
the option of the holder, currently at the rate of one-to-one, subject to
antidilution provisions. An equivalent number of unissued shares of common stock
are reserved for issuance in the event of full conversion of all redeemable
convertible preferred stock. Each share of redeemable convertible preferred
stock has voting rights equivalent to the number of shares of common stock
issuable if converted. Stockholders of certain series of preferred stock have
the right to elect one member to the Board of Directors while common
stockholders may elect two members to the Board of Directors.
Subject to certain conditions, the redeemable convertible preferred stock
has mandatory conversion requirements in the event of a qualified initial public
offering of the Company's common stock, or if 80% of the preferred stockholders,
voting as a single class, elects to convert to common stock. Each series of
redeemable convertible preferred stock has dividend rights payable at various
rates per share when and if declared. In the event of any distribution of assets
upon liquidation of the Company, the order of preference to those assets will be
holders of Series E, Series D, Series C, Series B, and Series A Preferred Stock
at the original offering price per share, plus any declared but unpaid
dividends. Any remaining assets will be distributed ratably to all stockholders
up to various maximum rates for the preferred stockholders.
The redeemable convertible preferred stock will be redeemed in four equal
annual installments beginning in October 2001 unless waived in writing by more
than 60% of the holders of such stock. Redemption amounts
F-17
<PAGE> 93
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED)
are based on the original offering price of the stock plus any declared but
unpaid dividends. The order of preference in any such redemption effected is as
follows: Series E, Series D, Series C, Series B and Series A Preferred Stock.
Following is a summary of terms and conditions for each series of
redeemable convertible preferred stock as of June 30, 1998:
<TABLE>
<CAPTION>
ANNUAL
AGGREGATE DIVIDEND
SHARES STATED LIQUIDATION RATE --
OUTSTANDING VALUE VALUE NONCUMULATIVE
----------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Issues and outstanding:
Series A.......................... 3,824,092 $0.52 $ 2,000,000 $0.0366
Series B.......................... 4,687,500 0.64 3,000,000 0.0448
Series C.......................... 9,712,301 0.80 7,770,000 0.0560
Series D.......................... 3,188,357 1.46 4,655,000 0.1020
Series E.......................... 2,508,773 3.10 7,777,000 0.2170
---------- -----------
23,921,023 $25,202,000
========== ===========
</TABLE>
Warrants to Purchase Preferred Stock
In May 1996, the Company issued warrants to purchase 70,313 shares of
Series C Preferred Stock in conjunction with a renewal and increase in the bank
line of credit (see Note 4). The warrants are immediately exercisable at a price
of $0.80 per share, expiring May 2001. The estimated fair value of these
warrants of $5,000 has been recorded as debt issuance costs.
In July 1997, the Company issued warrants to Comdisco to purchase 112,068
and 57,471 shares of Series D Preferred Stock in conjunction with the Company's
receipt of financing commitments relating to the promissory note and lease
agreement, respectively (see Note 2). Each has a purchase price of $1.46 per
share. The warrants become immediately exercisable on the effective date of the
agreements and remain exercisable for a period of five years; or two years from
the effective date of the Company's initial public offering, whichever is
longer, provided the offering is less than $15.0 million. Should the offering
exceed $15.0 million, the warrant will expire, if not previously exercised,
immediately upon the closing of the issuance and sale of shares of common stock
of the Company. The estimated fair values of these warrants of $30,000 and
$16,000, respectively, has been recorded as debt issuance costs.
In September 1997, the Company issued warrants to purchase 35,000 shares of
Series D Preferred Stock in conjunction with a new loan facility and an
increase/renewal in the bank line of credit (see Note 4). The warrants have an
initial exercise price of $1.46 per share, a five-year maturity inclusive of
certain provisions to include, but not limited by, a net exercise provision,
antidilution protection and a $30,000 put option. The right to exercise the put
option expires two years from the issue date of the warrants. The estimated fair
value of these warrants of $7,000 has been expensed as debt issuance costs.
In April 1998, the Company issued warrants to purchase 32,968 shares of
Series E Preferred Stock in conjunction with the increase to the senior loan
facility (see Note 4). The warrants have an initial exercise price of $3.10 per
share. The warrants became immediately exercisable on the effective date of the
agreements and are exercisable for a period of five years. Additionally, the
agreement provides for a $75,000 put option, which expires in April 2000. The
estimated fair value of these warrants of $3,000 has been expensed as debt
issuance costs.
F-18
<PAGE> 94
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED)
In May 1998, the Company issued warrants to Comdisco to purchase 141,129
shares of Series E Preferred Stock in conjunction with the new subordinated
promissory note (see Note 2). The warrants are immediately exercisable at a
price of $3.10 per share and are exercisable for a period of five years; or two
years from effective date of the Company's initial public offering, whichever is
longer, provided the offering is less than $15.0 million. Should the offering
exceed $15.0 million, the right to purchase preferred stock as granted shall
expire, if not previously exercised, immediately upon the closing of the
issuance and sale of shares of common stock of the Company. The estimated fair
value of these warrants of $11,000 has been recorded as debt issuance costs.
Under the terms of this subordinated debt agreement, the Company has an
outstanding commitment to issue additional warrants to purchase as many as
67,742 shares of Series E Preferred Stock at an exercise price of $3.10 per
share if it utilizes the $1.5 million additional financing available under the
agreement.
All preferred stock warrants automatically convert to common stock warrants
upon the closing of a qualified initial public offering of the Company's common
stock.
12. STOCKHOLDERS' EQUITY
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
1994 Stock Option Plan...................................... 6,900,000
1997 Stock Option Plan assumed in connection with
acquisition of 7Software.................................. 309,809
Conversion of redeemable convertible preferred stock:
Series A............................................... 3,824,092
Series B............................................... 4,687,500
Series C............................................... 9,774,801
Series D............................................... 3,357,897
Series E............................................... 4,500,000
Warrants to purchase Series C Preferred Stock that are
convertible to common stock............................... 70,313
Warrants to purchase Series D Preferred Stock that are
convertible to common stock............................... 204,539
Warrants to purchase Series E Preferred Stock that are
convertible to common stock............................... 174,097
----------
Total............................................. 33,803,048
==========
</TABLE>
F-19
<PAGE> 95
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
13. NET LOSS PER SHARE
Basic and diluted net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding. Pro forma net
loss per share is computed using the weighted average number of shares used for
basic and diluted per share amounts and the weighted average convertible
redeemable preferred stock outstanding as if such shares were converted to
common stock at the time of issuance.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net loss........................... $ (2,890) $ (4,953) $ (5,524) $ (3,681) $ (13,095)
========== ========== =========== ========== ===========
Basic and diluted net loss per
common share..................... $ (0.52) $ (0.87) $ (0.97) $ (0.64) $ (2.26)
========== ========== =========== ========== ===========
Weighted average number of common
shares used for basic and diluted
per share amounts................ 5,585,546 5,705,956 5,720,948 5,720,763 5,802,492
========== ========== ==========
Weighted average common shares
issuable upon pro forma
conversion of preferred stock.... 18,740,768 21,706,049
----------- -----------
Weighted average number of shares
used for pro forma per share
amounts.......................... 24,461,716 27,508,541
=========== ===========
Pro forma basic and diluted net
loss per share (unaudited)....... $ (0.23) $ (0.48)
=========== ===========
</TABLE>
Options to purchase 3,597,214 shares of common stock with exercise prices
of $0.04 to $2.25 per share and warrants to purchase 448,949 shares of common
stock at a range of $0.80 to $3.10 per share were outstanding at June 30, 1998.
These options and warrants were excluded from the computation of diluted
earnings per share because their effect was anti-dilutive.
14. RETIREMENT 401(k) PLAN
The Company sponsors a 401(k) Profit Sharing and Trust Plan that is
available to substantially all employees. Each employee may elect to contribute
up to 20% of his or her pre-tax gross earnings, subject to annual limits. The
Company reserves the right to amend the Plan at any time. Employee contributions
to the Plan are subject to statutory limitations regarding maximum
contributions. There are no Company matching contributions.
F-20
<PAGE> 96
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
15. INTERNATIONAL REVENUES
The Company licenses and markets its products primarily in the United
States, and operates in a single industry segment. Information regarding
revenues in different geographic regions is as follows:
<TABLE>
<CAPTION>
REVENUES
------------------------------------------------------
NINE NINE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
COUNTRY 1995 1996 1997 1997 1998
------- ------ ------ ------ ----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
United States..................... $2,128 $1,959 $6,981 $4,369 $11,260
United Kingdom.................... -- -- 612 512 312
Canada............................ -- -- 677 324 31
Australia......................... -- -- -- -- 112
------ ------ ------ ------ -------
Total................... $2,128 $1,959 $8,270 $5,205 $11,715
====== ====== ====== ====== =======
</TABLE>
From the inception of the Company to September 30, 1996, there were no
significant export sales or operations in countries outside of the United
States.
16. SIGNIFICANT AGREEMENTS
Strategic Marketing Alliance Agreement with American Express
In December 1997, the Company entered into a strategic alliance agreement
with American Express Company ("American Express") under which American Express
refers to the Company its corporate charge card customers that seek a T&E
expense management software solution. Under the terms of the agreement, American
Express receives a fee for referring to the Company clients of American Express
who become XMS customers. The fee varies based upon licensing revenue realized
from referred customers. Except for the referral, the Company is responsible for
the entire sales effort and also for customer support and warranty service.
Under the agreement, the Company and American Express have also agreed to
develop certain product features enabling a higher level of integration between
XMS and certain American Express services and products.
License Agreements
The Company has entered into various agreements that allow the Company to
incorporate licensed technology into its products or that allow the Company the
right to sell separately the licensed technology. The Company incurs royalty
fees under these agreements that are based on a predetermined fee per license
sold. Royalty costs incurred under these agreements are recognized as products
are licensed and are included in cost of product sales. These amounts totaled
$203,000 for the year ended September 30, 1997, and $82,000 and $151,000 for the
nine months ended June 30, 1997 and 1998, respectively. Amounts recognized in
1995 and 1996 were insignificant.
17. SUBSEQUENT EVENTS
Lease Agreement
In July 1998, the Company entered into a third Master Lease Agreement with
Comdisco, whereby the total financing commitment extended by Comdisco was
increased by an additional $1.5 million to a total of $5.0 million.
F-21
<PAGE> 97
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
17. SUBSEQUENT EVENTS (CONTINUED)
Sale of Additional Series E Preferred Stock and Related Warrants
On August 11, 1998, the Series E Preferred Stock Purchase Agreement (the
"Purchase Agreement") was amended for the sale of an additional 1,612,903 shares
of the Company's Series E Preferred Stock for $4,999,999 to American Express
Travel Related Services Company, Inc. ("TRS"). The additional shares of Series E
Preferred Stock were purchased on the terms and conditions set forth in the
Purchase Agreement. The total number of shares of Series E Preferred Stock
issued through August 11, 1998 was 4,121,676.
In connection with the sale of an additional 1,612,903 shares of Series E
Preferred Stock, the Company issued a warrant to TRS and its assignees to
purchase an additional 6,000,000 shares of Series E Preferred Stock. If all of
the shares of Series E Preferred Stock are converted into shares of common stock
in connection with a registration of the Company's common stock under the
Securities Act, this warrant will automatically become exercisable for 6,000,000
shares of the Company's common stock. The warrant is exercisable in four
tranches as follows: 750,000 shares may be acquired at the time of the Company's
initial public offering at a cash purchase price equal to the initial public
offering price less 7%; 1,750,000 shares may be acquired at any time on or
before October 15, 1999 at a cash purchase price of $13.50 per share; 1,750,000
shares may be acquired at any time on or before January 15, 2001 at a cash
purchase price of $20.25 per share; and the remaining 1,750,000 shares may be
acquired at any time on or before January 15, 2002 at a cash purchase price of
$34.00 per share. As was permitted by the warrant, the Board of Directors
determined, within 60 days of the date of the warrant, to cancel 25% of the
shares that could have been acquired under the warrant at the time of the
Offering or on or before October 15, 1999. Thus, 562,500 shares may be acquired
at the time of the Offering, and 1,312,500 shares may be acquired on or before
October 15, 1999. The estimated fair value of these warrants is minimal due to
the exercise prices being in excess of the fair value of the underlying Series E
Preferred Stock at the time of the sale. Accordingly, the entire proceeds from
the sale of Series E Preferred Stock and Related Warrants has been recorded as
redeemable convertible preferred stock.
Co-Branded XMS Service Marketing Agreement
On August 11, 1998, the Company and TRS entered into a Co-Branded XMS
Service Marketing Agreement. Under the terms of the agreement, TRS will receive
a fee for marketing to TRS's clients a co-branded enterprise service provider
("ESP") version of XMS containing special features. The marketing fee is based
on the amount of revenue received. The Company is responsible for providing
warranty and customer support services to these customers. In addition, under
the terms of the agreement, the Company and TRS have agreed to jointly develop
certain product features for integration into the co-branded ESP version of XMS.
Initial Public Offering
On August 21, 1998, the Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit the
Company to offer its common stock to the public. If the offering is consummated
under terms presently anticipated each outstanding share of redeemable
convertible preferred stock will convert into one share of common stock.
Unaudited pro forma stockholders' equity reflects the assumed conversion of the
redeemable convertible preferred stock outstanding at June 30, 1998 into common
stock and the assumed conversion of redeemable convertible preferred stock
warrants outstanding at June 30, 1998 into common stock warrants as of June 30,
1998.
F-22
<PAGE> 98
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
17. SUBSEQUENT EVENTS (CONTINUED)
Benefit Plans
On August 21, 1998, the Board adopted the 1998 Equity Incentive Plan, the
Director Stock Option Plan and the Employee Stock Purchase Plan, subject to
approval by the Company's stockholders. The Equity Incentive Plan authorizes
issuance of 8,100,000 shares of common stock upon the exercise of stock options
or otherwise pursuant to the plan. The Director Stock Option Plan authorizes the
issuance of 600,000 shares of common stock upon the exercise of stock options
that may be granted pursuant to the plan. The Employee Stock Option Plan
authorizes the issuance of 800,000 shares of Common Stock.
F-23
<PAGE> 99
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
7Software, Inc.
We have audited the accompanying balance sheet of 7Software, Inc. (a
development stage company) as of December 31, 1997 and the related statements of
income, shareholders' equity, and cash flows for the period May 30, 1997 (date
of incorporation) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 7Software, Inc. at December
31, 1997 and the results of its operations and its cash flows for the period May
30, 1997 (date of incorporation) to December 31, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
August 14, 1998
F-24
<PAGE> 100
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $25 $ 39
Accounts receivable....................................... 12 36
--- -----
Total current assets.............................. 37 75
Furniture and equipment, net................................ 21 28
--- -----
Total assets...................................... $58 $ 103
=== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6 $ 4
Accrued payroll liabilities............................... 4 4
--- -----
Total current liabilities......................... 10 8
Convertible note payable.................................... 25 130
Commitments
Shareholders' equity:
Preferred stock, no par value:
Authorized shares: 5,000,000
No shares issued and outstanding....................... -- --
Common stock, no par value:
Authorized shares: 10,000,000
2,000,000 and 2,082,294 shares issued and outstanding
at December 31, 1997 and June 30, 1998,
respectively.......................................... 20 212
Deferred stock compensation............................... -- (8)
Retained earnings (deficit)............................... 3 (239)
--- -----
Total shareholders' equity........................ 23 (35)
--- -----
Total liabilities and shareholders' equity........ $58 $ 103
=== =====
</TABLE>
See accompanying notes.
F-25
<PAGE> 101
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 30, 1997 SIX MONTHS
(DATE OF INCORPORATION) ENDED
TO DECEMBER 31, 1997 JUNE 30, 1998
----------------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $66 $ 131
Cost of revenues............................................ 5 (25)
--- -----
Gross profit................................................ 61 106
Operating expenses:
Research and development.................................. 30 213
Selling, general, and administration...................... 27 135
--- -----
Total operating expenses.......................... 57 348
--- -----
Income (loss) before taxes.................................. 4 (242)
Provision for taxes......................................... 1 --
--- -----
Net income (loss)................................. $ 3 $(242)
=== =====
</TABLE>
See accompanying notes.
F-26
<PAGE> 102
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
AND FOR THE 6 MONTH UNAUDITED PERIOD ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DEFERRED RETAINED STOCKHOLDERS'
------------------- STOCK EARNINGS EQUITY
SHARES AMOUNT COMPENSATION (DEFICIT) (DEFICIT)
--------- ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Sale of common stock at $0.01 per
share for cash on June 6, 1997... 630,000 $ 6 $ -- $ 6
Issuance of common stock at $0.01
per share for furniture and
equipment at cost on June 6,
1997.......................... 630,000 6 -- 6
Issuance of common stock at $0.01
per share for employee
services on June 6, 1997...... 740,000 8 -- 8
Net income....................... -- -- 3 3
--------- ---- ---- ----- -----
Balance at December 31, 1997....... 2,000,000 $ 20 $ 3 $ 23
Issuance of common stock......... 12,632 1 -- 1
Issuance of common stock on
conversion of notes payable
(unaudited)................... 69,662 100 -- 100
Net loss (unaudited)............. -- (242) (242)
Deferred stock compensation...... -- 91 (91) --
Amortization of deferred stock
compensation.................. -- -- 83 83
--------- ---- ---- ----- -----
Balance at June 30, 1998
(unaudited)...................... 2,082,294 $212 (8) $(239) $ (35)
========= ==== ==== ===== =====
</TABLE>
See accompanying notes.
F-27
<PAGE> 103
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 30, 1997
(DATE OF
INCORPORATION) SIX MONTHS ENDED
TO DECEMBER 31, 1997 JUNE 30, 1998
-------------------- ----------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 3 $(242)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation.............................................. 1 2
Stock compensation........................................ 8 83
Changes in assets and liabilities:
Accounts receivable.................................... (12) (24)
Accounts payable and accrued payroll liabilities....... 10 (2)
---- -----
Net cash provided by operating activities................... 10 (183)
---- -----
INVESTING ACTIVITIES
Purchases of furniture and equipment........................ (16) (9)
---- -----
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 6 1
Proceeds from convertible note payable...................... 25 75
Proceeds from convertible note payable to Concur............ 130
---- -----
Net cash provided by financing activities................... 31 206
---- -----
Net increase in cash and cash equivalents................... 25 14
Cash and cash equivalents at beginning of period............ -- 25
---- -----
Cash and cash equivalents at end of period.................. $ 25 $ 39
==== =====
NONCASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES
Furniture and equipment contributed for common stock........ $ 6 --
==== =====
Issuance of common stock in consideration for conversion of
note payable.............................................. -- $ 100
==== =====
</TABLE>
See accompanying notes.
F-28
<PAGE> 104
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF ACTIVITIES
7Software, Inc. (the "Company") was incorporated in California on May 30,
1997. The Company performs consulting services for product development and
developed a product called CompanyStore that automates the purchasing of
nonproduction goods. CompanyStore runs on corporate intranets, providing access
to company-specific information and making that information available on
employee desktops throughout the enterprise. The Company is in the development
stage.
On June 30, 1998, the Company merged with Concur Technologies, Inc.
("Concur"). The merger resulted in all shares of the Company's outstanding
capital stock and all stock options being converted into Concur common stock and
stock options, respectively.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the six months ended June 30, 1998 is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of its
financial position at such date and its operating results and cash flows for
that period. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the entire year.
REVENUE RECOGNITION
The Company generates revenues from performing computer programming
consulting. Revenue is recognized by the Company based upon hours of consulting
performed and billable, in accordance with the related consulting agreement.
CASH EQUIVALENTS
All short-term investments with maturities of three months or less at date
of purchase are considered to be cash equivalents.
DEVELOPMENT COSTS
All software development costs are expensed until technological feasibility
has been established. No software development costs were capitalized during the
period ended December 31, 1997 or June 30, 1998.
ADVERTISING AND MARKETING COSTS
Costs of marketing materials and advertising expenditures are charged to
operations when the materials are used or the advertising is first released.
Advertising costs were $5,000 for the period ended December 31, 1997 and $17,000
for the six months ended June 30, 1998.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement No. 109, deferred tax assets and liabilities are recorded using the
liability method, which recognizes the effect of temporary differences between
the reporting of revenues and expenses for financial statement and income tax
return purposes. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts expected to be realized.
F-29
<PAGE> 105
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25, no
compensation expense is recorded when the exercise price of employee stock
options equals the market price of the underlying stock on the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements and
accompanying notes. Actual results could materially differ from these estimates.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated on the
straight-line method over the estimated useful lives of the assets, ranging from
two to four years.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following: (in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment.......................... $20 $20
Furniture, fixtures, and equipment.......... 2 12
--- ---
22 32
Accumulated depreciation.................... (1) (4)
--- ---
$21 $28
=== ===
</TABLE>
3. CONVERTIBLE NOTES
On November 30, 1997, the Company entered into an agreement to receive
$75,000 in consideration of a non-interest bearing convertible note. The terms
of this agreement were such that the entire balance of the note was convertible
into securities sold in the Company's first stock financing with outside
investors after the date thereof. Additionally, the agreement provided that the
note holder would receive warrants to purchase common stock if and when the
Company received additional equity financing. The Company received $25,000 of
the $75,000 note in December 1997 and the remaining balance during the first
quarter of 1998. On January 1, 1998, the Company entered into another agreement
and received $25,000 in consideration of a non-interest bearing convertible note
with similar terms to those as described above. On June 9, 1998, the note
holders and the Company agreed to convert the notes in exchange for the issuance
of 69,662 shares of common stock. As a result of this transaction, the note
holders' rights to the warrants were cancelled.
F-30
<PAGE> 106
7SOFTWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
4. SHAREHOLDERS' EQUITY
On June 6, 1997, the Company issued 2,000,000 shares of common stock to the
founders of the Company. The shares were issued for $20,000 of consideration,
which included cash, furniture and equipment, and services rendered since the
incorporation of the Company.
On June 9, 1998, the Company issued 69,662 shares of common stock to
certain note holders in exchange for the cancellation of the convertible notes
and the obligations of issuing warrants as discussed in Note 3.
Between January 1, 1998 and June 10, 1998, the Company issued 12,632 shares
of common stock. The shares were issued for approximately $1,000 in cash and
services rendered during this period.
5. STOCK OPTION PLAN
The Company's 1997 Stock Option Plan authorizes the grant of options to
employees, directors, and eligible participants for up to 500,000 shares of the
Company's common stock. The term of options granted to certain significant
stockholders cannot exceed five years while the term of all other options cannot
exceed ten years. The options vest over periods defined in each option agreement
as determined at the discretion of the Company's Board of Directors. Stock
options that qualify as incentive stock options are exercisable at not less than
the fair market value of the stock at the date of grant, and nonqualified stock
options are exercisable at prices determined at the discretion of the Board of
Directors, which may not be less than 85% of the fair market value of the stock
at the date of grant. No options had been granted under the plan as of December
31, 1997. For the period May 30, 1997 to June 30, 1998, the Company issued
364,000 options to purchase common stock at $0.01 per share resulting in
deferred stock compensation of approximately $91,000 which is being amortized
over the vesting period of the options of generally four years. Stock
compensation expense was $83,000 for the six months ended June 30, 1998.
6. INCOME TAXES
Temporary differences between the book and tax basis of assets and
liabilities to December 31, 1997 were insignificant; therefore no deferred taxes
were provided. Significant components of the Company's deferred tax assets were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax asset relating to net operating loss $ -- $ 52
credit carry-forward................................
Valuation allowance................................... -- (52)
---- ----
$ -- $ --
==== ====
</TABLE>
Since the Company was acquired by Concur on June 30, 1998 it will not
utilize its deferred tax assets; therefore, a valuation allowance for the full
amount of all deferred tax assets has been provided.
7. COMMITMENTS
The Company leased its facility under an operating lease that expired on
June 30, 1998. Total rental expense for the period ended December 31, 1997 and
June 30, 1998 were $4,000 and $24,000, respectively.
8. SALES TO MAJOR CUSTOMERS
All revenues recognized by the Company for the period ended December 31,
1997 were received from SAP Technology for computer programming consulting. For
the six months ended June 30, 1998, all revenues were received for sales and
services provided to two customers.
F-31
<PAGE> 107
CONCUR TECHNOLOGIES, INC.
(FORMERLY PORTABLE SOFTWARE CORPORATION)
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following financial statements present the Concur Technologies, Inc.
("Concur," formerly Portable Software Corporation) Pro Forma Consolidated
Statements of Operations for the year ended September 30, 1997 and nine months
ended June 30, 1998.
The Company's acquisition of 7Software, Inc. ("7Software") has been
accounted for under the "purchase" method of accounting, which requires the
purchase price to be allocated to the acquired assets and liabilities of
7Software on the basis of their estimated fair values as of the date of
acquisition. The following pro forma consolidated statements of operations for
the year ended September 30, 1997 and the nine months ended June 30, 1998 give
effect to the acquisition of 7Software as if it occurred on October 1, 1996, and
include adjustments directly attributable to the acquisition of 7Software and
expected to have a continuing impact on the combined company (collectively, the
"Pro Forma Financial Statements"). As the Pro Forma Financial Statements have
been prepared based on estimated fair values, amounts actually recorded may
change upon determination of the total purchase price (which may change based on
future performance) and additional analysis of individual assets and liabilities
assumed.
The pro forma information is based on historical financial statements. The
assumptions give effect to the business combination with 7Software under the
purchase method of accounting. The information has been prepared in accordance
with the rules and regulations of the Commission and is provided for comparative
purposes only. The pro forma information does not purport to be indicative of
the results that actually would have occurred had the combination been effected
at the beginning of the periods presented.
F-32
<PAGE> 108
CONCUR TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PURCHASE PRO FORMA
CONCUR 7SOFTWARE ADJUSTMENTS CONSOLIDATED
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total revenues, net..................... $ 11,715 $ 170 $ -- $ 11,885
Cost of revenues........................ 4,020 30 176 4,226
----------- ---------- ------- -----------
Gross profit............................ 7,695 140 (176) 7,659
Sales and marketing..................... 7,886 143 32 8,061
Research and development................ 4,162 239 32 4,433
General and administrative.............. 3,225 -- -- 3,225
Acquired in-process technology.......... 5,203 -- (5,203) --
----------- ---------- ------- -----------
Total operating expense....... 20,476 382 (5,139) 15,719
----------- ---------- ------- -----------
Loss from operations.................... (12,781) (242) 4,963 (8,060)
Other expense........................... (314) -- -- (314)
----------- ---------- ------- -----------
Net loss...................... $ (13,095) $ (242) $ 4,963 $ (8,374)
=========== ========== ======= ===========
Pro forma net loss per share............ $ (0.48) $ (0.29)
=========== ===========
Weighted average shares used in
computation of basic and diluted net
loss per share........................ 27,509 29,231
=========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE> 109
CONCUR TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PURCHASE PRO FORMA
CONCUR 7SOFTWARE ADJUSTMENTS CONSOLIDATED
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total revenues, net........................ $ 8,270 $ 66 -- $ 8,336
Cost of revenues........................... 2,663 5 232 2,900
----------- ---------- ----- -----------
Gross profit............................... 5,607 61 (232) 5,436
Sales and marketing........................ 5,896 -- -- 5,896
Research and development................... 3,401 30 44 3,475
General and administrative................. 1,815 27 44 1,886
----------- ---------- ----- -----------
Total operating expense.......... 11,112 57 88 11,257
----------- ---------- ----- -----------
Income (loss) from operations.............. (5,505) 4 (320) (5,821)
Other expense.............................. (19) -- -- (19)
----------- ---------- ----- -----------
Income (loss) before income taxes.......... (5,524) 4 (320) (5,840)
Income taxes............................... -- 1 (1) --
----------- ---------- ----- -----------
Net income (loss)................ $ (5,524) $ 3 $(319) $ (5,840)
=========== ========== ===== ===========
Pro forma basic and diluted net loss per
share.................................... $ (0.23) $ (0.22)
=========== ===========
Weighted average shares used in computation
of basic and diluted net loss per
share.................................... 24,462 26,055
=========== ===========
</TABLE>
See accompanying notes.
F-34
<PAGE> 110
CONCUR TECHNOLOGIES, INC.
NOTES TO PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 30, 1998, the Company acquired 7Software, Inc. ("7Software").
7Software was incorporated in May 1997 and focused on the development and
licensing of Internet-based procurement solutions that bring purchasing to the
desktops of employees of large corporations. Concurrent with this transaction,
7Software was merged into the Company.
The unaudited pro forma information presented is not necessarily indicative
of future consolidated results of operations of Concur or the consolidated
results of operations that would have resulted had the acquisition taken place
on October 1, 1996. The unaudited pro forma consolidated statements of
operations for the year ended September 30, 1997 and the nine months ended June
30, 1998 reflect the effects of the acquisition, assuming the related events
occurred as of October 1, 1996 for the purposes of the unaudited pro forma
consolidated statements of operations.
2. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS
The unaudited pro forma consolidated financial statements reflect the
conversion of all the outstanding shares of 7Software common stock into
1,772,302 shares and stock options to purchase 309,809 shares of Concur common
stock pursuant to the acquisition. This consideration resulted in a total
purchase price of $6.2 million (including acquisition expenses).
The allocation of the purchase price resulted in intangible assets,
primarily capitalized technology and the value of an acquired workforce, of
$960,000 which are being amortized on a straight line basis over three years.
In-process research and development acquired and valued using the income
approach in the amount of $5,203,000 was charged to expense. In-process research
and development charges have not been reflected in the pro forma consolidated
financial statements of operations for the year ended September 30, 1997, or the
nine months ended June 30, 1998 as they are considered a nonrecurring charge.
3. UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE
The net loss per share and shares used in computing the net loss per share
for the year ended September 30, 1997 and the nine months ended June 30, 1998
are based upon the historical weighted average common shares outstanding
adjusted to reflect the issuance, as of October 1, 1996 and October 1, 1997 of
approximately 1,772,302 shares and stock options to purchase 309,809 shares of
Concur common stock as described in Note 2 to these Notes to Unaudited Pro Forma
Consolidated Financial Statements. Options to purchase approximately 364,000
shares of 7Software common stock were assumed by Concur pursuant to the
acquisition and converted into options to purchase approximately 309,809 shares
of Concur common stock. The Concur common stock issuable upon the exercise of
the stock options have been excluded as the effect would be antidilutive. In
addition to the shares used in computing the net income (loss) per share above,
pro forma basic and diluted net loss per share is calculated using the weighted
average convertible and redeemable preferred stock outstanding as if such shares
were converted to common stock at the time of issuance.
4. PURCHASE ADJUSTMENTS
Pro forma adjustments have been prepared to reflect the elimination of the
non-recurring one-time charge for acquired in-process technology and to reflect
the amortization of capitalized technology and other intangible assets.
F-35
<PAGE> 111
DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
Graphic:
Concur logo. A large Concur logo without the words "Concur-TM TECHNOLOGIES" and
without the box in the center of the circle, which is replaced by the text
below.
Text:
Concur Technologies is a leading provider of Web-based Employee-Facing
Applications.
Envision a workplace where manual, paper-based processes are not only automated
but also extend throughout the enterprise, to partners, vendors and to service
providers. Concur Technologies provides travel and entertainment expense
management and front-office procurement solutions that enable organizations to
work more efficiently and increase employee productivity. The Company leverages
Intranet technology to deploy such applications quickly and on an
enterprise-wide basis. The Company also leverages the public Internet
infrastructure to offer its solutions to a broad range of businesses.
Concur Technologies' mission is to be the dominant Web-based integrated
solution provider of employee-facing business applications throughout the
extended enterprise.
GATEFOLD
Graphic:
Box divided into 5 vertical sections. The top of the first is the Concur logo.
The next four are headed by "Preparation," "Approval," "Processing" and "Data
Analysis and Reporting," respectively. There are pictures of eight screen shots
showing various stages of the software. The top four screen shots deal with XMS
and the bottom four deal with CompanyStore.
Text:
Under Concur logo:
Concur products automate the preparation, approval, processing and data analysis
of T & E expense reports and front-office procurement requisitions. By
automating manual paper-based processes, costs are reduced and customers are
enabled to collect and analyze data to consolidate purchases with preferred
vendors.
Under "Preparation":
[XMS logo]
Expense Reports are easily prepared using a checkbook-style user interface and
prepopulated with corporate charge card data.
[CompanyStore logo]
Using CompanyStore's simple user interface, orders are placed on-line through a
customized electronic catalog.
Under "Approval":
XMS allows the enterprise to determine the approval process and automatically
flags those reports that are not in compliance.
CompanyStore allows the enterprise to determine how the requisitions should be
processed.
Under "Processing":
XMS integrates with existing and future corporate charge cards, financial,
Intranet, e-mail and operating systems, allowing employees to be reimbursed more
quickly.
CompanyStore saves time by integrating with the customer's ERP system, allowing
orders to be entered into the purchasing system automatically and then forwarded
electronically to the vendor.
Under "Data Analysis and Reporting":
Provides access to expense trends and data, allowing negotiation of better
supplier rates.
Better data allows managers to determine how best to control costs, negotiate
more favorable supplier arrangements and consolidate vendors.
<PAGE> 112
PAGE 45
This graphic depicts the interconnection of various systems. A box with three
divisions, captioned "Concur Applications," is on the top. The three divisions
are the XMS logo, the CompanyStore logo and "Others" in text. A box with eight
divisions, captioned "Concur Technology Platform," is below the "Concur
Solutions" box. The eight divisions are "Prepopulation," "Workflow/Routing,"
"Business Intelligence," "Security," "Messaging," "Business Rules," "User
Management," and "Database," as text. A box with five divisions, captioned "ERP
Platforms," is below the "Concur Technology Platform" box. The five divisions
are "SAP," "Oracle," "PeopleSoft," "Others" and "Legacy Systems" as text. A box
with four divisions, captioned "E-Commerce," is to the right of the other three
boxes. The three divisions are "Travel Services," "Corporate Charge Card
Suppliers," "Vendors & Suppliers" and "Financial Institutions" as text. "Concur
Technology Platform" and "Concur Applications" have three double-ended arrows
pointing to each other. "Concur Technology Platform" and "E-Commerce" have a
double-ended arrow pointing to each other. "Concur Technology Platform" and "ERP
Platforms" have five double-ended arrows pointing to each other.
INSIDE BACK COVER
Graphic: Two screen shots, one of a CompanyStore page, and the other of an XMS
page. Both the CompanyStore logo with the slogan "Business to Business
Procurement: A Timely Solution" and XMS logos. A large Concur logo without the
words "Concur-TM TECHNOLOGIES" and without the box in the center of the circle.
Text:
CompanyStore-TM is an Intranet application designed to support procurement of
front-office goods and services.
The Xpense Management Solution-TM is a proven travel expense automation product
that has been licensed to more than 125 companies for use by hundreds of
thousands of employees around the world.
BACK COVER
Graphic:
Concur logo with shadow. Dark background.
<PAGE> 113
(This page intentionally left blank.)
<PAGE> 114
LOGO
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 10,915
NASD filing fee............................................. 4,200
Nasdaq National Market filing fee........................... *
Accounting fees and expenses................................ 175,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 100,000
Road show expenses.......................................... 30,000
Transfer agent and registrar fees and expenses.............. 3,000
Custodian fees.............................................. *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law
("DGCL"), the Company's Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. In addition, as permitted by Section 145
of the DGCL, the Bylaws of the Company provide that: (i) the Company is required
to indemnify its directors and executive officers to the fullest extent
permitted by the DGCL (except if such person is seeking indemnity in connection
with a proceeding (or part thereof) initiated by such person and not authorized
by the Board of Directors); (ii) the Company may, in its discretion, indemnify
other officers, employees and agents as set forth in the DGCL; (iii) upon
receipt of an undertaking to repay such advances if indemnification is
determined to be unavailable, the Company is required to advance expenses, as
incurred, to its directors and executive officers to the fullest extent
permitted by the DGCL in connection with a proceeding (except if the expenses
incurred by such person are incurred because the Company is directly bringing a
claim, in a proceeding, against such person, alleging that such person has
breached his or her duty of loyalty to the Company, committed an act or omission
not in good faith or that involves intentional misconduct or a knowing violation
of law, or derived an improper personal benefit from a transaction); (iv) the
rights conferred in the Bylaws are not exclusive and the Company is authorized
to enter into indemnity agreements with its directors, officers, employees and
agents and (v) the Company may not retroactively amend the Bylaw provisions
relating to indemnity.
The Company's policy is to enter into Indemnity Agreements with each of its
directors and executive officers. The Indemnity Agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Company, on account of their
services as directors, officers, employees or agents of the Company or as
directors, officers, employees or agents of any other company or enterprise when
they are serving in such capacities at the request of the Company. The
II-1
<PAGE> 116
Company will not be obligated pursuant to the agreements to indemnify or advance
expenses to an indemnified party with respect to proceedings or claims (i)
initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board of Directors and successful
proceedings brought to enforce a right to indemnification under the indemnity
agreements; (ii) for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement; (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of profits
made from the purchase or sale by the indemnified party of securities of the
Company pursuant to the provisions of sec. 16(b) of the Securities Exchange Act
of 1934 and related laws; (iv) on account of conduct by an indemnified party
that is finally adjudged to have been in bad faith or conduct that the
indemnified party did not reasonably believe to be in, or not opposed to, the
best interests of the Company; (v) on account of any criminal action or
proceeding arising out of conduct that the indemnified party had reasonable
cause to believe was unlawful; or (vi) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The Indemnity Agreement requires a director or executive officer to
reimburse the Company for expenses advanced only to the extent it is ultimately
determined that the director or executive officer is not entitled, under
Delaware law, the Bylaws, his or her indemnity agreement or otherwise to be
indemnified for such expenses. The Indemnity Agreement provides that it is not
exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-interest
vote of the stockholders or vote of disinterested directors, Delaware law or
otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Company and its directors and executive officers, may
be sufficiently broad to permit indemnification of the Company's directors and
executive officers for liabilities arising under the Securities Act.
As authorized by the Company's Bylaws, the Company, with approval by the
Company's Board of Directors, has applied for, and expects to obtain, directors
and officers liability insurance with a per claim and annual aggregate coverage
limit of $5 million.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement...................................... 1.01
Company's Certificate of Incorporation...................... 3.01
Company's Bylaws............................................ 3.04
Form of Indemnity Agreement................................. 10.06
</TABLE>
II-2
<PAGE> 117
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities of the
Company sold by the Company from September 30, 1995 to September 30, 1998.
References to warrants below assume the full exercise of all warrants.
<TABLE>
<CAPTION>
NUMBER AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SECURITIES PURCHASE PRICE CONSIDERATION
- -------------------- ----------------- ----------------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1 investor May 15, 1996 Warrants to purchase -- $ -- --(1)
70,313 shares of Series
C Preferred Stock
10 investors July 10, 1996 Series C Preferred 9,375,000 7,500,000 Cash
Stock
2 investors December 31, 1996 Series C Preferred 337,301 269,697 --(2)
Stock
1 investor July 22, 1997 Warrants to purchase -- -- --(3)
169,539 shares of
Series D Preferred
Stock
10 investors July 23, 1997 Series D Preferred 3,188,357 4,655,001 Cash
Stock
1 investor September 3, 1997 Warrants to purchase -- -- --(4)
35,000 shares of Series
D Preferred Stock
1 investor April 28, 1998 Warrants to purchase -- -- --(5)
32,968 shares of Series
E Preferred Stock
1 investor May 8, 1998 Warrants to purchase -- -- --(6)
141,129 shares of
Series E Preferred
Stock
8 shareholders June 30, 1998 Common Stock 1,772,302 -- Exchange for(7)
Common Stock
of 7Software
Corporation
25 investors June 30, 1998 and Series E Preferred 4,121,676 12,777,196 Cash
August 11, 1998 Stock
1 investor August 11, 1998 Warrant to purchase -- -- --(8)
6,000,000 shares of
Series E Preferred
Stock
Officers, directors, September 30, Exercise of Options to 274,018 $ 14,172 Cash(9)
employees and other 1995 to September purchase Common Stock
eligible 30, 1998
participants
</TABLE>
- ---------------
* As part of the reincorporation of the Company into Delaware, the Company
will exchange 7,746,390 shares of its Common Stock, 25,533,926 shares of its
redeemable convertible preferred stock and warrants to purchase 5,823,949
shares of its redeemable convertible preferred stock for 7,746,390 shares of
Common Stock, 25,533,926 shares of redeemable convertible preferred stock
and warrants to purchase 5,823,949 shares of redeemable convertible
preferred stock, respectively.
(1) Issued to Imperial Bank as additional consideration for a bank line of
credit.
(2) In connection with the cancellation of previous indebtedness, 175,975 shares
of Series C Preferred Stock were issued to Michael W. Hilton and 161,326
shares of Series C Preferred Stock were issued to S. Steven Singh.
(3) Issued to Comdisco, Inc. as additional consideration for a promissory note
and an equipment lease.
(4) Issued to Imperial Bank as additional consideration for a bank line of
credit and other financing.
(5) Issued to Imperial Bank as additional consideration for additional
financing.
(6) Issued to Comdisco, Inc. as additional consideration for a promissory note.
(7) In connection with the Company's acquisition of 7Software, the Company
exchanged 1,772,302 shares of Common Stock for 7Software's Common Stock.
(8) Issued to TRS in connection with TRS's purchase of Series E Preferred Stock.
See "Certain Transactions."
II-3
<PAGE> 118
(9) With respect to the grant of stock options, exemption from registration
under the Securities Act was unnecessary in that none of such transactions
involved a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
All sales of Common Stock made pursuant to the exercise of stock options
granted under the stock option plans of the Company or its predecessors were
made pursuant to the exemption from the registration requirements of the
Securities Act afforded by Rule 701 promulgated under the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. The securities were
sold to a limited number of people with no general solicitation or advertising.
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate the investment and who represented to the
issuer that the shares were being acquired for investment.
II-4
<PAGE> 119
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement.**
2.01 -- Form of Agreement and Plan of Merger between Company and
Concur Technologies, Inc., a Washington corporation.*
2.02 -- Agreement and Plan of Reorganization between Company, PSC
Merger Corp., 7Software, Inc., Andrew Dent and Melissa
Widner dated June 30, 1998.*
3.01 -- Company's Certificate of Incorporation.*
3.02 -- Company's Certificate of Designation.
3.03 -- Form of Company's Amended and Restated Certificate of
Incorporation to be filed with the Delaware Secretary of
State immediately following the Offering.*
3.04 -- Company's Bylaws.*
4.01 -- Specimen Certificate for Company's Common Stock.
4.02 -- Second Amended and Restated Information and Registration
Rights Agreement dated May 29, 1998.*
5.01 -- Opinion of Fenwick & West LLP regarding legality of the
securities being issued.**
10.01 -- Company's Amended and Restated 1994 Stock Option Plan and
related documents.*
10.02 -- Company's 1998 Equity Incentive Plan and related documents.*
10.03 -- Company's 1998 Employee Stock Purchase Plan and related
documents.*
10.04 -- Company's 1998 Directors Stock Option Plan and related
documents.*
10.05 -- Company's 401(k) Profit Sharing and Trust Plan.*
10.06 -- Form of Indemnity Agreement entered into by Company with
each of its directors and executive officers.*
10.07 -- Series D Preferred Stock Purchase Agreement dated July 22,
1997.*
10.08 -- Series E Preferred Stock Purchase Agreement dated May 29,
1998.*
10.09 -- Strategic Marketing Alliance Agreement between Company and
American Express Company dated December 17, 1997.*/***
10.10 -- Co-Branded XMS Service Marketing Agreement between Company
and American Express Company dated August 11, 1998.*/***
10.11 -- Warrant to purchase shares of Company's Series E Preferred
Stock issued by Company to American Express Travel Related
Services Company, Inc. ("TRS") dated August 11, 1998.*
10.12 -- Voting Agreement among Company and stockholders of Company
identified therein dated May 29, 1998.*
10.13 -- Amendment Agreement among Company and stockholders of
Company identified therein dated July 30, 1998.*
10.14 -- Facility Lease between Company and CarrAmerica Realty
Corporation dated October 31, 1997, as amended on April 10,
1998.*
10.15 -- Letter Agreement between Company and Sterling R. Wilson
dated April 21, 1994.*
10.16 -- Letter Agreement between Company and Jon T. Matsuo dated
June 20, 1994.*
10.17 -- Letter Agreement between Company and Frederick L. Ingham
dated December 5, 1996.*
10.18 -- Letter Agreement between Company and John P. Russo, Jr.
dated April 1, 1996.*
10.19 -- Standstill Agreement between Company and TRS dated August
10, 1998.*
</TABLE>
II-5
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C> <C>
21.01 -- List of Company's subsidiaries.*
23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).**
23.02 -- Consent of Ernst & Young LLP, Independent Auditors.
24.01 -- Power of Attorney*
27.01 -- Financial Data Schedule.*
99.01 -- Report of Ernst & Young LLP, Independent Auditors, on
Financial Statement Schedule.*
</TABLE>
- ---------------
* Previously filed.
** To be supplied by amendment.
*** Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Commission.
(b) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts*
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 14 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 13th day of October, 1998.
CONCUR TECHNOLOGIES, INC.
By: S. STEVEN SINGH*
------------------------------------
S. Steven Singh
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
S. STEVEN SINGH* President, Chief Executive October 13, 1998
- ----------------------------------------------------- Officer and Director
S. Steven Singh (principal executive officer)
STERLING R. WILSON* Chief Financial Officer and October 13, 1998
- ----------------------------------------------------- Vice President of Operations
Sterling R. Wilson (principal financial officer
and principal accounting
officer)
MICHAEL W. HILTON* Chairman of the Board of October 13, 1998
- ----------------------------------------------------- Directors and Chief Technical
Michael W. Hilton Officer
JEFFREY D. BRODY* Director October 13, 1998
- -----------------------------------------------------
Jeffrey D. Brody
NORMAN A. FOGELSONG* Director October 13, 1998
- -----------------------------------------------------
Norman A. Fogelsong
MICHAEL J. LEVINTHAL* Director October 13, 1998
- -----------------------------------------------------
Michael J. Levinthal
JAMES D. ROBINSON III* Director October 13, 1998
- -----------------------------------------------------
James D. Robinson III
</TABLE>
*By /s/ STERLING R. WILSON
----------------------------------
Sterling R. Wilson
Attorney-in-fact
II-7
<PAGE> 122
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C> <C>
3.02 -- Company's Certificate of Designation.
4.01 -- Specimen Certificate for Company's Common Stock.
23.02 -- Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
<PAGE> 1
EXHIBIT 3.02
CONCUR TECHNOLOGIES, INC.
(a Delaware corporation)
CERTIFICATE OF DESIGNATION OF
PREFERRED STOCK
Concur Technologies, Inc., a Delaware corporation (the "Company") does
hereby certify that pursuant to the authority contained in Article IV of its
Certificate of Incorporation, and in accordance with the provisions of Section
151 of the Delaware General Corporation Law, the Company's Board of Directors
has duly adopted the following resolutions creating ten (10) separate series of
Preferred Stock designated as Series A Preferred Stock, Series A1 Preferred
Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C Preferred
Stock, Series C1 Preferred Stock, Series D Preferred Stock, Series D1 Preferred
Stock, Series E Preferred Stock and Series E1 Preferred Stock.
RESOLVED, that the Company hereby designates and creates ten (10) separate
series of the authorized Preferred Stock designated, respectively, as
Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred
Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock,
Series E Preferred Stock and Series E1 Preferred Stock as follows:
A. Of the fifty-three million (53,000,000) shares of Preferred Stock,
$0.001 par value, authorized to be issued by the Company, three million eight
hundred twenty-four thousand and ninety-two (3,824,092) shares are hereby
designated as "Series A Preferred Stock," three million eight hundred
twenty-four thousand and ninety-two (3,824,092) shares are hereby designated as
"Series A1 Preferred Stock," four million six hundred eighty-seven thousand five
hundred (4,687,500) shares are hereby designated as "Series B Preferred Stock,"
four million six hundred eighty-seven thousand five hundred (4,687,500) shares
are hereby designated as "Series B1 Preferred Stock," nine million seven hundred
eighty-two thousand six hundred and fourteen (9,782,614) shares are hereby
designated as "Series C Preferred Stock," nine million seven hundred eighty-two
thousand six hundred and fourteen (9,782,614) shares are hereby designated as
"Series C1 Preferred Stock," three million three hundred ninety-two thousand
eight hundred ninety-six (3,392,896) shares are hereby designated as Series D
Preferred Stock, three million three hundred ninety-two thousand eight hundred
ninety-six (3,392,896) shares are hereby designated as Series D1 Preferred
Stock, four million five hundred thousand (4,500,000) shares are hereby
designated as "Series E Preferred Stock," and four million five hundred thousand
(4,500,000) shares are hereby designated as "Series E1 Preferred Stock." Any
shares of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock or Series E1 Preferred Stock that are acquired by the Company,
whether by redemption, purchase, conversion or otherwise, so that such shares
are issued but not outstanding, may not be reissued as shares of any such series
or as shares of the class of Preferred Stock. Upon the retirement of any such
shares and the filing of a certificate of retirement pursuant to Sections 103
and 243 of the Delaware General Corporation Law with
<PAGE> 2
respect thereto, the shares of such series shall be eliminated and the number of
shares of Preferred Stock shall be reduced accordingly. The rights, preferences,
privileges and restrictions granted to and imposed upon the respective classes
and series of the Company's capital stock are set forth below in Article B.
Nothing in this Article A shall limit the Board of Directors' ability to
designate and establish the rights, preferences, privileges and restrictions of
the remaining authorized but unissued Preferred Stock of the Company.
B. Rights, Preferences and Restrictions of Preferred Stock. The rights,
preferences, restrictions and other matters relating to the Series A Preferred
Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred
Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock, Series E Preferred Stock and Series E1
Preferred Stock are as follows:
1. DEFINITIONS. For purposes of this Article B, the following
definitions shall apply:
1.1 "Board" shall mean the Board of Directors of the Company.
1.2 "Company" shall mean this corporation.
1.3 "Common Stock" shall mean the Common Stock, $0.001 par value,
of the Company.
1.4 "Dividend Preference Rate" shall mean $0.0366 per annum for
each share of the Series A Preferred Stock and the Series A1 Preferred Stock,
$0.0448 per annum for each share of the Series B Preferred Stock and the Series
B1 Preferred Stock, $0.056 per annum for each share of the Series C Preferred
Stock and the Series C1 Preferred Stock, $0.1022 per annum for each share of the
Series D Preferred Stock and the Series D1 Preferred Stock, and $0.2170 per
annum for each share of the Series E Preferred Stock and the Series E1 Preferred
Stock, plus any declared but unpaid dividends on such shares of stock as
appropriately adjusted for stock dividends, splits and combinations.
1.5 "Original Issue Price" shall mean $0.523 per share for the
Series A Preferred Stock and the Series A1 Preferred Stock, $0.64 per share for
the Series B Preferred Stock and the Series B1 Preferred Stock, $0.80 per share
for the Series C Preferred Stock and the Series C1 Preferred Stock, $1.46 per
share for the Series D Preferred Stock and the Series D1 Preferred Stock, and
$3.10 per share for the Series E Preferred Stock and the Series E1 Preferred
Stock.
1.6 "Preferred Stock" shall mean the Preferred Stock, $0.001 par
value, of the Company, including, without limitation, the Series A Preferred
Stock, the Series A1 Preferred Stock, the Series B Preferred Stock, the Series
B1 Preferred Stock, the Series C Preferred Stock, the Series C1 Preferred Stock,
the Series D Preferred Stock, the Series D1 Preferred Stock, the Series E
Preferred Stock, the Series E1 Preferred Stock and any series of Preferred Stock
created by the Board pursuant to Article IV of the Company's Certificate of
Incorporation.
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<PAGE> 3
1.7 "Series A Preferred Stock" shall mean the Series A Preferred
Stock, $0.001 par value, of the Company.
1.8 "Series A1 Preferred Stock" shall mean the Series A1
Preferred Stock, $0.001 par value, of the Company.
1.9 "Series B Preferred Stock" shall mean the Series B Preferred
Stock, $0.001 par value, of the Company.
1.10 "Series B1 Preferred Stock" shall mean the Series B1
Preferred Stock, $0.001 par value, of the Company.
1.11 "Series C Preferred Stock" shall mean the Series C Preferred
Stock, $0.001 par value, of the Company.
1.12 "Series C1 Preferred Stock" shall mean the Series C1
Preferred Stock, $0.001 par value, of the Company.
1.13 "Series D Preferred Stock" shall mean the Series D Preferred
Stock, $.001 par value, of the Company.
1.14 "Series D1 Preferred Stock" shall mean the Series D1
Preferred Stock, $0.001 par value, of the Company.
1.15 "Series E Preferred Stock" shall mean the Series E Preferred
Stock, $0.001 par value, of the Company.
1.16 "Series E1 Preferred Stock" shall mean the Series E1
Preferred Stock, $0.001 par value, of the Company.
2. DIVIDEND RIGHTS.
2.1 Subject to the payment of dividends on any senior series of
Preferred Stock which may be created by the Board pursuant to Article IV of the
Company's Certificate of Incorporation, the holders of the then outstanding
Preferred Stock shall be entitled to receive, out of any funds of the Company
legally available therefor, cumulative dividends at the Dividend Preference Rate
per annum, payable when and as declared by the Board of Directors, in preference
and priority to the payment of dividends on any shares of Common Stock (other
than a Common Stock Dividend). Such dividends may be declared and paid as to one
series of Preferred Stock only if they are simultaneously declared and paid as
to all series. After payment of dividends to the holders of Series A Preferred
Stock, Series Al Preferred Stock, Series B Preferred Stock, Series B1 Preferred
Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock, Series E Preferred Stock and Series E1
Preferred Stock, dividends may be declared and distributed among all holders of
Common Stock, and all holders of Series A Preferred Stock, Series Al Preferred
Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C Preferred
Stock, Series C1 Preferred Stock, Series D
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<PAGE> 4
Preferred Stock, Series D1 Preferred Stock, Series E Preferred Stock and Series
E1 Preferred Stock in proportion to the number of shares of Common Stock which
would be held by each on an as-converted basis, but at an annual rate not
exceeding $0.0366 per share (as adjusted for stock splits and the like). The
dividends payable to all holders of the Preferred Stock shall not be cumulative,
and no right shall accrue to the holders of the Preferred Stock by reason of the
fact that dividends on the Preferred Stock are not declared or paid in any
previous fiscal year of the corporation, whether or not the earnings of the
corporation in that previous fiscal year were sufficient to pay such dividends
in whole or in part. In the event that the corporation shall have declared but
unpaid dividends outstanding immediately prior to, and in the event of, a
conversion of Preferred Stock (as provided in Section 6 hereof), the corporation
shall, at the option of the holder, pay in cash to the holder(s) of Preferred
Stock subject to conversion the full amount of any such dividends or allow such
dividends to be converted into Common Stock in accordance with, and pursuant to
the terms specified in, Section 6 hereof.
2.2 Each holder of Preferred Stock shall be deemed to have
consented to distributions made by the Company in connection with the repurchase
of shares of Common Stock issued to or held by officers, directors, or employees
of, or consultants to, the Company or its subsidiaries upon termination of their
employment or services pursuant to agreements (whether now existing or hereafter
entered into) providing for the right of said repurchase between the Company and
such persons.
3. LIQUIDATION RIGHTS.
3.1 In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary (a "Liquidation Event"), the funds
and assets of the Company that may be legally distributed to the Company's
stockholders shall, after distribution of the liquidation preference(s) of all
senior series of Preferred Stock which may be created by the Board pursuant to
Article IV of the Company's Certificate of Incorporation, be distributed to the
holders of Preferred Stock in the following manner:
(a) Each holder of Series E Preferred Stock and Series E1
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to the holders
of the Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred
Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred
Stock, Series D Preferred Stock, Series D1 Preferred Stock or the Common Stock,
by reason of their ownership of such stock, the Original Issue Price for Series
E Preferred Stock and Series E1 Preferred Stock per share for each share of
Series E Preferred Stock and Series E1 Preferred Stock then held by such holder,
plus an amount equal to all declared but unpaid dividends on such shares of
Series E Preferred Stock and Series E1 Preferred Stock (collectively, the
"Series E Preference"). If, upon the occurrence of a Liquidation Event, the
assets and funds available to be distributed among the holders of the Series E
Preferred Stock and Series E1 Preferred Stock shall be insufficient to permit
the payment to such holders of the full preferential amount, then the entire
assets and funds of the Company legally available for distribution to such
holders shall be distributed ratably based on the number of shares of Series E
Preferred Stock and Series E1 Preferred Stock held by each holder.
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<PAGE> 5
(b) After payment has been made to the holders of Series E
Preferred Stock and Series E1 Preferred Stock, each holder of Series D Preferred
Stock and Series D1 Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Company to the holders of the Series A Preferred Stock, Series A1 Preferred
Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C Preferred
Stock, Series C1 Preferred Stock or the Common Stock, by reason of their
ownership of such stock, the Original Issue Price for Series D Preferred Stock
and Series D1 Preferred Stock per share for each share of Series D Preferred
Stock and Series D1 Preferred Stock then held by such holder, plus an amount
equal to all declared but unpaid dividends on such shares of Series D Preferred
Stock and Series D1 Preferred Stock (collectively, the "Series D Preference").
If, upon the occurrence of a Liquidation Event, the assets and funds available
to be distributed among the holders of the Series D Preferred Stock and Series
D1 Preferred Stock shall be insufficient to permit the payment to such holders
of the full preferential amount, then the entire assets and funds of the Company
legally available for distribution to such holders shall be distributed ratably
based on the number of shares of Series D Preferred Stock and Series D1
Preferred Stock held by each holder.
(c) After payment has been made to the holders of Series E
Preferred Stock, Series E1 Preferred Stock, Series D Preferred Stock and Series
D1 Preferred Stock of the full amounts to which they are entitled pursuant to
paragraphs (a) and (b) above, each holder of Series C Preferred Stock and Series
C1 Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to the holders
of the Series A Preferred Stock, Series Al Preferred Stock, Series B Preferred
Stock, Series B1 Preferred Stock or the Common Stock, by reason of their
ownership of such stock, the Original Issue Price for Series C Preferred Stock
and Series C1 Preferred Stock per share for each share of Series C Preferred
Stock and Series C1 Preferred Stock then held by such holder, plus an amount
equal to all declared but unpaid dividends on such shares of Series C Preferred
Stock and Series C1 Preferred Stock (collectively, the "Series C Preference").
If, upon the occurrence of a Liquidation Event, the assets and funds available
to be distributed among the holders of the Series C Preferred Stock and Series
C1 Preferred Stock shall be insufficient to permit the payment to such holders
of the full preferential amount, then the entire assets and funds of the Company
legally available for distribution to such holders shall be distributed ratably
based on the number of shares of Series C Preferred Stock and Series C1
Preferred Stock held by each holder.
(d) After payment has been made to the holders of Series E
Preferred Stock, Series E1 Preferred Stock, Series D Preferred Stock, Series D1
Preferred Stock, Series C Preferred Stock and Series C1 Preferred Stock of the
full amounts to which they are entitled pursuant to paragraphs (a), (b) and (c)
above, each holder of Series B Preferred Stock and Series B1 Preferred Stock
shall be entitled to receive, prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of the Series A
Preferred Stock, the Series A1 Preferred Stock or Common Stock, by reason of
their ownership of such stock, the Original Issue Price for Series B Preferred
Stock and Series B1 Preferred Stock per share for each share of Series B
Preferred Stock and Series B1 Preferred Stock then held by such holder, plus an
amount equal to all declared but unpaid dividends on such shares of Series B
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<PAGE> 6
Preferred Stock and Series B1 Preferred Stock (collectively, the "Series B
Preference"). If, upon the occurrence of a Liquidation Event, the assets and
funds available to be distributed among the holders of the Series B Preferred
Stock and Series B1 Preferred Stock shall be insufficient to permit the payment
to such holders of the full preferential amount, then the entire assets and
funds of the Company legally available for distribution to such holders shall be
distributed ratably based on the number of shares of Series B Preferred Stock
and Series B1 Preferred Stock held by each holder.
(e) After payment has been made to the holders of Series E
Preferred Stock, Series E1 Preferred Stock, Series D Preferred Stock, Series D1
Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series B
Preferred Stock and Series B1 Preferred Stock of the full amounts to which they
are entitled pursuant to paragraphs (a), (b), (c) and (d) above, each holder of
Series A Preferred Stock and Series A1 Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Company to the holders of the Common Stock, by reason of
their ownership of such stock, the Original Issue Price for Series A Preferred
Stock and Series A1 Preferred Stock per share for each share of Series A
Preferred Stock and Series A1 Preferred Stock then held by such holder, plus an
amount equal to all declared but unpaid dividends on such shares of Series A
Preferred Stock and Series A1 Preferred Stock (collectively, the "Series A
Preference"). If, upon the occurrence of a Liquidation Event, the assets and
funds available to be distributed among the holders of the Series A Preferred
Stock and Series A1 Preferred Stock shall be insufficient to permit the payment
to such holders of the full preferential amount, then the entire assets and
funds of the Company legally available for distribution to such holders shall be
distributed ratably based on the number of shares of Series A Preferred Stock
and Series A1 Preferred Stock held by each holder.
(f) After payment has been made to the holders of the
Preferred Stock of the full amounts to which they are entitled pursuant to
paragraphs (a), (b), (c), (d) and (e) above, the remaining assets of the Company
available for distribution to stockholders shall be distributed ratably among
all holders of Preferred Stock and holders of Common Stock based on the number
of shares of Common Stock held by each holder (assuming conversion of all
Preferred Stock). Notwithstanding the foregoing sentence, the right to receive
the remaining assets as so described shall (i) as to the holders of the Series A
Preferred Stock and Series A1 Preferred Stock, cease at such time as the holders
of the Series A Preferred Stock and Series A1 Preferred Stock receive an
aggregate of $1.568 per share (including amounts previously paid as the Series A
Preference), (ii) as to the holders of the Series B Preferred Stock and Series
B1 Preferred Stock after such time as the holders of the Series B Preferred
Stock and Series B1 Preferred Stock receive an aggregate of $1.92 per share
(including amounts previously paid as the Series B Preference), be reduced to
one-third of the rate at which the assets of the Company were being distributed
to the holders of the Series B Preferred Stock and Series B1 Preferred Stock
pursuant to the foregoing sentence, (iii) as to the holders of the Series C
Preferred Stock and Series C1 Preferred Stock after such time as the holders of
the Series C Preferred Stock and Series C1 Preferred Stock receive an aggregate
of $2.40 per share (including amounts previously paid as the Series C
Preference), be reduced to one-third of the rate at which the assets of the
Company were being distributed to the holders of the Series C Preferred Stock
and Series C1
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<PAGE> 7
Preferred Stock pursuant to the foregoing sentence, (iv) as to the holders of
Series D Preferred Stock and Series D1 Preferred Stock, cease at such time as
the holders of Series D Preferred Stock and Series D1 Preferred Stock receive an
aggregate of $2.92 per share (including amounts previously paid as the Series D
Preference), and (v) as to the holders of Series E Preferred Stock and Series E1
Preferred Stock, cease at such time as the holders of Series E Preferred Stock
and Series E1 Preferred Stock receive an aggregate of $6.20 per share (including
amounts previously paid as the Series E Preference).
3.2 Notwithstanding the foregoing provisions of this Section 3,
if any holder of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock or Series E1 Preferred Stock would have received greater
consideration as a result of the Liquidation Event if such holder had converted
its shares of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock or Series E1 Preferred Stock, as applicable, into Common Stock
in accordance with Section 6 hereof immediately prior to the Liquidation Event,
then for purposes of distributing the consideration received in connection with
the Liquidation Event to the stockholders of the Company pursuant to this
Section 3, such holder shall be treated as if such holder had converted such
shares of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock or Series E1 Preferred Stock, as applicable, into Common Stock
immediately prior to the Liquidation Event. The value of securities and property
paid or distributed pursuant to this Section 3 shall be computed at fair market
value at the time of payment to the Company or at the time made available to
stockholders, all as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment, provided that (i) if such
securities are listed on any established stock exchange or a national market
system, their fair market value shall be the closing sales price for such
securities as quoted on such system or exchange (or the largest such exchange)
for the date the value is to be determined (or if there are no sales for such
date, then for the last preceding business day on which there were sales), as
reported in the Wall Street Journal or similar publication, and (ii) if such
securities are regularly quoted by a recognized securities dealer but selling
prices are not reported, their fair market value shall be the mean between the
high bid and low asked prices for such securities on the date the value is to be
determined (or if there are no quoted prices for such date, then for the last
preceding business day on which there were quoted prices).
3.3 Nothing hereinabove set forth shall affect in any way the
right of each holder of Preferred Stock to convert such shares at any time and
from time to time into Common Stock in accordance with Section 6 hereof.
3.4 For purposes of this Section 3, the sale of all or
substantially all of the assets of the Company, or the acquisition of the
Company by another entity by means of consolidation or merger resulting in the
exchange of the outstanding shares of the Company for securities or other
consideration issued, or caused to be issued, by the acquiring corporation or
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<PAGE> 8
corporations and pursuant to which the stockholders of the Company (determined
immediately prior to such event) do not hold more than 50% of the common equity
and voting power of the surviving corporation, shall be treated as a Liquidation
Event, irrespective of the form of payment made in such transaction or series of
transactions. A Liquidation Event shall not include a firm commitment
underwritten public offering pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "Securities Act"),
covering the offer and sale of Common Stock of the Company.
4. MANDATORY REDEMPTION RIGHTS.
4.1 Unless waived in writing by the holders of more than sixty
percent (60%) of the outstanding shares of Preferred Stock, considered together
as a single class, the corporation shall redeem, on the terms and conditions
stated herein, out of funds legally available therefor, all of the Series E
Preferred Stock, the Series E1 Preferred Stock, the Series D Preferred Stock,
Series D1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock,
Series B Preferred Stock, Series B1 Preferred Stock, Series A1 Preferred Stock
and Series A Preferred Stock in four (4) annual installments beginning on
October 13, 2001 (the "Initial Redemption Date"), and continuing thereafter on
the first, second, and third anniversaries of the Initial Redemption Date (each
a "Redemption Date"), by paying in cash therefor a sum equal to (i) the Original
Series E Issue Price for each share of Series E Preferred Stock or Series E1
Preferred Stock, (ii) the Original Series D Issue Price for each share of Series
D Preferred Stock or Series D1 Preferred Stock, (iii) the Original Series C
Issue Price for each share of Series C Preferred Stock or Series C1 Preferred
Stock to be redeemed plus all declared but unpaid dividends thereon (the "Series
C Redemption Price"), (iv) the Original Series B Issue Price for each share of
Series B Preferred Stock or Series B1 Preferred Stock to be redeemed plus all
declared but unpaid dividends thereon (the "Series B Redemption Price"), and (v)
the Original Series A Issue Price for each share of Series A1 Preferred Stock or
Series A Preferred Stock to be redeemed plus all declared but unpaid dividends
thereon (the "Series A Redemption Price"). Any redemption effected pursuant to
this Section 4.1 shall first be made ratably among the holders of Series E
Preferred Stock and Series E1 Preferred Stock in proportion to the shares of
Series E Preferred Stock and Series E1 Preferred Stock then held by them and,
thereafter, to the extent funds remain legally available therefor, ratably among
the holders of Series D Preferred Stock and Series D1 Preferred Stock in
proportion to the shares of Series D Preferred Stock and Series D1 Preferred
Stock then held by them and, thereafter, to the extent funds remain legally
available therefor, ratably among the holders of Series C Preferred Stock and
Series C1 Preferred Stock in proportion to the shares of Series C Preferred
Stock and Series C1 Preferred Stock then held by them and, thereafter, to the
extent funds remain legally available therefor, ratably among the holders of
Series B Preferred Stock and Series B1 Preferred Stock in proportion to the
number of shares of Series B Preferred Stock and Series B1 Preferred Stock then
held by them and, thereafter, to the extent funds remain legally available
therefor, ratably among the holders of Series A Preferred Stock and Series A1
Preferred Stock in proportion to the number of shares of Series A Preferred
Stock and Series A1 Preferred Stock then held by them. The number of shares of
Series E Preferred Stock, Series E1 Preferred Stock, Series D Preferred Stock,
Series D1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock,
Series B Preferred Stock, Series B1 Preferred Stock, Series A Preferred Stock
and Series A1 Preferred
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Stock that the corporation shall be required to redeem under this Section 4.1 on
any one Redemption Date shall be equal to the amount determined by dividing (i)
the aggregate number of shares of (v) Series E Preferred Stock and Series E1
Preferred Stock, (w) Series D Preferred Stock and Series D1 Preferred Stock, (x)
Series C Preferred Stock and Series C1 Preferred Stock, (y) Series B Preferred
Stock and Series B1 Preferred Stock, or (z) Series A Preferred Stock and Series
A1 Preferred Stock, as the case may be, outstanding immediately prior to the
Redemption Date by (ii) the number of remaining Redemption Dates (including the
Redemption Date to which such calculation applies). In the event that the
corporation is unable to redeem the full number of shares to be redeemed on any
Redemption Date, the shares not redeemed shall be redeemed by this corporation
as provided in this Section 4 as soon as practicable and from time to time after
funds are legally available therefor.
4.2 At least twenty (20) but no more than sixty (60) days prior
to each Redemption Date, the Company shall give written notice by certified or
registered mail, postage prepaid, to all holders of outstanding Preferred Stock,
at the address last shown on the records of the Company for such holder, stating
such Redemption Date, the applicable Redemption Price, the then current
Conversion Price (as hereinafter defined) for such shares, and the date of
termination of the right to convert (which date shall not be earlier than thirty
(30) days after the written notice by the Company has been given) and shall call
upon such holder to surrender to the Company on such Redemption Date at the
place designated in the notice such holder's certificate or certificates
representing the shares to be redeemed. On or after the Redemption Date stated
in such notice, the holder of each share of Preferred Stock called for
redemption shall surrender the certificate evidencing such shares to the Company
at the place designated in such notice and shall thereupon be entitled to
receive payment of the Redemption Price for the shares surrendered. If less than
all the shares represented by any such surrendered certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares. If such
notice of redemption shall have been duly given, and if on such Redemption Date
funds necessary for the redemption shall be available therefor, then, as to any
certificates evidencing any Preferred Stock so called for redemption and not
surrendered, all rights of the holders of such shares so called for redemption
and not surrendered shall cease with respect to such shares, except only the
right of the holders to receive the applicable Redemption Price for the
Preferred Stock which they hold, without interest, upon surrender of their
certificates therefor.
4.3 Notwithstanding anything herein to the contrary, if, on or
prior to a Redemption Date, the Company deposits, with any bank or trust company
in the State of Washington having aggregate capital and surplus in excess of
$100,000,000, as a trust fund, a sum sufficient to redeem on such Redemption
Date the shares called for redemption, with irrevocable instructions and
authority to the bank or trust company to give the notice of redemption thereof
(or to complete the giving of such notice if theretofor commenced) and to pay,
on or after the Redemption Date or prior thereto, the Redemption Price of the
shares to their respective holders upon the surrender of their share
certificates, then from and after the date of the deposit (although prior to
such Redemption Date), the shares so called shall be redeemed. The deposit of
such sum shall constitute full payment of the shares to their holders and from
and after the date of the deposit the shares shall no longer be outstanding, and
the holders thereof shall cease to be stockholders with respect to such shares,
and shall have no rights with respect
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thereto except the right to receive from the bank or trust company payment of
the applicable Redemption Price for the shares of Preferred Stock which they
hold, without interest, upon the surrender of their certificates therefor and
the right to convert said shares as provided herein at any time up to but not
after the close of business on the fifth day prior to the Redemption Date of
such shares (which conversion date will not be earlier than thirty (30) days
after the written notice of redemption has been given). Any monies so deposited
on account of the Redemption Price of Preferred Stock converted into Common
Stock subsequent to the making of such deposit shall be repaid to the
corporation forthwith upon the conversion of such Preferred Stock. Any interest
accrued on any funds so deposited shall be the property of, and paid to, the
Company. If the holders of Preferred Stock so called for redemption shall not,
at the end of two (2) years after the applicable Redemption Date, have claimed
any funds so deposited, such bank or trust company shall thereupon pay over to
the Company such unclaimed funds, and such bank or trust company shall
thereafter be relieved of all responsibility in respect thereof to such holders
and such holders shall look only to the Company for payment of the Redemption
Price for the Preferred Stock which they hold.
5. VOTING RIGHTS.
5.1 Except as otherwise required by law or hereunder, the holder
of each share of Common Stock issued and outstanding shall have one (1) vote and
the holder of each share of Preferred Stock shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Preferred Stock could be converted at the record date for determination of the
stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
stockholders is solicited, such votes to be counted together with all other
shares of stock of the corporation having general voting power and not
separately as a class. Fractional votes by the holders of Preferred Stock shall
not, however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Preferred Stock held by each holder
could be converted) be rounded to the nearest whole number (with one-half vote
being rounded up). Holders of Common Stock and Preferred Stock shall be entitled
to notice of any stockholders' meeting in accordance with the Bylaws of the
Company. In accordance with Section 228(a) of the Delaware General Corporation
Law, any action that may be taken at a meeting of the Company's stockholders may
be taken by written consent by the stockholders holding of record or otherwise
entitled to vote in the aggregate not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote on the action were present and voted. If action is taken
by less than unanimous consent, the Company shall give nonconsenting
stockholders prompt notice of such action; provided that if the action is of a
type that would require a filing of a certificate under the Delaware General
Corporation Law (a "Certificate Action") then, if the Delaware General
Corporation Law so requires, the certificate so filed shall state that written
stockholder consent has been given in accordance with Section 228 of the
Delaware General Corporation Law and that written notice of the taking of
corporate action by stockholders without a meeting as described herein has been
given as provided in such section. Such notice shall include the resolution
approved by the stockholders by written consent and shall be hand delivered or
sent first-class mail to each nonconsenting stockholder at the address on the
books and records of the Company.
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5.2 Notwithstanding the provisions of Section 5.1, at each annual
or special meeting called for the purpose of electing directors or if directors
are elected by written consent, the holders of Series E Preferred Stock and
Series E1 Preferred Stock, voting as a single class, shall be entitled to elect
two (2) members of the Board, the holders of Series D Preferred Stock and Series
D1 Preferred Stock, voting as a single class, shall be entitled to elect one (1)
member of the Board, the Series C Preferred Stock and Series C1 Preferred Stock,
voting as a single class, shall be entitled to elect one (1) member of the
Board, the holders of the Series B Preferred Stock and Series B1 Preferred
Stock, voting as a single class, shall be entitled to elect one (1) member of
the Board, the holders of Series A Preferred Stock and Series A1 Preferred
Stock, voting as a single class, shall be entitled to elect one (1) member of
the Board, and the holders of the Common Stock, voting as a single class, shall
be entitled to elect two (2) members of the Board. The provisions of this
Section 5.2 shall expire and be of no further force or effect upon conversion of
all outstanding shares of Preferred Stock into Common Stock pursuant to the
provisions of Section 6 hereof. In the case of any vacancy in the office of a
director elected by a specified group of stockholders, a successor shall be
elected to hold office for the unexpired term of such director by the
affirmative vote of a majority of the shares of such specified group given at a
special meeting of such stockholders duly called or by an action by written
consent for that purpose. Any director who shall have been elected by a
specified group of stockholders may be removed during the aforesaid term of
office, either for or without cause, by, and only by, the affirmative vote of
the holders of a majority of the shares of such specified group, given at a
special meeting of such stockholders duly called or by an action by written
consent for that purpose, and any such vacancy thereby created, may be filled by
the vote of the holders of a majority of the shares of such specified group
represented at such meeting or in such consent.
6. CONVERSION RIGHTS. The holders of Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
6.1 Right to Convert. Each share of Series A Preferred Stock,
Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock,
Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred Stock,
Series D1 Preferred Stock, Series E Preferred Stock and Series E1 Preferred
Stock shall be convertible, without payment of any additional consideration by
the holder thereof and at the option of the holder thereof, at any time after
the date of issuance of such share and on or prior to the fifth day prior to the
Redemption Date, if any, as may have been set forth in any notice of redemption
with respect to such shares of Preferred Stock, at the office of the Company or
any transfer agent for such Preferred Stock. Each share of Preferred Stock shall
be convertible into such number of fully-paid and non-assessable shares of
Common Stock as (A) in the case of the Series A Preferred Stock is determined by
dividing $0.523 by the Series A Preferred Stock Conversion Price (as hereinafter
defined) at the time in effect for such share, (B) in the case of the Series A1
Preferred Stock is determined by dividing $0.523 by the Series A1 Preferred
Stock Conversion Price (as hereinafter defined) at the time in effect for such
share, (C) in the case of the Series B1 Preferred Stock is determined by
dividing $0.64 by the Series B1 Preferred Stock Conversion Price (as hereinafter
defined) at the time in effect for such share, (D) in the case of the Series B
Preferred Stock is determined by dividing $0.64 by the Series B Preferred Stock
Conversion Price (as hereinafter defined) at the time in effect for such share,
(E) in the case of the Series C Preferred Stock is
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determined by dividing $0.80 by the Series C Preferred Stock Conversion Price
(as hereinafter defined) at the time in effect for such share, (F) in the case
of the Series C1 Preferred Stock is determined by dividing $0.80 by the Series
C1 Preferred Stock Conversion Price (as hereinafter defined) at the time in
effect for such share, (G) in the case of the Series D Preferred Stock is
determined by dividing $1.46 by the Series D Conversion Price (as hereinafter
defined) at the time in effect for such share, (H) in the case of the Series D1
Preferred Stock is determined by dividing $1.46 by the Series D1 Conversion
Price (as hereinafter defined) at the time in effect for such share, (I) in the
case of the Series E Preferred Stock is determined by dividing $3.10 by the
Series E Conversion Price (as hereinafter defined) at the time in effect for
such share, and (J) in the case of the Series E1 Preferred Stock is determined
by dividing $3.10 by the Series E1 Conversion Price (as hereinafter defined) at
the time in effect for such share. The initial Series A Preferred Stock
Conversion Price and Series A1 Preferred Stock Conversion Price shall be $0.523
per share, the initial Series B Preferred Stock Conversion Price and Series B1
Preferred Stock Conversion Price shall be $0.64 per share, the initial Series C
Preferred Stock Conversion Price and Series C1 Preferred Stock Conversion Price
shall be $0.80 per share, the initial Series D Preferred Stock Conversion Price
and Series D1 Preferred Stock Conversion Price shall be $1.46 per share, and the
initial Series E Preferred Stock Conversion Price and Series E1 Preferred Stock
Conversion Price shall be $3.10 per share. Each of these Conversion Prices shall
be subject to adjustment in accordance with Section 6(d) hereof.
(b) Automatic Conversion. Each share of Series A Preferred Stock,
Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock,
Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred Stock,
Series D1 Preferred Stock, Series E Preferred Stock and Series E1 Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Conversion Price for such series of Preferred Stock upon the earlier
of: (i) the closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act, covering the
offer and sale of Common Stock for the account of the Company to the public at
an aggregate offering price to the public of greater than Fifteen Million
Dollars ($15,000,000) and a per share offering price of not less than $9.30
(adjusted to reflect subsequent stock dividends, stock splits, combinations, or
other recapitalizations), and (ii) a total of eighty percent (80%) of the shares
of all Preferred Stock, voting as a single class, elects to convert into shares
of Common Stock (each such event an "Automatic Conversion"). In the event of an
Automatic Conversion of the Preferred Stock upon a public offering as aforesaid,
the person(s) entitled to receive the Common Stock issuable upon such conversion
of Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(c) Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of Preferred Stock. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the Company
shall, in lieu of any fractional shares to which the holder would otherwise be
entitled, pay cash equal to such fraction multiplied by the then effective
Conversion Price for such series of Preferred Stock. Before any
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holder of Preferred Stock shall be entitled to convert the same into full shares
of Common Stock and to receive certificates therefor, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Company or of any transfer agent for the Preferred Stock, and shall give
written notice to the Company at such office that he or she elects to convert
the same; provided, however, that in the event of an Automatic Conversion
pursuant to Section 6(b), the outstanding shares of Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Company or its transfer agent, and provided further that the Company shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such Automatic Conversion unless the certificates evidencing such
shares of Preferred Stock are either delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen, or destroyed and executes
an agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates. The Company shall, as soon
as practicable after such delivery, or such agreement and indemnification in the
case of a lost certificate, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, or in the
case of Automatic Conversion, on the date of closing of the offering or the date
on which the last of the shares of Preferred Stock originally issued have been
converted into shares of Common Stock, as applicable, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(d) Adjustments to Conversion Price.
The Conversion Price of each series of Preferred Stock shall be
subject to adjustment from time to time as follows:
(i) Definitions: For purposes of this Section 6(d), the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to
subscribe for, purchase, or otherwise acquire either Common Stock or Convertible
Securities (as hereinafter defined).
(2) "Original Issue Date" shall mean the date on which
a share of Series C Preferred Stock was first issued.
(3) "Convertible Securities" shall mean any evidences
of indebtedness, shares (other than the Common Stock and Series A Preferred
Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred
Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock, Series E
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Preferred Stock, and Series E1 Preferred Stock) or other securities convertible
into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 6(d)(iii), deemed to be
issued) by the Company after the Original Issue Date, other than (a) at any time
after the date of first issuance of Series A Preferred Stock, shares of Common
Stock issued pursuant to a transaction described in Section 6(d)(vii); (b)
shares of Common Stock issued or issuable upon exercise of warrants issued in
connection with equipment leasing transactions approved by not less than
two-thirds of the Board; (c) shares of Common Stock issued (or pursuant to
Section 6(c)(iii), deemed to be issued) after the Original Issue Date by the
Company to officers, directors, employees of, or consultants to, the Company
pursuant to a stock option plan or equity compensation program approved by a
majority of the Board, or (d) shares issued pursuant to Section 7 hereof, and
Common Stock issued or issuable upon conversion of any such shares.
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price for a series of Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common Stock unless the consideration
per share for an Additional Share of Common Stock issued or deemed to be issued
by the Company is less than the Conversion Price for such series of Preferred
Stock in effect on the date of, and immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common Stock.
Except as otherwise provided in Sections 6(d)(ii) and 6(d)(iv), in the event the
Company at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(1) except as provided in Section 6(d)(iii)(2), no
further adjustment in the Series E Conversion Price, the Series D Conversion
Price, the Series C Conversion Price, the Series B Conversion Price, or the
Series A Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or in the number of shares
of Common Stock issuable, upon the exercise, conversion, or exchange thereof,
the Series E Conversion Price, the Series D
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<PAGE> 15
Conversion Price, the Series C Conversion Price, the Series B Conversion Price
and the Series A Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
E Conversion Price, the Series D Conversion Price, the Series C Conversion
Price, the Series B Conversion Price or the Series A Conversion Price shall
affect Common Stock previously issued upon conversion of the Series E Preferred
Stock, Series D Preferred Stock, Series C Preferred Stock, the Series B
Preferred Stock or the Series A Preferred Stock);
(3) upon the expiration of any such Options or any
rights of Conversion or exchange under such Convertible Securities which shall
not have been exercised, the Series E Conversion Price, the Series D Conversion
Price, the Series C Conversion Price, the Series B Conversion Price and the
Series A Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
Stock issued were shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Company for the issue of all such Options, whether or
not exercised, plus the consideration actually received by the Company upon such
exercise, or for the issue of all such Convertible Securities which were
actually converted or exchanged, plus the additional consideration, if any,
actually received by the Company upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of issue of such Options, and
the consideration received by the Company for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Company for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Company (determined
pursuant to Section 6(d)(vi)) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or
(3) above shall have the effect of increasing the Conversion Price for a series
of Preferred Stock to an amount that exceeds the lower of (i) the Conversion
Price for such series of Preferred Stock on the original adjustment date, or
(ii) the Conversion Price for such series of Preferred Stock that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date; and
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(5) in the case of any Options which expire by
their terms not more than 90 days after the date of issue thereof, no adjustment
of the Conversion Price for the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series
E Preferred Stock shall be made (except as to shares of Series E Preferred
Stock, Series D Preferred Stock, Series C Preferred Stock, Series B Preferred
Stock or Series A Preferred Stock converted in such period) until the expiration
or exercise of all such Options, whereupon such adjustment shall be made in the
manner provided in clause (3) above.
(iv) Adjustment of Series E Conversion Price Upon
Issuance of Additional Shares of Common Stock. In the event this Company shall
issue Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 6(d)(iii)) without consideration
or for a consideration per share less than the Series E Conversion Price in
effect on the date of and immediately prior to such issuance (such issuance
price being referred to herein as the "Lower Price"), and in such event, the
Series E Conversion Price shall be reduced, concurrently with the issue, to the
Lower Price.
(v) Adjustment of Conversion Prices Upon Issuance of
Additional Shares of Common Stock. In the event this Company shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 6(d)(iii)) without consideration or for
a consideration per share (the "Issuance Price") less than the Conversion Price
then in effect for Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, then, and thereafter successively
upon each such issuance or sale, the Conversion Price then in effect for such
series of Preferred Stock shall simultaneously with such issuance or sale
(except as otherwise provided in this Section 6(d)) be adjusted to a Conversion
Price (calculated to the nearest cent) determined by multiplying such Conversion
Price by a fraction, (A) the numerator of which shall be the sum of (i) the
number of shares of Common Stock outstanding and the number of shares of Common
Stock issuable upon conversion of all outstanding Convertible Securities
immediately prior to such issuance, and (ii) the number of shares of Common
Stock that the aggregate consideration received by the Company for such issuance
would purchase at such Conversion Price, and (B) the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding and the
number of shares of Common Stock issuable upon conversion of all outstanding
Convertible Securities immediately prior to such issuance, and (ii) the number
of Additional Shares of Common Stock.
No adjustment of the Conversion Price for a series of Preferred Stock
shall be made in an amount less than one cent per share, provided that any
adjustments which are not required to be made by reason of this sentence shall
be carried forward and shall be taken into account in any subsequent adjustment.
All calculations made under this Section 6(d) shall be made to the nearest
1/10th of a cent or to the nearest 1/100th of a share.
No adjustment to the Series A1 Conversion Price, the Series B1
Conversion Price, the Series C1 Conversion Price, the Series D1 Conversion
Price, or the Series E1 Conversion Price shall be made in respect of the
issuance or the deemed issuance of Additional Shares of Common Stock.
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(vi) Determination of Consideration. For purposes of this
Section 6(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company before
deducting any reasonable discounts, commissions or other expenses allowed, paid,
or incurred by the Company for any underwriting or otherwise in connection with
the issuance and sale thereof and excluding amounts paid or payable for accrued
interest or accrued dividends;
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board irrespective of any accounting
treatment; and
(C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 6(d)(iii), relating to
Options and Convertible Securities, shall be determined by dividing:
(A) the total amount, if any, received
or receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) Stock Dividends. Any Additional Shares of
Common Stock relating to stock dividends which may be issued by the Company
shall not be deemed to have been issued for purposes of Section 6(d)(v) but
shall be covered by Section 6(d)(vii).
(vii) Adjustments for Dividends, Splits, Subdivisions,
Combinations, or Consolidation of Common Stock. In the event the outstanding
shares of Common Stock shall be
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increased by stock dividend payable in Common Stock, stock split, subdivision,
or other similar transaction occurring after the filing of this Certificate of
Designation into a greater number of shares of Common Stock, the Conversion
Prices for the Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock and Series E1 Preferred Stock then in effect shall, concurrently
with the effectiveness of such event, be decreased proportionally. In the event
the outstanding shares of Common Stock shall be decreased by reverse stock
split, combination, consolidation, or other similar transaction occurring after
the filing of this Certificate of Designation into a lesser number of shares of
Common Stock, the Conversion Prices for the Series A Preferred Stock, Series A1
Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C
Preferred Stock, Series C1 Preferred Stock, Series D Preferred Stock, Series D1
Preferred Stock, Series E Preferred Stock and Series E1 Preferred Stock then in
effect shall, concurrently with the effectiveness of such event, be increased
proportionally.
(viii) Adjustments for Other Distributions. In the event
the Company at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Company other than shares of Common
Stock and other than as otherwise adjusted in this Section 6, then and in each
such event provision shall be made so that the holders of Series A Preferred
Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred
Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock, Series E Preferred Stock, and Series E1
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Company which they would have received had their Series A Preferred Stock,
Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock,
Series C Preferred Stock, and Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock, Series E Preferred Stock, and Series E1
Preferred Stock been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 6 with respect to the rights of the holders of
the Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred
Stock Series B1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred
Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E Preferred
Stock, and Series E1 Preferred Stock.
(ix) Adjustment for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series A
Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series B1
Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D
Preferred Stock, Series D1 Preferred Stock, Series E Preferred Stock, and Series
E1 Preferred Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the Conversion Prices then in effect
for the Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred
Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred
Stock,
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Series D Preferred Stock, Series D1 Preferred Stock, Series E Preferred Stock
and Series E1 Preferred Stock shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that the
Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock,
Series B1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock,
Series D Preferred Stock, Series D1 Preferred Stock, Series E Preferred Stock
and Series E1 Preferred Stock shall be convertible into, in lieu of the number
of shares of Common Stock which the holders would otherwise have been entitled
to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of such Series A Preferred Stock,
Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock,
Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred Stock,
Series D1 Preferred Stock, Series E Preferred Stock and Series E1 Preferred
Stock immediately before that change.
(e) No Impairment. Except as provided in Section 7, the Company
will not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company but will at all times in good faith assist in the
carrying out of all the provisions of this Section 6 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price for a series of Preferred
Stock pursuant to this Section 6, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written request
at any time of any holder of Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of the Preferred Stock.
(g) Notices of Record Date. In the event that this Company shall
propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock, or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock; or
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(iv) to merge or consolidate with or into any other
corporation, or sell, lease, or convey all or substantially all its property or
business, or to liquidate, dissolve, or wind up; then, in connection with each
such event, this Company shall send to the holders of the Preferred Stock:
(1) at least twenty (20) days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written notice of the date when
the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event or the record date
for the determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Preferred Stock at
the address for each such holder as shown on the books of this Company.
(h) Issue Taxes. The Company shall pay any and all issue and
other taxes (other than income taxes) that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of Preferred
Stock pursuant hereto; provided, however, that the Company shall not be
obligated to pay any transfer taxes resulting from any transfer requested by any
holder in connection with any such conversion.
(i) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to its Articles of Incorporation.
(j) Status of Converted Stock. In case any series of Preferred
Stock shall be converted pursuant to this Section 6, the shares so converted
shall resume the status of authorized but unissued shares of Preferred Stock
undesignated as to series.
7. Special Mandatory Conversion.
7.1 At any time following the Original Issue Date, if (i) any
holder of shares of Series E Preferred Stock, Series D Preferred Stock, Series C
Preferred Stock, Series B
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Preferred Stock or Series A Preferred Stock is entitled to exercise the right of
first refusal as set forth in Section 5 of that certain Second Amended and
Restated Information and Registration Rights Agreement dated as of May 29, 1998,
as amended from time to time (the "Right of First Offer"), with respect to an
equity financing of the Company at a price per share which is less than the then
current Conversion Price for such series of Preferred Stock (the "Equity
Financing"), (ii) the Company has complied with its obligations under the Right
of First Offer in respect thereof, and (iii) such holder (a "Non-Participating
Holder") does not by exercise of such holder's Right of First Offer acquire its
Pro Rata Share (as defined in the Restated Information and Registration Rights
Agreement) offered in such Equity Financing (a "Mandatory Offering"), then all
of such holder's shares of Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock
shall automatically and without further action on the part of such holder be
converted into an equivalent number of shares of Series E1 Preferred Stock,
Series D1 Preferred Stock, Series C1 Preferred Stock, Series B1 Preferred Stock
and Series A1 Preferred Stock, respectively, effective immediately prior to the
consummation of the Mandatory Offering (the "Mandatory Offering Date");
provided, however, that no such conversion shall occur in connection with a
particular Equity Financing if, pursuant to the written request of the Company,
the Right of First Offer with respect to such Equity Financing is waived;
provided further, however, that no such conversion shall occur in connection
with a particular Equity Financing with respect to a particular holder of shares
of Series E Preferred Stock, Series D Preferred Stock, Series C Preferred Stock,
Series B Preferred Stock, or Series A Preferred Stock if, pursuant to the
written request of the Company, such holder agrees in writing to waive his or
its Right of First Offer with respect to such Equity Financing and pursuant to
the written request of the Company, each other holder of shares of Series E
Preferred Stock, Series D Preferred Stock, Series C Preferred Stock, Series B
Preferred Stock and Series A Preferred Stock agrees in writing that such
particular holder of shares of Series E Preferred Stock, Series D Preferred
Stock, Series C Preferred Stock, Series B Preferred Stock or Series A Preferred
Stock may waive his or its Right of First Offer with respect to such Equity
Financing. Upon conversion pursuant to this Section 7, the shares of Series E
Preferred Stock, Series D Preferred Stock, Series C Preferred Stock, Series B
Preferred Stock or Series A Preferred Stock so converted shall be canceled and
not subject to reissuance.
7.2 The holder of any shares of Series E Preferred Stock, Series
D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock, or Series
A Preferred Stock converted pursuant to Section 6(a) hereof shall deliver to the
Company during regular business hours at the office of any transfer agent of the
Company for the Preferred Stock, or at such other place as may be designated by
the Company, the certificate or certificates for the shares so converted, duly
endorsed or assigned in blank or to the Company. As promptly as practicable
thereafter, the Company shall issue and deliver to such holder, at the place
designated by such holder, a certificate or certificates for the number of full
shares of the Series E1 Preferred Stock, Series D1 Preferred Stock, Series C1
Preferred Stock, Series B1 Preferred Stock, or Series A1 Preferred Stock to
which such holder is entitled. The person in whose name the certificate for such
shares of Series E1 Preferred Stock, Series D1 Preferred Stock, Series C1
Preferred Stock, Series B1 Preferred Stock or Series A1 Preferred Stock is to be
issued shall be deemed to have become a stockholder of record on the Mandatory
Offering Date unless the transfer books of the Company
21
<PAGE> 22
are closed on that date, in which event he or it shall be deemed to have become
a stockholder of record on the next succeeding date on which the transfer books
are open.
7.3 In the event that any shares of Series E1 Preferred Stock,
Series D1 Preferred Stock, Series C1 Preferred Stock, Series B1 Preferred Stock,
or Series A1 Preferred Stock are issued, concurrently with such issuance, the
Company shall use its best efforts to take all such action as may be required,
including amending the Certificate of Incorporation, (i) to cancel all
authorized shares of Series E1 Preferred Stock, Series D1 Preferred Stock,
Series C1 Preferred Stock, Series B1 Preferred Stock or Series A1 Preferred
Stock, as the case may be, that remain unissued after such issuance, (ii) to
create and reserve for issuance upon Special Mandatory Conversion (as provided
in Section 7.1) of the Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock, Series B Preferred Stock, or Series A Preferred Stock
a new series of Preferred Stock equal in number to the number of shares of
Series E1 Preferred Stock, Series D1 Preferred Stock, Series C1 Preferred Stock,
Series B1 Preferred Stock or Series A1 Preferred Stock so canceled and
designated Series E2 Preferred Stock, Series D2 Preferred Stock, Series C2
Preferred Stock, Series B2 Preferred Stock or Series A2 Preferred Stock,
respectively, with the designations, powers, preferences, and rights and the
qualifications, limitations and restrictions identical to those then applicable
to the Series E Preferred Stock, Series D Preferred Stock, Series C Preferred
Stock, Series B Preferred Stock or Series A Preferred Stock, except that the
Conversion Prices for such shares of Series E2 Preferred Stock, Series D2
Preferred Stock, Series C2 Preferred Stock, Series B2 Preferred Stock or Series
A2 Preferred Stock once initially issued shall be the Conversion Prices in
effect for the Series E Preferred Stock, Series D Preferred Stock, Series C
Preferred Stock, Series B Preferred Stock or the Series A Preferred Stock, as
the case may be, immediately prior to such issuance and shall no longer be
subject to adjustment under Section 6(d)(v) hereof, and (iii) to amend the
provisions of this Section 7 to provide that any subsequent Special Mandatory
Conversion will be into shares of Series E2 Preferred Stock, Series D2 Preferred
Stock, Series C2 Preferred Stock, Series B2 Preferred Stock or Series A2
Preferred Stock rather than Series E1 Preferred Stock, Series D1 Preferred
Stock, Series C1 Preferred Stock, Series B1 Preferred Stock or Series A1
Preferred Stock, as the case may be. The Company shall take the same actions
with respect to the Series E2 Preferred Stock, Series D2 Preferred Stock, Series
C2 Preferred Stock, Series B2 Preferred Stock or the Series A2 Preferred Stock
and each subsequently issued series of Preferred Stock upon initial issuance of
shares of the last such series to be authorized.
8. Covenants. In addition to any other rights provided by law, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of more than sixty percent (60%) of the outstanding
shares of Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, Series D1 Preferred Stock, Series E
Preferred Stock and Series E1 Preferred Stock, voting as a single class:
(a) amend or repeal any provision of, or add any provision to,
the Company's Certificate of Incorporation (other than actions authorized by
Section 7) if such action would alter or change the preferences, rights,
privileges, or powers of, or the restrictions provided for the benefit of, any
outstanding series of Preferred Stock;
22
<PAGE> 23
(b) increase or decrease the authorized number of shares of
Preferred Stock;
(c) authorize or issue shares of any class or series of stock
having any preference or priority over or on a parity with any preference or
priority of any outstanding series of Preferred Stock as to dividends or
redemption rights, liquidation preferences, conversion rights, or voting rights;
(d) reclassify any shares of capital stock of the Company into
shares having any preference or priority as to dividends or redemption rights,
liquidation preferences, conversion rights, or voting rights, superior to or on
a parity with any preference or priority of any outstanding series of Preferred
Stock;
(e) merge or consolidate the Company with any other corporation
or corporations (other than with a wholly-owned subsidiary of the Company) or
effect any other transaction or series of related transactions, in either case
resulting in the stockholders of the Company (determined prior to such event)
holding fifty percent or less in interest of the outstanding voting securities
of the surviving corporation, or sell, lease, assign, transfer, or convey all or
substantially all of the assets of the Company, in a transaction in which the
holders of Preferred Stock shall receive per each share of Preferred Stock held,
cash, securities, or other property valued, as of the date on which stockholder
approval of such transaction is solicited, at less than the applicable Original
Issue Price for such share of Preferred Stock plus 2.5% of the Original Issue
Price for each series per month for each full month of the period beginning on
the date such share was initially issued and ending on the date on which
stockholder approval of such transaction is solicited;
(f) declare or pay any dividends on or make any distributions on
account of its Common Stock;
(g) redeem, purchase or otherwise acquire for value (or pay into
or set aside for a sinking fund for such purpose) any share or shares of
Preferred Stock otherwise than by redemption in accordance with Section 4;
(h) permit any subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Company, any stock of such subsidiary;
(i) dissolve, liquidate or wind-up the Company; or
(j) repurchase, acquire or retire any shares of Common Stock such
that the total amount applied to such repurchase, acquisition or retirement
exceeds Twenty-Five Thousand Dollars ($25,000) in any twelve (12) month period,
other than pursuant to the terms of any stock purchase agreement between the
Company and any stockholder in connection with the employment of, or the
rendering of services by, such stockholder.
In addition to the foregoing, the affirmative vote or written
consent of the holders of at least seventy-five percent (75%) of the outstanding
shares of Series E Preferred Stock and
23
<PAGE> 24
Series E1 Preferred Stock shall be obtained by the Company before the occurrence
of any of the events described in Sections 8(a), (c), (d) and (g) above.
9. Residual Rights. All rights accruing to the outstanding shares of the
Company not expressly provided for to the contrary herein shall be vested in the
Common Stock. The Common Stock shall not be redeemable.
IN WITNESS WHEREOF, this Company has caused this Certificate of
Designation to be signed and attested by its duly authorized officers this 1st
day of September, 1998.
/s/ S. STEVEN SINGH
----------------------------
S. Steven Singh, President
ATTEST:
/s/ MATTHEW P. QUILTER
- -----------------------------
Matthew P. Quilter, Secretary
24
<PAGE> 1
NUMBER SHARES
COMMON STOCK COMMON STOCK
CONCUR TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 206708 10 9
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE PER
SHARE, OF
CONCUR TECHNOLOGIES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this Certificate properly endorsed. This Certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
-----------------------------------------------------------------------
[CONCUR TECHNOLOGIES CORPORATE SEAL]
VICE PRESIDENT PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes of series of shares and upon
the holders thereof as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Corporation's Secretary at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -- ______________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _____________________________________
UNIF TRF MIN ACT -- _________________ Custodian (until age ___)
___________________ under Uniform Transfers
(Minor)
to Minors Act _____________________________
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
____________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________
X ______________________________________________
X ______________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By _________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOANS ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO SEC RULE 17AD-16.
<PAGE> 1
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports dated
August 14, 1998 in the Registration Statement (Form S-1 no. 333-62299) and the
related Prospectus of Concur Technologies, Inc.
/s/ ERNST & YOUNG LLP
------------------------------
Ernst & Young LLP
Seattle, Washington
October 13, 1998
