<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- -----------
Commission File Number 000-30963
SYNQUEST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 14-1683872
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 Parkway Lane, Suite 555, Norcross, Georgia 30092
(Address of Principal Executive Offices-- Zip Code)
Registrant's Telephone Number, Including Area Code: (770) 325-2000
Indicate by check mark whether the registrants (1) have 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) have been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
------------------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
28,835,013 shares of common stock outstanding as of November 3, 2000.
================================================================================
<PAGE> 2
SYNQUEST, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS..............................................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................................................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................................15
SIGNATURES.......................................................................................16
</TABLE>
- 2 -
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNQUEST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 2000
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 456,670 $ 477,327
Marketable securities ............................................. -- 23,534,784
Accounts receivable (net of allowances of $1,600,000 and
$1,696,000 at June 30 and September 30, 2000,
respectively) .................................................... 4,840,296 5,800,711
Other receivables ................................................. 54,790 18,447
Prepaid expenses .................................................. 218,795 621,423
------------- -------------
Total current assets ...................................... 5,570,551 30,452,692
Property and equipment:
Leasehold improvements ............................................ 189,710 191,417
Furniture and fixtures ............................................ 845,742 856,283
Equipment ......................................................... 4,666,165 4,934,511
------------- -------------
5,701,617 5,982,211
Less accumulated depreciation and amortization .................... (3,418,257) (3,722,185)
------------- -------------
Net property and equipment .......................................... 2,283,360 2,260,026
Other assets ........................................................ 1,068,825 241,473
------------- -------------
Total assets............................................... $ 8,922,736 $ 32,954,191
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Subordinated notes payable and accrued interest payable
to related party.................................................. $ 20,928,315 $ --
Borrowings under line of credit agreement ......................... 7,642,082 --
Accounts payable .................................................. 1,265,235 1,269,455
Accrued expenses .................................................. 5,060,896 5,031,369
Deferred revenue .................................................. 7,168,878 3,836,791
Current portion of notes payable and obligations under
capital leases ................................................... 191,845 206,503
------------- -------------
Total current liabilities ................................. 42,257,251 10,344,118
Notes payable and obligations under capital leases, less
current portion .................................................. 163,359 177,480
Preferred Stock, in series, $0.01 par value; redeemable and
convertible:
Authorized shares-- 16,000,000
Issued and outstanding shares-- 12,995,356 at June 30, 2000
Liquidation preference of $64,474,679 at June 30, 2000 ............ 60,915,824 --
Shareholders' equity (deficit):
Common Stock, $0.01 par value; 100,000,000 shares
authorized and 1,762,704 and 28,573,190 shares issued
and outstanding at June 30 and September 30, 2000,
respectively ..................................................... 17,626 285,732
Additional paid-in-capital ........................................ 7,087,426 126,072,692
Accumulated deficit ............................................... (101,184,487) (103,589,330)
Equity adjustment from foreign currency translation ............... (334,263) (336,501)
------------- -------------
Total shareholders' equity (deficit) ...................... (94,413,698) 22,432,593
------------- -------------
Total liabilities and shareholders' equity (deficit)....... $ 8,922,736 $ 32,954,191
============= =============
</TABLE>
See accompanying notes.
- 3 -
<PAGE> 4
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Software license fees ............................................. $ 252,877 $ 5,665,020
Services .......................................................... 3,304,268 3,513,936
------------ ------------
Total revenue ............................................. 3,557,145 9,178,956
Operating expenses:
Cost of license fees .............................................. 124,595 181,555
Cost of services .................................................. 2,227,497 1,794,633
Research and development .......................................... 2,590,905 2,284,213
Sales and marketing ............................................... 3,228,303 4,460,129
General and administrative ........................................ 1,160,356 1,724,188
Provision for doubtful accounts ................................... 325,000 124,103
------------ ------------
Total operating expenses .................................. 9,656,656 10,568,821
------------ ------------
Operating loss ...................................................... (6,099,511) (1,389,865)
Other income (expense):
Interest expense .................................................. (568,194) (385,505)
Interest income and other ......................................... 29,529 190,681
------------ ------------
Total other income (expense) .............................. (538,665) (194,824)
------------ ------------
Loss before income taxes ............................................ (6,638,176) (1,584,689)
Income taxes ........................................................ -- --
------------ ------------
Net loss ............................................................ (6,638,176) (1,584,689)
Accretion of redeemable convertible preferred stock ................. (1,075,716) (820,154)
------------ ------------
Net loss attributable to common stock ............................... $ (7,713,892) $ (2,404,843)
============ ============
Basic and diluted net loss per common share ......................... $ (5.16) $ (0.16)
============ ============
Weighted average number of shares used in
computing basic and diluted net loss per common
share ............................................................. 1,494,559 15,226,364
============ ============
Pro forma basic and diluted net loss per common share:
Net loss .......................................................... $ (0.30) $ (0.06)
Accretion of redeemable convertible preferred stock................ $ (0.05) $ (0.03)
------------ ------------
Net loss attributable to common stock ............................. $ (0.35) $ (0.09)
============ ============
Weighted average number of shares used in
computing pro forma basic and diluted net loss
per common share .................................................. 21,834,714 25,457,839
============ ============
</TABLE>
See accompanying notes.
- 4 -
<PAGE> 5
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................ $ (6,638,176) $ (1,584,689)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ..................................... 316,238 316,674
Non-cash stock compensation ....................................... -- 60,361
Changes in operating assets and liabilities:
Accounts receivable ............................................ 2,103,297 (940,890)
Other assets ................................................... 11,830 428,745
Accounts payable ............................................... 289,293 9,839
Accrued expenses ............................................... (442,035) 118,927
Deferred revenue ............................................... 302,366 (3,328,487)
------------ ------------
Net cash used in operating activities ..................... (4,057,187) (4,919,520)
INVESTING ACTIVITIES
Increase in marketable securities ................................... -- (23,534,784)
Purchases of property and equipment ................................. (419,697) (203,249)
------------ ------------
Net cash used in investing activities...................... (419,697) (23,738,033)
FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit .................... 5,114,786 (7,642,082)
Proceeds from common stock offering ................................. -- 37,432,500
Payment of stock offering costs ..................................... -- (1,135,554)
Proceeds from issuance of common stock under
stock option plans ................................................ 8,661 87,462
Repayment of obligations under capital leases ....................... (79,763) (64,345)
------------ ------------
Net cash provided by financing activities.................. 5,043,684 28,677,981
Effect of exchange rate changes on cash ............................. (7,350) 229
------------ ------------
Net increase in cash ................................................ 559,450 20,657
Cash at beginning of period ......................................... 638,213 456,670
------------ ------------
Cash at end of period ............................................... $ 1,197,663 $ 477,327
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ....................................................... $ 187,000 $ 181,000
============ ============
Income taxes ................................................... $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Capital lease obligations incurred to acquire
equipment ......................................................... $ 18,000 $ 95,000
============ ============
</TABLE>
See accompanying notes.
- 5 -
<PAGE> 6
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the Securities and Exchange Commission. The accompanying unaudited
financial statements reflect, in the opinion of management, all adjustments
necessary to achieve a fair statement of financial position and results for the
interim periods presented. All such adjustments are of a normal recurring
nature. It is suggested that these financial statements be read in conjunction
with the Annual Report of the Company on Form 10-K for the year ended June 30,
2000.
2. INITIAL PUBLIC OFFERING
On August 11, 2000, the Company's registration statement in connection
with an initial public offering ("IPO") of its common stock was declared
effective by the Securities and Exchange Commission. The Company received
approximately $37.4 million of proceeds, net of underwriting discounts and
commissions, from the sale of 5,750,000 shares of common stock in the IPO.
Approximately $10.5 million of the net proceeds were used to repay the
outstanding balance under the Company's line of credit. Upon completion of the
offering, all of the outstanding convertible preferred stock was converted to
12,995,356 shares of common stock. Additionally, the board of directors approved
the payment of all accrued and unpaid dividends on the outstanding preferred
stock of the Company in shares of Series H preferred stock that automatically
converted to common stock upon completion of the IPO. Accordingly, the Company
issued 1,354,365 shares of Series H preferred stock which converted into the
same number of shares of common stock upon completion of the IPO. Furthermore,
upon completion of the IPO the outstanding subordinated promissory notes held by
E.M. Warburg, Pincus in the aggregate principal amount of $15 million plus all
accrued and unpaid interest on such notes were converted into 3,246,280 shares
of common stock at the initial public offering price, less underwriting
discounts and commissions. Upon completion of the IPO, E.M. Warburg, Pincus
exercised, on a cashless basis, all of its outstanding warrants based on the
initial public offering price, less underwriting discounts and commission,
resulting in the issuance of 3,430,835 shares of common stock.
3. BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per common share is computed based on the weighted average
number of common shares outstanding during each year. Diluted net loss per
common share is computed based on the weighted average number of common shares
outstanding during each year, plus potentially dilutive common shares
outstanding during the year, in accordance with SFAS No. 128, "Earnings Per
Share."
All shares of convertible preferred stock, outstanding stock options and
warrants have been excluded from the calculation of the diluted net loss per
common share because these securities are anti-dilutive for all periods
presented. The total number of shares related to the outstanding convertible
preferred stock, options and warrants excluded from the calculations of diluted
net loss per common share was 22,838,225 and 5,126,167 for the three months
ended September 30, 1999 and 2000, respectively.
As described in more detail in Note 2, in August 2000, the Company
completed an IPO of its common stock. In conjunction with the IPO, the following
changes in the Company's capitalization took place: (1) the conversion into
common stock of all outstanding convertible preferred stock, plus accrued and
unpaid dividends; (2) the conversion into common stock of outstanding
subordinated promissory notes, held by E.M. Warburg, Pincus in the aggregate
principal amount of $15 million, plus accrued interest; and (3) the cashless
exercise by E.M. Warburg, Pincus of all of its warrants to purchase common
stock. Pro
- 6 -
<PAGE> 7
forma basic and diluted net loss per common share has been calculated assuming
these changes in the Company's capitalization as of the beginning of each period
presented.
The following table presents the calculation of unaudited pro forma basic
and diluted net loss per common share:
<TABLE>
<CAPTION> THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Net loss ............................................................ $ (6,638,176) $ (1,584,689)
Accretion of convertible preferred stock .......................... (1,075,716) (820,154)
------------ ------------
Net loss attributable to common stock ............................... $ (7,713,892) $ (2,404,843)
------------ ------------
Pro forma:
Shares used in computing basic and diluted net loss per
common share .................................................... 1,494,559 15,226,364
Effect of assumed conversion of preferred stock and
dividends, subordinated notes payable and interest, and
warrants into common stock ...................................... 20,340,154 10,231,475
------------ ------------
Shares used in computing unaudited pro forma
basic and diluted net loss per common share .................... 21,834,714 25,457,839
============ ============
Pro forma basic and diluted net loss per common share:
Net loss .......................................................... $ (0.30) $ (0.06)
Accretion of convertible preferred stock .......................... $ (0.05) $ (0.03)
------------ ------------
Net loss attributable to common stock ............................. $ (0.35) $ (0.09)
============ ============
</TABLE>
4. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized around geographic areas. The Company's
operations in The Americas and Europe represent its two reportable segments. The
Americas segment is comprised of operations in the United States and the Europe
segment is comprised of operations in the United Kingdom, France and The
Netherlands.
Segment information for the three months ended September 30, 1999 and
2000 is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
REVENUE
The Americas
Software license fees ............................................. $ 252,877 $ 5,394,828
Services .......................................................... 2,826,949 3,149,836
------------ ------------
Total The Americas......................................... 3,079,826 8,544,664
Europe
Software license fees ............................................. -- 270,192
Services .......................................................... 477,319 364,100
------------ ------------
Total Europe .............................................. 477,319 634,292
------------ ------------
Total ..................................................... $ 3,557,145 $ 9,178,956
============ ============
NET LOSS
The Americas ........................................................ $ (5,672,010) $ (994,945)
Europe .............................................................. (966,166) (589,744)
------------ ------------
Total ..................................................... $ (6,638,176) $ (1,584,689)
============ ============
TOTAL ASSETS
The Americas ........................................................ $ 48,121,379
Europe .............................................................. 1,618,212
Eliminations ...................................................... (16,785,400)
------------
Total ..................................................... $ 32,954,191
============
</TABLE>
- 7 -
<PAGE> 8
All revenue was generated from external customers.
The eliminations within total assets represents the Company's investment
in the Europe segment and funding provided for operations in Europe.
Export sales from the United States were approximately $169,000 and
$426,000 for the three months ended September 30, 1999 and 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market and support supply chain management software that
enables enterprises to optimize financial and operational performance across
their supply chains. Since early 1999, we have begun to leverage our core
competencies in supply chain management software by developing additional
e-business products, as well as web-enabling our current products for use across
customer supply chains. The addition of e-business products to our SynQuest
One2One suite of solutions enables us to offer products that integrate and
financially optimize a customer's web-enabled supply chain.
Our fiscal year end is June 30. We generate revenues from two principal
sources:
- license fees derived from software products and
- professional services fees and maintenance and support fees
derived from consulting, implementation, training and
maintenance services and other technical support related to
our software products.
Software License Fees. Customers typically pay a one-time fee for a
perpetual license to use our software products. The amount of the fee is based
on the number of licensed sites, users and products. We require a written
software license contract that typically provides for an initial payment upon
execution of the license contract, followed by one or more periodic payments on
dates specified in the contract. Payments are required to be made within one
year of the contract date. Our initial software license arrangements with
customers typically provide for a fee for the first year of maintenance and
support services. We often negotiate contracts for specific implementation and
training services following the initial software license contract.
- 8 -
<PAGE> 9
Our software licenses have principally been the result of direct sales
to customers, and we expect that direct sales will continue to represent our
principal selling method in the future. However, we have used and expect to
continue to use independent resellers of our products in geographic areas where
we do not believe it is cost-effective to establish a direct sales force. We
rely on third parties such as business process improvement consultants,
implementers of software systems and complementary software application
providers to provide us with leads for potential new customers. Prior to
mid-1999, we primarily depended on J.D. Edwards for our leads. During fiscal
2000, we entered into relationships with several new lead sources, substantially
reducing our dependence on any single lead source.
The sales cycle for our products is typically six to nine months, and
software license revenues for a particular period are substantially dependent on
orders received in that period. Furthermore, we have experienced, and expect to
continue to experience, significant variation in the size of individual
licensing transactions.
We recognize software license revenue when a signed contract is
obtained, shipment of the product has occurred, the license fee is fixed and
determinable, collectibility is probable, and remaining obligations under the
license agreement are insignificant. For software licenses which result from
resellers or distributors sublicensing our products to end users, we do not
recognize software license revenue until our products are licensed to the final
end user and all other conditions for revenue recognition outlined in the
previous sentence have been met. Our software arrangements often include
multiple elements, each of which is available for sale and often is sold
separately. If a software arrangement includes multiple elements, such as
multiple software products, specified upgrades, maintenance and support and/or
other services, we allocate the total software arrangement fee among each
element of the arrangement. We use the residual method, as defined in Statement
of Position No. 98-9, to allocate revenue to delivered elements once we have
established our objective evidence for the value of all undelivered elements.
Our objective evidence of fair value for undelivered maintenance and support
services is based upon the then current standard renewal rate for these services
and is not discounted. Our objective evidence of fair value for undelivered
implementation and training services is based on our then current standard
hourly rates for such services as they are sold separately and are not
discounted. The remaining portion of the arrangement fee is allocated to the
licensed software products. As a result, all discounts negotiated with our
customers in multiple element arrangements are reflected as discounts to the
license fee portion of the arrangement and are prorated across multiple software
products, if there are multiple products, based on their list prices established
by authorized management. Our revenue recognition is in accordance with the
American Institute of Certified Public Accountants Statement of Position No.
97-2, "Software Revenue Recognition," as amended by Statement of Position Nos.
98-4 and 98-9. Prior to fiscal 1999, we recognized software license revenue in
accordance with Statement of Position No. 91-1, meaning that we then recognized
software license revenue upon shipment, provided we had a signed contract, that
we had no remaining significant obligations to perform and that collection of
payment was probable. Our adoption of the new standards in fiscal 1999 has not
had a material effect on our revenue recognition.
Services Revenue. Our services revenue consists principally of revenue
derived from professional services associated with implementing our products and
educating and training our customers' employees on the use of our products. In
addition and to a lesser extent, our services revenue includes fees for ongoing
maintenance and support, consisting primarily of customer technical support
services and product upgrades and enhancements.
Our implementation and training services are typically delivered on a
time-and-materials basis or occasionally on a fixed-price basis. We recognize
revenue from the services delivered on a time-and-materials basis as the
services are performed. Revenue from fixed-price arrangements are recognized
using a percentage-of-completion method based upon the cost incurred to date as
a percentage of the total expected cost. Out-of-pocket expense incurred by our
personnel performing professional services are
- 9 -
<PAGE> 10
reimbursed by the customer. Implementation and training services are generally
completed four to nine months following execution of the license contract.
However, implementations for customers licensing multiple products for numerous
locations may take place over a longer period of time.
As part of our maintenance and support services, we provide our
customers with product upgrades and enhancements as well as user and technical
support services for an annual fee. Most of our maintenance and support
contracts are invoiced annually in advance, are renewable at the discretion of
the customer and allow for future fee increases. The revenue from our
maintenance and support services is recognized ratably over the term of the
maintenance and support contract, which is generally 12 months. While a 90-day
warranty is included in the initial software license, our maintenance and
support contracts typically are entered into as of the date of the initial
software license. Warranty claims are typically not material and customers are
charged for support during the warranty period.
Cost of License Fees. Our cost of license fees consists primarily of
commissions or finder fees which we pay to third parties for providing us with a
new customer lead and sub-license fees paid by us to third parties for software
owned by a third party which we have licensed along with our products. Also
included is the amortization of software acquired through business acquisition.
We believe that our continued expansion of strategic alliances for sales lead
generation may increase the future cost of license fees over historical levels
both in dollars and as a percentage of total revenue.
Cost of Services. Our cost of services consists primarily of personnel
costs, including third-party consultants, and travel associated with providing
consulting, implementation, training and maintenance and support services
associated with our products.
Research and Development. Our research and development costs consist
primarily of personnel costs, travel, training and office facilities costs. We
maintain a development staff to enhance our products and to develop new
products. In accordance with Statement of Financial Accounting Standards No. 86,
we expense software costs as incurred until technological feasibility of the
software is determined and the recovery of the cost can reasonably be expected,
after which any additional costs are capitalized. To date, we have expensed all
software development costs because development costs incurred subsequent to the
establishment of both technological feasibility and the reasonable expectations
of cost recovery have been minimal.
Sales and marketing. Our sales and marketing expenses consist primarily
of personnel costs, commissions to employees, travel, promotional events such as
trade shows, seminars and technical conferences and advertising and public
relations programs.
General and Administrative. Our general and administrative expenses
consist primarily of personnel and other costs of our finance and human
resources activities, as well as legal and audit fees, depreciation and other
general corporate expenses.
Backlog. Our product delivery lead times are very short and,
consequently, substantially all of our license fee revenue in each quarter may
result from contracts entered into in that quarter. Accordingly, we generally
only maintain a significant backlog for our professional services and
maintenance and support activities.
RESULTS OF OPERATIONS
The period-to-period comparison of financial results are not
necessarily indicative of future results. The following table sets forth
selected statement of operations data expressed as a percentage of our total
revenue for the respective periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
-------- --------
<S> <C> <C>
Revenue:
Software license fees .................. 7.1% 61.7%
Services ............................... 92.9 38.3
-------- --------
Total revenue .................. 100.0 100.0
Operating expenses:
Cost of license fees ................... 3.5 2.0
Cost of services ....................... 62.6 19.5
Research and development ............... 72.8 24.9
Sales and marketing .................... 90.8 48.6
General and administrative ............. 32.7 18.8
Provision for doubtful accounts ........ 9.1 1.3
-------- --------
Total operating expenses ....... 271.5 115.1
-------- --------
Operating loss ............................. (171.5) (15.1)
Other income (expense):
Interest expense ....................... (16.0) (4.2)
Interest income and other .............. 0.8 2.1
-------- --------
Total other income (expense) ... (15.2) (2.1)
-------- --------
Loss before income taxes ................... (186.7) (17.2)
-------- --------
Net loss ....................... (186.7)% (17.2)%
======== ========
</TABLE>
- 10 -
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Software License Fees Revenue. Revenue from software license fees
increased to $5.7 million in the three months ended September 30, 2000 from
$253,000 in the same period in 1999. As a percentage of total revenue, revenue
from software license fees increased from 7.1% for the three months ended
September 30, 1999 to 61.7% for the same period in 2000. The increase was due to
increased customer awareness of the potential benefits derived from deploying
our software solutions, the introduction of new products as well as the
expansion of our sales force. In addition to the software license transactions
entered into during the three months ended September 30, 2000 for which software
license fees revenue was recognized, we also recognized $3.6 million (including
$2.2 million from Ford Motor Company) in revenue from software license fees that
were deferred as of June 30, 2000.
During the three months ended September 30, 1999, we believe that our
software license revenue was negatively impacted by the following factors:
- our traditional sources of customer leads did not meet our
growth expectations as we transitioned to new lead-generation
sources and
- during calendar 1999 potential customers' short-term focus of
financial and manpower resources on Year 2000 issues postponed
some potential customers' licensing decisions.
In order to increase the quantity and quality of customer leads, we
have entered into and continue to pursue relationships with third-party lead
sources such as business process improvement consultants, implementers of
software systems and complementary software application providers. We believe
that these efforts have resulted in an increase in the quantity and quality of
customer leads and we expect that the increase in our partner relationships with
third-party lead sources and the elimination of Year 2000 issues will continue
to have a positive effect on our future revenues. However, there can be no
assurance that our efforts to expand indirect sales will be successful or that
our relationships with these third-party lead sources will continue in the
future.
Services Revenue. Revenue from services was relatively consistent at
$3.5 million in the three months ended September 30, 2000 and $3.3 million in
the same period in 1999. As a percentage of total revenue, revenue from services
decreased from 92.9% for the three months ended September 30, 1999 to 38.3% for
the same period in 2000 primarily as a result of the increase in revenue from
software license fees. In addition, the amount of revenue from services
generated from software license transactions has declined as a result of our
partners performing a portion of the implementation services for our software
customers. Management expects that the continued use of third-party software
implementation providers as lead sources will have the future effect of reducing
our implementation services revenue from customers referred to us by the
implementation service provider.
Total Revenue. Total revenue increased 158.0% to $9.2 million in the
three months ended September 30, 2000 from $3.6 million in the same period in
1999.
- 11 -
<PAGE> 12
Cost of License Fees. Cost of license fees increased 45.7% to $182,000
in the three months ended September 30, 2000 from $125,000 in the same period in
1999. This increase resulted from an increase in finder fees paid to third
parties partially offset by a decrease in sub-license fees paid to third parties
as a result of fewer products owned by third parties being licensed along with
our products and a decrease in the amortization of software acquired through
business acquisitions.
Cost of Services. Cost of services decreased 19.4% to $1.8 million in
the three months ended September 30, 2000 from $2.2 million in the same period
in 1999. As a percentage of services revenue, cost of services decreased from
67.4% for the three months ended September 30, 1999 to 51.1% for the same period
in 2000. The decrease in the dollar amount of cost of services as well as the
percentage of services revenue was due to our decreased use of higher cost
third-party consultants for implementation services as well as an increase in
billable employee utilization.
Research and Development. Research and development expenses decreased
11.8% to $2.3 million in the three months ended September 30, 2000 from $2.6
million in the same period in 1999. This decrease is primarily the result of our
decreased use of third-party contractors for specific development projects.
Sales and Marketing. Sales and marketing expenses increased 38.2% to
$4.5 million in the three months ended September 30, 2000 from $3.2 million in
the same period in 1999. Approximately $559,000 of this increase was due to an
increase in compensation and related expenses associated with an increase in the
number of sales personnel and presales consultants as we expanded our direct
sales force to allow for future growth as well as the commissions to employees
on the additional software license transactions. In addition, $627,000 of this
increase was due to cost increases in marketing programs and public relations
activities as we expanded our presence in the market and further developed our
brand, as well as an increase in personnel costs of marketing department
employees due to the increased activities. Despite the increase in total sales
and marketing expenses, as a percentage of total revenue these costs decreased
from 90.8% for the three months ended September 30, 1999 to 48.6% for the same
period in 2000 as a result of the increase in total revenue.
General and Administrative. General and administrative expenses
increased 48.6% to $1.7 million in the three months ended September 30, 2000
from $1.2 million in the same period in 1999. This increase was the result of
higher costs associated with the increase in our infrastructure to support our
recent and anticipated growth as well as the additional costs related to being a
publicly held company. Despite the increase in total general and administrative
expenses, as a percentage of total revenue these costs decreased from 32.7% for
the three months ended September 30, 1999 to 18.8% for the same period in 2000
as a result of the increase in total revenue.
Provision for Doubtful Accounts. Our provision for doubtful accounts
decreased 61.8% to $124,000 in the three months ended September 30, 2000 from
$325,000 in the same period in 1999. This decrease was due to a provision in the
three months ended September 30, 1999 reflecting management's concern over the
collectibility of certain amounts from one of our European customers.
Operating Loss. As a result of the above factors, our operating loss
decreased 77.2% to $1.4 million in the three months ended September 30, 2000
from $6.1 million in the same period in 1999.
Other Income (Expense). Other income (expense) decreased 63.8% to
($195,000) in the three months ended September 30, 2000 from ($539,000) in the
same period in 1999. Interest expense decreased 32.2% to ($386,000) in the three
months ended September 30, 2000 from ($568,000) in the same period in 1999 due
to lower average borrowings as a result of the use of a portion of the net
proceeds from our initial public offering of common stock to repay in full the
outstanding indebtedness under our line of credit. Interest income and other
increased to $191,000 in the three months ended September 30, 2000 from $29,000
in the same period in 1999 primarily as a result of the interest earned on the
investment of the remaining net proceeds from our initial public offering in
government short-term marketable securities.
- 12 -
<PAGE> 13
Income Taxes. During the three months ended September 30, 2000 and
1999, we reported losses for both financial reporting and income tax purposes.
As a result, we made no significant provision for income taxes in either period.
Net Loss. As a result of the above factors, our net loss decreased
76.1% to $1.6 million in the three months ended September 30, 2000 compared to
$6.6 million in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have primarily financed our operations and our capital
expenditures through funds generated from operations, sales of our preferred
stock and borrowings from Greyrock Capital and E.M. Warburg, Pincus, our
principal shareholder. In August 2000, we completed the initial public offering
of our common stock and received proceeds, net of underwriting discounts and
commissions, of approximately $37.4 million. Approximately $10.5 million of the
net proceeds have been used to repay the outstanding balance of our line of
credit. Our line of credit will terminate on December 31, 2000. We intend to use
the remainder of the net proceeds for working capital, including funding of
operating losses and other general corporate purposes. At September 30, 2000,
our primary sources of liquidity consisted of $23.5 million of government
short-term marketable securities and cash totaling approximately $477,000.
Cash used in our operating activities was $4.9 million for the three
months ended September 30, 2000 compared to $4.1 million for the three months
ended September 30, 1999. The cash used in operating activities for the three
months ended September 30, 2000 resulted primarily from our net losses of $1.6
million and a $3.3 million decrease in deferred revenue. The decrease in
deferred revenue resulted from the recognition of revenue on certain software
license transactions closed during the quarter ended June 30, 2000 for which the
revenue was deferred as the products had not been shipped as of June 30, 2000.
The cash used in operating activities for the three months ended September 30,
1999 resulted primarily from our $6.6 million net loss partially offset by a
$2.1 million decrease in accounts receivable due to the reduced software license
transactions closed in the first quarter of fiscal 2000.
Cash used in our investing activities was approximately $23.7 million
in the three months ended September 30, 2000 as compared to $420,000 in the
same period in 1999. During the three months ended September 30, 2000, $203,000
of the cash used in investing activities was for purchases of computer hardware
and software for internal use to support our growth, as well as for furniture
and fixtures to accommodate the increased number of personnel compared to
$420,000 of cash used in investing activities for purchases of computer hardware
and software as well as furniture and fixtures during the three months ended
September 30, 1999. In addition, during the three months ended September 30,
2000 our investing activities included the purchase of investments of $23.5
million with the remainder of the net proceeds from our initial public offering
after repayment of the outstanding balance of our line of credit.
Cash provided by our financing activities amounted to approximately
$28.7 million in the three months ended September 30, 2000 as compared to $5.0
million in the same period in 1999. During the three months ended September 30,
2000, approximately $37.4 million was provided from the initial public offering
of our common stock, net of underwriting discounts and commissions.
Approximately $10.5 million of the net proceeds from the initial public offering
was used to repay the outstanding balance of our line of credit and $1.1 million
was used to pay costs associated with the public offering. Net of borrowings,
the line of credit was reduced in fiscal 2000 by $7.6 million. During the three
months ended September 30, 1999, cash provided by financing activities primarily
represented net borrowings under our line of credit.
We believe that our existing cash balance, short term investments and
cash flow from operations will be sufficient to meet our working capital and
capital expenditure requirements for the next twelve months. However, any
material variance of our operating results from our projections or the
acquisitions of complementary businesses, products or technologies could require
us to obtain additional equity or debt financing. Required financing may not be
available on acceptable terms, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
- 13 -
<PAGE> 14
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended, is effective for quarters beginning after June 15, 2000. We do
not currently utilize derivative financial instruments therefore the adoption of
SFAS No. 133 did not have a material impact on our results of operations or
financial position.
In December 1999, the Securities and Exchange Commission Staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which clarified some provisions of current standards related to
software revenue recognition and must be adopted no later than the fourth
quarter of the fiscal year ending June 30, 2001. The adoption of SAB No. 101 is
not expected to have a material impact on our revenue recognition policies,
results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25, which is referred to as "FIN 44". FIN 44 establishes guidance
for the accounting for stock option grants or modifications to existing stock
option awards and is effective for option grants made after June 30, 2000. FIN
44 also establishes guidance for the repricing of stock options and determining
whether a grantee is an employee, for which the guidance was effective after
December 15, 1998 and modifying a fixed option to add a reload feature, for
which the guidance was effective after January 12, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on the financial statements.
FORWARD-LOOKING STATEMENTS
This report contains certain statements, and other written or oral
statements made by us or on our behalf which may constitute "forward-looking
statements" within the meaning of the federal securities laws. When used in this
report, the words "believes," "expects," "estimates" and similar expressions are
intended to identify forward-looking statements. Statements regarding future
events and developments and our future performance, as well as our expectations,
beliefs, plans, estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. Examples of such
statements in this report include descriptions of our plans, the use of
third-party lead sources and our continuing growth. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual events to differ materially from those projected. We believe that these
forward-looking statements are reasonable; however, you should not place undue
reliance on such statements. These statements are based on current expectations
and speak only as of the date of such statements. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
future events, new information or otherwise. A variety of factors could cause
actual results to differ materially from those anticipated, including
technological changes in the e-commerce and supply chain management solutions
industries, the level of competition, our ability to attract and retain
qualified personnel, relationships with alliance partners, the availability of
financing, general economic conditions and other factors discussed in our
filings with the Securities and Exchange Commission, including our Annual Report
on Form 10-K for the year ended June 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest expense and interest income is sensitive to changes in the
general level of U.S. interest rates. Since the initial public offering of our
common stock in August 2000 we have repaid our line of credit with Greyrock,
converted our subordinated debt to common stock and invested in U.S. government
or its agencies securities with maturities of less than two years. As a result
we are now exposed to changes in interest rates on these investment securities.
Prior to completion of our initial public offering, we were exposed to changes
in interest rates primarily from our subordinated debt with E.M. Warburg, Pincus
and our line of credit with Greyrock. We do not currently utilize and we have
not in the past utilized derivative financial instruments to manage exposure to
interest rate changes. Based on the weighted average outstanding debt balances,
a one percent increase in the general level of U.S. interest rates would have
produced approximately $285,000 in additional interest expense in the fiscal
year ended June 30, 2000.
We develop products in the United States and market our products in
North America, South America and Europe. 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. Sales are currently made in both
- 14 -
<PAGE> 15
U.S. dollars and local currencies. A strengthening of the U.S. dollar or
weakening of these local currencies could make our products less competitive in
foreign markets.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule - First Quarter 2001 (for SEC filing
purposes only)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
three month period ended September 30, 2000.
- 15 -
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 13, 2000 /s/ Joseph Trino
------------------------------- ------------------------------------
(Date) Joseph Trino
Chairman of the Board and
Chief Executive Officer
November 13, 2000 /s/ John Bartels
------------------------------- ------------------------------------
(Date) John Bartels
Executive Vice President,
Finance and Administration
(Principal Financial Officer)
- 16 -
