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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended
June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-27431
Calico Commerce, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0373344
-------- ------------
(State of other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
333 West San Carlos, San Jose, California 95110
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(408) 975-7400
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(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
(1) Yes X No
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(2) Yes X No
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As of June 30, 2000 there were 35,080,000 shares of the Registrant's
Common Stock outstanding.
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CALICO COMMERCE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statement of Operations - Three
Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
</TABLE>
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CALICO COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
June 30, MARCH 31,
--------- ---------
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 6,780 $ 25,917
Short-term investments .............................................. 61,924 49,923
Accounts receivable, net ............................................ 13,050 10,829
Other current assets ................................................ 3,419 2,568
--------- ---------
Total current assets ............................................. 85,173 89,237
Long-term investments ................................................. 3,120 5,377
Property and equipment, net ........................................... 4,810 4,462
Intangible and other assets, net ...................................... 81,505 89,584
--------- ---------
$ 174,608 $ 188,660
========= =========
LIABILITIES, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................... $ 2,890 $ 4,152
Accrued liabilities ................................................. 10,099 11,641
Deferred revenue .................................................... 5,325 5,802
Current portion of notes payable .................................... 1,273 1,255
Current portion of capital lease
obligations ...................................................... 188 275
--------- ---------
Total current liabilities ........................................ 19,775 23,125
Notes payable, non-current ............................................ 1,529 1,413
Capital lease obligations, non-current ................................ 98 106
Other liabilities ..................................................... 12 32
--------- ---------
21,414 24,676
--------- ---------
Commitments and contingencies (Note 10) Stockholders' equity (deficit):
Preferred Stock; $0.001 par value; 15,000
shares authorized; no shares issued and
outstanding ...................................................... -- --
Common Stock; $0.001 par value; 150,000
shares authorized; 35,080 and 34,942
shares issued and outstanding .................................... 35 35
Additional paid-in capital .......................................... 226,769 224,587
Notes receivable from stockholders .................................. (1,261) (1,752)
Unearned compensation ............................................... (949) (1,228)
Other comprehensive loss ............................................ (102) (179)
Accumulated deficit ................................................. (71,298) (57,479)
--------- ---------
Total stockholders' equity (deficit) ............................. 153,194 163,984
========= =========
$ 174,608 $ 188,660
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CALICO COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenue:
License .................... $ 6,971 $ 3,457
Services ................... 5,609 3,976
-------- --------
Total net revenue ....... 12,580 7,433
-------- --------
Cost of net revenue:
License .................... 357 --
Amortization of purchased
technology .............. 497 137
Services ................... 5,179 2,660
-------- --------
Total cost of net revenue 6,033 2,797
-------- --------
Gross profit ................. 6,547 4,636
-------- --------
Operating expenses:
Sales and marketing ........ 6,953 4,558
Research and development ... 5,311 2,666
General and administrative . 1,453 1,452
Stock compensation ......... 279 514
Amortization of intangibles 7,481 240
-------- --------
Total operating expenses 21,477 9,430
-------- --------
Loss from operations ......... (14,930) (4,794)
Interest and other income, net 1,111 71
-------- --------
Net loss ..................... $(13,819) $ (4,723)
======== ========
Net loss per share:
Basic and diluted .......... $ (0.41) $ (0.52)
======== ========
Weighted average shares .... 34,000 9,000
======== ========
Pro forma net loss per share:
Basic and diluted .......... $ (0.19)
========
Weighted average shares .... 24,600
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(13,819) $ (4,723)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts ...................... -- 157
Provision for sales returns .......................... -- 153
Depreciation, amortization and other ................. 8,574 869
Stock compensation and other ......................... 306 514
Loss on disposal of assets ........................... (130) 36
Changes in assets and liabilities, net of acquisition:
Accounts receivable ................................ (2,221) (225)
Other current assets ............................... (851) (466)
Accounts payable ................................... (1,262) 455
Accrued liabilities ................................ (1,542) 281
Deferred revenue ................................... (20) (402)
Other liabilities .................................. (477) (44)
-------- --------
Net cash used in operating activities ............ (11,442) (3,395)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................... (814) (1,331)
Purchases of investments ............................... (15,892) --
Sales and maturities of investments .................... 6,225 --
Acquisition, net of cash acquired ...................... 101 --
-------- --------
Net cash used in investing activities ............ (10,380) (1,331)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock ................. 2,321 17
Common Stock repurchases ............................... (166) --
Proceeds from repayments of stockholder loans .......... 491 --
Net proceeds from issuance of preferred stock .......... -- 6
Proceeds from issuance of notes payable ................ 515 --
Repayments of notes payable ............................ (381) (149)
Principal payments under capital lease obligations ..... (95) (61)
-------- --------
Net cash provided by financing activities ........ 2,685 (187)
-------- --------
Net increase in cash and cash equivalents ................ (19,137) (4,913)
Cash and cash equivalents at beginning of period ......... 25,917 15,441
-------- --------
Cash and cash equivalents at end of period ............... $ 6,780 $ 10,528
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CALICO COMMERCE, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended June 30, 2000
(unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements
include the accounts of Calico Commerce, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of June
30, 2000 and for the three months ended June 30, 2000 and 1999 are unaudited and
have been prepared on a basis consistent with the March 31, 2000 audited
financial statements and include all normal recurring adjustments which are, in
the opinion of management, necessary for the fair statement of the results of
these periods. These condensed consolidated financial statements should be read
in conjunction with our consolidated financial statements and notes thereto
included in our Form 10-K for the fiscal year ended March 31, 2000. The results
of operations for the three months ended June 30, 2000 are not necessarily
indicative of results to be expected for the entire year or any other period.
2. REVENUE RECOGNITION
Revenues are derived from software licenses and related services, which
include implementation and integration, technical support, training and
consulting. For contracts with multiple elements, and for which vendor-specific
objective evidence of fair value for the undelivered elements exists, revenue is
recognized for the delivered elements based upon the residual contract value as
prescribed by Statement of Position No. 98-9, "Modification of SOP No. 97-2 with
Respect to Certain Transactions".
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exist, the fee is fixed
or determinable and collectibility is probable. Provisions for sales returns are
provided at the time of revenue recognition based upon estimated returns.
Services revenue primarily comprises revenue from consulting fees,
maintenance contracts and training. Services revenue from consulting and
training is recognized as the service is performed.
Maintenance contracts include the right to unspecified upgrades and
ongoing support. Maintenance revenue is deferred and recognized on a
straight-line basis as services revenue over the life of the related contract,
which is typically one year.
License and services revenue on contracts involving significant
implementation, customization or services which are essential to the
functionality of the software is recognized over the period of each engagement,
primarily using the percentage-of-completion method. Labor hours incurred is
generally used as the measure of progress towards completion. Revenue for these
arrangements is classified as license revenue and services revenue based upon
our estimates of fair value for each element and recognize the revenue based on
the percentage-of-completion ratio for the arrangement. A provision for
estimated losses on engagements is made in the period in which the loss becomes
probable and can be reasonably estimated.
Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in advance of
billing (typically under percentage-of-completion accounting) are recorded as
unbilled receivables.
3. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available
to Common Stockholders for the period by the weighted average number of shares
of Common Stock outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of shares of Common Stock and potential shares of Common Stock. The calculation
of diluted net loss per share excludes potential shares of Common Stock if the
effect is antidilutive. Potential shares of Common Stock consist of unvested
restricted Common Stock, incremental shares of Common
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Stock issuable upon the exercise of stock options and warrants and shares
issuable upon conversion of the Series A, Series B, Series C, Series D and
Series E Mandatorily redeemable Convertible Preferred Stock.
The Company's historical capital structure is not indicative of the
current structure due to the automatic conversion of all shares of mandatorily
redeemable convertible preferred stock into Common Stock concurrent with the
closing of the Company's initial public offering in October 1999. Accordingly,
pro forma earnings per share is presented assuming the conversion as of June 30,
1999 of all outstanding shares of mandatorily redeemable convertible preferred
stock into Common Stock upon our initial public offering, as if such conversion
occurred at the beginning of the periods presented, or from their respective
dates of issuance, if later.
The following table sets forth the computation of basic and diluted net
loss per share and the pro forma basic and diluted net loss per share for the
periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
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<S> <C> <C>
Numerator:
Net loss ................................. $(13,819) $ (4,723)
======== ========
Denominator:
Weighted average shares .................. 34,900 11,500
Weighted average unvested shares of Common
Stock subject to repurchase ........... (900) (2,500)
-------- --------
Denominator for basic and diluted
calculation ........................... 34,000 9,000
======== ========
Net loss per share:
Basic and diluted ........................ $ (0.41) $ (0.52)
======== ========
</TABLE>
The above table reflects the restated weighted average shares for the
year ended March 31, 1999 to reflect 1,052,632 shares sold to a private investor
in March 1999. Using these shares, the previously reported net loss per share
for that quarter would have been $0.52 instead of the $0.59 shown in the
Company's S-1 registration statement.
At June 30, 2000, 8,382,620 potential common shares are excluded from
the determination of diluted net loss per share as the effect of such shares is
antidilutive.
<TABLE>
<S> <C>
Pro forma:
Shares used above ...................... 9,000
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock ......... 15,600
-------
Shares used in computing pro forma
basic and diluted net loss per share 24,600
=======
Net loss per share:
Basic and diluted .................... $ (0.19)
=======
</TABLE>
4. COMPREHENSIVE LOSS
Comprehensive loss, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has had $102,000 in
unrealized losses on short-term and long-term investments that are required to
be reported in comprehensive loss.
5. INFORMATION CONCERNING BUSINESS SEGMENTS
Calico operates in one single industry segment. There are no separate
operating segments for which discrete financial statements are prepared.
Management makes operating decisions and assesses performance primarily based
upon product revenues and related gross margins.
The majority of our sales to other foreign countries are originated in
the United States and therefore represent export sales. The following is a
breakdown of revenues by
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shipment or service delivery destination for the three months ended June 30,
2000 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-------------------
2000 1999
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<S> <C> <C>
North America..................................... $10,954 $ 6,542
European countries................................ 1,363 439
Other foreign countries........................... 263 452
------- -------
$12,580 $ 7,433
======= =======
</TABLE>
9. DEBT AND WARRANTS
In September 1999, Calico entered into a commitment with a bank to issue
variable rate installment notes in connection with a proposed $3.0 million
equipment financing credit line expiring June 30, 2000. Each advance bears
interest at the bank's prime rate plus 0.5% per year, with the principal to be
repaid in 36 equal monthly installments. As of March 31, 2000, the bank had made
three advances totaling $2,143,000 under this commitment, and an additional
$515,000 was advanced on June 30, 2000.
Under this commitment, Calico is required to meet certain monthly and
quarterly financial tests, including minimum operating results and certain
liquidity, leverage and debt service ratios. All previous agreements with the
above financial institution are also under these same covenants. At June 30,
2000 the Company was in compliance with all of the financial covenants.
In June 2000 the Company entered into a software license agreement with
a customer and in connection with this agreement, the Company issued a warrant
to purchase 5,395 shares of Common Stock at $12.60 per share, expiring on
December 22, 2001. The estimated fair value of the warrants was $27,450 using
the Black-Scholes option pricing model using the following assumptions: the fair
value of the Common Stock of $14.83, risk free interest rate of 6.2%, volatility
factor of 75% and life of 1.5 years. Software license revenue was offset by the
value of the warrant.
10. COMMITMENTS AND CONTINGENCIES
At June 30, 2000 the Company had noncancelable operating leases for
office space and equipment of approximately $10.5 million, which are payable
through fiscal 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Factors that might cause such a
discrepancy include, but are not limited to, those discussed in "Factors that
May Affect Results" and "Liquidity and Capital Resources" below as well as Risk
Factors included in our 10-K/A dated July 3, 2000, as filed with the Securities
and Exchange Commission. The following discussion should be read in conjunction
with the Condensed Consolidated Financial Statements and notes thereto appearing
elsewhere in this report.
OVERVIEW
We provide software and services that enable companies to interact directly
with their customers over the Internet, intranets, extranets, and corporate
networks, and accessed through desktop and mobile computers and retail kiosks to
improve the interactive buying and selling of complex products and services. We
were incorporated in April 1994. From May 1994 through March 1997, we generated
revenue primarily from the license of products based upon our first generation
configuration technology. In March 1997, we released our first product designed
for use over the Internet and corporate networks. In December 1998, we released
Calico eSales 2.0, an integrated suite of products that extended the
Internet-based architecture and included Calico eSales Catalog (since re-named
Calico eSales InfoGuide), a product that allows targeted delivery
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of information without the need to modify existing applications or information
sources. Calico eSales InfoGuide was the first product release based upon
technology obtained from our August 1998 acquisition of FirstFloor, Inc. In May
1999, we released Calico eSales Loyalty Builder, which incorporates technology
also obtained from our acquisition of FirstFloor. In June 1999, we released
Calico eSales 2.5, an integrated suite that incorporates eSales Loyalty Builder,
eSales Quote and improved versions of our other products. During the quarter
ended December 31, 1999, we first sold the product obtained through our
sublicense agreement with ConnectInc.com. We subsequently acquired
ConnectInc.com in January 2000, and sell the product under the name Market
Maker. In March 2000, we released Calico eSales 2.7, an improved version of our
suite, and introduced Calico Advisor, a product with a next generation
configuration and recommendation application designed for extremely large scale
e-commerce sites. In March 2000 the Company also introduced the Calico
"Lightning Architecture(TM)", Calico's next-generation, standards based
eBusiness application platform.
We derive revenue principally from the license of our Calico eSales Suite
of products and the delivery of associated implementation and support services.
The mix of products and services sold varies by customer, and follow-on sales
typically reflect an expansion of the use of our products within the customer's
business, rather than a migration to different products. To date, our sales have
been primarily within the computer hardware, emerging growth and network and
telecommunications equipment industries.
Licenses for our suite of products are sold in different methods, such as
per user, per site or per enterprise. Customer licenses are typically several
hundred thousand dollars. The price of our annual maintenance contracts are
based on a percentage of the related product license price and is generally paid
in advance. Consulting fees for implementation and training are generally priced
on a per hour basis.
For contracts with multiple elements, and for which vendor-specific
objective evidence of fair value exists for the undelivered elements, we
recognize revenue for the delivered elements based upon the residual contract
value as prescribed by SOP 98-9. Revenue from license fees is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant obligations of Calico with regard to implementation
exist, the fee is fixed or determinable, and collection is probable. Provisions
for sales returns are made at the time of revenue recognition based upon
estimated returns. License revenue from contracts involving customization or
services which are essential to the functionality of the software is recognized
under contract accounting using the completed contract or
percentage-of-completion methods as appropriate.
Services revenue primarily comprises revenue from consulting services,
maintenance contracts and training. Services revenue from consulting and
training is generally recognized as the service is performed.
Maintenance contracts include the right to unspecified upgrades and ongoing
support. Maintenance revenue is deferred and recognized on a straight-line basis
as services revenue over the life of the related contract, which is typically
one year. Our customers generally purchase maintenance contracts with their
initial software implementation.
Revenue from contracts involving significant implementation, customization
or services essential to the functionality of the software is recognized over
the period of each engagement, primarily using the percentage-of-completion
method of contract accounting. Labor hours completed is generally used as the
measure of progress towards completion. We classify revenue for these
arrangements as license revenue and services revenue based upon our estimate of
fair value for each element and recognize the revenue based on the
percentage-of-completion ratio for the arrangement. A provision for estimated
losses on engagements is made in the period in which the loss becomes probable
and can be reasonably estimated.
We bill customers in accordance with contract terms. Customer advances and
amounts billed to customers in excess of revenue recognized are recorded as
deferred revenue. Amounts recognized as revenue in advance of billing are
recorded as unbilled receivables.
Since our inception, we have incurred quarterly and annual losses, and we
expect to continue to incur losses on both a quarterly and annual basis for the
foreseeable future. We incurred net losses of $27.8 million for fiscal 2000,
$15.3 million for fiscal 1999, $5.5 million for fiscal 1998 and $13.8 million
for the three months ended June 30, 2000. As of June 30, 2000, we had an
accumulated deficit of $71.3 million. We expect that our operating expenses will
continue to increase substantially in future quarters as we
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increase sales and marketing operations, develop new distribution channels,
expand our professional services organization, and continue to fund research and
development.
We have recently experienced a period of rapid growth and expansion, and
expect to continue to expand through multiple growth strategies. To manage this
growth effectively, we will have to improve our existing operational and
financial systems and hire additional qualified personnel. In addition, we
expanded our current headquarters during the first half of fiscal 2000, and
expect to expand into additional facilities during fiscal 2001. The expenses
related to this expansion or move may be greater than our obligations for our
current facility.
RESULTS OF OPERATIONS
The following table sets forth the periods indicated, the percentage of
revenues represented by certain lines in our condensed consolidated statements
of operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
----------------
2000 1999
---- ----
<S> <C> <C>
Net revenue:
License .................... 55% 47%
Services ................... 45 53
---- ----
Total net revenue ....... 100 100
---- ----
Cost of net revenue:
License .................... 3 0
Amortization of purchased
technology .............. 4 2
Services ................... 41 36
---- ----
Total cost of net revenue 48 38
---- ----
Gross margin ................. 52 62
---- ----
Operating expenses:
Sales and marketing ........ 55 61
Research and development ... 42 36
General and administrative . 12 20
Stock compensation ......... 2 7
Amortization of intangibles 60 3
---- ----
Total operating expenses 171 127
---- ----
Loss from operations ......... (119) (65)
Interest and other income, net 9 1
---- ----
Net loss ..................... (110) (64)
==== ====
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE
Total net revenue increased 69% to $12.6 million in the three months
ended June 30, 2000 from $7.4 million in the three months ended June 30, 1999.
LICENSE. License revenue increased 102% to $7.0 million in the three
months ended June 30, 2000 from $3.5 million in the three months ended June 30,
1999. License revenue as a percentage of total net revenue was 55% in the three
months ended June 30, 2000 and 47% in the three months ended June 30, 1999. The
increase in license revenue in absolute dollars is attributable to an increase
in the number of license transactions recognized during the quarter.
SERVICES. Services revenue increased 41% to $5.6 million in the three
months ended June 30, 2000 from $4.0 million in the three months ended June 30,
1999. Services revenue as a percentage of total net revenue was 45% in the three
months ended June 30, 2000 and 53% in the three months ended June 30, 1999. The
increase in services revenue in absolute dollars is attributable to an increase
in the number of consulting engagements,
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as well as an increase in the installed base of customers and in the average
size of maintenance contracts. During the three months ended June 30, 2000, 53%
of maintenance revenue came from initial maintenance contracts, with the
remainder from maintenance renewals.
COST OF REVENUE
LICENSE. Cost of license revenue increased to $357,000 in the three
months ended June 30, 2000 from zero in the three months ended June 30, 1999.
Cost of license revenue as a percentage of license revenue was 5% in the three
months ended June 30, 2000 and zero percent in the three months ended June 30,
1999. The increase in cost of license revenue as a percentage of license revenue
is due to royalties paid to third parties for embedded technology. Since it is
our continuing strategy to license third-party technology for inclusion in our
products, we expect the cost of license revenue as a percentage of license
revenue to fluctuate or increase in future periods.
SERVICES. Cost of services revenue increased 95% to $5.2 million in the
three months ended June 30, 2000 from $2.7 million in the three months ended
June 30, 1999. Cost of services revenue as a percentage of services revenue was
92% in the three months ended June 30, 2000 and 67% in the three months ended
June 30, 1999. The increase in cost of services revenue in absolute dollars is
primarily due to costs associated with increased personnel in our services
organization. The increase in cost of services revenue as a percentage of
services revenue is primarily due to higher cost contract personnel used to
augment company services capacity, as well as investments in infrastructure and
training to support our systems integrator partners.
AMORTIZATION OF PURCHASED TECHNOLOGY. Expenses for amortization of
purchased technology increased to $497,000 in the three months ended June 30,
2000 from $137,000 in the three months ended June 30, 1999. The increase is due
to the amortization of existing technology received in the ConnectInc.com
acquisition.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 53% to $7.0
million in the three months ended June 30, 2000 from $4.6 million in the three
months ended June 30, 1999. Sales and marketing expenses as a percentage of
total net revenue decreased to 55% in the three months ended June 30, 2000 from
61% in the three months ended June 30, 1999. Sales and marketing expenses
increased in absolute dollars primarily due to increased personnel-related
costs, resulting from our continued investment in the development of our
domestic and international sales and marketing organizations, as well as
advertising and other marketing activities. We intend to continue to expand our
sales and marketing efforts, and accordingly, expect sales and marketing
expenses to increase in absolute dollars in future periods.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
99% to $5.3 million in the three months ended June 30, 2000 from $2.7 million in
the three months ended June 30, 1999. Research and development expenses as a
percentage of total net revenue increased to 42% in the three months ended June
30, 2000 from 36% in the three months ended June 30, 1999. Research and
development expenses increased in absolute dollars and as a percentage of total
net revenue as a result of the addition of engineering and product development
personnel and consultants. Personnel-related expenses accounted for the majority
of the increase in absolute dollars. We believe that continued investment in new
product development is central to achieving our strategic objectives, and expect
research and development expenses to increase in absolute dollars in future
periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
flat at $1.5 million in the three months ended June 30, 2000 similar to the $1.5
million in the three months ended June 30, 1999. General and administrative
expenses as a percentage of total net revenue were 12% in the three months ended
June 30, 2000 and 20% in the three months ended June 30, 1999. General and
administrative expenses in absolute dollars remained flat due to increased
personnel-related costs being offset by reduced professional fees related to
outside advisors. General and administrative expenses declined as a percentage
of net revenues due primarily to higher sales growth. We expect general and
administrative expenses to continue to increase in absolute dollars in future
periods as we add personnel and incur costs to support the growth of our
business.
STOCK COMPENSATION. In connection with the granting of stock options to
our employees, we recorded aggregate unearned compensation totaling $5.6 million
through June 30, 2000. The unearned compensation represents the difference
between the exercise price of stock option grants and the deemed fair value of
our common stock at the time of the
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grants. We recorded expenses related to stock compensation of $279,000 in the
three months ended June 30, 2000 and $514,000 in the three months ended June 30,
1999. Stock compensation expenses as a percentage of total net revenue were 2%
in the three months ended June 30, 2000 and 7% in the three months ended June
30, 1999.
AMORTIZATION OF INTANGIBLES. During the three months ended June 30,
2000, we recorded $7.5 million in amortization, reflecting the amortization of
intangibles acquired as part of our acquisitions, primarily ConnectInc.com.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, increased to $1.1 million in the three
months ended June 30, 2000 from $71,000 in the three months ended June 30, 1999.
The increase is primarily due to interest earned on increased cash and cash
equivalents balances as a result of our initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had $6.8 million of cash and cash equivalents,
$61.9 million of short-term investments and $3.1 million of long-term
investments, compared with $10.5 million of cash and cash equivalents as of June
30, 1999. Cash used in operating activities was $11.4 million in the three
months ended June 30, 2000, primarily from net losses net of non-cash expenses
including depreciation and stock compensation, an increase in our accounts
receivable, and decreases in accounts payable and accrued liabilities. Cash used
in operating activities was $3.4 million in the three months ended June 30,
1999, primarily from net losses net of non-cash expenses including depreciation
and stock compensation, and increases in our accounts receivable and other
current assets offset by increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $10.4 million for the three
months ended June 30, 2000, primarily related to the purchases of investments
and capital equipment, offset by sales and maturities of investments. Net cash
used in investing activities of $1.3 million for the three months ended June 30,
1999, related to purchases of computer equipment and to a lesser extent software
and office furniture to support our expanding operations.
Financing activities provided $2.7 million in the three months ended
June 30, 2000 and used net cash of $0.2 million for the three months ended June
30, 1999. Financing activities consisted primarily of sales of our common stock.
We have also used debt and leases to partially finance our operations and
capital purchases. At June 30, 2000, we had $2.8 million in current and
non-current debt as well as $286,000 in current and non-current lease
obligations.
Included in the amounts above are four variable rate installment notes
with a bank that are secured by the equipment financed by the bank. The notes
bear interest at the bank's prime rate and are due between March 2001 and
February 2002. Also included are two notes payable to an equipment financing
company that bear interest at 7% per year and are due between August 2000 and
October 2000, and three capital leases for the lease of computer and office
equipment due through January 2003.
In September 1999, we entered into a commitment with the bank issuing
the variable rate installment notes described above in connection with a
proposed $3.0 million equipment financing credit line which expired on June 30,
2000. Each advance bears interest at the bank's prime rate plus 0.5% per year,
with principal to be repaid in 36 equal monthly installments. As of March 31,
2000, the bank had made three advances totaling $2,143,000 under this
commitment, and advanced an additional $515,000 on June 30, 2000.
This commitment requires us to meet certain monthly and quarterly
financial tests, including minimum operating results and certain liquidity,
leverage and debt service ratios. All previous agreements with the above
financial institution are also under these same covenants. At June 30, 2000 we
were in compliance with all of the financial covenants.
At June 30, 2000, we had noncancelable operating leases for office space
and equipment of approximately $10.5 million, which are payable through fiscal
2005.
Although we have no material long-term commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We intend to fund the intended increase in
expenses and capital expenditures with existing cash and
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cash equivalents and short-term investments, and believe that these funds will
be sufficient to meet our working capital needs for at least the next 12 months.
However, we may need to raise additional funds in order to support more rapid
expansion of our sales force, develop new or enhanced products or services,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or otherwise acceptable to us. If we raise additional funds through
the issuance of equity securities, the percentage ownership of our stockholders
would be reduced. Furthermore, these securities may have rights, preferences or
privileges senior to our Common Stock.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure or revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
will adopt SAB No. 101 in the fiscal quarter ended March 31, 2001. Management
believes the impact of SAB No. 101 will not have a material effect on the
financial position or results of operations of the Company.
In June 1998,the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No 137, "Accounting with Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement 133" ("SFAS
137"). SFAS 137 deferred the effective date of until the first fiscal quarter of
all fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133
in its quarter ended June 30, 2002. The Company has not engaged in hedging
activities or invested in derivative instruments and accordingly, does not
believe implementation of SFAS 133 will have a material effect on its financial
statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -an Interpretation of APB Opinion No. 25" ("FIN 44"). The
Interpretation clarifies the definition of employees for purposes of applying
Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. Management believes the adoption of FIN 44 will not have a
material effect on the financial position or results of operations of the
Company.
FACTORS THAT MAY AFFECT RESULTS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before deciding whether to
invest in our common stock.
If any of the following risks actually occurs, our business could be
harmed. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred quarterly and annual losses in each of the six years
since we were formed, and we expect to continue to incur losses on both a
quarterly and annual basis for the foreseeable future. We incurred net losses of
$13.8 for the three months ended June 30, 2000, $27.8 million for fiscal 2000,
$15.3 million for fiscal 1999 and $5.5 million for fiscal 1998. As of June 30,
2000, we had an accumulated deficit of $71.3 million. Moreover, we expect to
continue to incur significant sales and marketing and research and development
expenses, and, as a result, we will need to generate significant revenue to
achieve and maintain profitability. Although our revenue has grown in recent
quarters, we cannot be certain that we can sustain this growth or that we will
generate sufficient revenue for profitability. If we do achieve profitability,
we cannot be
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certain that we can sustain or increase profitability on a quarterly or annual
basis in the future.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY, ARE SUBJECT TO SEASONALITY AND
MAY FALL SHORT OF ANTICIPATED LEVELS, WHICH MAY CAUSE VOLATILITY OR DECLINE IN
THE PRICE OF OUR COMMON STOCK
Our quarterly operating results have varied significantly in the past and
we expect that they will continue to vary significantly from quarter to quarter
in the future.
In addition, we receive a major portion of our orders near the end of each
quarter. Therefore, we have difficulty predicting the volume and timing of
orders, and short delays in closing orders or implementation of products can
cause our operating results to fall substantially short of anticipated levels
for that quarter.
We also expect to experience seasonal fluctuations in the sales of our
software products. For example, our quarterly results may fluctuate based upon
our customers' calendar year budgeting cycles. These seasonal variations may
lead to fluctuations in our quarterly operating results.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not necessarily
meaningful and are not a good predictor of our future performance. In some
future quarter our operating results may be below the expectations of public
market analysts and investors, which could cause volatility or decline in the
price of our common stock.
OUR PRODUCTS HAVE A LONG SALES AND IMPLEMENTATION CYCLE WHICH MAKES IT DIFFICULT
TO PREDICT OUR QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS TO VARY
SIGNIFICANTLY
The sales cycle for our products is long, typically ranging from three
months to a year, making it difficult to predict the quarter in which revenue
recognition may occur. Our products have a relatively high sales price per unit,
and often are part of a significant strategic decision by our customers
regarding their information systems infrastructure. Accordingly, the decision to
purchase our products typically requires significant pre-purchase evaluation. We
spend significant time educating and providing information to prospective
customers regarding the use and benefits of our products. During this evaluation
period, we may expend substantial funds in sales, marketing and management
efforts.
This lengthy sales cycle may cause license revenue and operating results
to vary significantly from period to period. If anticipated sales from a
specific customer for a particular quarter are not realized in that quarter, our
operating results may vary significantly and we may not achieve forecasted
revenues.
IF WE ARE UNABLE TO COMPLETE SUBSTANTIAL LICENSE SALES WHEN ANTICIPATED OR
EXPERIENCE DELAYS IN THE PROGRESS ON A PROJECT OR IN THE SATISFACTION OF
CONTRACT TERMS, WE MAY HAVE TO DEFER REVENUE UNTIL LATER QUARTERS, CAUSING OUR
QUARTERLY RESULTS TO FLUCTUATE AND FALL BELOW ANTICIPATED LEVELS
Even after purchase of our products, it often takes substantial time and
resources to implement our software and to integrate it with our customers'
existing computer systems. We may not be able to recognize all or a portion of
the revenue until the implementation of the software is completed or milestones
are achieved. We have in the past and may in the future be required to defer
license revenue for software products from the period in which the agreement for
the license of software is signed to subsequent periods. If we are unable to
complete one or more substantial anticipated license sales or experience delays
in the progress on a project or product or in the satisfaction of contract terms
required for revenue recognition in a particular quarter, we may not be able to
recognize revenue when anticipated, causing our quarterly results to fluctuate
and fall below anticipated levels. This could cause our stock price to decline.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR
REVENUE, OUR REVENUE COULD DECLINE IF WE LOSE A MAJOR CUSTOMER
We derive a significant portion of our software license revenue in each
quarter from a limited number of customers. For example, for the three months
ended June 30,
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2000, four customers accounted for 29% of our revenue and ten customers
accounted for 53% of our revenue. A number of our contracts are in excess of
$1.0 million. We expect that a limited number of customers will continue to
account for a substantial portion of our revenue for the foreseeable future. As
a result, if we lose a major customer, if a contract is delayed, cancelled or
deferred or if an anticipated sale is not made, our revenue would be adversely
affected. In addition, customers that have accounted for significant revenue in
the past may not continue to generate revenue in any future period.
A GROWING NUMBER OF EMERGING GROWTH CUSTOMERS HAS CONSEQUENTLY HEIGHTENED THE
EFFECT OF CREDIT-RELATED ISSUES ON US AND WE MAY NOT ACHIEVE ANTICIPATED REVENUE
SHOULD WE NEED TO DEFER A SIGNIFICANTLY INCREASED AMOUNT OF REVENUE
The number of emerging growth companies to which we have sold licenses
and services has increased significantly. These emerging growth customers often
are in the process of obtaining funding and in many of these instances we have
deferred a portion or all of the revenues from these customers until they have
achieved adequate levels of financing and are able to compensate us. Should we
have more customers than we anticipate with credit issues or if payment is not
received on a timely basis, our business, operating results and general
financial condition could be materially and adversely affected.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE IF WE DO NOT SUCCESSFULLY INTRODUCE, OR
IF OUR CUSTOMERS DO NOT ACCEPT, UPGRADES AND ENHANCEMENTS TO OUR PRODUCTS
Our business depends on the success and customer acceptance of the
introduction of upgrades as well as future enhancements. Although our products
have been subject to our internal testing procedures, since a number of our
products have only recently been introduced, including the Advisor product and
the Lightning Architecture based Suite, customers may discover errors or other
problems with the products, which may adversely affect its acceptance.
We expect that we will continue to depend on revenue from new and enhanced
versions of our products for the foreseeable future, and if our target customers
do not continue to adopt and expand their use of these products, we may not
achieve anticipated revenue.
WE COULD FAIL TO ACHIEVE ANTICIPATED REVENUE IF WE EXPERIENCE DELAYS IN
INTRODUCTION AND MARKET ACCEPTANCE OF NEW PRODUCTS
We expect to add new products by acquisition or internal development and
by developing enhancements to our existing products. We have in the past
experienced delays in the planned release dates of our software products and
upgrades. New products may not be released on schedule or may contain defects
when released. The introduction of enhancements to our suite of products may
cause customers to defer orders for our existing products. New and enhanced
products may not meet the requirements of the marketplace and achieve market
acceptance. If we are unable to ship or implement new or enhanced products when
planned, or fail to achieve timely market acceptance of our new or enhanced
products, we may suffer lost sales and could fail to achieve anticipated
revenue.
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENTS AND IF OUR PRODUCTS DO
NOT SCALE TO OPERATE IN A COMPANY-WIDE ENVIRONMENT, WE MAY LOSE SALES AND SUFFER
DECREASED REVENUE
Our strategy requires that our software be highly scalable, or able to
accommodate substantial increases in the number of users concurrently using the
product. However, we are just beginning to deploy large-scale Internet-based
solutions and no large-scale deployment has been operating at any customer site
for an extended period of time. If our solutions do not perform adequately in
large-scale implementations, we may lose customer sales resulting in a decline
in revenue.
In addition, the computer software for our larger customer applications is
often implemented together with computer software applications from other
companies. Some of these implementations are performed by third parties. If our
customers experience delays or difficulties implementing our software together
with these computer software applications in large scale complex integrations,
we may lose sales, incur customer dissatisfaction and suffer decreased revenue.
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TO DATE, OUR SALES HAVE BEEN CONCENTRATED IN THE COMPUTER HARDWARE AND NETWORK
AND TELECOMMUNICATIONS EQUIPMENT MARKETS AND IF WE ARE UNABLE TO SUCCESSFULLY
PENETRATE NEW MARKETS, WE MAY NOT BE ABLE TO ACHIEVE EXPECTED SALES GROWTH
Sales of our products and services in three markets -- computer hardware,
network and telecommunications equipment and emerging growth companies --
accounted for nearly 58% of our total net revenue in the three months ended June
30, 2000. We expect that revenue from these three markets will continue to
account for a substantial portion of our total net revenue in fiscal 2001. We
are targeting expansion in additional market segments defined by industry where
e-commerce software is highly strategic and promote competitive advantage,
including manufacturing, retail, telecommunications services and financial
services. If we are unable to successfully increase penetration of our existing
markets or expand in these additional markets, or if the overall economic
climate of our target markets deteriorates, we may not be able to achieve
expected sales growth.
IN ORDER TO INCREASE SALES OF OUR PRODUCTS, WE MUST INCREASE OUR DIRECT SALES
FORCE; HOWEVER, HIRING AND INTEGRATING SALES PERSONNEL TAKES TIME AND THERE IS A
SHORTAGE OF QUALIFIED PERSONNEL
Our future growth depends on the ability of our direct sales force to
develop customer relationships and increase sales to a level that will allow us
to reach and maintain profitability. Our ability to increase our sales will
depend on our ability to recruit, train and retain top quality sales people who
are able to target prospective customers' senior management, and who can
productively generate and service large accounts. In addition, our Vice
President of Worldwide Sales has only joined us in June of 2000.
There is a shortage of the sales personnel we need, and competition for
qualified personnel is intense. In addition, it will take time for new sales
personnel to achieve full productivity. If we are unable to hire or retain
qualified sales personnel, or if newly hired personnel fail to develop the
necessary skills or to reach productivity when anticipated, we may not be able
to expand our sales organization and increase sales of our products.
IF WE DO NOT EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION AND ESTABLISH AND
MAINTAIN RELATIONSHIPS WITH THIRD PARTY CONSULTANTS, WE MAY NOT BE ABLE TO
PROVIDE ADEQUATE IMPLEMENTATION SERVICES TO OUR CUSTOMERS
Growth in the license of our products depends on our ability to provide
our customers with professional services to assist with design, implementation
and maintenance. If we are unable to get the support of third-party consultants
to provide these services or if third parties do not provide these services
effectively or in a cost-efficient manner, or decide to develop their own
products or support the products of our competitors rather than our products, we
may not be able to provide sufficient implementation services to our customers.
This could result in decreased customer satisfaction and loss of sales. In
addition, if we have to retain third party consultants to provide services for
our customers for which we have previously committed, the resulting increased
costs could have an adverse impact on the gross margins for our professional
services.
OUR DEPENDENCE ON SERVICES REVENUE, WHICH HAS A LOWER GROSS MARGIN THAN LICENSE
REVENUE, COULD ADVERSELY IMPACT OUR GROSS MARGIN AND OPERATING RESULTS
We anticipate that services revenue will continue to represent a
significant percentage of total net revenue as we continue to provide consulting
and training services that complement our products and as our installed base of
customers grows. To increase services revenue, we must expand our services
organization, successfully recruit and train a sufficient number of qualified
services personnel, and obtain renewals of current maintenance contracts by our
customers.
Although services revenue is important to our business, services revenue
has lower gross margins than license revenue. As a result, a continued increase
in the percentage of total net revenue represented by services revenue or an
unexpected decrease in license revenue could have a detrimental impact on our
overall gross margins and our operating results.
WE NEED TO ESTABLISH AND MAINTAIN KEY MARKETING ALLIANCES TO COMPLEMENT OUR
DIRECT SALES FORCE IN ORDER TO GROW SALES; HOWEVER, FEW POTENTIAL PARTNERS HAVE
FOCUSED ON OUR SOFTWARE MARKET AND WE HAVE ONLY ENTERED INTO A SMALL NUMBER OF
KEY ALLIANCES
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In order to increase geographic sales coverage worldwide and to address
new markets and customer segments, we must complement our direct sales force
with strategic marketing alliances. Until recently, few potential partner
organizations have focused on the emerging class of packaged electronic commerce
applications and we have only established a limited number of such key
alliances. To date, we have not generated significant revenue from these
alliances. If we fail to maintain our existing relationships and to establish
new key alliances, or if our partners do not perform to our or our customers'
expectations, we may not be able to expand our sales as anticipated.
ACQUISITIONS, SUCH AS OUR ACQUISITION OF FIRSTFLOOR AND THE RECENTLY COMPLETED
ACQUISITION OF CONNECTINC.COM, MAY BE COSTLY AND DIFFICULT TO INTEGRATE, DIVERT
MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE
As part of our business strategy, we have in the past and may in the
future make acquisitions of, or investments in companies, products or
technologies that complement our current products, augment our market coverage,
enhance our technical capabilities or that may otherwise offer growth
opportunities. For example, in 1998 we acquired FirstFloor Software and in
January 2000 we completed our acquisition of ConnectInc.Com. We encountered the
following difficulties in these acquisitions and would anticipate similar
difficulties in any other future acquisitions:
- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from other business concerns; and
- adverse effects on existing business relationships with suppliers and
customers.
Future acquisitions could also pose risks of entering markets where we
have no or limited prior experience and require us to use substantial portions
of our available cash to consummate the acquisition.
- In addition, in connection with any future acquisitions, we could:
- issue equity securities which would dilute current stockholders' percentage
ownership;
- incur substantial debt; or
- assume significant liabilities.
These actions by us could materially adversely affect our operating
results and/or the price of our common stock.
COMPETITION IN THE MARKET FOR ADVANCED ELECTRONIC COMMERCE PRODUCTS AND SERVICES
IS INTENSE AND COMES FROM DEVELOPERS OF IN-HOUSE SOLUTIONS, VENDORS OF
ENTERPRISE CLASS SOFTWARE AND EMERGING COMPANIES FOCUSED ON ELECTRONIC COMMERCE,
AND COULD REDUCE OUR SALES AND PREVENT US FROM ACHIEVING PROFITABILITY
The market for software and services that enable electronic commerce is
new, intensely competitive, highly fragmented, and rapidly changing. We expect
competition to persist and intensify, which could result in price reductions,
reduced gross margins and loss of market share.
Competitors vary in size and in the scope and breadth of the products and
services offered. Many of our competitors and potential competitors have a
number of significant advantages over us, including:
- a longer operating history;
- preferred vendor status with our customers;
- more extensive name recognition and marketing power; and
- significantly greater financial, technical, marketing and other resources,
giving them the ability to respond more quickly to new or changing
opportunities, technologies and customer requirements.
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Our competitors may also bundle their products in a manner that may
discourage users from purchasing our products. Current and potential competitors
may establish cooperative relationships with each other or with third parties,
or adopt aggressive pricing policies to gain market share. Competitive pressures
may require us to reduce the prices of our products and services. We may not be
able to maintain or expand our sales if competition increases and we are unable
to respond effectively.
MANY OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE RELATIVELY NEW AND MUST BE
INTEGRATED INTO OUR ORGANIZATION, AND WE NEED TO IMPROVE AND IMPLEMENT NEW
SYSTEMS, PROCEDURES AND CONTROLS AND HIRE ADDITIONAL PERSONNEL IN ORDER TO
CONTINUE TO MANAGE OUR RAPID GROWTH
We have recently experienced a period of rapid growth and expansion, which
places significant demands on our managerial administrative, operational,
financial and other resources. All members of our management team, other than
our Vice President, Research and Development have joined Calico since June 1997.
Our Vice President, Engineering joined Calico in January 1999, Our Vice
President, our Vice President and Chief Financial Officer joined Calico in June
1999, our Vice President, Human Resources joined Calico in April 2000, and our
Vice President, Worldwide Sales joined Calico in June 2000. From September 30,
1997 to June 30, 2000, we expanded from 85 to 338 employees. Our new employees
include a number of key managerial, marketing, planning, technical and
operations personnel who have not yet been fully integrated into our
organization.
We also plan to expand the geographic scope of our operations. Our rapid
growth and expansion places significant demands on our managerial,
administrative, operational, financial and other resources. To accommodate
continued anticipated growth and expansion, we will be required to:
- improve existing and implement new operational and financial systems,
procedures and controls; and
- hire, train, manage, retain and motivate qualified personnel.
These measures may place additional burdens on our management and our
internal resources.
THE MARKET FOR OUR ELECTRONIC COMMERCE PRODUCTS AND SERVICES IS NEW AND EVOLVING
AND CUSTOMERS MAY NOT ACCEPT OUR PRODUCTS
The market for our products and services is at an early stage of
development and is rapidly evolving. This market may not continue to develop and
grow, and companies may not elect to utilize our products and services rather
than attempt to develop applications internally or through other sources.
Companies that have already invested substantial resources in other methods of
conducting commerce may be reluctant to adopt a new approach that may replace,
limit or compete with their existing systems. We expect that we will continue to
need intensive marketing and sales efforts to educate prospective customers
about the uses and benefits of our products and services. Therefore, demand for
and market acceptance of our products and services will be subject to a high
level of uncertainty.
NEW TECHNOLOGIES COULD RENDER OUR PRODUCTS OBSOLETE OR REQUIRE US TO REWRITE OUR
SOFTWARE IN NEW COMPUTER LANGUAGES OR FOR OTHER OPERATING SYSTEMS
The market for software and services that enable electronic commerce is
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. Advances in Internet technology or in applications software
directed at electronic commerce, or the development of entirely new technologies
to replace existing software, could lead to new competitive products that have
better performance or lower prices than our products and could render our
products obsolete and unmarketable. In addition, if a new software language or
operating system becomes standard or is widely adopted in our industry, we may
need to rewrite portions of our products in another computer language or for
another operating system to remain competitive. If we are unable to develop
products that respond to changing technology, our business could be harmed.
It is common for software companies to acquire other companies as a means
of introducing new products or emerging technologies. If a new technology or
product emerges that may displace our product lines, competitors with large
market capitalizations or cash reserves would be better positioned than we are
to acquire such new technology or product.
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IF WE LOSE KEY PERSONNEL, WE COULD EXPERIENCE REDUCED SALES, DELAYED PRODUCT
DEVELOPMENT AND DIVERSION OF MANAGEMENT RESOURCES
Our success depends largely on the continued contributions of our key
management, engineering, sales and marketing and professional services
personnel, many of whom would be difficult to replace. We do not have employment
agreements with most of our key personnel. Although we have not experienced
significant turnover in our key personnel in the recent past, if one or more
members of our senior management were to resign, the loss of personnel could
result in loss of sales, delays in new product development and diversion of
management resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT OR SALES OF OUR
PRODUCTS
Our success depends on our ability to attract and retain additional
qualified engineering, sales and marketing and professional services personnel.
Competition for these types of personnel is intense, especially in Silicon
Valley. If we are unable to retain our existing key personnel, or attract and
train additional qualified personnel, our growth may be limited due to our lack
of capacity to develop and market our products.
WE INTEND TO PURSUE RELATIONSHIPS WITH EMERGING ELECTRONIC COMMERCE BUSINESSES
THAT MAY HAVE NO PROVEN RECORD OF SUCCESS
We intend to pursue relationships with and foster development of emerging
electronic commerce-based businesses at an early stage of their development. We
may pursue these new ventures by acquisition, joint venture, or other
alternative investment. We cannot be certain that these new ventures will be
successful, or that we will generate any revenue from these new ventures. In
addition to the risks posed by traditional acquisitions, these new ventures may
have no proven record of success, and may fail, causing us to lose our
investment, and may divert management time and resources.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES FOR OUR APPLICATION
SERVERS, SEARCH CAPABILITY SOFTWARE, A LICENSING MECHANISM AND QUOTE GRID
TECHNOLOGY, AND THE LOSS OR INABILITY TO MAINTAIN THESE LICENSES COULD RESULT IN
INCREASED COSTS OR DELAY SALES OF OUR PRODUCTS
We license technology from several software providers for our application
servers, our search capability software, a licensing mechanism and quote grid
technology. We anticipate that we will continue to license technology from third
parties in the future. This software may not continue to be available on
commercially reasonable terms, if at all. Some of the software we license from
third parties could be difficult to replace. The loss of any of these technology
licenses could result in delays in the license of our products until equivalent
technology, if available, is developed or identified, licensed and integrated.
In addition, the effective implementation of our products depends upon the
successful operation of third-party licensed products in conjunction with our
products, and therefore any undetected errors in these licensed products could
prevent the implementation or impair the functionality of our products, delay
new product introductions and/or injure our reputation. The use of additional
third-party software would require us to enter into license agreements with
third parties, which could result in higher royalty payments and a loss of
product differentiation.
SOFTWARE DEFECTS IN OUR SOFTWARE PRODUCTS AND SYSTEM ERRORS IN OUR CUSTOMERS'
SYSTEMS AFTER INSTALLING OUR SOFTWARE COULD DIMINISH DEMAND FOR OUR PRODUCTS AND
RESULT IN LOSS OF REVENUE, DELAY IN MARKET ACCEPTANCE AND INJURY TO OUR
REPUTATION
Complex software products like ours may contain undetected errors or
defects, that may be detected at any point in the life of the product. We have
in the past discovered software errors in our products and as a result have
experienced delays in shipment of products during the period required to correct
these errors. Errors may be found from time to time in our new or enhanced
products after commencement of commercial shipments, such as this latest version
of our suite, resulting in loss of revenue, delay in market acceptance and
sales, diversion of development resources, injury to our reputation or increased
warranty and repair costs.
Our products are generally used in systems with other vendors' products,
and as a result our products must integrate successfully with these existing
systems. System errors, whether caused by our products or those of another
vendor, could adversely affect the market acceptance of our products, and any
necessary revisions could cause us to incur significant expenses.
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IF WE BECOME SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE COSTLY AND
TIME CONSUMING TO DEFEND
Since our products are used for company-wide, integral computer
applications with potentially strong impact on our customers' sales of their
products, errors, defects or other performance problems could result in
financial or other damages to our customers. Although our license agreements
generally contain provisions designed to limit our exposure to product liability
claims, existing or future laws or unfavorable judicial decisions could negate
such limitation of liability provisions. Product liability litigation, even if
it were unsuccessful, would be time consuming and costly to defend.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY LOSE A VALUABLE
ASSET OR INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS
Our success and ability to compete depend upon our proprietary technology.
We rely on patent, trademark, trade secret and copyright laws to protect our
intellectual property. Despite our efforts to protect our intellectual property,
a third party could copy or otherwise obtain our software or other proprietary
information without authorization, or could develop software competitive to
ours. Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around our patents or other intellectual property. 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 the use of our products as we increase our
international presence.
We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets or know-how or to determine their scope, validity or
enforceability. Enforcing or defending our proprietary technology is expensive,
could cause the diversion of our resources and may not prove successful. Our
protective measures may prove inadequate to protect our proprietary rights. Any
failure to enforce or protect our rights could cause us to lose a valuable
asset. If we are unable to protect our intellectual property, we may lose a
valuable asset or incur costly litigation to protect our rights.
IF THE FUNCTIONALITY OF OUR PRODUCTS OVERLAPS A COMPETITORS' PRODUCTS AND WE
BECOME SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, THESE CLAIMS COULD
BE COSTLY AND TIME-CONSUMING TO DEFEND, DIVERT MANAGEMENT ATTENTION OR CAUSE
PRODUCT DELAYS
There has been substantial litigation in the software and Internet
industries regarding intellectual property rights. It is possible that, in the
future, third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that software product
developers and providers of electronic commerce solutions will increasingly be
subject to infringement claims as the number of products and competitors in our
industry grows and the functionality of products overlaps. Any claims, with or
without merit, could be costly and time-consuming to defend, divert our
management's attention, or cause product delays. If our products were found to
infringe a third party's proprietary rights, we could be required to enter into
royalty or licensing agreements in order to be able to sell our products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to us or at all.
IF USE OF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY ELECTRONIC COMMERCE, IT MAY NOT DEVELOP AS A COMMERCIAL
MARKETPLACE, CAUSING US TO FAIL TO ACHIEVE ANTICIPATED SALES GROWTH
Growth in sales of our products and services depends upon the continued
and increased use of the Internet as a medium for commerce and communication.
Although the Internet is experiencing growth in the number of users and traffic,
such rapid growth is a recent phenomenon and may not continue. In addition, the
Internet infrastructure may not be able to support the demands placed on it by
increased usage and bandwidth requirements. Other risks associated with
commercial use of the Internet could slow its growth, including:
- inadequate security of information distributed over the Internet, resulting
in privacy concerns;
- inadequate reliability of the network infrastructure;
- slow development of enabling technologies and complementary products; and
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- limited accessibility and ability to deliver quality service.
In addition, the recent growth in the use of the Internet has caused
frequent periods of poor or slow performance, requiring components of the
Internet infrastructure to be upgraded. Delays in the development or adoption of
new equipment and standards or protocols required to handle increased levels of
Internet activity, or increased government regulation, could cause the Internet
to lose its viability as a commercial medium. If the Internet infrastructure
does not develop sufficiently to address these concerns, it may not develop as a
commercial marketplace, necessary for us to increase sales.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR OUR
PRODUCTS AND SERVICES, OR IMPOSE ON US GREATER TAX BURDENS OR LIABILITY FOR
TRANSMISSION OF PROTECTED DATA
As electronic commerce and the Internet continue to evolve, we expect that
federal, state and foreign governments will adopt laws and regulations covering
issues such as user privacy, taxation of goods and services provided over the
Internet, pricing, content and quality of products and services. If enacted,
these laws and regulations could limit the market for electronic commerce, and
therefore the market for our products and services. Although many of these
regulations may not apply directly to our business, we expect that laws
regulating the solicitation, collection or processing of personal or consumer
information could indirectly affect our business.
The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. The imposition upon us and other software and service
providers of potential liability for information carried on or disseminated
through our applications could require us to implement measures to reduce our
exposure to this liability. These measures could require us to expend
substantial resources or discontinue certain services. In addition, although
substantial portions of the Communications Decency Act (the Act through which
the Telecommunications Act of 1996 imposes criminal penalties) were held to be
unconstitutional, similar legislation may be enacted and upheld in the future.
It is possible that this legislation could expose companies involved in
electronic commerce to liability, which could limit the growth of electronic
commerce generally. Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth of Internet usage and
decrease its acceptance as a communications and commercial medium.
RESTRICTIONS ON EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE US TO INCUR DELAYS IN
INTERNATIONAL PRODUCT SALES
Our software utilizes encryption technology, the export of which is
regulated by the United States government. If our export authority is revoked or
modified, if our software is unlawfully exported or if the United States adopts
new legislation restricting export of software and encryption technology, we may
experience delay or reduction in shipment of our products internationally.
Current or future export regulations could limit our ability to distribute our
products outside of the United States. While we take precautions against
unlawful exportation of our software, we cannot effectively control the
unauthorized distribution of software across the Internet.
IF WE DO NOT EXPAND OUR INTERNATIONAL OPERATIONS, WE MAY NOT ACHIEVE ANTICIPATED
SALES GROWTH
In order to increase our international sales opportunities, we will need
to develop further our international sales, professional services and support
organizations, and we will need to form additional relationships with partners
worldwide. If we are unable to expand our international operations and
international sales on a timely basis, we may not achieve anticipated sales
growth. This expansion may be more difficult or take longer than we anticipate,
and we may not be able to successfully market, sell, deliver and support our
products internationally.
INTERNATIONAL EXPANSION COULD BE DIFFICULT AND PRESENT RISKS TO OUR BUSINESS
If successful in our international expansion, we will be subject to a
number of risks associated with international operations, including:
- longer accounts receivable collection cycles;
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- expenses associated with localizing products for foreign markets;
- difficulties in managing operations across disparate geographic areas;
- difficulties in hiring qualified local personnel;
- difficulties associated with enforcing agreements and collecting receivables
through foreign legal systems; and
- unexpected changes in regulatory requirements that impose multiple
conflicting tax laws and regulations.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND THE POSSIBLE LACK OF FINANCIAL
STABILITY IN FOREIGN COUNTRIES COULD PREVENT OVERSEAS SALES GROWTH
Our international sales are currently U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets. In
the future, we may elect to invoice some of our international customers in local
currencies. Doing so will subject us to fluctuations in exchange rates between
the U.S. dollar and the particular local currency. Our operating results could
also be adversely affected by the seasonality of international sales and the
economic conditions of our overseas markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in
North America, and to a lesser extent in Europe and Asia. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Because
nearly all of our revenue is currently denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the short-term nature of our investments, we do
not believe that we have a material risk exposure. Because some of our debt
arrangements are based on variable rates of interest, our interest expense is
sensitive to changes in the general level of U.S. interest rates. Since these
obligations represent a small percentage of our total capitalization, we believe
that there is not a material risk exposure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about June 11, 1997, Susan D. Quinn, a former employee of ours,
filed a complaint for sexual harassment and related causes of action against the
Company and another former employee of ours in Santa Clara County Superior Court
for the State of California. In or about June 1998, Ms. Quinn filed an amended
complaint against the Company and our former employee for various claims
including violation of the California Government Code, violations of the
California Civil Code, wrongful termination and demotion, defamation, and
intentional infliction of emotional distress. The Company filed its answer to
the amended complaint in or about July 1998, generally denying each of its
material allegations and denying that Ms. Quinn is entitled to any relief
whatsoever. The parties have engaged in extensive written discovery to date, and
depositions of the principal parties have begun. The parties have been engaging
in settlement negotiations, and a tentative agreement has been reached. However,
if the settlement is not finalized, Calico intends to defend itself vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
27.1 Financial Data Schedule (filed only with the electronic submission of
Form 10-Q in accordance with Edgar requirements)
</TABLE>
(b) Reports on Form 8-K
Not applicable
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SIGNATURE
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.
Date: August 11, 2000 /s/ Arthur F. Knapp, Jr.
-------------------- --------------------------------
Arthur F. Knapp, Jr.
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
27.1 Financial Data Schedule (filed only with the electronic submission of Form
10-Q in accordance with Edgar requirements)
</TABLE>
