<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended
December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-82907
Calico Commerce, Inc.
---------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(408) 975-7400
--------------
(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 [ ]
(2) Yes [X] No [ ]
As of January 31, 2000 there were 33,570,720 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE> 2
CALICO COMMERCE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
December 31, 1999 and March 31, 1999 3
Condensed Consolidated Statement of Operations - Three and
Nine Months Ended December 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended December 31, 1999 and 1998 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>
2
<PAGE> 3
CALICO COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
December 31, MARCH 31,
--------- ---------
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 16,306 $ 15,441
Short-term investments .................................... 54,304 --
Accounts receivable, net .................................. 11,613 7,443
Other current assets ...................................... 2,383 1,417
--------- ---------
Total current assets ................................... 84,606 24,301
Long-term investments ....................................... 10,630 --
Property and equipment, net ................................. 4,208 2,532
Intangible and other assets, net ............................ 3,494 4,535
--------- ---------
$ 102,938 $ 31,368
========= =========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................... $ 1,697 $ 1,728
Accrued liabilities ....................................... 9,415 5,448
Deferred revenue .......................................... 5,808 6,054
Current portion of notes payable .......................... 1,113 628
Current portion of capital lease
obligations ............................................ 181 256
--------- ---------
Total current liabilities .............................. 18,214 14,114
Notes payable, non-current .................................. 1,520 700
Capital lease obligations, non-current ...................... 71 177
Other liabilities ........................................... 491 622
--------- ---------
20,296 15,613
--------- ---------
Mandatorily Redeemable Convertible Preferred
Stock ..................................................... -- 32,535
--------- ---------
Commitments and contingencies
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; 33,446 and 11,436
shares issued and outstanding .......................... 33 11
Additional paid-in capital ................................ 132,756 17,877
Notes receivable from stockholders ........................ (2,007) (2,211)
Unearned compensation ..................................... (1,524) (2,779)
Other comprehensive loss .................................. (94) --
Accumulated deficit ....................................... (46,522) (29,678)
--------- ---------
Total stockholders' equity (deficit) ................... 82,642 (16,780)
========= =========
$ 102,938 $ 31,368
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
CALICO COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
License ........................ $ 4,403 $ 2,560 $ 11,362 $ 8,149
Services ....................... 4,317 3,155 12,967 7,504
-------- -------- -------- --------
Total net revenue ........... 8,720 5,715 24,329 15,653
-------- -------- -------- --------
Cost of net revenue:
License ........................ 455 350 828 716
Services ....................... 3,078 2,036 9,211 5,145
-------- -------- -------- --------
Total cost of net revenue ... 3,533 2,386 10,039 5,861
-------- -------- -------- --------
Gross profit ..................... 5,187 3,329 14,290 9,792
-------- -------- -------- --------
Operating expenses:
Sales and marketing ............ 5,583 3,699 14,782 9,523
Research and development ....... 3,899 1,684 10,366 3,888
General and administrative ..... 1,875 934 5,227 3,034
Stock compensation ............. 322 582 1,256 1,475
Acquired in-process research and
development ................. -- -- -- 1,840
Amortization of goodwill ....... 236 234 712 312
-------- -------- -------- --------
Total operating expenses .... 11,915 7,133 32,343 20,072
-------- -------- -------- --------
Loss from operations ............. (6,728) (3,804) (18,053) (10,280)
Interest and other income, net ... 1,071 54 1,208 (27)
-------- -------- -------- --------
Net loss ......................... $ (5,657) $ (3,750) $(16,845) $(10,307)
======== ======== ======== ========
Net loss per share:
Basic and diluted .............. $ (0.19) $ (0.55) $ (1.04) $ (1.59)
======== ======== ======== ========
Weighted average shares ........ 30,302 6,855 16,223 6,486
======== ======== ======== ========
Pro forma net loss per share:
Basic and diluted .............. $ (0.18) $ (0.17) $ (0.62) $ (0.52)
======== ======== ======== ========
Weighted average shares ........ 31,517 22,480 27,047 19,918
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
CALICO COMMERCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(16,845) $(10,307)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts ...................... 617 159
Provision for sales returns .......................... 329 250
Depreciation, amortization and other ................. 2,491 1,602
Stock compensation and other ......................... 1,456 1,657
Loss on disposal of assets ........................... 36 260
Acquired in-process research and development ......... -- 1,840
Changes in assets and liabilities, net of acquisition:
Accounts receivable ................................ (5,116) (2,492)
Other current assets ............................... (966) (409)
Accounts payable ................................... (31) 341
Accrued liabilities ................................ 3,967 766
Deferred revenue ................................... (246) (52)
Other liabilities .................................. (37) 77
-------- --------
Net cash used in operating activities ............ (14,345) (6,308)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................... (3,072) (1,350)
Purchases of investments ............................... (77,128) --
Sales of investments ................................... 12,100 --
Deposits ............................................... (184) --
-------- --------
Net cash used in investing activities ............ (68,284) (1,350)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock ................. 82,013 80
Common Stock repurchases ............................... -- (499)
Proceeds from repayments of stockholder loans .......... 341 69
Net proceeds from issuance of preferred stock .......... 16 12,217
Proceeds from issuance of notes payable ................ 1,800 413
Repayments of notes payable ............................ (495) (289)
Principal payments under capital lease obligations ..... (181) (122)
-------- --------
Net cash provided by financing activities ........ 83,494 11,869
-------- --------
Net increase in cash and cash equivalents ................ 865 4,211
Cash and cash equivalents at beginning of period ......... 15,441 2,514
-------- --------
Cash and cash equivalents at end of period ............... $ 16,306 $ 6,725
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
CALICO COMMERCE, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended December 31, 1999
(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
December 31, 1999 and for the three and nine months ended December 31, 1999 and
1998 are unaudited and have been prepared on a basis consistent with the March
31, 1999 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 Registration Statement on
Form S-1 for the fiscal year ended March 31, 1999. The results of operations for
the three and nine months ended December 31, 1999 are not necessarily indicative
of results to be expected for the entire year or any other period.
2. REINCORPORATION
Effective September 23, 1999 the Company reincorporated in the State of
Delaware. Effective with the reincorporation, the Company is authorized to issue
150,000,000 shares of $0.001 par value Common Stock and 15,000,000 shares of
$0.001 par value Preferred Stock. The Board of Directors has the authority to
issue the undesignated Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof. Share and per share
information for each of the periods presented have been retroactively adjusted
to reflect the reincorporation.
3. 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
6
<PAGE> 7
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.
4. 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 number 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 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 recent initial public offering. Accordingly, pro forma earnings
per share is presented assuming the conversion as of December 31, 1999 and 1998
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 NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss ................................. $ (5,657) $ (3,750) $(16,845) $(10,307)
======== ======== ======== ========
Denominator:
Weighted average shares .................. 32,039 10,389 18,335 10,328
Weighted average unvested shares of Common
Stock subject to repurchase ........... (1,737) (3,534) (2,112) (3,842)
-------- -------- -------- --------
Denominator for basic and diluted
calculation ........................... 30,302 6,855 16,223 6,486
======== ======== ======== ========
Net loss per share:
Basic and diluted ........................ $ (0.19) $ (0.55) $ (1.04) $ (1.59)
======== ======== ======== ========
</TABLE>
At December 31, 1999 8,362,211 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> <C> <C> <C>
Pro forma:
Shares used above ...................... 30,302 6,855 16,223 6,486
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock .......... 1,215 15,625 10,824 13,432
------- ------- ------- -------
Shares used in computing pro forma
basic and diluted net loss per share 31,517 22,480 27,047 19,918
======= ======= ======= =======
Net loss per share:
Basic and diluted .................... $ (0.18) $ (0.17) $ (0.62) $ (0.52)
======= ======= ======= =======
</TABLE>
5. 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
$94,000 in unrealized losses on short-term and long-term investments that are
required to be reported in comprehensive loss.
7
<PAGE> 8
6. 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 shipment or service delivery destination for the three
and nine months ended December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America ......... $ 7,335 $ 4,743 $21,177 $14,580
Other foreign countries 1,385 972 3,152 1,073
------- ------- ------- -------
$ 8,720 $ 5,715 $24,329 $15,653
======= ======= ======= =======
</TABLE>
7. INITIAL PUBLIC OFFERING
On October 7, 1999, Calico completed it's initial public offering of
Common Stock. The initial public offering price for the 4,600,000 shares offered
by the Company, including the over-allotment option exercised by the
underwriters, was $14.00 per share. Net proceeds to the Company, before offering
expenses, were $59.9 million or $13.02 per share.
Simultaneous with the closing of the initial public offering, the
Company received an additional $24.0 million from the sale of an aggregate of
1,843,200 shares of Common Stock at $13.02 per share in private placements to
Dell U.S.A., L.P., a Texas limited partnership ($20.0 million) and Andersen
Consulting LLP ($4.0 million).
8. STOCK SPLIT
On August 24, 1999, the Board of Directors approved a 3-for-2 stock
split of outstanding Common Stock. Share and per share information for all
periods presented have been retroactively adjusted to reflect the stock split.
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. The bank advanced us $1.0 million under
this commitment on September 30, 1999 and an additional $800,000 on December
30,1999. In connection with this commitment, warrants were issued in September
1999 to the bank to purchase 5,263 shares of Common Stock at $9.50 per share,
expiring on September 24, 2002. We estimated the fair value of the warrants at
$30,000 using the Black-Scholes option pricing model using the fair value of our
Common Stock of $12.00, risk-free interest rate of 5.5%, volatility factor of
50% and life of three years. An expense related to the warrants will be recorded
over the life of the associated financing instrument as additional interest
expense.
Under this commitment, which was finalized in October 1999 with the same
terms stated above, 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 now under these same covenants. At December 31, 1999
the Company was in compliance with all of the financial covenants.
8
<PAGE> 9
In December 1999 the Company entered into a software license agreement
with a customer and in connection with this agreement, the Company issued a to
purchase 4,100 shares of Common Stock at $45.05 per share, expiring on December
29, 2002. The estimated fair value of the warrants at $118,000 using the
Black-Scholes option pricing model using the fair value of the Common Stock of
$53.00, risk free interest rate of 5.79%, volatility factor of 75% and life of
three years. Software license revenue was offset by the value of the warrant.
10. COMMITMENTS AND CONTINGENCIES
In August 1999, Calico entered into a new office lease for our corporate
headquarters, as the previous sub-lease had expired. At December 31, 1999, the
Company had noncancelable operating leases for office space and equipment of
approximately $9.4 million, which are payable through fiscal 2004.
11. SUBSEQUENT EVENTS
On January 31, 2000 the Company completed its acquisition of
ConnectInc.com, Co., a provider of technology and services that dynamically
connect the buying and selling companies via the Internet. Under the terms of
the agreement, approximately 1.4 million shares of Calico common stock were
exchanged for all outstanding shares, options and warrants of ConnectInc.com.
The transaction will be accounted for as a purchase transaction.
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 prospectus dated October 6, 1999, 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 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 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 and network and
telecommunications equipment industries.
9
<PAGE> 10
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 $6.9 million for fiscal 1997,
$5.5 million for fiscal 1998, $15.3 million for fiscal 1999 and $16.8 million
for the nine months ended December 31, 1999. As of December 31, 1999, we had an
accumulated deficit of $46.5 million. We expect that our operating expenses will
continue to increase substantially in future quarters as we 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 the first half of 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 NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
License ........................ 50% 45% 47% 52%
Services ....................... 50 55 53 48
---- ---- ---- ----
Total net revenue ........... 100 100 100 100
---- ---- ---- ----
Cost of net revenue:
License ........................ 5 6 3 5
Services ....................... 36 36 38 32
---- ---- ---- ----
Total cost of net revenue ... 41 42 41 37
---- ---- ---- ----
Gross margin ..................... 59 58 59 63
---- ---- ---- ----
Operating expenses:
Sales and marketing ............ 64 65 61 61
Research and development ....... 44 29 43 25
General and administrative ..... 22 17 21 19
Stock compensation ............. 4 10 5 9
Acquired in-process research and
development ................. -- -- -- 12
Amortization of goodwill ....... 3 4 3 2
---- ---- ---- ----
Total operating expenses .... 137 125 133 128
---- ---- ---- ----
Loss from operations ............. (78) (67) (74) (65)
Interest and other income, net ... 13 1 5 (1)
---- ---- ---- ----
Net loss ......................... (65) (66) (69) (66)
==== ==== ==== ====
</TABLE>
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUE
Total net revenue increased 53% to $8.7 million in the three months
ended December 31, 1999 from $5.7 million in the three months ended December 31,
1998.
LICENSE. License revenue increased 72% to $4.4 million in the three
months ended December 31, 1999 from $2.6 million in the three months ended
December 31, 1998. License
10
<PAGE> 11
revenue as a percentage of total net revenue was 50% in the three months ended
December 31, 1999 and 45% in the three months ended December 31, 1998. 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 37% to $4.3 million in the three
months ended December 31, 1999 from $3.2 million in the three months ended
December 31, 1998. Services revenue as a percentage of total net revenue was 50%
in the three months ended December 31, 1999 and 55% in the three months ended
December 31, 1998. The increase in services revenue in absolute dollars is
attributable to an increase in the number and size of consulting engagements, as
well as an increase in the installed base of customers and in the average size
of maintenance contracts. During the three months ended December 31, 1999, 70%
of maintenance revenue came from initial maintenance contracts, with the
remainder from maintenance renewals.
COST OF REVENUE
LICENSE. Cost of license revenue increased 30% to $455,000 in the three
months ended December 31, 1999 from $350,000 in the three months ended December
31, 1998. Cost of license revenue as a percentage of license revenue was 10% in
the three months ended December 31, 1999 and 14% in the three months ended
December 31, 1998. The decrease in cost of license revenue as a percentage of
license revenue is primarily due to one of the two products acquired in the
acquisition of FirstFloor being fully amortized, somewhat offset by increases in
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 51% to $3.1 million in the
three months ended December 31, 1999 from $2.0 million in the three months ended
December 31, 1998. Cost of services revenue as a percentage of services revenue
was 71% in the three months ended December 31, 1999 and 65% in the three months
ended December 31, 1998. 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 costs of personnel added late in the
prior quarter who had not yet achieved full productivity.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 51% to $5.6
million in the three months ended December 31, 1999 from $3.7 million in the
three months ended December 31, 1998. Sales and marketing expenses as a
percentage of total net revenue decreased to 64% in the three months ended
December 31, 1999 from 65% in the three months ended December 31, 1998. 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 international direct sales and indirect sales and marketing
organizations. 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
132% to $3.9 million in the three months ended December 31, 1999 from $1.7
million in the three months ended December 31, 1998. Research and development
expenses as a percentage of total net revenue increased to 44% in the three
months ended December 31, 1999 from 29% in the three months ended December 31,
1998. 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. 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
increased 101% to $1.9 million in the three months ended December 31, 1999 from
$934,000 in the three months ended December 31, 1998. General and administrative
expenses as a percentage of total net revenue were 22% in the three months ended
December 31, 1999 and 17% in the three months ended December 31, 1998. General
and administrative expenses increased as a percentage of total net revenue and
on an absolute basis as a result of increased personnel-related costs resulting
from the growth of our finance, human resources and information systems staff,
along with increased legal and financial advisory fees. We
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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 December 31, 1999. 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 grants. We recorded expenses related to
stock compensation of $322,000 in the three months ended December 31, 1999 and
$582,000 in the three months ended December 31, 1998. Stock compensation
expenses as a percentage of total net revenue were 4% in the three months ended
December 31, 1999 and 10% in the three months ended December 31, 1998.
AMORTIZATION OF GOODWILL. During the three months ended December 31,
1999, we recorded $236,000 in amortization, reflecting the amortization of
goodwill acquired as part of the FirstFloor acquisition.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, increased to $1.1 million in the three
months ended December 31, 1999 from $54,000 in the three months ended December
31, 1998. The increase is primarily due to interest earned on increased cash and
equivalents balances as a result of our initial public offering.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUE
Total net revenue increased 55% to $24.3 million in the nine months
ended December 31, 1999 from $15.7 million in the nine months ended December 31,
1998.
LICENSE. License revenue increased 39% to $11.4 million in the nine
months ended December 31, 1999 from $8.1 million in the nine months ended
December 31, 1998. License revenue as a percentage of total net revenue was 47%
in the nine months ended December 31, 1999 and 52% in the nine months ended
December 31, 1998. The increase in license revenue in absolute dollars is
attributable to an increase in the number and average size of license
transactions recognized during the period. Of this period's license revenue, 2.5
percent resulted from an arrangement with a Shareholder who at the time of the
transaction owned 4% of the Company's outstanding Stock (including conversion of
mandatory redeemable convertible preferred stock).
SERVICES. Services revenue increased 73% to $13.0 million in the nine
months ended December 31, 1999 from $7.5 million in the nine months ended
December 31, 1998. Services revenue as a percentage of total net revenue was 53%
in the nine months ended December 31, 1999 and 48% in the nine months ended
December 31, 1998. The increase in services revenue in absolute dollars and as a
percentage of total net revenue is attributable to a significant increase in the
number and size of consulting engagements, as well as an increase in the
installed base of customers and in the average size of maintenance contracts.
This increase in services revenue as a percentage of total net revenue has
resulted in reduced overall gross margins, since services revenue typically has
lower gross margins than license revenue. During the nine months ended December
31, 1999, 71% of maintenance revenue came from initial maintenance contracts,
with the remainder from maintenance renewals.
COST OF REVENUE
LICENSE. Cost of license revenue increased 16% to $828,000 in the nine
months ended December 31, 1999 from $716,000 in the nine months ended December
31, 1998. Cost of license revenue as a percentage of license revenue was 7% in
the nine months ended December 31, 1999 and 9% in the nine months ended December
31, 1998. The increase in cost of license revenue in absolute dollars is due to
payments to third parties for embedded technology, which was offset slightly by
the full amortization of one of the two existing products acquired in the
acquisition of FirstFloor in 1998. The decline in cost of license revenue as a
percentage of net license revenue is due to growth in license revenue and the
reduction in amortization expense.
SERVICES. Cost of services revenue increased 79% to $9.2 million in the
nine months ended December 31, 1999 from $5.1 million in the nine months ended
December 31, 1998. Cost of services revenue as a percentage of services revenue
was 71% in the nine months
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ended December 31, 1999 and 69% in the nine months ended December 31, 1998. The
increase in cost of services revenue in absolute dollars is primarily due to
costs associated with increased personnel in our services organization as well
as increased costs for third-party contractors used to staff consulting
engagements.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 55% to $14.8
million in the nine months ended December 31, 1999 from $9.5 million in the nine
months ended December 31, 1998. Sales and marketing expenses as a percentage of
total net revenue was 61% in the nine months ended December 31, 1999 and 61% in
the nine months ended December 31, 1998. 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 international
direct sales and indirect sales and marketing organizations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
167% to $10.4 million in the nine months ended December 31, 1999 from $3.9
million in the nine months ended December 31, 1998. Research and development
expenses as a percentage of total net revenue increased to 43% in the nine
months ended December 31, 1999 from 25% in the nine months ended December 31,
1998. Research and development expenses increased in absolute dollars and as a
percentage of total net revenue as a result of increased engineering and product
development personnel partially attributable to personnel added as a result of
our acquisition of FirstFloor in the quarter ended December 31, 1998.
Personnel-related expenses accounted for the majority of the increase in
absolute dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 72% to $5.2 million in the nine months ended December 31, 1999 from
$3.0 million in the nine months ended December 31, 1998. General and
administrative expenses as a percentage of total net revenue were 21% in the
nine months ended December 31, 1999 and 19% in the nine months ended December
31, 1998. In the nine months ended December 31, 1998, general and administrative
expenses included a charge of $660,000 in the quarter ended December 31, 1998
for the minimum lease payments committed under our previous leased facility
which we vacated and losses on disposal of certain fixed assets, related to the
relocation of our corporate headquarters. Excluding this charge, the majority of
the increase in absolute dollars in general and administrative expenses was due
to increased personnel-related costs resulting from the growth of our finance,
human resources and information systems staff, and due to increased spending for
legal and financial advisory services.
STOCK COMPENSATION. We recorded expenses related to stock compensation
of $1.3 million in the nine months ended December 31, 1999 and $1.5 million in
the nine months ended December 31, 1998. Stock compensation expenses as a
percentage of total net revenue were 5% in the nine months ended December 31,
1999 and 9% in the nine months ended December 31, 1998.
AMORTIZATION OF GOODWILL. During the nine months ended December 31,
1999, we recorded $712,000 in amortization, compared with $312,000 in the nine
months ended December 31, 1998, reflecting the amortization of goodwill acquired
as part of the FirstFloor acquisition.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, improved to $1.2 million of net interest
income in the nine months ended December 31, 1999 from $27,000 of net interest
expense in the nine months ended December 31, 1998. The improvement 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
In October 1999, we completed an initial public offering of 4,600,000
shares of Common Stock (including the exercise of the underwriters'
overallotment option) at $14.00 per share. Net proceeds to us, before offering
expenses, were $59.9 million or $13.02 per share. Simultaneous with the closing
of the initial public offering, the Company received an additional $24.0 million
from the sale of an aggregate of 1,843,200 shares of common stock at $13.02 per
share in private placements to Dell U.S.A., L.P., a Texas limited partnership
($20.0 million) and Andersen Consulting LLP ($4.0 million). We have used, and
continue to expect to use, the proceeds from the sale of stock for general
corporate purposes, including working capital. A portion of the proceeds may
also be used to acquire or invest in complementary companies, product lines,
products or
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technologies. Pending such uses, we have invested the net proceeds from the sale
of stock in investment grade, interest-bearing securities. Prior to our initial
public offering, we had financed our operations and met our capital expenditure
requirements primarily through the sale of private equity securities, and to a
lesser extent, notes payable and capital equipment leases.
As of December 31, 1999, we had $16.3 million of cash and cash
equivalents, $54.3 million of short-term investments and $10.6 million of
long-term investments, compared with $15.4 million of cash and cash equivalents
as of March 31, 1999. Cash used in operating activities was $6.3 million in the
nine months ended December 31, 1998 and $14.5 million in the nine months ended
December 31, 1999. Cash used in operations resulted primarily from net losses
net of non-cash expenses including depreciation and stock compensation, and
increases in our accounts receivable, offset in part by the growth in accrued
liabilities.
Net cash used in investing activities of $1.4 million for the nine
months ended December 31, 1998, related to purchases of computer equipment and
to a lesser extent software and office furniture to support our expanding
operations. Net cash used in investing activities was $68.3 million for the nine
months ended December 31, 1999, primarily related to the purchases of
investments and capital equipment, offset by sales of investments.
Financing activities provided net cash of $11.9 million for the nine
months ended December 31, 1998 and $83.6 million in the nine months ended
December 31, 1999. Financing activities consisted primarily of the sale of our
common and preferred stock, including $83.9 received from our initial public
offering and simultaneous private placements. We have also used debt and leases
to partially finance our operations and capital purchases. At December 31, 1999
we also had $2.6 million in current and non-current debt as well as $252,000 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 three notes payable to an equipment financing
company that bear interest at 7% per year and are due between June 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 expiring 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. The bank advanced us
$1.0 million under this commitment on September 30, 1999 and an additional
$800,000 on December 30, 1999. We issued warrants to the bank to purchase 5,263
shares of common stock at $9.50 per share in connection with this commitment.
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 now under these same covenants. At December 31, 1999
we were in compliance with all of the financial covenants.
In August 1999, we entered into a new office lease for our corporate
headquarters, as the previous sub-lease had expired. At December 31, 1999, we
had noncancelable operating leases for office space and equipment of
approximately $9.4 million, which are payable through fiscal 2004.
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 through the proceeds of the completed October
1999 initial public offering, together with existing cash and cash equivalents,
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.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivatives and Hedging Activities". This
statement establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 will become effective during
the year ending March 31, 2001. The adoption of SFAS No. 133 is not expected to
have a material effect on our results of operations, financial position or cash
flows.
YEAR 2000 COMPLIANCE
We have designed our products to be year 2000 compliant, and as a result
we have not experienced year 2000 problems related to our products. The majority
of the computer software and hardware that we use in our internal operations did
not require replacement or modification as a result of the year 2000 issue. We
believe that our significant vendors and service providers are year 2000
compliant and we have not, to date, been made aware that any of our significant
vendors or service providers have experienced year 2000 disruptions in their
systems. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any year 2000
problems.
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 five 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
$6.9 million for fiscal 1997, $5.5 million for fiscal 1998, $15.3 million for
fiscal 1999 and $16.8 million for the nine months ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of $46.5 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 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.
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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 miss our revenue forecast.
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 nine months
ended December 31, 1999, two customers accounted for 36% of our revenue and ten
customers accounted for 74% of our revenue. Many 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.
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
We currently derive substantially all of our revenue from licenses,
professional services and support related to sales of the Calico eSales Suite.
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 the new version of
the Calico eSales Suite has only recently been introduced, customers may
discover errors or other problems with the product, which may adversely affect
its acceptance.
We expect that we will continue to depend on revenue from new and
enhanced versions of the Calico eSales Suite for the foreseeable future, and if
our target customers do not
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continue to adopt and expand their use of the Calico eSales Suite, 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, THE CALICO ESALES
CONFIGURATOR OPERATES ONLY ON WINDOWS NT AND NOT ON UNIX-BASED WEB SERVERS, 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. In addition, the interface component of the
Calico eSales Configurator is powered by Microsoft Active Server Pages and
therefore operates only on Windows NT. We are developing user interface
components to allow our customers to use either a Unix-based or Windows NT-based
web server. If we are unable to promptly or successfully develop the Unix
version, the scalability of our Calico eSales Configurator may be limited for
larger customer applications due to the scalability limitations of Windows NT.
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.
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 two markets -- computer hardware
and network and telecommunications equipment -- accounted for nearly 60% of our
total net revenue in the nine months ended December 31, 1999. We expect that
revenue from these two markets will continue to account for a substantial
portion of our total net revenue in fiscal 2000. We are targeting expansion in
additional market segments defined by industry where eCommerce 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.
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
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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.
YEAR 2000 CONSIDERATIONS MAY CAUSE OUR CUSTOMERS AND POTENTIAL CUSTOMERS TO
DELAY PURCHASES OF OUR PRODUCTS UNTIL LATER IN 2000, AND MAY REDUCE OUR SALES
We may experience reduced license of products as customers and potential
customers put a priority on correcting year 2000 problems and therefore defer
purchase decisions for software products until later in 2000. Accordingly,
demand for our products may be particularly volatile and unpredictable for the
remainder of calendar 1999 and 2000.
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
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. We
encountered the following difficulties in our acquisition of FirstFloor and
would anticipate similar difficulties in our acquisition of ConnectInc.com and
in any other future acquisitions:
- - difficulties in the assimilation of acquired personnel, operations,
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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.
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, and our Vice
President and Chief Financial Officer joined Calico in June 1999. From September
30, 1997 to December 31, 1999, we expanded from 85 to 267 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.
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<PAGE> 20
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.
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
20
<PAGE> 21
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, including year 2000 related errors, 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.
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 OUR SYSTEMS AND THE SYSTEMS OF OUR KEY SUPPLIERS AND CUSTOMERS ARE NOT YEAR
2000 COMPLIANT, WE COULD INCUR INCREASED COSTS, DELAY OR LOSS OF REVENUE,
DIVERSION OF DEVELOPMENT RESOURCES OR DAMAGE TO OUR REPUTATION
Our products are generally integrated into computer systems involving
sophisticated hardware and complex software products, which may not be year 2000
compliant. The failure of our customers' systems to be year 2000 compliant could
impede the success of applications that we or our partners have developed for
them. Accordingly, known or unknown defects that affect the operation of our
software, including any defects or errors in applications that include our
products, could result in delay or loss of
21
<PAGE> 22
revenue, diversion of development resources, damage to our reputation, or
increased service or warranty costs and litigation costs.
We have completed our internal audit of our own internal computer and
other systems, and have substantially completed our testing of our software
products and audit of the year 2000 compliance status of our suppliers and
business partners. We have completed our year 2000 investigation and overall
compliance initiative, and the total cost of our year 2000 compliance has not
been substantial. While we have yet to experience year 2000 problems, we may
still experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal systems.
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 if 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
22
<PAGE> 23
- - 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;
23
<PAGE> 24
- - 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
We are currently involved in litigation with a former employee arising
out of the alleged sexual harassment and wrongful termination of the employee.
We have responded to the lawsuit by filing an answer that denies all of the
material allegations. The lawsuit was filed by Susan D. Quinn on June 11, 1997
in the Santa Clara County Superior Court for the State of California, naming us
and one of our former employees as defendants. The case is currently in the
early stages of pre-trial discovery. The lawsuit seeks unspecified monetary
amounts for lost wages and benefits, emotional and physical distress and
punitive damages.
We believe that we have meritorious defenses against the alleged claims,
and intend to defend ourselves vigorously. However, due to the nature of
litigation and the fact that discovery is still in its early stages, we cannot
determine the possible loss, if any, that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. We may also
incur substantial legal fees in this matter. After consideration of the nature
of the claims and facts relating to the litigation, we believe that the
resolution of this matter will not harm our business. However, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not harm our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Registration Statement for the Company's
initial public offering, filed on Form S-1 under the Securities Act of 1933
(Registration Statement Number 333-82907), was October 6, 1999. The class of
securities registered was Common
24
<PAGE> 25
Stock. The managing underwriters in the offering was Goldman, Sachs & Co.;
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Hambrecht & Quist LLC.
Pursuant to the Registration Statement, the Company registered and sold
4,600,000 shares of it's Common Stock to an underwriting syndicate at an initial
public offering price of $14.00 per share. Net proceeds to the Company, before
offering expenses, were $59.9 million or $13.02 per share. The offering
commenced on October 6, 1999 and terminated on October 13, 1999 after we sold
all 4,600,000 shares of common stock registered (including 600,000 shares sold
in connection with the exercise of the underwriters over allotment option).
We paid a total of $3.9 million in underwriting discounts and
commissions. In addition, we incurred estimated expenses of $2.2 million, for
estimated net proceeds of approximately $57.7 million.
Simultaneous with the closing of the initial public offering, the
Company received an additional $24.0 million from the sale of an aggregate of
1,843,200 shares of common stock at $13.02 per share in private placements to
Dell U.S.A., L.P., a Texas limited partnership ($20.0 million) and Andersen
Consulting LLP ($4.0 million).
We have used, and continue to expect to use, the proceeds from the sale
of stock for general corporate purposes, including working capital. A portion of
the proceeds may also be used to acquire or invest in complementary companies,
product lines, products or technologies. Pending such uses, we have invested the
net proceeds from the sale of stock in investment grade, interest-bearing
securities. None of the net proceeds of the offering were paid by the Company,
directly or indirectly, to any director, officer or general partner of the
Company or any of their associates, or to any persons owning ten percent or more
of any class of the Company's equity securities, or any affiliates of the
Company.
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>
2.1* Agreement and Plan of Merger dated as of November 19, 1999 by and
between Calico Commerce, Inc., ConnectInc.com, Co., and Calico
Acquisition, Inc.
27.1 Financial Data Schedule (filed only with the electronic submission of
Form 10-Q in accordance with Edgar requirements)
</TABLE>
* Incorporated by reference to Calico's Current Report on Form 8-K filed
November 29, 1999
(b) Reports on Form 8-K
Report on Form 8-K dated November 19, 1999 regarding the acquisition of
ConnectInc.com, Co., as filed with the Securities and Exchange
Commission on November 29, 1999.
25
<PAGE> 26
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: February 11, 2000 /s/ Arthur F. Knapp, Jr.
-------------------- --------------------------------
Arthur F. Knapp, Jr.
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1* Agreement and Plan of Merger dated as of November 19, 1999 by and
between Calico Commerce, Inc., ConnectInc.com, Co., and Calico
Acquisition, Inc.
27.1 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with Edgar requirements)
</TABLE>
* Incorporated by reference to Calico's Current Report on Form 8-K filed
November 29, 1999
(b) Reports on Form 8-K
Report on Form 8-K dated November 19, 1999 regarding the acquisition of
ConnectInc.com, Co., as filed with the Securities and Exchange
Commission on November 29, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,306
<SECURITIES> 54,304
<RECEIVABLES> 12,888
<ALLOWANCES> 1,276
<INVENTORY> 0
<CURRENT-ASSETS> 84,606
<PP&E> 7,677
<DEPRECIATION> 3,469
<TOTAL-ASSETS> 102,938
<CURRENT-LIABILITIES> 15,624
<BONDS> 2,082
0
0
<COMMON> 33
<OTHER-SE> 82,609
<TOTAL-LIABILITY-AND-EQUITY> 102,938
<SALES> 11,362
<TOTAL-REVENUES> 24,329
<CGS> 828
<TOTAL-COSTS> 10,039
<OTHER-EXPENSES> 31,726
<LOSS-PROVISION> 817
<INTEREST-EXPENSE> (1,208)
<INCOME-PRETAX> (16,845)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,845)
<EPS-BASIC> ($1.04)
<EPS-DILUTED> ($1.04)
</TABLE>
