<PAGE>
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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, 2000 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 April 30, 2000, there were 24,930,281 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
CONCUR TECHNOLOGIES, INC.
FORM 10-Q
MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
. Consolidated Balance Sheets as of March 31, 2000 and
September 30, 1999.............................................. 3
. Consolidated Statements of Operations for the three and
six months ended March 31, 2000 and 1999........................ 4
. Consolidated Statement of Stockholders' Equity for the
six months ended March 31, 2000................................. 5
. Consolidated Statements of Cash Flows for the six months
ended March 31, 2000 and 1999................................... 6
. Notes to Consolidated Financial Statements...................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk....... 27
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................ 27
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 28
ITEM 6. Exhibits and Reports on Form 8-K................................. 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONCUR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................................... $ 64,406 $ 59,815
Marketable securities................................................................... 28,560 48,907
Accounts receivable, net of allowance for doubtful accounts of $976 and $870 at
March 31, 2000 and September 30, 1999, respectively.................................... 11,385 9,020
Prepaid expenses and other current assets............................................... 2,103 1,110
Notes receivable from stockholders...................................................... 167 333
--------- --------
Total current assets.................................................................... 106,621 119,185
Equipment and furniture, net............................................................ 12,034 7,087
Deposits and other assets............................................................... 1,481 1,829
Notes receivable from stockholders, net of current portion.............................. 167 167
Capitalized technology and other intangible assets, net................................. 400 560
--------- --------
Total assets............................................................................ $ 120,703 $128,828
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................................................ $ 2,709 $ 5,323
Accrued liabilities..................................................................... 8,216 11,809
Accrued commissions..................................................................... 706 1,452
Current portion of accrued payment to stockholders...................................... 167 333
Current portion of long-term debt....................................................... 3,667 3,762
Current portion of capital lease obligations............................................ 2,462 1,869
Deferred revenues....................................................................... 4,372 4,011
--------- --------
Total current liabilities............................................................... 22,299 28,559
--------- --------
Accrued payment to stockholders, net of current portion................................. 167 167
Long-term debt, net of current portion.................................................. 2,068 3,890
Capital lease obligations, net of current portion....................................... 2,057 2,269
Deferred rental expense................................................................. 162 169
Commitments............................................................................. - -
Stockholders' equity:
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; 24,618,960 and
22,693,022 shares issued and outstanding at March 31, 2000 and September 30,
1999, respectively..................................................................... 221,228 184,943
Deferred stock compensation............................................................. (904) (1,439)
Accumulated deficit..................................................................... (126,374) (89,730)
--------- --------
Total stockholders' equity.............................................................. 93,950 93,774
--------- --------
Total liabilities and stockholders' equity.............................................. $ 120,703 $128,828
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CONCUR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues, net:
Licenses....................................... $ 6,175 $ 5,504 $ 10,383 $ 11,167
Services....................................... 4,661 3,191 9,460 5,647
-------- ------- -------- --------
Total revenues.................................. 10,836 8,695 19,843 16,814
Cost of revenues:
Licenses....................................... 289 349 517 573
Services....................................... 6,654 3,625 12,559 7,042
-------- ------- -------- --------
Total cost of revenues.......................... 6,943 3,974 13,076 7,615
-------- ------- -------- --------
Gross profit.................................... 3,893 4,721 6,767 9,199
Operating expenses:
Sales and marketing............................ 10,610 6,983 19,698 13,359
Research and development....................... 9,718 4,211 18,352 8,056
General and administrative..................... 3,493 2,396 6,968 4,344
-------- ------- -------- --------
Total operating expenses........................ 23,821 13,590 45,018 25,759
-------- ------- -------- --------
Loss from operations............................ (19,928) (8,869) (38,251) (16,560)
Interest income................................. 1,069 642 2,466 883
Interest expense................................ (436) (440) (740) (736)
Other expense, net.............................. (19) (75) (119) (112)
-------- ------- -------- --------
Net loss........................................ $(19,314) $(8,742) $(36,644) $(16,525)
======== ======= ======== ========
Basic and diluted net loss per share............ $ (0.83) $ (0.49) $ (1.59) $ (1.36)
======== ======= ======== ========
Weighted average shares used in calculation of
basic and diluted net loss per share............ 23,204 17,916 23,024 12,154
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CONCUR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------
Deferred Total
Stock Accumulated Stockholders'
Shares Amount Compensation Deficit Equity
---------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999............. 22,693,022 $184,943 $ (1,439) $ (89,730) $93,774
Issuance of common stock, net of
offering costs............................ 1,503,500 34,915 - - 34,915
Issuance of common stock in connection
with Employee Share Purchase Plan.......... 111,964 1,059 - - 1,059
Issuance of common stock from net exercise
of common stock warrants................... 93,785 - - - -
Issuance of common stock from exercise of
stock options.............................. 216,689 311 - - 311
Amortization of deferred stock
compensation............................... - - 535 - 535
Net loss................................... - - - (36,644) (36,644)
---------- -------- ------- ---------- --------
Balance at March 31, 2000................. 24,618,960 $221,228 $ (904) $(126,374) $ 93,950
========== ======== ======= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CONCUR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------
2000 1999
------------------------
<S> <C> <C>
Operating activities:
Net loss......................................................................... $ (36,644) $(16,525)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of acquired in-process technology................................... 160 160
Amortization of deferred stock compensation...................................... 535 423
Depreciation..................................................................... 2,346 747
Provision for bad debts.......................................................... 319 251
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (2,684) (2,882)
Prepaid expenses and other current assets........................................ (993) (643)
Deposits and other assets........................................................ 348 (2,096)
Accounts payable................................................................. (2,614) 3,156
Accrued liabilities and accrued commissions...................................... (4,339) 3,680
Deferred revenues................................................................ 361 826
------------ --------
Net cash used in operating activities............................................ (43,205) (12,903)
------------ --------
Investing activities:
Sale (purchase) of marketable securities, net.................................... 20,347 (37,544)
Purchases of equipment and furniture............................................. (5,691) (238)
------------ --------
Net cash provided by (used in) investing activities.............................. 14,656 (37,782)
------------ --------
Financing activities:
Net proceeds from initial public offering........................................ - 37,369
Proceeds from exercise of preferred stock warrants............................... - 2,616
Proceeds from borrowings......................................................... - 4,817
Payments on borrowings........................................................... (1,917) (873)
Payments on capital leases....................................................... (1,228) (513)
Issuance of common stock in connection with Employee Share Purchase Plan......... 1,059 -
Issuance of common stock, net of offering costs.................................. 34,915 -
Proceeds from issuance of common stock from exercise of stock options............ 311 71
------------ --------
Net cash provided by financing activities........................................ 33,140 43,487
------------ --------
Net increase (decrease) in cash and cash equivalents............................. 4,591 (7,198)
Cash and cash equivalents at beginning of period................................. 59,815 17,058
------------ --------
Cash and cash equivalents at end of period....................................... $ 64,406 $ 9,860
============ ========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................... $ 696 $ 506
Equipment and furniture obtained through capital leases.......................... $ 1,609 $ 973
Conversion of redeemable convertible preferred stock and redeemable convertible
preferred stock warrants into common stock and common stock warrants............. $ - $ 30,129
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of the Company
Concur Technologies, Inc. ("Concur" or the "Company") is a leading
provider of workplace eCommerce software and services that extend automation to
employees throughout an enterprise and to partners, suppliers and service
providers in the extended enterprise. The Company's flagship product, Concur
eWorkplace(TM), integrates the Company's suite of workplace eCommerce solutions
and provides a portal through which employees can access critical business
eCommerce information and services. The Concur eWorkplace suite is available in
two versions: licensed and application service provider ("ASP"). The Company
was originally incorporated in the State of Washington on August 19, 1993 and
reincorporated in the State of Delaware on November 25, 1998. Operations
commenced during 1994.
Unaudited Interim Financial Information
The financial information as of March 31, 2000, and for the three and six
months ended March 31, 2000 and 1999, 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, 1999, included in the Company's
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission. Operating results for the three and six months ended March 31, 2000,
are not necessarily indicative of results that may be expected for the entire
fiscal 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.
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosures of revenue in financial statements. This SAB will not be effective
for the Company until the fiscal year beginning October 1, 2000. The Company
believes that the adoption of this pronouncement will not have a significant
impact on the Company's financial position or operating results. The Company
will continue to evaluate interpretations of SAB 101.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Seeker Software, Inc., Concur Technologies (UK)
Ltd., Concur Technologies Pty. Limited and 7Software, Inc. All significant
intercompany accounts and transactions are eliminated in consolidation.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. STRATEGIC RELATIONSHIP AND STOCK PURCHASE AGREEMENT
On February 22, 2000, Concur entered into a Stock Purchase Agreement with
SAFECO Corporation and Nortel Networks, Inc. for the purchase of 1,073,929 and
429,571 shares, respectively, of Concur's common stock at a purchase price of
$23.28 per share. In connection with the Stock Purchase Agreement, Concur also
entered into strategic marketing and distribution agreements with SAFECO Life
Insurance Company (SAFECO) and Nortel Networks Corporation (Nortel) under which
SAFECO and Nortel will resell Concur's ASP products through their respective
distribution networks and will undertake joint marketing activities with Concur
to promote Concur's ASP products. Revenues generated from the joint marketing
activities will be shared equally. This strategic alliance also provides the
establishment of the Concur Business Advantage(TM), a business-to-business
electronic trading network providing discounted products and services primarily
geared to small and mid-size businesses.
Under the terms of these agreements, Concur has granted SAFECO and Nortel
warrants to purchase up to 3,750,000 and 1,500,000 shares of common stock,
respectively. The warrants become exercisable upon SAFECO and Nortel achieving
certain annual milestones relating to revenue derived in connection with the
arrangements over the next five years at a price determined to be the greater of
$30.26 or 50% of the fair value of the common stock price on prescribed dates.
In the event these milestones are achieved or the achievement becomes probable,
Concur may be required to record a significant non-cash distribution/marketing
expense throughout the remaining related service period to the extent that the
fair value of the common stock exceeds the exercise price of the warrants at
that time. Concur has not recorded an expense associated with these agreements
to date and is uncertain whether these milestones will be achieved in the
future. In addition, from time to time Concur may enter into similar
arrangements with, and issue additional warrants to, other third-parties that
could require the Company to record significant non-cash expenses based upon the
value of such warrants. Effective upon the closing of the sale of the common
shares, a representative of SAFECO was elected to serve on the Company's Board
of Directors.
NOTE 4. RELATED PARTY TRANSACTION
During the three months ended March 31, 2000, the Company recorded $2.0
million in revenue from an agreement to license its software to a stockholder of
the Company. At March 31, 2000, accounts receivable from this transaction was
$1.0 million.
NOTE 5. 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 shares outstanding. Pro forma net loss
per share is computed using the weighted average number of common shares used
for basic and diluted per share amounts but also assuming that all preferred
stock outstanding converted to common stock at the time of issuance.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss........................................................ $(19,314) $(8,742) $(36,644) $(16,525)
-------- ------- -------- --------
Basic and diluted net loss per common share..................... $ (0.83) $ (0.49) $ (1.59) $ (1.36)
-------- ------- -------- --------
Weighted average number of common shares used
for basic and diluted per share amounts........................ 23,204 17,916 23,024 12,154
Weighted average common shares issuable upon pro
forma conversion of preferred stock............................ - 1,557 - 5,755
-------- ------- -------- --------
Weighted average number of shares used for pro
forma per share amounts........................................ 23,204 19,473 23,024 17,909
-------- ------- -------- --------
Pro forma net loss per share.................................... $ (0.83) $ (0.45) $ (1.59) $ (0.92)
-------- ------- -------- --------
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note. Pro forma results for the three and six months ended March 31, 1999 are
presented for informational purposes only and are not prepared in accordance
with generally accepted accounting principles. Shares used in computation of pro
forma basic and diluted loss per share assumes the conversion of all preferred
stock to common stock at the time of issuance, and is presented for comparative
purposes only. (Pro forma results do not differ from basic and diluted financial
information for the three and six months ended March 31, 2000).
Options to purchase 4,960,696 shares of common stock with exercise prices of
$0.01 to $50.38 per share and warrants to purchase 6,650,000 shares of common
stock were outstanding as of March 31, 2000. Of these warrants, 1,400,000 are
exercisable at prices ranging from $50.625 to $85.00 per share. The remaining
5,250,000 warrants will become exercisable based on achieving certain annual
milestones for revenue derived in connection with the agreements over the next
five years at a price determined to be the greater of $30.26 or 50% of the
common stock price on the prescribed dates. All options and warrants were
excluded from the computation of diluted earnings per share because their effect
was anti-dilutive.
9
<PAGE>
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 our use of the future tense, or by forward-looking words such as
"may," "will," "expect," "anticipate," "believe," "estimate" and "continue." 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 and our future financial condition, or state other "forward-
looking" information. There may be events in the future, however, that we are
not 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 actual
results to differ from what 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 workplace eCommerce software and services that
extend automation to employees throughout an enterprise and to partners,
suppliers and service providers in the extended enterprise. Our flagship
product, Concur eWorkplace(TM), integrates our suite of workplace eCommerce
solutions and provides a portal through which employees can access critical
business eCommerce information and services. The Concur eWorkplace suite is
available in two versions: licensed and application service provider ("ASP").
Our licensed version, which is principally marketed to larger corporations,
includes our entire suite of workplace eCommerce solutions, consisting of
corporate procurement, human resources self-service and travel and entertainment
expense management. Our ASP version is offered on a subscription-pricing basis
either through a dedicated server, principally for large companies or through a
shared server, principally for small and mid-size businesses. The shared server
ASP version of Concur eWorkplace currently includes travel and entertainment
expense management and corporate procurement functionality. The dedicated server
ASP version currently includes travel and entertainment expense management. At
March 31, 2000, we had more than 390 companies worldwide, representing over 2.6
million registered users.
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 it 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
released Concur Expense(TM), a client-server based enterprise travel and
entertainment expense management solution, in July 1996. In March 1998, we
shipped an intranet-based version of Concur Expense. Since its release, the
intranet-based version has accounted for a majority of Concur Expense license
revenues. We expect to focus all future product development efforts on the
intranet and Internet-based versions of our products.
In June 1998, we acquired 7Software, Inc. ("7Software"), a privately held
software company and the developer of Concur Procurement(TM). 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 during the quarter
ended June 30, 1998. In addition, we recorded capitalized technology and other
intangible assets of $960,000 that are being amortized on a straight-line basis
over three years.
In June 1999, we acquired Seeker Software Inc. ("Seeker Software"), a
privately held software company and developer of Concur Human Resources(TM). The
transaction was accounted for as a pooling of interests. We issued 3,419,929
shares of common stock in exchange for all outstanding preferred stock,
preferred stock warrants and common stock of Seeker Software, and we converted
all outstanding options to purchase Seeker Software common stock into options to
purchase up to 680,234 shares of Concur common stock. These consolidated
financial statements have been prepared to reflect the restatement of all
periods presented to include the accounts of Seeker Software. The historical
results of the pooled entities reflect each of their actual operating cost
structures and, as a result, do not necessarily reflect the cost structure of
the newly combined entity. These consolidated financial statements are now
considered the historical financial statements of the Company.
In January 1999, we introduced Concur eWorkplace, which provides a common user
interface to integrate Concur Expense and Concur Procurement and provides a
portal through which employees can access critical business eCommerce
information and services. We began the integration of Concur Human Resources
into Concur eWorkplace in fiscal 1999, and completed the first
10
<PAGE>
level of integration in the second quarter of fiscal 2000. Additional efforts
are ongoing to continue the integration of our suite of products, including
Concur Expense, Concur Procurement, and Concur Human Resources.
In October 1999, we introduced the shared-server option for Concur eWorkplace
ASP, which provides features and benefits similar to Concur eWorkplace but is
offered as an ASP product principally for small and mid-size companies, and
requires limited IT infrastructure and support. Our shared-server option for
Concur eWorkplace ASP is currently available with Concur Expense and Concur
Procurement. In December 1999, we introduced the dedicated-server option for
Concur eWorkplace ASP, which provides features and benefits similar to Concur
eWorkplace, but is offered as an ASP product principally to companies that want
a configured solution offered on an outsourced basis with limited IT
infrastructure and support requirements. Our dedicated-server option for Concur
eWorkplace ASP is currently available with Concur Expense.
In December 1999, we introduced the Concur Commerce Network, which enables
customers to conduct business-to-business eCommerce transactions over the
Internet by bringing buyers and suppliers together through an Internet-based
electronic marketplace. In February 2000, we entered into a strategic alliance
with Nortel and SAFECO to create Concur Business Advantage, a business-to-
business electronic trading network providing discounted products and services
primarily geared to small and mid-size businesses.
Substantially all of our revenues in the periods presented have been derived
from licenses of Concur Expense and related services, and to a lesser degree,
the sale of licenses and services relating to Concur Human Resources. We expect
that the majority of our revenues will continue to be derived from our Concur
Expense product line and related services. Our revenues, which consist of
software license revenues and service revenues, totaled $6.2 million and $5.5
million in the three months ended March 31, 2000 and 1999, respectively. The
pricing for our license version includes an up-front fee, which is primarily
based on the number of users or employees of the customer. Our ASP version is
offered on a monthly subscription-pricing basis. 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, United Kingdom, France and Australia.
Revenues from licenses and services to customers outside the United States were
$971,000 and $117,000 in the three months ended March 31, 2000 and 1999,
respectively. Historically, as a result of the relatively small amount of
international sales, fluctuations in foreign currency exchange rates have not
had a material effect on our operating results.
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. 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. 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
ratably over the term of the related maintenance contract. Revenues relating to
consulting and training services provided to customers are generally recognized
as such services are performed. SOP 97-2 has been subject to certain
modifications and interpretations since its release in October 1997. 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. Most recently, in December 1999, the
SEC released Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which provides guidance on the recognition,
presentation and disclosures of revenue in financial statements. This Staff
Accounting Bulletin will not be effective for us until our fiscal year 2001. We
believe that the adoption of this pronouncement will not have a significant
impact on our financial position or operating results. 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. The Company will continue to
evaluate interpretations of SAB 101.
Since inception we have incurred, and we expect to continue to incur,
substantial research and development costs and we 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. As a result of
investments in our infrastructure, we have incurred net losses in each fiscal
quarter since inception and as of March 31, 2000, had an accumulated deficit of
$126.4 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 plan to
expand our customers' and suppliers' ability to conduct business-to-business
eCommerce transactions over the Internet through the use of our Concur Commerce
Network and Concur Business Advantage.
11
<PAGE>
The Concur Commerce Network and Concur Business Advantage will require
additional expenditures as we expand our marketing efforts and continue their
development. Accordingly, we expect to incur net losses for the foreseeable
future.
We have recorded aggregate deferred stock compensation of $3.4 million.
Deferred stock compensation is amortized over the life of the options, generally
four years. Since inception, we recorded amortization of deferred stock
compensation of $2.5 million of which $1.6 million was a result of the
operations of Seeker Software.
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 that we will be successful in addressing such risks and difficulties.
Although historically we have experienced significant revenue growth, this trend
may not continue. In addition, we may not achieve or maintain profitability in
the future.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
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, 2000 and 1999, 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,
---------------------------- ---------------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses........................................ 57.0% 63.3% 52.3% 66.4%
Services........................................ 43.0 36.7 47.7 33.6
------ ------ ------ ------
Total revenues................................ 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Licenses........................................ 2.7 4.0 2.6 3.4
Services........................................ 61.4 41.7 63.3 41.9
------ ------ ------ ------
Total cost of revenues........................ 64.1 45.7 65.9 45.3
------ ------ ------ ------
Gross profit..................................... 35.9 54.3 34.1 54.7
------ ------ ------ ------
Operating expenses:
Sales and marketing............................. 97.9 80.3 99.3 79.5
Research and development........................ 89.7 48.4 92.5 47.9
General and administrative...................... 32.2 27.6 35.1 25.8
------ ------ ------ ------
Total operating expenses...................... 219.8 156.3 226.9 153.2
------ ------ ------ ------
Loss from operations............................. (183.9) (102.0) (192.8) (98.5)
Interest income.................................. 9.9 7.4 12.4 5.3
Interest expense................................. (4.0) (5.1) (3.7) (4.4)
Other expense, net............................... (0.2) (0.9) (0.6) (0.7)
------ ------ ------ ------
Net loss......................................... (178.2)% (100.6)% (184.7)% (98.3)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
We derive our revenues from software licenses and related services. Total
revenues were $10.8 million and $8.7 million for the three months ended March
31, 2000 and 1999, respectively, representing an increase of $2.1 million, or
25%. International revenues were $971,000 and $117,000 for the three months
ended March 31, 2000 and 1999, respectively.
License Revenues. Our license revenues were $6.2 million and $5.5 million
for the three months ended March 31, 2000 and 1999, respectively, representing
an increase of $700,000, or 12%. License revenues represented 57.0% and 63.3% of
total revenues for the three months ended March 31, 2000 and 1999, respectively.
The decrease in license revenues as a percentage of total revenues reflects the
accelerated growth in our service revenue compared to our license revenue based
on our growing customer base, increased service capacity and a slow down in the
rate of increase in license revenue.
Service Revenues. Our service revenues consist of revenue from consulting
and implementation, maintenance and, to a lesser extent, training services. Our
service revenues were $4.7 million and $3.2 million for the three months ended
March 31, 2000 and 1999, respectively, representing an increase of $1.5 million,
or 46%. Service revenues represented 43.0% and 36.7% of total revenues for the
three months ended March 31, 2000 and 1999, respectively. This increase reflects
continuing growth in our service revenues as a result of our increasing customer
base and increase in our service capacity, and requests by existing customers
for our services continue to grow as they upgrade our products to newer
versions, expand the number of their current users or decide to utilize
additional functionality available within these products. We believe that the
percentage of total revenues represented by service revenues in prior fiscal
periods may not be indicative of levels to be expected in future periods as the
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proportion of our service revenues to total revenues will fluctuate in the
future. This fluctuation will depend, in part, on the demand by existing
customers for our consulting services, our use of third-party consulting and
implementation service providers as well as market acceptance of our ASP
products since the amount of consulting efforts required for our licensed
product is higher than for our ASP products.
Cost of Revenues
Cost of License Revenues. Our cost of license revenues includes license fees
for sublicensing third-party software, expenses to house our servers for our ASP
business, amortization of capitalized technology and other intangible assets,
and product media and duplication costs. Our cost of license revenues was
$289,000 and $349,000 for the three months ended March 31, 2000 and 1999,
respectively, representing a decrease of $60,000, or 17%. Cost of license
revenues represented 4.7% and 6.3% of total license revenue for the three months
ended March 31, 2000 and 1999. We expect that the cost of license revenues will
continue to fluctuate in the future.
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 $6.7 million and $3.6 million for the three
months ended March 31, 2000 and 1999, respectively, representing an increase of
$3.1 million, or 84%. This increase was due to costs associated with the start
up and operation of our ASP business and an increase in professional service
personnel to manage and support our growing customer base, including salaries
and benefits and travel and entertainment expenses. The number of our
professional services personnel increased from 113 at March 31, 1999, to 135 at
March 31, 2000. Cost of service revenues represented 142.8% and 113.6% of
service revenues for the three months ended March 31, 2000 and 1999,
respectively. This increase is attributed to the costs associated with the
start up and operation of our ASP business, cost of training new service
personnel, the mix of products and services provided by us and our third-party
implementation service provider partners, as well as the increasing complexity
of implementing our suite of products within our customers' existing
infrastructure. We expect that the cost of service revenues as a percentage of
service revenues will vary between periods due to changes in the mix of products
and services provided by us or by our third-party implementation service
provider partners and costs associated with the start up and operation of our
ASP business.
Costs and Expenses
Sales and Marketing. Our sales and marketing expenses consist primarily of
salaries, benefits and commissions earned by sales and marketing personnel and
advertising, travel and entertainment expenses, and to a lesser extent, lead
referral fees and promotional expenses. Our sales and marketing expenses were
$10.6 million and $7.0 million for the three months ended March 31, 2000 and
1999, respectively, representing an increase of $3.6 million, or 52%. This
increase reflects a significant increase in advertising and marketing expenses,
as well as our continuing investment in our domestic and international sales
infrastructure, including significant personnel-related expenses such as
salaries and benefits, commissions and travel and entertainment expenses. Sales
and marketing expenses represented 97.9% and 80.3% of total revenues for the
three months ended March 31, 2000 and 1999, respectively. We believe that a
significant increase in our sales and marketing efforts is essential for us to
maintain our market position and increase market acceptance of our products.
Accordingly, we anticipate that we will continue to invest significantly in
sales and marketing for the foreseeable future, and sales and marketing expenses
will continue to increase in future periods.
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 $9.7 million and $4.2 million for the
three months ended March 31, 2000 and 1999, respectively, representing an
increase of $5.5 million, or 131%. This increase mainly related to increased
usage of outside contractors and the increase in software engineers, program
management and quality assurance personnel to support the development of our ASP
solutions and the Concur Commerce Network, as well as continued support and
development for our existing suite of products. Research and development costs
represented 89.7% and 48.4% of total revenues for the three months ended March
31, 2000 and 1999, respectively. We believe that a significant increase in our
research and development investment is essential for us to maintain our market
position, to continue expanding our product lines and to enhance the common
technology platform for our suite of products. We expect that development
efforts for our ASP products, the Concur Commerce Network, Concur Business
Advantage, and our existing suite or products will require additional
expenditures. Accordingly, we anticipate that we will 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.
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General and Administrative. Our general and administrative expenses include
primarily salaries, benefits and related costs for our executive, finance,
business development, investor relations, legal and information services
personnel. Our general and administrative expenses were $3.5 million and $2.4
million for the three months ended March 31, 2000 and 1999, respectively,
representing an increase of $1.1 million, or 46%. This increase was primarily
the result of an increase in the number of general and administrative employees,
increased use of outside contractors to fulfill hiring needs and, to a lesser
extent, an increase in professional fees, such as legal and accounting fees.
General and administrative costs represented 32.2% and 27.6% of our total
revenues for the three months ended March 31, 2000 and 1999, respectively. We
believe that our general and administrative expenses will continue to increase
as a result of the expansion of our administrative staff to support our growth.
Interest Income and Interest Expense. Our interest income was $1.1 million
and $642,000 for the three months ended March 31, 2000 and 1999, respectively,
representing an increase of approximately $458,000, or 67%. This increase
reflects interest income earned on the higher cash, cash equivalents and
marketable securities balances as a result of proceeds received in March 2000
and April 1999 from private and public sales of our common stock. Interest
expense was $436,000 and $440,000 for the three months ended March 31, 2000 and
1999, respectively, representing an increase of $4,000.
Provision for Income Taxes. No provision for federal and state income taxes
has been recorded because we have experienced net losses since inception that
have 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, 2000 AND 1999
Revenues
Total revenues were $19.8 million and $16.8 million for the six months ended
March 31, 2000 and 1999, respectively, representing an increase of $3.0 million,
or 18%. International revenues were $1,625,000 and $665,000 for the six months
ended March 31, 2000 and 1999, respectively.
License Revenues. Our license revenues were $10.4 million and $11.2 million
for the six months ended March 31, 2000 and 1999, respectively, representing a
decrease of $800,000, or 7%. License revenues represented 52.3% and 66.4% of
total revenues for the six months ended March 31, 2000 and 1999, respectively.
The decrease in license revenues reflects our introduction of a suite of
applications, and the shift in demand for our products from licensed to ASP
products. In fiscal 1999, we introduced our Concur eWorkplace suite, which
increased the number of applications available for license from one to three
(Concur Expense, Concur Procurement and Concur Human Resources). This has had
the effect of lengthening our sales cycle because it makes our customers'
acquisition decision more complex, and license revenues declined as a result.
Second, we have experienced a shift in the market demand for our products from
the licensed version to the ASP version of Concur eWorkplace. In our traditional
license sales model, a license fee is generally recognized upon delivery; in
contrast, ASP sales require recognition of revenue over the life of the ASP
contract, which is generally two to four years. License revenue recognized for
the ASP version was immaterial for the six months ended March 31, 2000.
Service Revenues. Our service revenues were $9.5 million and $5.6 million
for the six months ended March 31, 2000 and 1999, respectively, representing an
increase of $3.9 million, or 68%. Service revenues represented 47.7% and 33.6%
of total revenues for the six months ended March 31, 2000 and 1999,
respectively. This increase reflects continuing growth in our service revenues
as a result of our increasing customer base and requests by existing customers
for our services continue to grow as they upgrade their products to newer
versions, expand the number of their current users or decide to utilize
additional functionality available within these products. The number of our
professional services personnel increased approximately 19%, from 113 at March
31, 1999, to 135 at March 31, 2000. The percentage of total revenues represented
by service revenues in prior fiscal periods may not be indicative of levels to
be expected in future periods as the proportion of our service revenues to total
revenues will fluctuate in the future. This fluctuation will depend, in part, on
the demand by existing customers for our consulting services, our use of third-
party consulting and implementation service providers as well as market
acceptance of our ASP products since the amount of consulting efforts required
for our licensed product is higher than for our ASP products.
Cost of Revenues
Cost of License Revenues. Our cost of license revenues was $517,000 and
$573,000 for the six months ended March 31, 2000 and 1999, respectively,
representing a decrease of $56,000, or 10%. Cost of license revenues fluctuate
from period to period based on the quantity and type of sublicensed third-party
software purchased with our software and the respective royalty fees payable as
a result of these sales, product mix and overall demand for our products. Cost
of license revenues represented 5.0%
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and 5.1% of total license revenue for the six months ended March 31, 2000 and
1999, respectively. We expect that the cost of license revenues will continue to
fluctuate in the future.
Cost of Service Revenues. Our cost of service revenues was $12.6 million and
$7.0 million for the six months ended March 31, 2000 and 1999, respectively,
representing an increase of $5.6 million, or 78%. This increase was primarily
due to costs associated with the start up and operation of our ASP business and
an increase in professional service personnel to manage and support our growing
customer base, costs incurred resulting from the use of our third-party service
providers, as well as expenses to recruit professional services personnel. Cost
of service revenues represented 133% and 125% of service revenues for the six
months ended March 31, 2000 and 1999, respectively. We expect that the cost of
service revenues as a percentage of service revenues will vary between periods
due to changes in the mix of products and services provided by us or by our
third-party implementation service provider partners and costs associated with
the start up and operation of our ASP business.
Costs and Expenses
Sales and Marketing. Our sales and marketing expenses were $19.7 million and
$13.4 million for the six months ended March 31, 2000 and 1999, respectively,
representing an increase of $6.3 million, or 47%. This increase primarily
reflects our investment in our sales and marketing infrastructure, including
significant personnel-related expenses such as salaries and benefits and travel
and entertainment expenses, as well as a significant increase in our advertising
and marketing expenditures. The increase also reflects our continuing investment
in our international operations in the United Kingdom, France and Australia.
Sales and marketing expenses represented 99.3% and 79.5% of total revenues for
the six months ended March 31, 2000 and 1999, respectively.
Research and Development. Our research and development expenses were $18.4
million and $8.1 million for the six months ended March 31, 2000 and 1999,
respectively, representing an increase of $10.3 million, or 128%. This increase
was primarily related to costs associated with an increased usage of outside
contractors as well as our own internal software engineers, program management
and quality assurance personnel to support our existing suite of products, new
product development and expenditures to support the Concur Commerce Network.
Research and development costs represented 92.5% and 47.9% of total revenues for
the six months ended March 31, 2000 and 1999, respectively. We believe that a
significant increase in our research and development investment is essential for
us to maintain our market position, to continue expanding our product lines and
to enhance the common technology platform for our suite of products. In
addition, we are continuing to expand our customers' and suppliers' ability to
conduct business-to-business eCommerce transactions over the Internet through
the use of our Concur Commerce Network and Concur Business Advantage.
Development of the Concur Commerce Network and Concur Business Advantage will
require additional expenditures as we continue to expand our marketing efforts
and further our development efforts. Accordingly, we anticipate that we will
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
$7.0 million and $4.3 million for the six months ended March 31, 2000 and 1999,
respectively, representing an increase of $2.7 million, or 60%. This increase
was primarily the result of increased use of outside contractors to fulfill
hiring needs, an increase in personnel-related costs, including salaries and
benefits, recruiting expenses and an increase in professional fees, such as
accounting and legal fees. General and administrative costs represented 35.1%
and 25.8% of our total revenues for the six months ended March 31, 2000 and
1999, respectively. We believe that our general and administrative expenses will
continue to increase as a result of the expansion of our administrative staff to
continue supporting our ongoing growth.
Interest Income and Interest Expense. Our interest income was $2.5 million
and $883,000 for the six months ended March 31, 2000 and 1999, respectively,
representing an increase of approximately $1.6 million, or 179%. This increase
reflects interest income earned on the higher cash, cash equivalents and
marketable securities balances as a result of proceeds received in March 2000
and April 1999 from private and public sales of our common stock. Interest
expense was $740,000 and $736,000 for the six months ended March 31, 2000 and
1999, respectively, representing an increase of $4,000.
Provision for Income Taxes. No provision for federal and state income taxes
has been recorded because we have experienced net losses since inception that
have 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.
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Financial Condition
Our total assets were $120.7 million and $128.8 million at March 31, 2000 and
September 30, 1999, respectively, representing a decrease of $8.1 million, or
6%. This decrease was primarily the result of cash in the amount of
approximately $43.2 million used to fund operations, offset by net cash proceeds
of $34.9 million received in March 2000 from the sale of our common stock in a
private placement. At March 31, 2000, we had $93.0 million of cash, cash
equivalents and marketable securities compared to $108.7 million at September
30, 1999, representing a net decrease of $15.7 million, or 14%.
Our accounts receivable balance, net of allowance for doubtful accounts, was
$11.4 million and $9.0 million as of March 31, 2000 and September 30, 1999,
respectively, representing an increase of $2.4 million, or 26%. This increase
was principally a result of a $1.8 million increase in license and service
revenues during the three months ended March 31, 2000, compared with the three
months ended September 30, 1999. Days' sales outstanding ("DSO") in accounts
receivable was 95 days and 90 days for the three months ended March 31, 2000 and
September 30, 1999, respectively. We expect that our DSO will fluctuate
significantly in future quarters, and may continue to increase.
Our total current liabilities were $22.3 million and $28.6 million at March
31, 2000 and September 30, 1999, respectively, representing a decrease of $6.3
million, or 22%. This decrease is primarily a result of the timing of third-
party vendor and other related cash payments, as well as the timing of bonus and
commission payments.
Liquidity and Capital Resources
Net cash used in operating activities was $43.2 million and $12.9 million in
the six months ended March 31, 2000 and 1999, respectively, representing an
additional use of cash of $30.3 million, or 235%. Net cash used by operating
activities in these periods was primarily a result of funding operations, the
timing of payments of accrued expenses, third-party vendor payments, and timing
of bonus and commission payments.
Our investing activities have consisted primarily of purchases of property and
equipment and the purchase and sale of marketable securities. During the six
months ended March 31, 2000, our net sales of marketable securities totaled
approximately $20.3 million which was used to fund operations. Marketable
securities consist primarily of corporate bonds and commercial paper. Property
and equipment acquisitions, including those acquired under capital leases,
totaled $7.3 million and $1.2 million in the six months ended March 31, 2000 and
1999, representing an increase of $6.1 million. Through the first quarter of
fiscal 2000, we financed a significant portion of our acquisitions of property
and equipment through capital leases, which consist primarily of computer
hardware and software. Although our equipment financing activities slowed
during the second quarter, we anticipate that we will continue to experience an
increase in our capital expenditures and lease commitments consistent with our
anticipated growth in operations, infrastructure and personnel.
Cash provided by financing activities was $33.1 million and $43.5 million in
the six months ended March 31, 2000 and 1999, respectively. In the six months
ended March 31, 2000, cash provided by financing activities consisted primarily
of net cash proceeds received in March 2000 of $34.9 million from the sale of
our common stock in a private placement and $1.1 million from the issuance of
common stock in connection with our Employee Share Purchase Plan, offset by
repayments on bank debt and capital lease obligations totaling $3.1 million.
Cash provided by financing activities in the six months ended March 31, 1999,
consisted primarily of initial public offering ("IPO") proceeds totaling $37.4
million, proceeds totaling $2.6 million from the exercise of warrants concurrent
with the IPO and $4.8 million from private financing.
We have a line of credit with a bank for $4.0 million which expires on July
10, 2000. The 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, 2000, we had not borrowed under the line of
credit; however, there was a standby letter of credit outstanding for $450,000.
Approximately $3.6 million remained available under this line as of March 31,
2000.
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 senior term loan facility
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 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, 2000, the outstanding indebtedness under the loan agreement was $1.4
million.
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In July 1997, we entered into a subordinated loan and security agreement with
the same company with which we lease capital equipment in the principal amount
of $1.5 million which bears interest at an annual rate of 8.5%. In May 1998,
this agreement was amended to allow for additional borrowings of $3.5 million.
The notes are due in varying monthly installments through April 2002. At March
31, 2000, the outstanding indebtedness under the subordinated loan agreement was
$3.0 million.
We also have an existing equipment line of credit with a bank, which is no
longer available for additional borrowings. Principal payments of approximately
$32,000, plus interest, which accrues at the prime rate plus 1.5%, are due
monthly through October 2001. At March 31, 2000, the outstanding indebtedness
under the equipment line of credit was $207,000.
In September 1998, we entered into an additional subordinated promissory note
agreement with the same company with which we lease capital equipment in the
principal amount of $2.0 million. The note bears interest at 11%, payments are
due in monthly installments of approximately $65,000 including interest, and the
note matures in November 2001. At March 31, 2000, the outstanding indebtedness
under the subordinated loan agreement was $1.2 million.
In August 1998, we issued a warrant to American Express Travel Related
Services Company, Inc. ("TRS") to purchase shares of our Series E Preferred
Stock. In connection with our IPO in December 1998, this warrant was converted
into a warrant to purchase 2,325,000 shares of our common stock. In December
1998, TRS exercised a portion of the warrant to purchase 225,000 shares at
$11.625 per share and on October 15, 1999, a portion of the warrant to purchase
700,000 shares expired. TRS may acquire 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.
In February 2000, we entered into a Stock Purchase Agreement with SAFECO
Corporation and Nortel Networks, Inc. for the purchase of 1,073,929 and 429,571
shares, respectively, of our common stock at a purchase price of $23.28 per
share. Net proceeds received from the Stock Purchase Agreements totaled $34.9
million. Under the terms of these agreements, we granted SAFECO and Nortel
warrants to purchase up to 3,750,000 and 1,500,000 shares of common stock,
respectively. The warrants become exercisable upon SAFECO and Nortel achieving
certain annual milestones relating to revenue derived in connection with the
arrangements over the next five years at a price determined to be the greater of
$30.26 or 50% of the fair value of the common stock price on prescribed dates.
In the event these milestones are achieved or the achievement becomes probable,
we may be required to record a significant non-cash distribution/marketing
expense to the extent that the fair value of the common stock exceeds the
exercise price of the warrants at that time. To date, we have not recorded an
expense associated with these agreements and it is uncertain whether these
milestones will be achieved in the future.
We currently anticipate that for the foreseeable future we will continue to
experience significant growth in our operating expenses related to increasing
research and development, augmenting our sales and marketing operations 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 cash equivalents 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.
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YEAR 2000 COMPLIANCE
In November 1998, we established a Year 2000 Compliance Task Force (the "Task
Force"), composed of high-level representatives of the product management,
information systems, technical services and legal departments. The Task Force
was charged with the responsibility of formulating and implementing our Year
2000 readiness program, and working to ensure the Year 2000 readiness of our
operations, products and relationships.
In the course of our testing, we discovered several minor Year 2000 issues
that were promptly resolved with patches or updates provided at no charge to
authorized licensees. We have maintained a plan to discontinue support of some
very early product versions not currently shipping; however, our customer base
was duly notified of this fact via our Web site and via written correspondence.
We have now completed all four phases of our Year 2000 compliance program.
Through the first part of 2000 we have tested our current and future products by
applying our Year 2000 compliance criteria and have not found significant Year
2000 issues. We plan to continue testing as considered appropriate and will
take any necessary corrective actions if any issues are identified.
We also reviewed our internal management information and other systems in
order to identify any products, services or systems that were not Year 2000
compliant. 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. We have received responses to compliance verification requests from
substantially all of the material external vendors supplying software and
information systems to us to whom we circulated such requests. The purpose of
these requests was to determine the readiness of third parties' remediation of
their own Year 2000 issues. We also established contingency plans for continuing
operations in the event problems with third-party vendors arose and for handling
Year 2000 problems that were not detected and corrected prior to their
occurrence. Despite our efforts, however, we may yet find that we did not
foresee all significant Year 2000 problems and such unforeseen problems may have
a material adverse effect on our business.
Shortly after the millennium date change, some of our customers reported minor
problems with our software products that appear to have been related to Year
2000 problems. In each case, these minor problems were resolved at no charge to
the affected customers. However, we may yet be subject to claims based on Year
2000 problems in other companies' products, other as-yet-unreported 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 as-
yet-unreported Year 2000-related claims. We expect that this uncertainty about
the extent of Year 2000 problems will continue through fiscal 2000. The cost of
resolving Year 2000-related issues and contingency plan promulgation may yet
become material and could harm our business.
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 damages, would
have a material adverse effect on our business, results of operations and
financial condition.
We also reviewed our internal management information and other systems in
order to identify any products, services or systems that were not Year 2000
compliant. To assist us in this initiative, we retained the services of a Year
2000 consulting firm that assisted with all four phases of our Year 2000
program. 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. We have received responses to compliance verification requests from
substantially all of the material external vendors supplying software and
information systems to us to whom we circulated such requests. The purpose of
these requests was to determine the readiness of third parties' remediation of
their own Year 2000 issues. We also established contingency plans for continuing
operations in the event problems with third-party vendors arose and for handling
Year 2000 problems that were not detected and corrected prior to their
occurrence. Despite our efforts, however, we may yet find that we did not
foresee all significant Year 2000 problems and such unforeseen problems may have
a material adverse effect on our business.
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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 Concur Expense product and related services,
and to a lesser degree, the sale of licenses and services relating to Concur
Human Resources. To compete effectively, we expect to devote substantial
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 totaling $36.6 million in the six
months ended March 31, 2000, and incurred net losses of $46.5 million, $26.2
million and $7.6 million in fiscal 1999, 1998 and 1997, respectively. As of
March 31, 2000, we had an accumulated deficit of $126.4 million. We expect to
continue to incur net losses for the foreseeable future. Despite substantial net
operating loss carry-forwards as of March 31, 2000, tax laws will likely 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.
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. In the past our quarterly operating
results have fluctuated significantly, and we expect them to continue to
fluctuate in the future. Our licensed software products, from which we derive
most of our revenues, are typically shipped when orders are received, so our
license backlog at the beginning of any quarter in the past represented only a
small portion, if any, of that quarter's expected license revenues. This has
made and will continue to make license revenues in any quarter difficult to
forecast because they depend on orders booked and shipped in that quarter.
Moreover, we have historically recognized 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, and we expect this trend to continue for as long as our
licensed software products represent a substantial part of our overall business.
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.
If revenues or operating results fall below our expectations in a particular
quarter, our stock price could fall. In the fourth quarter of fiscal 1999, our
license and service revenues did, in fact, fall below our own and the consensus
of securities analysts' estimates for the quarter and, as a result, the price of
our common stock experienced a sharp decline. In the first quarter of fiscal
2000, our license revenues and operating results fell below our own and the
consensus of securities analysts' estimates for the quarter and, as a result,
the price of our common stock experienced another sharp decline. If our revenues
or operating results fall below our own estimates or below the consensus of
analysts' estimates in an upcoming quarter, our common stock price could
experience a more substantial and lasting decline, harming our business
significantly in terms of, among other things, diminished employee morale and
public image. See "--We are at risk of securities class action litigation due
to our stock price volatility."
We have been public for only a short time and our common stock price has been
volatile.
We completed our initial public offering in December 1998. Since then, the
market price of our common stock has been highly volatile and is subject to wide
fluctuations. We expect our common stock price to continue to fluctuate:
. in response to quarterly variations in operating results;
. in reaction to announcements of technological innovations, new products or
signficant agreements by us or our competitors;
. because of market conditions in the enterprise software and eCommerce
industries;
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. in reaction to changes in financial estimates by securities analysts, and our
failure to meet or exceed the expectations of analysts or investors; and
. as a result of the active trading of our stock by online day traders.
We are at risk of securities class action litigation due to our stock price
volatility.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation, either due
to prior volatility associated with our failure to meet consensus analysts'
estimates for revenues for the fourth quarter of fiscal 1999 or our failure to
meet consensus analysts' estimates for license revenues and operating results
for the first quarter of fiscal 2000. Securities litigation could result in
substantial costs and divert management's attention and resources.
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 Concur Expense product. We believe that Concur
Expense revenues will continue to account for a large portion of our revenues
for the foreseeable future. Our future financial performance and revenue growth
will depend upon the successful development, introduction and customer
acceptance of new and enhanced versions of Concur Expense, Concur Procurement,
Concur Human Resources and other applications, and our business could be harmed
if we fail to deliver the enhancements to our current and future products that
customers want. In particular, our business could be harmed if we are unable to
establish our Concur Procurement product in the corporate procurement software
market. Within our current suite of offerings, we believe that Concur
Procurement is of critical strategic importance because some customers may view
this application as more useful to their business and the license fees
associated with such software tend to be significantly larger than for the other
types of applications we offer. As a result, where our customers' software
buying decisions are linked together, these decisions are more typically led by
their procurement software buying decision than by their evaluation of either
travel and entertainment expense management or human resources solutions. As a
result, we believe that an inability to compete effectively in the procurement
software market could significantly hamper our future financial performance and
revenue growth.
We face significant competition.
The market for our products is intensely competitive and rapidly changing.
Direct competition comes from independent software vendors of business-to-
business electronic commerce software, travel and entertainment expense
management, corporate procurement applications and human resources self-service
applications, and from providers of enterprise resource planning ("ERP")
software applications that have or may be developing travel and entertainment
expense management, corporate procurement products and human resources self-
service applications. Many of our competitors 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. Some of our competitors in the business-to-business electronic
commerce field are establishing commerce or purchasing networks involving
suppliers, customers and partners and effectively excluding other companies that
do not participate in these commerce networks. 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.
Our expansion into the corporate procurement application and human resources
self-service application markets is risky.
We added Concur Procurement to our product line in 1998 and we added Concur
Human Resources in 1999. To date, substantially all of our revenues have come
from Concur Expense. Our future revenue growth depends on our ability to license
Concur Procurement and Concur Human Resources to new customers and to our
existing base of Concur Expense customers. Potential and existing customers may
not purchase Concur Procurement or Concur Human Resources for many reasons,
including:
. an absence of desired functionality;
. the costs of and time required for implementation;
. incompatibility of these applications with customers' preferred technology
platforms;
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. possible software defects; and
. customers lacking the necessary hardware, software or intranet
infrastructure.
Further, we must overcome some significant obstacles to expand into the market
for corporate procurement applications and human resources self-service
applications, including:
. competitors that have more experience and better name recognition;
. the limited experience of our sales and consulting personnel in these
markets; and
. our limited reference accounts in these markets.
Our business could be harmed if we fail to deliver enhancements to Concur
Procurement and Concur Human Resources that customers want. In addition, our
business could also be harmed if our expansion into these newer markets and
resulting broadening of our focus causes Concur Expense, upon which we continue
to rely for most of our revenues, to lose market share to our competitors that
are solely or primarily focused on travel and entertainment expense management
software applications. This broadening of focus could also harm us by causing us
to spread our limited resources across to many initiatives and diverting
management time and attention required to execute any given initiative properly.
Our effort to sell products as an Internet-based application service provider
under our ASP version of Concur eWorkplace may fail and we may face related
security issues; the shift in our revenue mix from our traditional licensed
model to our newer business models tends to cause a greater proportion of
revenue deferral to future quarters and makes it difficult to predict revenues
over the near-term.
In addition to licensing our software applications, we offer them in an ASP
version. With this version we price our products on a subscription basis to
companies seeking to outsource their workplace eCommerce 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 limited experience selling products or services in this manner, and our
efforts to develop this business model have diverted, and are expected to
continue to divert, our financial resources and management time and attention.
In connection with this version of our software applications, we have engaged
third-party service providers to perform many of the necessary services as
independent contractors, and we are and 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 the ASP version of our products. We have limited
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
subscription basis, our business will be harmed. In connection with the ASP
version of our software applications, we receive confidential information,
including credit card, travel booking, employee, purchasing, supplier 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. Any such lapse in security could
expose us to litigation, loss of customers or other harm to our business. In
addition, any person who is able to circumvent our security measures could
misappropriate proprietary or confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information. Our failure to prevent security breaches, or well-
publicized security breaches affecting the Web in general, could significantly
harm our business, operating results and financial condition.
Even if our strategy of offering products to customers over the Internet
proves 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 ASP version,
which is unproven and potentially less profitable, could harm our business. In
addition, in recent quarters, the pace of sales growth in our ASP model has
outstripped the sales growth of our traditional licensing business, and as an
increasing proportion of our business moves to this business model, our revenues
may be inconsistent
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and hard to predict, given that revenues under these new business models are
recognized ratably over the contract term whereas most of our revenues under the
traditional licensing arrangements are recognized in the same quarter that the
contract is signed.
We have limited experience selling our products as a suite and our Concur
eWorkplace model may fail.
We recently introduced Concur eWorkplace, which integrates Concur Expense,
Concur Procurement and Concur Human Resources as a suite of applications. Prior
to that introduction, we had 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 have also found that selling our products as a suite has lengthened
our sales cycle because the sale is more complex and is more likely to involve
information technology specialists and, in some cases, higher-level decision-
makers at the prospective customer. We do not anticipate that the trend toward
longer sales cycles will abate in the foreseeable future. Because we are
inexperienced selling our products this way, we cannot predict whether it will
harm 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 from six to fifteen months. As a result of our lengthy
sales cycle, we have only a limited ability to forecast the timing and size of
specific sales. In addition, customers may delay their purchases from a given
quarter to another as they elect to wait for new product enhancements. 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. See "--Our operating results fluctuate widely and are difficult
to predict."
We must attract and retain qualified 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 business-to-business electronic commerce
solution providers, and with consulting and professional services companies.
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. In particular, in order to offer our customers our suite of workplace
eCommerce software applications, we license technology from third parties. 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.
It is important for us to establish and maintain strategic relationships.
To offer products and services to a larger customer base than we can reach
through direct sales, telesales and our internal marketing efforts, we depend on
strategic referral and, in the future, strategic reseller relationships. If we
were unable to maintain our existing strategic referral relationships or enter
into additional strategic referral or reseller relationships, we would have to
devote more resources to the distribution, sale and marketing of our products
and services. Our success depends in part on the ultimate success of our
strategic referral and reseller partners and their ability to market our
products and services successfully. For instance, we have recently entered into
reseller arrangements with Nortel and SAFECO for the distribution of Concur
eWorkplace ASP; however, there is no assurance that these arrangements will
produce anticipated or hoped-for results in terms of sales volume. In the
developing field of business-to-business electronic commerce, strategic business
relationships with key suppliers and others are critical to the successful
establishment of commerce or buying networks that may become the source of
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multiple revenue opportunities for their participants. If we are unable to
establish such relationships and our competitors have these relationships, our
workplace eCommerce business strategy would be harmed. 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.
We have limited experience with large-scale deployment, which is important to
our future success.
To date, only a limited number of customers have fully deployed Concur
Expense, Concur Procurement and Concur Human Resources. 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 will be harmed. Similarly, because only a
limited number of customers are using the ASP version of our product offering,
we do not have assurance that our ASP product would be able to support a large
volume of users or transactions and our business would be harmed by any failure
in this regard.
We do not have assurance that our ASP products will be able to support a high
volume of users or transactions.
Because only a limited number of customers are using the ASP version of our
product offering, we do not have assurance that our ASP product would be able to
support a large volume of users or transactions and our business would be harmed
by any failure in this regard.
We may experience difficulties in introducing new products and upgrades.
We expect to add additional workplace eCommerce applications to our product
suite by acquisition, internal development, or through O.E.M. arrangements, and
to develop enhancements to our existing applications. We have experienced delays
in the planned release dates of our software products and upgrades, and we have
discovered software defects in new products after their introduction. New
products or upgrades may not be released according to schedule, or may contain
defects when released. Either situation could result in adverse publicity, loss
of sales, delay in market acceptance of our products or customer claims against
us, any of which could harm our business. If we do not develop, license or
acquire new software products, or deliver enhancements to existing products on a
timely and cost-effective basis, our business will be harmed.
We may encounter problems with respect to the hosting, management and security
of our Concur Commerce Network infrastructure.
We contract with a third party to expand, host, manage and maintain our Concur
Commerce Network infrastructure. Services provided by the third party include
web server hosting, maintaining communications lines and managing network data
centers. If our relationship or agreement with this third party were terminated
for any reason, we would have to obtain similar services from another provider
or perform these functions ourselves. We may not successfully obtain or perform
these services on a timely and cost-effective basis. Because our Concur Commerce
Network infrastructure is serviced by a third party, we are entirely dependent
on that party to manage and maintain our network infrastructure and to provide
security for it, so this component of our business depends on that third party.
In addition, as with our ASP business model, we may, with respect to our Concur
Commerce Network, encounter security problems that could significantly harm our
business, operating results and financial condition. See "--Our effort to sell
products as an Internet-based application service provider under our ASP version
of Concur eWorkplace may fail and we may face related security issues."
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, database technology and electronic commerce
technical standards. 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, some of our products
are not currently based upon the Java programming language, an increasingly
widely used language for developing Internet applications. Accordingly,
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some features available to products written in Java may not be available in our
products, and this could result in reduced customer demand.
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. 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 have entered into agreements with resellers
to market our ASP products. We have limited experience utilizing resellers to
date. The failure to develop indirect channels may place us at a significant
competitive disadvantage.
Our ability to protect our intellectual property is limited and our products may
be subject to infringement claims by third parties.
Our business depends upon our proprietary technology. We presently have no
patents or patent applications pending. We rely on a combination of copyright
and trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary information. In some cases, we are using
unregistered marks, and some of the marks that we have filed for federal
registration may not ultimately be registrable. As a result, we may have
incomplete rights to use some of our marks. We have also taken steps to avoid
disclosure of our proprietary technology by generally restricting customer
access to our products' source code and requiring all employees and contractors
to enter into confidentiality and invention assignment agreements. However, some
of our customers and partners have received access to source code versions of
our products in order to facilitate more extensive testing of our products and
certain of our former technical personnel and contractors did not execute such
confidentiality and invention assignment agreements. Further, we only recently
began requiring contractors and temporary employees to execute our
confidentiality agreement rather than executing the confidentiality agreements
maintained by temporary agencies or not executing any such agreements.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. In addition, the laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
the United States, and we expect that it will become more difficult to monitor
use of our products as we increase our international presence. There can be no
assurance that our means of protecting these proprietary rights will be
adequate, nor that our competitors will not independently develop similar
technology. In addition, there can be no assurance that third parties will not
claim infringement by us with respect to current or future products or other
intellectual property rights. Any such claims could have a material adverse
effect on our business, results of operations and financial condition.
We depend on service revenues to increase our overall revenues; services may not
achieve profitability.
Our service revenues have increased each year as a percentage of total
revenues. Service revenues represented 47.7% of total revenues for the six
months ended March 31, 2000, and 35.2%, 34.5%, and 27.8% of total revenues for
fiscal 1999, 1998 and 1997, respectively. We anticipate that service revenues
will continue to represent a significant percentage of total revenues, however,
the percentage of service revenues as a percentage of total revenues in prior
fiscal periods may not be indicative of levels to be expected in future periods
as the proportion of our service revenues to total revenues will fluctuate in
the future. Our service revenues depend, in part, upon the ongoing renewals of
customer support contracts by our 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.
We formed our professional services organization in 1996. Since that time, we
have not achieved profitability with respect to these services. Due to the
increasing costs of operating a professional services organization, we may not
be able to achieve profitability in this part of our business in the near
future, or ever.
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We depend on our key employees.
Our success depends on the performance of our senior management, particularly
S. Steven Singh, our President, Chief Executive Officer and Chairman of the
Board, who is not bound by an employment agreement. Although we maintain key
person life insurance on Mr. Singh in the amount of $1.0 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 could harm our business. For example,
in April 2000 Sterling Wilson, Chief Financial Officer and Executive Vice
President of Operations, announced his intention to resign to join a private,
non-competitive company effective June 1, 2000. We are actively recruiting for
a replacement, however, if we are unable to find a replacement in a timely
manner, our business could be harmed.
We rely on third-party implementation service providers.
Beginning with fiscal 1999, a significant portion of the consulting services
associated with the implementation of our software at our customers' facilities
has been performed by third-party implementation service providers. If we are
unable to establish and maintain effective, long-term relationships with our
implementation providers, or if these providers do not meet the needs or
expectations of our customers, our business would be seriously harmed. This
strategy will also require that we develop new relationships with additional
third-party implementation providers to provide these services if the number of
our customer implementations continues to increase. Our current implementation
partners are not contractually required to continue to help implement our
solutions. As a result of the limited resources and capacities of many third-
party implementation providers, we may be unable to establish or maintain
relationships with third parties having sufficient resources to provide the
necessary implementation services to support our needs. If these resources are
unavailable, we will be required to provide these services internally, which
would significantly limit our ability to meet our customers' implementation
needs. In addition, we cannot control the level and quality of service provided
by our current and future implementation partners.
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;
. uncertain regulation of electronic commerce;
. 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 still a relatively new
currency and may be subject to economic risks that are not currently
contemplated. We currently do not engage in foreign exchange
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hedging activities, and therefore our international revenues and expenses are
currently subject to the risks of foreign currency fluctuations.
A key component of our business strategy is to expand our sales and support
operations internationally. We employ sales professionals in London, Paris,
Sydney and Toronto 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. 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 (as well as business-to-business procurement and human
resources self-service solutions) that incorporates the tax laws and accounting
practices followed in Germany and other European countries, and to develop
workplace eCommerce 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 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 delivered, the
vendors' fee is fixed and determinable and collection is deemed probable. We
recognize customer support revenues ratably over the customer support contract
term, typically one year, and recognize revenues for consulting and training
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 SOP 97-2 and related modifications have
not yet been issued. Once available, such guidelines could lead to unanticipated
changes in our current revenue accounting practices, and such changes could
materially affect our future revenues and earnings. See "Our plan to sell
products as an Internet-based applications service provider may fail."
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our operating results are sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our cash equivalents are
invested in short-term debt instruments while certain portions of our
outstanding long-term debt bear interest at variable rates. Based on our
marketable securities portfolio and interest rates at March 31, 2000, a one
percent increase or decrease in interest rates would result in a decrease or
increase of approximately $890,000, respectively, in the fair value of the
marketable securities portfolio. Changes in interest rates may affect the fair
value of the marketable securities portfolio; however, such gains or losses
would not be realized unless the investments are sold.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent sales of unregistered securities
During the three months ended March 31, 2000, we sold 1,503,500 shares of our
common stock and warrants to purchase up to 5,250,000 additional shares of our
common stock to two investors for an aggregate purchase price of approximately
$34.9 million, net of offering costs and in consideration of certain agreements.
The sales were consummated on March 23, 2000 in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act. The
securities were sold to a limited number of investors with no general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investment and who
represented to us that the shares were being acquired for investment purposes.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on February 8, 2000, the following
actions were taken:
1. Election of Directors
S. Steven Singh
For: 13,875,983 Withheld: 73,182
Russell P. Fradin
For: 13,895,782 Withheld: 53,383
2. Amendment to the 1998 Equity Incentive Plan
For: 6,750,682 Withheld: 6,079,678 Against: 1,118,805
3. Ratification of Ernst & Young LLP as the Company's independent auditors for
fiscal year 2000
For: 13,913,810 Withheld: 27,825 Against: 7,530
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description of Exhibit
----------- ----------------------
27.01 Financial Data Schedule.
Reports on Form 8-K
On February 24, 2000, we filed a current report on Form 8-K dated February 23,
2000 under Item 5 announcing we had entered into a Stock Purchase Agreement with
SAFECO Corporation and Nortel Networks, Inc. as well as entered into strategic
marketing and distribution agreements with SAFECO Life Insurance Company and
Nortel Networks Corporation.
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 11, 2000 CONCUR TECHNOLOGIES, INC.
By /s/ Sterling R. Wilson
--------------------------------------
Sterling R. Wilson
Chief Financial Officer and
Executive Vice President of
Operations
28
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
27.01 Financial Data Schedule
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 64,406
<SECURITIES> 28,560
<RECEIVABLES> 11,385
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 106,621
<PP&E> 12,034
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,703
<CURRENT-LIABILITIES> 22,299
<BONDS> 0
0
0
<COMMON> 221,228
<OTHER-SE> (904)
<TOTAL-LIABILITY-AND-EQUITY> 120,703
<SALES> 6,175
<TOTAL-REVENUES> 10,836
<CGS> 289
<TOTAL-COSTS> 6,943
<OTHER-EXPENSES> 23,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (436)
<INCOME-PRETAX> (19,314)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,314)
<EPS-BASIC> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
