<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER: 0-25137
---------------
CONCUR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 91-1608052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6222 185TH AVENUE NE
REDMOND, WASHINGTON 98052
(Address of principal executive offices)
(425) 702-8808
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
As of May 10, 1999, there were 19,190,338 shares of the Registrant's Common
Stock outstanding.
<PAGE> 2
Concur Technologies, Inc.
Form 10-Q
March 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. Consolidated Financial Statements
- Consolidated Balance Sheets as of March 31, 1999 and
September 30, 1998..................................... 3
- Consolidated Statements of Operations for the three
and six months ended March 31, 1999 and 1998........... 4
- Consolidated Statement of Stockholders' Equity
(Deficit) for the three month periods ended
March 31, 1999 and December 31, 1998................... 5
- Consolidated Statements of Cash Flows for the six
months ended March 31, 1999 and 1998................... 6
- Notes to Consolidated Financial Statements............. 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.................. 25
ITEM 6. Exhibits and Reports on Form 8-K........................... 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1999 SEPTEMBER 30, 1998
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,612 $ 15,629
Marketable securities 37,544 --
Accounts receivable, net of allowance for doubtful accounts of
$720 and $547 at March 31, 1999 and September 30, 1998, respectively 7,111 4,988
Prepaid expenses and other current assets 1,160 536
Note receivable from stockholders 167 167
-------- --------
Total current assets 54,594 21,320
Equipment and furniture, net 2,640 2,162
Deposits and other assets 2,432 336
Note receivable from stockholders, net of current portion 333 333
Capitalized technology and other intangible assets 720 880
-------- --------
TOTAL ASSETS $ 60,719 $ 25,031
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 4,900 $ 1,838
Accrued liabilities 6,827 3,850
Accrued commissions 1,067 902
Current portion of accrued payment to stockholders 167 167
Current portion of long-term debt 2,757 2,033
Current portion of capital lease obligations 1,681 1,004
Deferred revenues 3,770 3,052
-------- --------
Total current liabilities 21,169 12,846
-------- --------
NONCURRENT LIABILITIES
Accrued payment to stockholders, net of current portion 333 333
Long-term debt, net of current portion 4,336 5,632
Capital lease obligations, net of current portion 1,910 2,127
Deferred rental expense 183 183
Redeemable convertible preferred stock:
no shares and 10,213,553 shares issued and outstanding at
March 31, 1998 and September 30, 1998, respectively -- 29,685
Redeemable convertible preferred stock warrants -- 444
Commitments -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, par value $0.001 per share,
60,000,000 shares authorized; 17,103,430 and 3,098,543
shares issued and outstanding at March 31,
1999 and September 30, 1998, respectively 76,413 6,276
Deferred stock compensation (319) (452)
Accumulated deficit (43,306) (32,043)
-------- --------
Total stockholders' equity (deficit) 32,788 (26,219)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 60,719 $ 25,031
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues, net:
Licenses $ 5,198 $ 2,818 $ 9,243 $ 4,854
Services 2,388 1,141 4,348 2,220
------------ ------------ ------------ ------------
Total revenues 7,586 3,959 13,591 7,074
Cost of revenues:
Licenses 349 90 573 172
Services 2,686 1,115 5,139 2,212
------------ ------------ ------------ ------------
Total cost of revenues 3,035 1,205 5,712 2,384
------------ ------------ ------------ ------------
Gross profit 4,551 2,754 7,879 4,690
Operating expenses:
Sales and marketing 5,714 2,400 10,401 4,606
Research and development 2,893 1,195 5,505 2,278
General and administrative 1,797 836 3,434 1,673
------------ ------------ ------------ ------------
Total operating expenses 10,404 4,431 19,340 8,557
------------ ------------ ------------ ------------
Loss from operations (5,853) (1,677) (11,461) (3,867)
Interest income 622 37 847 91
Interest expense (315) (75) (537) (210)
Other expense, net (75) (65) (112) (77)
------------ ------------ ------------ ------------
Net loss $ (5,621) $ (1,780) $ (11,263) $ (4,063)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.33) $ (0.77) $ (1.00) $ (1.76)
============ ============ ============ ============
Shares used in calculation of basic
and diluted net loss per share 17,071,361 2,319,397 11,293,627 2,308,845
============ ============ ============ ============
Pro forma basic and diluted net loss
per share $ (0.33) $ (0.16) $ (0.73) $ (0.37)
============ ============ ============ ============
Shares used in calculation of pro
forma basic and diluted net
loss per share 17,071,361 10,884,189 15,502,509 10,873,637
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------- DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
------ ------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 3,098,543 $ 6,276 $(452) $(32,043) $(26,219)
Proceeds from initial public
offering, net of offering
costs 3,365,000 37,369 -- -- 37,369
Conversion of redeemable
convertible preferred
stock into common stock 10,213,553 29,685 -- -- 29,685
Conversion of redeemable
convertible preferred
warrants into common
stock warrants -- 444 -- -- 444
Proceeds from issuance
of common stock
from exercise of
common stock warrants 225,000 2,616 -- -- 2,616
Issuance of common stock
from net exercise of
common stock warrants 33,537 -- -- -- --
Issuance of common stock from
exercise of stock options 94,099 8 -- -- 8
Amortization of deferred
stock compensation -- -- 68 -- 68
Net loss -- -- -- (5,642) (5,642)
---------- ------- ----- -------- --------
BALANCE AT DECEMBER 31, 1998 17,029,732 76,398 (384) (37,685) 38,329
Issuance of common stock from
exercise of stock options 63,183 15 -- -- 15
Issuance of common stock
from net exercise of
common stock warrants 10,515 -- -- -- --
Amortization of deferred
stock compensation -- -- 65 -- 65
Net loss -- -- -- (5,621) (5,621)
---------- ------- ----- -------- --------
BALANCE AT MARCH 31, 1999 17,103,430 $76,413 $(319) $(43,306) $ 32,788
========== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
-------------------------
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,263) $(4,063)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of acquired in-process technology 160
Amortization of deferred stock compensation 133 189
Depreciation 580 231
Provision for bad debts 172 86
Changes in operating assets and liabilities:
Accounts receivable (2,295) (484)
Prepaid expenses and other current assets (624) (60)
Deposits and other assets (2,096) (32)
Accounts payable 3,062 (478)
Accrued liabilities 3,142 1,038
Deferred revenues 718 (13)
-------- -------
Net cash used in operating activities (8,311) (3,586)
-------- -------
INVESTING ACTIVITIES
Purchases of equipment and furniture (85) (29)
Purchase of marketable securities (37,544) --
-------- -------
Net cash used in investing activities (37,629) (29)
-------- -------
FINANCING ACTIVITIES
Net proceeds from initial public offering 37,369 --
Proceeds from exercise of preferred stock warrants 2,616 --
Proceeds from sales leaseback transaction -- 192
Payments on borrowings (572) (164)
Payments on capital leases (513) (170)
Issuance of common stock 23 4
-------- -------
Net cash provided by (used in) financing activities 38,923 (138)
-------- -------
Net decrease in cash and cash equivalents (7,017) (3,753)
Cash and cash equivalents at beginning of period 15,629 6,695
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,612 $ 2,942
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 443 $ 157
Equipment and furniture obtained through
capital leases $ 973 $ 818
Conversion of redeemable convertible preferred
stock and redeemable convertible preferred
stock warrants into common stock and common
stock warrants $ 29,992 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
Concur Technologies, Inc. (the "Company") is a leading provider of
Intranet-based employee-facing software 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 recently introduced Employee
Desktop, which integrates XMS and CompanyStore through a common user interface
and provides a business portal through which corporate customers and third
parties can deliver other information and services to employees. The Company was
originally incorporated in the State of Washington on August 19, 1993, and was
re-incorporated in the State of Delaware on November 25, 1998. Operations
commenced in 1994.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 1999 and for the three and six
month periods ended March 31, 1999 and 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
dates and its operations and cash flows for the periods then ended. The
financial statements should be read in conjunction with the financial statements
and notes thereto for the fiscal year ended September 30, 1998 included in the
Company's Prospectus, dated December 16, 1998, as filed with the Securities and
Exchange Commission in conjunction with the Company's initial public offering.
Operating results for the three and six month periods ended March 31, 1999 are
not necessarily indicative of results that may be expected for the entire year.
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, integration services performed for customers who
license the software, and to a lesser degree, training services.
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 adopted SOP 97-2 beginning in fiscal 1999. SOP 97-2 has been
modified by SOP 98-4 and SOP 98-9 as it relates to certain transactions. These
standards generally require revenues earned on software arrangements involving
multiple elements such as software products, upgrades, enhancements,
post-contract 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 post-contract
customer support generally are recognized
7
<PAGE> 8
ratably over the term of the contract. If evidence of the fair value for all
elements of the arrangement does not exist, all revenues from the arrangement
are deferred until such evidence exists or until all elements are delivered.
Full guidelines for SOP 97-2 and related modifications have not been issued.
Once available, such guidelines 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.
MARKETABLE SECURITIES
The Company's marketable securities consist primarily of corporate bonds and
commercial paper. Marketable securities are stated at fair value at the balance
sheet date. By policy, the Company invests primarily in high-grade marketable
securities. Marketable securities are defined as available-for-sale securities
under the provisions of Statement of Financial Accounting Standards No. ("SFAS")
115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. The Company has classified its marketable securities
as available-for-sale, which are carried at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of stockholders'
equity. At March 31, 1999, the fair value of marketable securities approximates
their cost. Therefore, no comprehensive income or loss has been recorded.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes new standards for
reporting information about operating segments in interim and annual financial
statements. This statement is effective for the Company's 1999 Annual Report,
however the Company does not anticipate a material effect, if any, of this
statement on the disclosures in the consolidated annual financial statements.
NOTE 3. INITIAL PUBLIC OFFERING ("IPO")
On December 16, 1998, the Company issued 3,365,000 shares of its common stock
(including 465,000 shares issued upon the exercise of the underwriters' over
allotment option) at an initial public offering price of $12.50 per share. The
net proceeds to the Company from the offering, net of offering costs were
approximately $37.4 million. In connection with the IPO, warrants were exercised
to purchase 225,000 shares of common stock at a price of $11.625 per share,
resulting in additional capital proceeds to the Company totaling $2.6 million.
Concurrent with the IPO, each outstanding share of the Company's redeemable
convertible preferred stock was automatically converted into one share of common
stock and remaining preferred stock warrants for 2,237,454 shares were
automatically converted into warrants for the purchase of 2,237,454 shares of
common stock.
NOTE 4. NET LOSS PER SHARE
Basic and diluted net loss per common share is calculated by dividing the 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>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT SHARE DATA) EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net loss $ (5,621) $ (1,780) $ (11,263) $ (4,063)
=========== =========== =========== ============
Basic and diluted net loss per common share $ (0.33) $ (0.77) $ (1.00) $ (1.76)
=========== =========== =========== ============
Weighted average number of common shares
used for basic and diluted per share amounts 17,071,361 2,319,397 11,293,627 2,308,845
=========== =========== =========== ============
Weighted average common shares issuable
upon pro forma conversion of preferred stock 0 8,564,792 4,208,882 8,564,792
=========== =========== =========== ============
Weighted average number of shares used for
pro forma per share amounts 17,071,361 10,884,189 15,502,509 10,873,637
=========== =========== =========== ============
Pro forma basic and diluted net loss per share $ (0.33) $ (0.16) $ (0.73) $ (0.37)
=========== =========== =========== ============
</TABLE>
8
<PAGE> 9
Options to purchase 2,569,371 shares of common stock with exercise prices of
$0.10 to $34.00 per share and warrants to purchase 2,224,266 shares of common
stock at a range of $3.65 to $85.00 per share were outstanding as of March 31,
1999. These options and warrants were excluded from the computation of diluted
earnings per share because their effect was anti-dilutive.
NOTE 5. SUBSEQUENT EVENT
FOLLOW ON OFFERING -- On April 16, 1999, the Company issued an additional
2,018,620 shares of its common stock at an offering price of $43.50. The net
proceeds to the Company from the offering, net of offering costs were
approximately $82.5 million.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the information in this document contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results of our future financial condition, or state other "forward-
looking" information. There may be events in the future, however, that we are
not accurately able to predict or over which we have no control. The risk
factors listed in this document, as well as any other cautionary language in
this document, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. You should be aware that the occurrence of
any of the events described below or elsewhere in this document could have a
material and adverse effect on our business, results of operations and financial
condition.
OVERVIEW
We are a leading provider of Intranet-based employee-facing software
applications that extend automation to employees throughout the enterprise and
to partners, vendors and service providers in the extended enterprise. Our
Xpense Management Solution, or XMS, and CompanyStore products automate the
preparation, approval, processing and data analysis of travel and entertainment
expense reports and front-office procurement requisitions. We recently
introduced our Employee Desktop product, which integrates XMS and CompanyStore
through a common user interface and provides a business portal through which
corporate customers and third parties can deliver other information and services
to employees. We believe we are the leading provider of travel and entertainment
expense management solutions, based on a combination of the number of customers
we serve and the features our solutions provide. Since 1996, we have licensed
products to over 200 enterprise customers for use by over 1,000,000 end users.
By automating manual, paper-based processes, our products reduce processing
costs and enable customers to consolidate purchases with preferred vendors and
negotiate vendor discounts.
We were incorporated in 1993 and commenced operations in fiscal 1994,
initially developing QuickXpense, a retail, shrink-wrapped application that
automated travel and entertainment expense reporting for individuals. We 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 travel and entertainment expense reporting
process, including back-office processing and integration to financial systems,
we significantly expanded our product development efforts and released XMS, a
client-server based enterprise travel and entertainment expense management
solution in July 1996. In March 1998, we shipped an Intranet-based version of
XMS. While we continue to sell the client-server version of XMS, since its
release the Intranet-based version has accounted for a majority of XMS license
revenues. We expect to continue to focus product development efforts on the
Intranet-based versions of our products.
On June 30, 1998, we acquired 7Software Inc., 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 we acquired it. In connection with the
acquisition, we issued 708,918 shares of our common stock in exchange for all
the outstanding shares of 7Software. We also converted all of 7Software's
outstanding options into options to purchase up to 123,921 shares of our common
stock, paid $130,000 to 7Software, and agreed to pay $500,000 to certain
shareholders of 7Software. Our total purchase price was valued at $6.2 million,
including direct costs of the acquisition. The total purchase price was
determined by our management and board of directors based on an assessment of
the value of 7Software and as a result of negotiations with 7Software. In
determining the purchase price, we estimated the fair value of our common stock
and our stock options issued in the transaction. We 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 our consolidated financial statements beginning on the
acquisition date. In connection with this acquisition, we recorded $5.2 million
for in-process technology as an expense in the quarter ended June 30, 1998. In
addition, we recorded capitalized technology and other intangible assets of
$960,000 that will be amortized on a straight-line basis over the three years
following the acquisition.
In January 1999 we introduced EmployeeDesktop, which provides a common user
interface and a common technology platform to integrate our current products and
future applications. We plan to offer our products as an Internet-based
enterprise service provider on a per-transaction or subscription basis to
companies seeking to outsource their employee-facing business applications.
10
<PAGE> 11
Through June 1996, our revenues were derived from licenses of QuickXpense and
related services. In July 1996, we released XMS. Substantially all of our
revenues since the fourth quarter of fiscal 1996 have been derived from licenses
of XMS and related services. We expect that the majority of our revenues will
continue to be derived from our XMS product line and related services. Our
revenues, which consist of software license revenues and service revenues,
totaled $13.6 million and $7.1 million in the six months ended March 31, 1999
and 1998, respectively. Our product pricing is based on the number of users or
employees of the purchasing enterprise. Service revenues consist of consulting,
customer support and training.
We market our software and services primarily through our direct sales
organization in the United States, Canada, the United Kingdom and Australia.
Revenues from licenses and services to customers outside the United States
were $665,000 and $329,000 in the six months ended March 31, 1999 and 1998.
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 our business.
For fiscal 1998 and prior years, we recognized revenues in accordance with
the American Institute of Certified Public Accountants Statement of Position
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. Commencing with fiscal 1999, we recognize revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position 97-2, "Software Revenue Recognition," or SOP 97-2. SOP 97-2 has been
subject to certain modifications and interpretations since its release in
October 1997. Most recently in December 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
which has been adopted by us without any significant effect on revenue
recognition. Further implementation guidelines relating to SOP 97-2 and related
modifications may result in unanticipated changes in our revenue recognition
practices and such changes could affect our future revenues and earnings.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. The number of our full-time employees increased from
150 as of March 31, 1998, to 281 as of March 31, 1999, representing an increase
of 87%. As a result of investments in our infrastructure, we have incurred net
losses in each fiscal quarter since inception and, as of March 31, 1999, had an
accumulated deficit of $43.3 million. We anticipate that our operating expenses
will increase substantially for the foreseeable future as we expand our product
development, sales and marketing and professional services staff. In addition,
we expect to incur substantial expenses associated with sales personnel,
referral fees and marketing programs in future periods as a result of our joint
marketing agreements with American Express Travel Related Services Company, Inc.
("TRS") and Automatic Data Processing ("ADP"). Accordingly, we expect to incur
net losses for the foreseeable future.
We have recorded aggregate deferred stock compensation of $861,000. Deferred
stock compensation is amortized over the life of the options, generally four
years. During fiscal 1998, we recorded amortization of deferred stock
compensation of $409,000 and during the six month period ended March 31, 1999,
we recorded amortization of deferred stock compensation of $133,000.
We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicative of future performance.
Our 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 we will be successful in addressing such risks and difficulties. In
addition, although we have experienced significant revenue growth recently, this
trend may not continue. In addition, we may not achieve or maintain
profitability in the future.
11
<PAGE> 12
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
The following table sets forth certain financial data, derived from the
Company's unaudited statements of operations, as a percentage of total revenues
for the periods indicated. The operating results for the three and six months
ended March 31, 1999 and 1998 are not necessarily indicative of the results that
may be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
--------------------------- --------------------------
1999 1998 1999 1998
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Revenues, net:
Licenses 68.5% 71.2% 68.0% 68.6%
Services 31.5 28.8 32.0 31.4
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Licenses 4.6 2.3 4.2 2.4
Services 35.4 28.2 37.8 31.3
------ ------ ------ ------
Total cost of revenues 40.0 30.5 42.0 33.7
------ ------ ------ ------
Gross margin 60.0 69.5 58.0 66.3
------ ------ ------ ------
Operating expenses:
Sales and marketing 75.3 60.6 76.5 65.1
Research and development 38.1 30.2 40.5 32.2
General and administrative 23.7 21.1 25.3 23.6
------ ------ ------ ------
Total operating expenses 137.1 111.9 142.3 120.9
------ ------ ------ ------
Loss from operations (77.1) (42.4) (84.3) (54.6)
Interest income 8.2 0.9 6.2 1.3
Interest expense (4.1) (1.9) (3.9) (3.0)
Other expense, net (1.0) (1.6) (0.8) (1.1)
------ ------ ------ ------
Net loss (74.0)% (45.0)% (82.8)% (57.4)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues
Our revenues are derived from software licenses and related services. Our
revenues were $7.6 million and $4.0 million for the three months ended March 31,
1999 and 1998, respectively, representing an increase of $3.6 million, or 92%.
International revenues were $117,000 and $143,000 for the three months ended
March 31, 1999 and 1998, respectively.
Our license revenues were $5.2 million and $2.8 million for the three months
ended March 31, 1999 and 1998, respectively, representing an increase of $2.4
million, or 84%. License revenues represented 68.5% and 71.2% of total revenues
for the three months ended March 31, 1999 and 1998, respectively. The increase
in revenues from the comparable period in the prior year consisted of rising
sales of XMS and the introduction of CompanyStore, reflecting the increased
market acceptance of these products, as well as the introduction and sale of our
products as a suite of products integrated together by EmployeeDesktop in the
quarter. Also driving this rise in sales were an increase in the size and
productivity of our sales force, and sales related to referrals attributable to
our December 1997 strategic marketing alliance agreement with American Express
Company ("American Express") and our November 1998 strategic marketing alliance
agreement with ADP.
Our service revenues were $2.4 million and $1.1 million for the three months
ended March 31, 1999 and 1998, respectively, representing an increase of $1.3
million, or 109%. Service revenues consist primarily of revenues from consulting
and implementation service fees, maintenance and, to a lesser extent, training
services. Service revenues represented 31.5% and 28.8% of total revenues for the
three months ended March 31, 1999 and 1998, respectively. This increase
reflected increased sales of XMS and CompanyStore licenses, and the introduction
of EmployeeDesktop in fiscal 1999. Additionally, it represents service revenues
recognized with respect to maintenance agreements entered into in the current
and prior periods. We believe that the percentage of total revenues represented
by service revenues in prior fiscal periods is not indicative of levels to be
expected in future periods. In addition, we expect that the proportion of our
service revenues to total revenues will fluctuate in the future, depending in
part on our use of third-party consulting and implementation service providers
as well as market acceptance of our outsourced enterprise service provider, or
ESP, solution.
Cost of Revenues
Cost of License Revenues. Our cost of license revenues includes license fees for
sub-licensing third-party software, product media, product duplication, manuals
and amortization of capitalized technology. Our cost of license revenues was
$349,000 and $90,000 for the three months ended March 31, 1999 and 1998,
respectively, representing an increase of $259,000, or 288%. This increase was
principally a result of the amortization of capitalized technology recorded in
connection with the June 1998 acquisition of 7Software, increased expenses
associated with sub-licensing of third-party software due to increased sales of
XMS, and the costs of production,
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manuals and other media associated with the release of both EmployeeDesktop 5.0
and CompanyStore 5.0 during the quarter. Cost of license revenues represented
6.7% and 3.2% of license revenues for the three months ended March 31, 1999 and
1998, respectively. We expect that the cost of license revenues may increase
significantly as a percentage of total revenues and as a percentage of license
revenues upon the introduction of our outsourced ESP solution and will fluctuate
in the future depending in part on the demand for our current products and our
outsourced ESP solution.
Cost of Service Revenues. Our cost of service revenues includes personnel and
other costs related to consulting services, technical support and training. Our
cost of service revenues was $2.7 million and $1.1 million for the three months
ended March 31, 1999 and 1998, respectively, representing an increase of $1.6
million, or 141%. This increase was primarily due to an increase in professional
service support personnel to manage and support our growing customer base.
Professional services personnel increased from 38 as of March 31, 1998 to 87 as
of March 31, 1999, representing an increase of 49, or 129%. Cost of service
revenues was 112% and 98% of service revenues for the three months ended March
31, 1999 and 1998, respectively. Cost of service revenues as a percentage of
service revenues may vary between periods due to the mix of services provided by
us and the resources used to provide such services.
Costs and Expenses
Sales and Marketing. Our sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, lead
referral fees, travel and entertainment expenses, and promotional expenses. Our
sales and marketing expenses were $5.7 million and $2.4 million for the three
months ended March 31, 1999 and 1998, respectively, representing an increase of
$3.3 million, or 138%. This increase reflects a combination of the overall
increase in expenses associated with the overall increase in revenues as well as
our continuing investment in our sales and marketing infrastructure, which
included significant personnel-related costs to recruit and hire sales
management, sales representatives and sales engineers, especially for our
international offices located in the United Kingdom and Australia. Sales and
marketing employees increased from 56 as of March 31, 1998 to 89 as of March 31,
1999, representing an increase of 33, or 59%. The increase also reflects higher
trade show expenses, and sales referral fees under our agreements with our
referral partners, principally American Express and ADP. Sales and marketing
expenses represented 75.3% and 60.6% of total revenues for the three months
ended March 31, 1999 and 1998, respectively. We believe that a significant
increase in our sales and marketing efforts is essential for us to maintain our
market position and further increased acceptance of our products, particularly
CompanyStore and EmployeeDesktop. Accordingly, we anticipate we will continue to
invest significantly in sales and marketing for the foreseeable future, and
sales and marketing expenses will increase in absolute dollars, although they
may decline as a percentage of total revenues.
Research and Development. Our research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel as well as payments to outside contractors. Our
research and development expenses were $2.9 million and $1.2 million for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of $1.7 million, or 142%. This increase was primarily related to the
increase in software developers, program management and quality assurance
personnel and outside contractors to support our expanded product lines and
ongoing product development of XMS, CompanyStore, and Employee Desktop. Our
research and development employees increased from 42 as of March 31, 1998 to 75
as of March 31, 1999, representing an increase of 33, or 79%. Research and
development costs represented 38.1% and 30.2% of total revenues for the three
months ended March 31, 1999 and 1998, respectively. We believe that a
significant increase in our research and development investment is essential for
us to maintain our market position, to continue to expand our product lines, and
to enhance the common technology platform for our suite of products.
Accordingly, we anticipate that we will continue to invest significantly 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 our new products and enhancements of existing products, the
technological feasibility of the software is not established until substantially
all product development is complete. Historically, software development costs
eligible for capitalization have been insignificant, and all costs related to
internal research and development have been expensed as incurred.
General and Administrative. Our general and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance,
administrative, business development and information services personnel. Our
general and administrative expenses were $1.8 million and $836,000 for the three
months ended March 31, 1999 and 1998, respectively, representing an increase of
$961,000, or 115%. This increase was primarily the result of additional finance,
executive, information services and human resources personnel to support the
growth of our business, an increase of outside contractors associated with
increased recruiting efforts and expanded human resources programs, and an
increase in the allowance for doubtful accounts related to our increase in
revenues. Our general and administrative employees increased from 20 as of March
31, 1998 to 30 as of March 31, 1999, representing an increase of 10, or 50%.
General and administrative costs represented 23.7% and 21.1% of our total
revenues for the three months ended March 31, 1999 and 1998, respectively. We
believe that our general and administrative expenses will continue to increase
as a result of the
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continued expansion of our administrative staff and expenses associated with
being a public company, including public reporting expenses, directors' and
officers' liability insurance, investor relations programs and professional
services fees.
Interest Income and Interest Expense. Our interest income was $622,000 and
$37,000 for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of $585,000. This increase reflects interest income
earned on the higher cash and cash equivalents and marketable securities
balances resulting from the proceeds received in December 1998 from our initial
public offering. Our interest expense was $315,000 and $75,000 for the three
months ended March 31, 1999 and 1998, respectively, representing an increase of
$240,000. This increase was due to additional bank borrowings and higher capital
lease obligations.
Provision for Income Taxes. No provision for federal and state income taxes
has been recorded because we have experienced net losses since inception which
has resulted in deferred tax assets. A valuation allowance has been recorded for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset balance.
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues
Total revenues were $13.6 million and $7.1 million for the six months ended
March 31, 1999 and 1998, respectively, representing an increase of $6.5 million,
or 92%. International revenues were $665,000 and $329,000 for the six months
ended March 31, 1999 and 1998, respectively.
Our license revenues were $9.2 million and $4.9 million for the six months
ended March 31, 1999 and 1998, respectively, representing an increase of $4.3
million, or 90%. License revenues represented 68.0% and 68.6% of total revenues
for the six months ended March 31, 1999 and 1998, respectively. The increase in
revenues from the prior year period consisted primarily of increased sales of
XMS, and the sale of CompanyStore and EmployeeDesktop in fiscal 1999. Also
resulting in increased sales were the referrals attributable to our strategic
marketing alliance agreement with American Express and ADP.
Our service revenues were $4.3 million and $2.2 million for the six months
ended March 31, 1999 and 1998, respectively, representing an increase of $2.1
million, or 96%. Service revenues represented 32.0% and 31.4% of total revenues
for the six months ended March 31, 1999 and 1998, respectively. This increase
reflected increased sales of XMS licenses in fiscal 1999 as well as revenues
recognized with respect to maintenance agreements entered into in the current
and prior periods. We believe that the percentage of total revenues represented
by service revenues in prior fiscal periods is not indicative of levels to be
expected in future periods. In addition, we expect that the proportion of our
service revenues to total revenues will fluctuate in the future depending in
part on our use of third-party consulting and implementation service providers
as well as market acceptance of our outsource enterprise service provider, or
ESP solution.
Cost of Revenues
Cost of License Revenues. Our cost of license revenues was $573,000 and
$172,000 for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of $401,000, or 233%. This increase was principally a
result of the amortization of capitalized technology recorded in connection with
the June 1998 acquisition of 7Software, 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 both
EmployeeDesktop 5.0 and CompanyStore 5.0 during the second quarter of fiscal
1999. Cost of license revenues represented 6.2% and 3.5% of license revenues for
the six months ended March 31, 1999 and 1998, respectively. We expect that the
cost of license revenues may increase significantly as a percentage of total
revenues and as a percentage of license revenues upon the introduction of our
outsourced ESP solution and will fluctuate in the future depending in part on
the demand for our current products and our outsourced ESP solution.
Cost of Service Revenues. Our cost of service revenues was $5.1 million and
$2.2 million for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of $2.9 million, or 132%. This increase was primarily
due to an increase in professional service support personnel to manage and
support our growing customer base. Cost of service revenues was 118% and 100% of
service revenues for the six months ended March 31, 1999 and 1998, respectively.
Cost of service revenues as a percentage of service revenues may vary between
periods due to the mix of services provided by us and the resources used to
provide such services.
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Costs and Expenses
Sales and Marketing. Our sales and marketing expenses were $10.4 million and
$4.6 million for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of $5.8 million, or 126%. This increase primarily
reflects a combination of increased expenses associated with the overall
increase in revenues as well as our continuing investment in our sales and
marketing infrastructure, which included significant personnel-related costs to
recruit and hire sales personnel, trade show expenses, and sales referral fees
under our agreements with our referral partners, principally American Express
and ADP. Sales and marketing expenses represented 76.5% and 65.1% of total
revenues for the six months ended March 31, 1999 and 1998, respectively. We
believe that a significant increase in our sales and marketing efforts is
essential for us to maintain our market position and further increase acceptance
of our products, especially for CompanyStore and EmployeeDesktop. Accordingly,
we anticipate we will continue to invest significantly in sales and marketing
for the foreseeable future, and sales and marketing expenses will increase in
future periods.
Research and Development. Our research and development expenses were $5.5
million and $2.3 million for the six months ended March 31, 1999 and 1998,
respectively, representing an increase of $3.2 million, or 142%. This increase
was primarily related to the increase in software developers, program management
and quality assurance personnel and outside contractors to support our expanded
product lines and ongoing product development of XMS, CompanyStore, and
EmployeeDesktop. Research and development costs represented 40.5% and 32.2% of
total revenues for the six months ended March 31, 1999 and 1998, respectively.
We believe that a significant increase in our research and development
investment is essential for us to maintain our market position, to continue to
expand our product lines, and to enhance the common technology platform for our
suite of products. Accordingly, we anticipate that we will continue to invest
significantly 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 our new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, software
development costs eligible for capitalization have been insignificant, and all
costs related to internal research and development have been expensed as
incurred.
General and Administrative. Our general and administrative expenses were $3.4
million and $1.7 million for the six months ended March 31, 1999 and 1998,
respectively, representing an increase of $1.7 million, or 105%. This increase
was primarily the result of additional general and administrative personnel to
support the growth of our business, an increase of outside contractors
associated with increased recruiting efforts, and an increase in the allowance
for doubtful accounts related to our increase in revenues. General and
administrative costs represented 25.3% and 23.6% of our total revenues for the
six months ended March 31, 1999 and 1998, respectively. We believe that our
general and administrative expenses will continue to increase as a result of the
continued expansion of our administrative staff and expenses associated with
being a public company, including public reporting expenses, directors' and
officers' liability insurance, investor relations programs and professional
services fees.
Interest Income and Interest Expense. Our interest income was $847,000 and
$91,000 for the six months ended March 31, 1999 and 1998, respectively,
representing an increase of $756,000, or 831%. This increase reflects interest
income earned on the higher cash and cash equivalents and marketable securities
balances as a result of proceeds we received in December 1998 from our initial
public offering. Interest expense was $537,000 and $210,000 for the six months
ended March 31, 1999 and 1998, respectively, representing an increase of
$327,000, or 156%. This increase was due to additional bank borrowings and
higher capital lease obligations during the six months ended March 31, 1999, as
compared to the comparable six month period in the prior year.
Provision for Income Taxes. No provision for federal and state income taxes
has been recorded because we have experienced net losses since inception which
has resulted in deferred tax assets. A valuation allowance has been recorded for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset balance.
FINANCIAL CONDITION
Our total assets were $60.7 million and $25.0 million as of March 31, 1999
and September 30, 1998, respectively, representing an increase of $35.7 million,
or 143%. This increase was primarily due to cash proceeds raised from the sale
of our common stock in our IPO in December 1998. As of March 31, 1999, we had
$46.2 million of cash and cash equivalents and marketable securities, compared
to $15.6 million as of September 30, 1998, representing an increase of $30.6
million, or 195%. During December 1998, we issued 3,365,000 shares of our common
stock in connection with our IPO, netting us total proceeds of approximately
$37.4 million. In connection with our IPO, we also received proceeds totaling
$2.6 million from the exercise of a warrant to purchase 225,000 shares of our
common stock.
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Our accounts receivable was $7.1 million and $5.0 million as of March 31,
1999 and September 30, 1998, respectively, representing a increase of $2.1
million, or 43%. This increase was principally a result of increased license
revenues and service revenues of XMS, CompanyStore, and EmployeeDesktop in the
second quarter of fiscal 1999. Days' sales outstanding ("DSO") in accounts
receivable was 69 days and 79 days as of March 31, 1999 and September 30, 1998,
respectively. We expect that DSO will fluctuate significantly in future
quarters, and most likely will increase. Deposits and other assets increased
primarily due to a prepayment for a sales referral, marketing, and business
partnership.
Our total current liabilities were $21.2 million and $12.8 million as of
March 31, 1999 and September 30, 1998, respectively, representing an increase of
$8.4 million, or 65%. This increase consists primarily of an increase in
accounts payable and accrued liabilities of $6.0 million. The increase in
accounts payable and accrued liabilities was primarily due to expenses incurred
but unpaid as of March 31, 1999 relating to our IPO, and the follow-on offering
of our common stock, as well as our increased growth and ongoing business
activities.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through sales of
equity securities and to a lesser degree the use of long-term debt and equipment
leases. Prior to our initial public offering, we had raised approximately $29.7
million, net of offering costs from the issuance of preferred stock, and
approximately $8.0 million from the issuance of long-term debt, and had financed
equipment purchases totaling approximately $3.6 million.
In December 1998, we completed our initial public offering of common stock
and received approximately $37.4 million in cash, net of underwriting discounts,
commissions and other offering costs. In April 1999, we completed a follow-on
offering and received approximately $82.5 million in cash, net of underwriting
discounts, commissions and other offering costs. Our sources of liquidity as of
March 31, 1999 consisted principally of cash and cash equivalents and
investments in corporate bonds and commercial paper, all totaling $46.2 million,
and approximately $4.0 million of available borrowings under a line of credit.
Net cash used in operating activities was $8.3 million and $3.6 million in
the six months ended March 31, 1999 and 1998, respectively, representing an
increase of $4.7 million, or 132%. For such periods, net cash used by operating
activities was primarily a result of funding ongoing operations.
Since 1995, our investing activities have consisted of purchases of property
and equipment. Capital expenditures, including those under capital leases,
totaled $1.1 million and $847,000 in the six months ended March 31, 1999 and
1998, respectively, representing an increase of $211,000, or 25%. We finance the
majority of our acquisitions of property and equipment, primarily computer
hardware and software for our increasing employee base as well as for our
management information systems, primarily through capital leases. We anticipate
that we will experience an increase in our capital expenditures and lease
commitments consistent with our anticipated growth in operations, infrastructure
and personnel. We do not expect to incur significant costs to make our internal
information systems Year 2000 compliant because we believe such information
systems are designed to function properly through and beyond the year 2000.
Our financing activities provided $38.9 million in the six month period
ending March 31, 1999 compared with cash used in financing activities of
$138,000 in the six month period ending March 31, 1998. In the six months ended
March 31, 1999, cash provided by financing activities consisted primarily of
$37.4 million from our initial public offering of common stock and $2.6 million
from the exercise of warrants offset in part by principal payments on long-term
debt of $572,000 and payments on capital lease obligations of $513,000.
Prior to March 15, 1999, we had a line of credit with a bank for $2.0
million. On March 15, 1999, the credit facility was amended to increase the
borrowing amount to $4.0 million and to extend the expiration date to March
2000. This $4.0 million line of credit 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 $4.0 million and are secured by substantially all of our
non-leased assets. As of March 31, 1999, we had not borrowed under the line of
credit; however, there were approximately $500,000 in standby letters of credit
outstanding. Approximately $3.5 million remains available under this line as of
March 31, 1999.
In September 1997, we entered into a $1.0 million senior term loan facility with
the same bank with which we have the line of credit, pursuant to the terms of a
security and 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 were interest only through February 15, 1999, at
which time we started to pay off the facility in 24 equal
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monthly principal payments plus interest. The loan agreement contains certain
financial restrictions and covenants, with which we are currently in compliance.
As of March 31, 1999, the outstanding indebtedness under the loan agreement was
$2.9 million.
In July 1997, we 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%. In May 1998, the subordinated loan agreement was
amended to allow for additional 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, which expired on December 31, 1998. The notes are due in varying
monthly installments through April 2002, and contain certain restrictions and
covenants, with which we are currently in compliance. As of March 31, 1999, the
outstanding indebtedness under the subordinated loan agreement was $4.2 million.
On August 11, 1998, we issued a warrant to TRS to purchase shares of our
Series E preferred stock which, in connection with our initial public offering
in December 1998, converted into a warrant to purchase 2,325,000 shares of our
common stock. In December 1998, TRS partially exercised the warrant to purchase
225,000 shares at $11.625 per share. Additionally, under the warrant, TRS may
acquire 700,000 shares at any time on or before October 15, 1999 at a cash
purchase price of $33.75 per share, 700,000 additional shares at any time on or
before January 15, 2001 at a cash purchase price of $50.625 per share, and
700,000 shares at any time on or before January 15, 2002 at a cash purchase
price of $85.00 per share.
We currently anticipate that for the foreseeable future we will continue to
experience significant growth in our operating expenses related to augmenting
our sales and marketing operations, increasing research and development and
extending our professional service capabilities. We also anticipate developing
new distribution channels, improving our operational and financial systems,
entering new markets for our products and services, and possibly acquiring or
investing in complementary businesses, products or technologies or investing in
joint ventures. Such expenditures will be a material use of our cash resources.
We believe that our existing cash and marketable securities and available bank
borrowings will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise such additional funds through private or
public sales of securities, strategic relationships, bank debt, financing under
leasing arrangements, or otherwise. If additional funds are raised through the
issuance of equity securities, stockholders may experience additional dilution,
or such equity securities may have rights, preferences, or privileges senior to
those of the holders of our common stock. There can be no assurance that
additional financing will be available on acceptable terms, or at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
financial condition and operating results.
Qualitative and Quantitative Disclosures about Market Risk
Concur's operating results are sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of its cash equivalents are
invested in short-term debt instruments while certain portions of its
outstanding long-term debt bear interest at variable rates.
YEAR 2000 COMPLIANCE
Background of Year 2000 Issues
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because such systems were developed using two digits rather than four to
determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process translations, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
State of Readiness
Our business is dependent on the operation of numerous systems that could
potentially be affected by Year 2000-related problems. Those systems include,
among others:
- hardware and software systems used by us to deliver products and
services to customers, including our proprietary software systems as
well as software supplied by third parties;
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- communications networks such as the Internet and private intranets;
- the internal systems of our customers and suppliers;
- software products sold to customers;
- the hardware and software systems used internally by us in the
management of our business; and
- non-information technology systems and services, such as power,
telephone systems and building systems.
Our Year 2000 Compliance Task Force, composed of high-level representatives
of the product, management and information systems and legal departments, is
formulating and implementing the Year 2000 readiness of our operations,
products, and relationships. The phases of our Year 2000 program include:
(1) assignment of responsibility for external issues, such as products
developed by us and licensed to customers, and internal issues, such
as systems, facilities, equipment, software and legal audit;
(2) inventory of all aspects of our operations and relationships subject
to the Year 2000 problem;
(3) comprehensive analysis, including impact analysis and cost analysis,
of our Year 2000 readiness, as well as business contingency planning;
and
(4) remediation and subsequent testing.
We have tested our software products and have determined that the currently
shipping versions of all of our software products are Year 2000 compliant, with
a patch or update provided to authorized licensees for no charge, consistent
with the Year 2000 compliance specifications established by the British
Standards Institute's DISC PD-2001. Some product versions no longer shipping had
Year 2000 issues that have already been resolved with patches or updates
provided at no charge to authorized licensees. Some earlier product versions no
longer shipping that have Year 2000 issues will be patched or updated timely
with no charge to authorized licensees. Some remaining older versions not
currently shipping may not be supported beyond December 1999; however, those
customers will be timely notified and will be timely provided a free upgrade to
at least the next more current Year 2000 compliant version.
We are evaluating the Year 2000 compliance of our products currently under
development. We plan to continue to test our current and future products by
applying our Year 2000 compliance criteria and to include any necessary
modifications the compliance process reveals. We have completed Phases 1 and 2
of our program. We anticipate completing Phase 3 by June 1999 and Phase 4 by
August 1999.
Risks Related to Year 2000 Issues:
Our products are generally integrated into enterprise systems involving
sophisticated third-party hardware and software products which may not
themselves be Year 2000 compliant. In addition, in some cases even certain
earlier Year 2000 compliant versions of our software, while compatible with
earlier, non-Year 2000 compliant versions of other software products with which
Concur's software was integrated, are not compatible with certain more recent
Year 2000 compliant versions of such other third-party software providers. While
we do not believe we have any obligation under this circumstance (because
customers using our older versions of our software would have to upgrade in
order to be compatible with newer versions of third parties' products) there can
be no assurance that we will not be subject to claims or complaints by our
customers. We sell our products to companies in a variety of industries, each of
which is experiencing different Year 2000 compliance issues. Customer
difficulties with their Year 2000 issues might require us to devote additional
resources to resolve their underlying problems. However, our Year 2000
compliance efforts cannot assure the success of our customers in dealing with
their Year 2000 issues.
Although we have not been a party to any litigation or arbitration
proceeding to date involving our products or services and related to Year 2000
compliance issues, there can be no assurance that we will not in the future be
required to defend our 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 for Year 2000-related damages, including consequential
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damages, would have a material adverse effect on our business, results of
operations and financial condition. In addition, we believe 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 or defer additional software
purchases until after 2000. As a result, some customers and potential customers
may have more limited budgets available to purchase software products such as
those offered by us, and others may choose to refrain from changes in their
information technology environment until after 2000. To the extent Year 2000
issues cause significant delay in, or cancellation of, decisions to purchase our
products or services, our business would be materially adversely affected.
We are also reviewing our internal management information and other systems
in order to identify any products, services or systems that are not Year 2000
compliant, in order to take corrective action. To assist us in this initiative,
we have retained the services of a Year 2000 consulting firm. To date, we have
not encountered any material Year 2000 problems with our computer systems or any
other equipment that might be subject to such problems. Our plan for the Year
2000 calls for compliance verification of external vendors supplying software
and information systems to us and communication with significant suppliers to
determine the readiness of third parties' remediation of their own Year 2000
issues. As part of our assessment, we are evaluating the level of validation we
will require of third parties to ensure their Year 2000 compliance and are in
process of circulating letters to our suppliers and other business partners
requesting their Year 2000 compliance status. We are taking steps with respect
to new supplier agreements to ensure that the suppliers' products and internal
systems are Year 2000 compliant. In the event that any such third parties'
products, services or systems do not meet the Year 2000 requirements on a timely
basis, our business could be materially adversely affected. We could also
experience material adverse effects on our business if we fail to identify all
Year 2000 dependencies in our systems and in the systems of our suppliers,
customers and financial institutions. Therefore, we plan to develop contingency
plans for continuing operations in the event such problems arise, but do not
presently have a contingency plan for handling Year 2000 problems that are not
detected and corrected prior to their occurrence. We have not completed our Year
2000 investigation, and there can be no assurance that the total cost of Year
2000 compliance will not be material to our business. We may not identify and
remediate all significant Year 2000 problems on a timely basis, remediation
efforts may involve significant time and expense, and unremediated problems may
have a material adverse effect on our business.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OUR SHORT OPERATING HISTORY AND SIGNIFICANT LOSSES MAKE OUR BUSINESS DIFFICULT
TO EVALUATE.
We are still in the early stages of our development, so evaluating our
business operations and our prospects is difficult. We incorporated in 1993 and
have incurred net losses in each quarter since then. We shipped our first
product in fiscal 1995, and since fiscal 1997 have derived substantially all of
our revenues from licenses of our XMS product and related services. To compete
effectively, we expect to devote substantial cash, financial and other resources
to expanding our sales and marketing, research and development, and professional
services organizations. These investments may never produce a profit. We
incurred net losses of $5.0 million for fiscal 1996, $5.5 million for fiscal
1997, $18.1 million for fiscal 1998 and $11.3 million for the six months ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of $43.3
million. We expect to continue to incur net losses for the foreseeable future.
Despite substantial net operating loss carryforwards as of March 31, 1998, tax
laws may limit their use in the future upon the occurrence of certain events,
including a significant change in ownership interests.
OUR OPERATING RESULTS FLUCTUATE WIDELY AND ARE DIFFICULT TO PREDICT.
In the past our quarterly operating results have fluctuated significantly,
and we expect them to continue to fluctuate in the future. Our products are
typically shipped when orders are received, so license backlog at the beginning
of any quarter in the past represented only a small portion of that quarter's
expected license revenues. This makes license revenues in any quarter difficult
to forecast because they are dependent on orders booked and shipped in that
quarter. Moreover, we typically recognize a substantial percentage of revenues
in the last month of the quarter, frequently in the last week or even the last
days of the quarter. Since our expenses are 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. We find it difficult to forecast quarterly license revenues
because our sales cycle, from initial evaluation to delivery of software, is
lengthy and varies substantially from customer to customer. If revenues fall
below our expectations in a particular quarter, our business could be harmed.
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<PAGE> 20
YEAR 2000 CONSIDERATIONS AMONG OUR CUSTOMERS AND POTENTIAL CUSTOMERS MAY REDUCE
OUR SALES.
We may experience reduced sales of products as customers and potential
customers put a priority on correcting Year 2000 problems and therefore defer
purchases of our products until later in 2000. Accordingly, demand for our
products may be particularly volatile and unpredictable for the remainder of
1999 and early 2000.
THE MARKET FOR OUR PRODUCTS IS NEWLY EMERGING AND CUSTOMERS MAY NOT ACCEPT OUR
PRODUCTS.
The market for employee-facing applications is newly emerging. Enterprises
have historically performed the processes addressed by employee-facing
applications themselves. Accordingly, our future success will depend on
companies adopting third-party employee-facing applications, particularly travel
and entertainment expense management and front-office procurement solutions. In
addition, companies that have already invested substantial resources in other
methods of implementing enterprise processes may be reluctant to adopt a new
strategy. Even if companies implement employee-facing applications, they may
still choose to design, develop or manage all or part of their process
automation internally. Thus, the use of employee-facing applications may not
increase significantly in the future, and our products or services may not
achieve commercial success.
WE RELY HEAVILY ON SALES OF ONE PRODUCT.
Since 1997, we have generated substantially all of our revenues from licenses
and services related to our XMS product. We believe that XMS revenues will
continue to account for a large portion of our revenues for the foreseeable
future. Our future financial performance will depend upon the successful
development, introduction and customer acceptance of new and enhanced versions
of XMS and our business could be harmed if we fail to deliver the enhancements
to XMS that customers want.
OUR EXPANSION INTO THE FRONT-OFFICE PROCUREMENT APPLICATION MARKET IS RISKY.
We also recently added the CompanyStore front-office procurement application
to our product line. To date, we have licensed CompanyStore to only five
customers. Our future revenue growth depends on our ability to license
CompanyStore to new customers and our existing base of XMS customers. Potential
and existing customers may not purchase CompanyStore for a number of reasons,
including:
- an absence of desired functionality;
- the costs of and time required for implementation;
- possible software defects; and
- a customer's lack of the necessary hardware, software or Intranet
infrastructure.
Further, we must overcome certain significant obstacles to expand into the
front-office procurement automation market, including:
- competitors that have more experience and better name recognition;
- the limited experience of our sales and consulting personnel in the
front-office procurement automation market; and
- our limited reference accounts in the front-office procurement
automation market.
Our business could be harmed if we fail to deliver the enhancements to
CompanyStore that customers want.
WE FACE SIGNIFICANT COMPETITION.
The market for our products is intensely competitive and rapidly changing.
Direct competition comes from independent software vendors of travel and
entertainment expense management and front-office procurement applications, and
from providers of enterprise resource planning, or ERP, software applications
that have or may be developing travel and entertainment expense management and
front-office procurement products. Many of our competitors in both the travel
and entertainment 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 we do. Moreover, a number of our
competitors,
20
<PAGE> 21
particularly major ERP vendors, have well-established relationships with our
current and potential customers as well as with systems integrators and other
vendors and service providers. These competitors may also 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 we can. We also face indirect competition from
potential customers' internal development efforts and have to overcome their
reluctance to move away from existing paper-based systems.
WE HAVE LIMITED EXPERIENCE SELLING OUR PRODUCTS AS A SUITE AND OUR EMPLOYEE
DESKTOP MODEL MAY FAIL.
We recently introduced Employee Desktop, which integrates XMS and
CompanyStore as a suite of applications. Until recently we have not sold our
products as a suite, and we do not know whether customers will prefer to buy our
products this way. In an effort to increase overall revenues, we expect to offer
our integrated suite of applications at prices that will be lower than would be
the case for the applications sold separately. This may have the effect of
reducing per-user revenues. We also expect that selling our products as a suite
will lengthen our sales cycle because the sale is more complex and is more
likely to involve information technology specialists at the prospective
customer. Because we are inexperienced selling our products this way, we cannot
predict whether it will hurt our business.
OUR PLAN TO SELL PRODUCTS AS AN INTERNET-BASED ENTERPRISE SERVICE PROVIDER MAY
FAIL.
In addition to licensing our software applications, we plan to offer them as
an Internet-based enterprise service provider, or ESP. We would price solutions
on a per-transaction basis or on a subscription 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 us and other enterprise software vendors. We have no
experience selling products or services as an ESP, and our efforts to develop
this ESP business may significantly divert our revenues and management time and
attention. In connection with our planned ESP business model, we will engage
third-party service providers to perform many of the necessary services as
independent contractors, and we will be responsible for monitoring their
performance. We have limited experience outsourcing services or other important
business functions in the past, and independent contractors may not perform
those services adequately. If any service provider delivers inadequate support
or service to our customers, our reputation could be harmed. In addition, we
plan to use resellers to market ESP products. We have no experience utilizing
resellers and we may not be successful in this effort.
If customers determine that our 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 our products for use on the Internet or on a
per-transaction or subscription basis, our business will be harmed. As an
outsourced ESP provider, we may regularly receive large amounts of confidential
information, including credit card, travel booking and other financial and
accounting data through the Internet or extranets, and there can be no assurance
that this information will not be subject to computer break-ins, theft and other
improper activity that could jeopardize the security of information for which we
are responsible. Even if our strategy of offering products to customers over the
Internet is successful, some of those Internet customers may be ones that
otherwise might have bought our software and services through our traditional
licensing arrangements. Any such shift in potential license revenues to the ESP
model, which is unproven and potentially less profitable, could harm our
business.
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENT, WHICH IS IMPORTANT TO
OUR FUTURE SUCCESS.
To date only a limited number of customers have deployed XMS on a large
scale, and no customer has deployed CompanyStore on a large scale. We think that
the ability of large customers to roll out our products across large numbers of
users is critical to our success. If our customers cannot successfully implement
large-scale deployments, or they determine that our products cannot accommodate
large-scale deployments, our business would be harmed.
IT IS IMPORTANT FOR US TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We depend on strategic referral relationships to offer products and
services to a larger customer base than we can reach through direct sales,
telesales and internal marketing efforts. If we were unable to maintain our
existing strategic referral relationships or enter into additional strategic
referral relationships, we would have to devote substantially more resources to
the distribution, sale and marketing of our products and services. We would also
lose anticipated customer introductions and co-marketing benefits. Our success
depends in part on the ultimate success of our strategic referral partners and
their ability to market our products and services successfully. A significant
number of our new XMS sales have come through referrals from American Express,
but American Express
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<PAGE> 22
is not obligated to refer any potential customers to us, and it may enter into
strategic relationships with other providers of expense reporting and front
office procurement applications.
Many of our strategic partners have multiple strategic relationships, and
they may not regard us as significant for their businesses. In addition, our
strategic partners may terminate their respective relationships with us, pursue
other partnerships or relationships, or attempt to develop or acquire products
or services that compete with our products or services. Further, our existing
strategic relationships may interfere with our ability to enter into other
desirable strategic relationships.
FUTURE ACQUISITIONS MIGHT HARM OUR BUSINESS.
As part of our business strategy, we might seek to acquire or invest in
businesses, products or technologies that we feel could complement or expand our
business. If we identify an appropriate acquisition opportunity, we might not be
able to negotiate the terms of that acquisition successfully, finance it, or
integrate it into our existing business and operations. We have completed only
one acquisition to date, 7Software, Inc. We may not be able to select, manage or
absorb any future acquisitions successfully, particularly acquisitions of
companies larger than 7Software. Further, the negotiation of potential
acquisitions, as well as the integration of an acquired business, would divert
management time and other resources. We may have to use a substantial portion of
our available cash, including proceeds of this offering, to consummate an
acquisition. On the other hand, if we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
In addition, we cannot assure you that any particular acquisition, even if
successfully completed, will ultimately benefit our business.
OUR LENGTHY SALES CYCLE COULD ADVERSELY AFFECT OUR REVENUE GROWTH.
Because of the high costs involved, customers for enterprise software
products typically commit significant resources to an evaluation of available
software applications and require us to expend substantial time, effort and
money educating them about the value of our products and services. The time
between initial contact with a potential customer and the ultimate sale, our
sales cycle, typically ranges between six and nine months. As a result of our
lengthy sales cycle, we have only a limited ability to forecast the timing and
size of specific sales. Any delay in completing, or failure to complete, sales
in a particular quarter or fiscal year could harm our business and could cause
our operating results to vary significantly.
WE DEPEND ON OUR KEY EMPLOYEES.
Our success depends on the performance of our senior management, particularly
S. Steven Singh, our President and Chief Executive Officer, who is not bound by
an employment agreement. Although we maintain key person life insurance on Mr.
Singh in the amount of $1 million, the loss of his services would harm our
business. If one or more members of our senior management or any of our key
employees were to resign, particularly to join or form a competitor, the loss of
that personnel and any resulting loss of existing or potential customers to that
competitor would harm our business.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL, PARTICULARLY SERVICE PERSONNEL.
Our success depends on our ability to attract and retain qualified,
experienced employees. There is substantial competition for experienced
engineering, sales and consulting personnel in the market segments in which we
compete. Many of our competitors for experienced personnel have greater
financial and other resources than we have. In particular, we compete for
personnel with Microsoft Corporation, which is located in the same geographic
area as our headquarters. We also compete for personnel with other software
vendors, including ERP vendors, and with consulting and professional services
companies. In addition, our customers generally purchase consulting and
implementation services. While we have recently established relationships with
some third-party providers, we continue to be the primary provider of these
consulting and implementation services. It is difficult and expensive to
recruit, train and retain qualified personnel to perform these services, and we
may from time to time have inadequate levels of staffing to perform these
services. As a result, our growth could be limited due to our lack of capacity
to provide such services, or we could experience deterioration in service levels
or decreased customer satisfaction, any of which would harm our business.
WE DEPEND ON OUR DIRECT SALES MODEL.
We sell our products primarily through our direct sales force. We believe
that there is significant competition for direct sales personnel with the
advanced sales skills and technical knowledge we need. Our inability to hire
competent sales personnel, or our failure to retain them, would harm our
business.
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<PAGE> 23
In addition, by relying primarily on a direct sales model, we may miss sales
opportunities that might be available through other sales channels, such as
domestic and international resellers. In the future, we intend to develop
indirect distribution channels through third-party distribution arrangements,
but we may not be successful in establishing those arrangements, or they may not
increase revenues. Furthermore, we plan to use resellers to market our ESP
products in particular. We have no experience utilizing resellers to date. The
failure to develop indirect channels may place us at a significant competitive
disadvantage.
WE DEPEND ON SERVICE REVENUES TO INCREASE OUR OVERALL REVENUES.
Our service revenues have increased each year as a percentage of total
revenues. Service revenues represented 12.4% of total revenues for fiscal 1996,
23.3% of total revenues for fiscal 1997, 31.8% of total revenues for fiscal 1998
and 32% of total revenues for the six months ended March 31, 1999. We anticipate
that service revenues will continue to represent a significant percentage of
total revenues. To a large extent, the level of service revenues depends upon
the ongoing renewals of customer support contracts by our growing installed
customer base. Customer support contracts might not be renewed. And, if
third-party organizations such as systems integrators become proficient in
installing or servicing our products, consulting revenues could decline. Our
ability to increase service revenues will depend in large part on our ability to
increase the scale of our services organization, including our ability to
successfully recruit and train a sufficient number of qualified services
personnel.
THERE ARE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our international operations are 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 in collecting accounts receivable;
- import and export restrictions and tariffs;
- difficulties staffing and managing foreign operations;
- multiple conflicting tax laws and regulations; and
- political and economic instability.
Our international operations also face foreign currency-related risks. To
date, most of our revenues have been denominated in U.S. Dollars, but we believe
that an increasing portion of our revenues will be denominated in foreign
currencies. In particular, we expect that an increasing portion of our
international sales may be Euro-denominated. The Euro is an untested currency
and may be subject to economic risks that are not currently contemplated. We
currently do not engage in foreign exchange hedging activities, and therefore
our international revenues and expenses are currently subject to the risks of
foreign currency fluctuations.
Revenues from 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 in fiscal 1997, $810,000 in fiscal 1998
and $665,000 in the six months ended March 31, 1999. A key component to our
business strategy is to expand our sales and support operations internationally.
We employ sales professionals in London and Sydney and intend to establish
additional international sales offices, expand our international management,
sales and support organizations, and enter into relationships with additional
international remarketers. We are in the early stages of developing our indirect
distribution channels in markets outside the United States. We may not be able
to attract remarketers that will be able to market our products effectively.
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<PAGE> 24
We must also customize our products for local markets. For example, our
ability to expand into the European market will depend on our ability to develop
a travel and entertainment 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. Further, if
we establish significant operations overseas, we may incur costs that would be
difficult to reduce quickly because of employee practices in those countries.
OUR PRODUCTS MIGHT NOT BE COMPATIBLE WITH ALL MAJOR PLATFORMS, WHICH COULD
INHIBIT SALES.
We must continually modify and enhance our 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, back-office
applications, and browsers and other Internet-related applications could hurt
our business. In addition, our products are not currently based upon the Java
programming language, an increasingly widely-used language for developing
Internet applications. We have made a strategic decision not to develop a fully
Java-based product at this time. Accordingly, certain features available to
products written in Java may not be available in our products, and this could
result in reduced customer demand.
WE RELY ON THIRD-PARTY SOFTWARE THAT IS DIFFICULT TO REPLACE.
Some of the software we license from third parties would be difficult to
replace. This software may not continue to be available 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 our products and
services until equivalent technology, if available, is identified, licensed and
integrated, which could harm our business.
SOFTWARE DEFECTS OR SECURITY BREACHES COULD DIMINISH DEMAND FOR OUR PRODUCTS.
Complex products like ours frequently contain defects or errors that may be
detected only when the product is in use. Further, we often render
implementation, consulting and other technical services, the performance of
which typically involves working with sophisticated software, computing and
networking systems, and we could fail to meet project milestones in a timely
manner or to meet customer expectations for services as a result of any such
defects or services. Our software products may be vulnerable to break-ins,
theft or other improper activity that could jeopardize the security of
information for which we are responsible. 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 our reputation,
increased insurance costs or increased service and warranty costs. To address
these problems, we may need to expend significant capital and resources that
may not have been budgeted.
OUR REVENUE RECOGNITION POLICY MAY CHANGE WHEN DEFINITIVE GUIDANCE IS AVAILABLE.
We recognize revenues from sales of software licenses when we sign a
non-cancelable license agreement with a customer, the software is shipped, no
significant post-delivery vendor obligations remain and collection is deemed
probable. We recognize customer support revenues ratably over the contract term
(which is typically one year) and recognize revenues for consulting services as
such services are performed. We believe our current revenue recognition policies
and practices are consistent with applicable accounting standards. However, full
guidelines for recently introduced software revenue recognition standards have
not yet been issued. Once available, such guidance could lead to unanticipated
changes in our current revenue accounting practices, and such changes could
significantly reduce our future revenues and earnings.
YEAR 2000 COMPLIANCE COSTS ARE DIFFICULT TO ASSESS.
We have tested our software products and have determined that the currently
shipping versions of all of our software products are Year 2000 compliant, with
a patch or update provided to authorized licensees for no charge, consistent
with the Year 2000 compliance specifications established by the British
Standards Institute's DISC PD-2001. However, our products are generally
integrated into enterprise systems involving sophisticated third-party hardware
and software products, which may not themselves be Year 2000 compliant. We may
in the future be subject to claims based on Year 2000 problems in others'
products, Year 2000 problems alleged to be found in our products, Year
2000-related issues arising from the integration of multiple products within an
overall system, or other Year 2000-related claims. In addition, earlier versions
of our products were not Year 2000 compliant, and we do not intend to make them
Year 2000 compliant. We also need to ensure Year 2000 compliance of our own
internal computer and other systems, to continue testing our software products,
to audit the Year 2000 compliance status of our suppliers and business partners,
and to conduct a legal audit. We have not completed our Year 2000 investigation
and overall compliance initiative, and the total cost of Year 2000 compliance
may be material and may harm our business. See Year 2000-related discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
WE HAVE BEEN PUBLIC FOR ONLY A SHORT TIME AND OUR STOCK PRICE HAS BEEN VOLATILE.
We completed our initial public offering in December 1998. Prior to this
there was no trading market for our stock. The market price of our common stock
has been highly volatile and is subject to wide fluctuations. We expect our
stock price to continue to fluctuate:
- in response to quarterly variations in operating results;
- in reaction to announcements of technological innovations or new
products by us or our competitors;
- because of market conditions in the enterprise software industry; and
- in reaction to changes in financial estimates by securities analysts,
and our failure to meet or exceed the expectations of analysts or
investors.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS.
On December 16, 1998, we commenced and completed our IPO. The managing
underwriters in the IPO were BancBoston Robertson Stephens Inc., Hambrecht &
Quist LLC and Piper Jaffray Inc. (the "Underwriters"). The shares of common
stock sold our in IPO were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (No. 333-62299), which was
declared effective by the Securities and Exchange Commission on December 15,
1998. We sold a total of 3,365,000 shares of common stock registered under the
Registration Statement (including 465,000 shares sold pursuant to the exercise
of the Underwriters' over-allotment option). An additional 200,000 shares of
common stock were sold on behalf of certain selling stockholders as part of the
same offering. The initial public offering price was $12.50 per share for an
aggregate initial public offering of $44,562,500. After deducting the
underwriting discounts and commissions and the IPO expenses, the net proceeds to
us and the selling stockholders from our IPO were $37,368,453 and $2,325,000,
respectively. In connection with our offering, we also received proceeds
totaling $2,615,625 from the exercise of a warrant to purchase 225,000 shares of
our common stock.
From the time of receipt through March 31, 1999, we have applied the proceeds
of the IPO and the warrant exercise to working capital and general corporate
purposes. We have not used any of the net offering proceeds for construction of
a plant, building or facilities, purchases of real estate, or repayment of
indebtedness. None of the net offering proceeds were paid, and none of the IPO
expenses were for payments, directly or indirectly to directors, officers or
general partners of us or our associates, persons owning 10% or more of any
class of our securities, or affiliates of us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
10.1 Third Amendment to Lease between Company and Carr America
Realty Corporation dated February 11, 1999, (incorporated by
reference to Exhibit 10.27 to Registrant's Registration
Statement on Form S-1, effective April 15, 1999, Registration
No. 333-74685)
10.2 Sublease between Company and Emerging Technology Solutions
International (ETSI), Inc. dated February 1, 1999,
(incorporated by reference to Exhibit 10.28 to Registrant's
Registration Statement on Form S-1, effective April 15, 1999,
Registration No. 333-74685)
10.3 Third Amendment to Security and Loan Agreement and Addendum to
Security and Loan Agreement between Company and Imperial Bank
dated March 15, 1999, (incorporated by reference to Exhibit
10.29 to Registrant's Registration Statement on Form S-1,
effective April 15, 1999, Registration No. 333-74685)
10.4 Letter Agreement between Company and Bruce Chatterley dated
March 2, 1999, (incorporated by reference to Exhibit 10.30 to
Registration Statement on Form S-1, effective April 15, 1999,
Registration No. 333-74685)
27.01 Financial Data Schedule.
</TABLE>
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31,
1999.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant and as
the principal financial officer thereof.
Dated May , 1999 CONCUR TECHNOLOGIES, INC.
By /s/ Sterling R. Wilson
-------------------------------------
Sterling R. Wilson
Chief Financial Officer and
Executive Vice President
of Operations
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,612
<SECURITIES> 37,544
<RECEIVABLES> 7,111
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,594
<PP&E> 2,640
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,719
<CURRENT-LIABILITIES> 21,169
<BONDS> 0
0
0
<COMMON> 76,413
<OTHER-SE> (319)
<TOTAL-LIABILITY-AND-EQUITY> 60,719
<SALES> 5,198
<TOTAL-REVENUES> 7,586
<CGS> 349
<TOTAL-COSTS> 3,035
<OTHER-EXPENSES> 10,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (315)
<INCOME-PRETAX> (5,621)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,621)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
