<PAGE>
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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 _______________
EVOLVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 65th Street, Suite 100, Emeryville, CA 94608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 428-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class November 6, 2000
----- ----------------
<S> <C>
Common stock, $.001 par value 38,449,825
</TABLE>
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TABLE OF CONTENTS
Page
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets
As of September 30, 2000 and June 30, 2000.................... 3
Consolidated Condensed Statements of Operations
For the Three Months Ended September 30, 2000 and 1999........ 4
Consolidated Condensed Statements of Cash Flows
For the Three Months Ended September 30, 2000 and 1999........ 5
Notes to Consolidated Condensed 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.... 20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 2. Changes in Securities and Use of Proceeds..................... 22
Item 3. Defaults Upon Senior Securities............................... 22
Item 4. Submissions of Matters to a Vote of Security Holders.......... 22
Item 5. Other Information............................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................. 22
Signatures............................................................ 23
2
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PART I-FINANCIAL INFORMATION
EVOLVE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Sept. 30, June 30,
2000 2000
---------------- -----------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 52,228 $ 18,660
Short term investments................................................................. 4,938 -
Accounts receivable, net............................................................... 6,594 3,952
Prepaid expenses and other current assets.............................................. 3,142 2,273
--------------- -----------------
Total current assets................................................................ 66,902 24,885
Property and equipment, net................................................................ 11,191 8,830
Restricted cash............................................................................ 2,000 2,000
Deposits and other assets.................................................................. 1,844 1,213
Note receivable from related party......................................................... 100 100
Goodwill and other intangibles, net........................................................ 24,927 26,951
--------------- -----------------
Total assets....................................................................... $ 106,964 $ 63,979
=============== =================
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable....................................................................... $ 6,083 $ 6,467
Accrued liabilities.................................................................... 6,523 5,965
Capital lease obligations, current portion............................................. 722 762
Deferred revenues...................................................................... 5,923 7,093
Short term debt........................................................................ 4,033 -
--------------- -----------------
Total current liabilities.......................................................... 23,284 20,287
Capital lease obligations, less current portion............................................ 712 852
Long term debt............................................................................. - 3,958
Deferred rent.............................................................................. 25 -
--------------- -----------------
Total liabilities.................................................................. 24,021 25,097
--------------- -----------------
Redeemable convertible preferred stock..................................................... - 79,514
Stockholders' equity (deficit)
Common stock........................................................................... 38 10
Additional paid-in capital............................................................. 265,488 113,210
Notes receivable from stockholders..................................................... (11,866) (9,174)
Unearned stock-based compensation...................................................... (35,082) (40,295)
Accumulated deficit.................................................................... (135,635) (104,383)
---------------- -----------------
Total stockholder's equity (deficit)............................................... 82,943 (40,632)
---------------- -----------------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit.................................................... $ 106,964 $ 63,979
================ =================
The accompanying notes are an integral part of these consolidated condensed financial statements
</TABLE>
3
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EVOLVE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
Sept. 30, Sept. 30,
2000 1999
------------ ----------
(unaudited)
<S> <C> <C>
Revenues:
Solutions..................................................................... $ 5,047 $ 338
Subscriptions................................................................. 1,912 195
---------- ---------
Total revenues............................................................ 6,959 533
---------- --------
Cost of Revenues:
Solutions..................................................................... 2,903 185
Subscriptions................................................................. 1,051 461
---------- --------
Total cost of revenues.................................................... 3,954 646
---------- --------
Gross profit (loss)....................................................... 3,005 (113)
Operating expenses:
Sales and marketing........................................................... 11,048 1,959
Research and development...................................................... 3,830 1,649
General and administrative.................................................... 2,521 667
Stock-based charges........................................................... 8,950 816
Amortization of goodwill and other intangible assets.......................... 2,726 -
---------- --------
Total operating expenses.................................................. 29,075 5,091
Operating loss.................................................................... (26,070) (5,204)
Other income (expense), net....................................................... 795 (49)
---------- --------
Net loss.......................................................................... (25,275) (5,253)
Beneficial conversion feature of Series I redeemable convertible preferred stock.. (5,977) -
---------- --------
Net loss attributable to common stockholders...................................... $ (31,252) $ (5,253)
========== ========
Net loss per common share -- basic and diluted.................................... $ (1.50) $ (2.58)
========== ========
Shares used in net loss per common share calculation -- basic and diluted......... 20,789 2,035
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
4
<PAGE>
EVOLVE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
Sept. 30, Sept. 30,
2000 1999
--------------------- -------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss attributable to common stockholders..........................................$ (31,252) $ (5,253)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets.................................................. 19 --
Allowance for doubtful accounts................................................... -- 26
Depreciation and amortization..................................................... 3,522 88
Accrued interest.................................................................. 75 75
Beneficial conversion feature of Series I redeemable
convertible preferred stock................................................. 5,977 --
Stock-based charges............................................................... 8,950 816
Changes in assets and liabilities:
Accounts receivable........................................................... (2,643) (1,278)
Prepaid expenses and other current assets..................................... (867) 86
Note receivable from related party............................................ -- (40)
Deposits and other assets..................................................... (633) --
Accounts payable.............................................................. (383) 248
Accrued liabilities........................................................... 582 687
Deferred revenues............................................................. (1,171) 1,752
--------------------- -------------------
Net cash used in operating activities..................................... (17,824) (2,793)
--------------------- -------------------
Cash flows from investing activities:
Purchase of short term investments.................................................... (4,938) --
Purchases of property and equipment................................................... (3,190) (153)
Proceeds from sale of property and equipment.......................................... 13 --
Purchase of intangibles............................................................... (700) --
--------------------- -------------------
Net cash used in investing activities....................................... (8,815) (153)
--------------------- -------------------
Cash flows from financing activities:
Payments under capital lease obligations.............................................. (181) (106)
Proceeds from payment on note receivable.............................................. 70 --
Proceeds from issuance of preferred stock, net of issuance costs...................... 12,577 24,594
Proceeds from exercise of stock options............................................... 839 72
Proceeds from exercise of common stock warrants....................................... 500 --
Proceeds from initial public offering................................................. 46,462 --
Repurchase of common stock............................................................ (60) (1)
--------------------- -------------------
Net cash provided by financing activities................................ 60,207 24,559
--------------------- -------------------
Increase in cash and cash equivalents......................................................$ 33,568 $ 21,613
Cash and cash equivalents at beginning of period........................................... 18,660 2,840
--------------------- -------------------
Cash and cash equivalents at end of period.................................................$ 52,228 $ 24,453
===================== ===================
The accompanying notes are an integral part of these consolidated condensed financial statements
</TABLE>
5
<PAGE>
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. All adjustments (consisting only of adjustments of a
normal recurring nature) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2001. For further information, refer to the financial statements
and notes thereto included in our Registration Statement filed on Form S-1,
effective August 9, 2000.
Principles of consolidated financial statements
These consolidated condensed financial statements include the accounts of Evolve
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
Use of estimates
We have prepared these financial statements in conformity with generally
accepted accounting principles which require us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Comprehensive loss
We follow Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and loss and their components in
financial statements. We did not have any significant components of
comprehensive income or loss for the three months ended September 30, 2000 and
1999.
Segment information
We operate in only one segment, namely professional services software and, as
such, use only one measure of profitability for internal reporting purposes. To
date substantially all of our revenues have been derived from within the United
States.
Note 2. Acquisition of InfoWide, Inc.
On March 31, 2000, we acquired all the common stock of InfoWide, Inc. for a
total consideration of 1.8 million shares of our common stock and related
expenses. The acquisition consideration, together with transaction expenses, was
valued at $33.0 million. InfoWide was incorporated on April 15, 1998 under the
laws of the state of Delaware. InfoWide provides a web-hosted, financial
management package designed for professional services organizations. The
acquisition was accounted for as a purchase and the results of operations of
InfoWide have been included in the consolidated financial statements from the
date of acquisition.
6
<PAGE>
The following unaudited pro forma consolidated financial information presents
the combined results of Evolve and InfoWide as if the acquisition had occurred
on July 1, 1999, after giving effect to certain adjustments, principally the
amortization of goodwill and other intangibles assets. The unaudited pro forma
consolidated financial information does not necessarily reflect the results of
operation that would have occurred had the acquisition been completed on July 1,
1999 (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Three months ended
----------------------
Sept. 30, Sept. 30,
2000 1999
--------- --------
(unaudited)
<S> <C> <C>
Pro forma total revenues............................ $ 6,959 $ 536
======== ========
Pro forma net loss.................................. $(31,252) $ (8,078)
======== ========
Basic and diluted pro forma net loss per share...... $ (1.50) $ (2.09)
======== ========
Shares used to compute basic and
diluted pro forma net loss per share............ 20,789 3,868
======== ========
</TABLE>
Note 3. Contingencies
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. In January 2000 PeopleSoft, Inc.
filed an action in the California Superior Court, Alameda County, alleging
claims arising out of our employment of former employees of PeopleSoft, and
seeking preliminary and permanent injunctions to preclude additional hiring of
PeopleSoft employees. PeopleSoft's claims include our inducing breach of
contract of their employees and unfair competition. PeopleSoft filed a motion
for preliminary injunction enjoining us from recruiting additional PeopleSoft
employees or disclosing any PeopleSoft trade secrets. The court denied this
motion in July 2000 due to PeopleSoft's failure to show that it was neither
likely to succeed in the litigation on the merits of their complaint nor had it
shown that it would be harmed if the injunction were not issued. PeopleSoft has
appealed the court's ruling on the motion. We do not believe that the motion,
even if granted on appeal, will have a material impact on our business. The
parties conducted a mediation in September 2000 but were unable to reach an
agreeable settlement. We continue to believe that PeopleSoft's claims are
without merit, and continue to contest these claims. However, this litigation,
whether or not determined or settled in our favor, may be costly and may divert
the efforts and attention of our management from normal business operations. We
believe that there are no other claims or actions pending or threatened against
us, the ultimate disposition of which would have a material adverse effect on
us.
7
<PAGE>
Note 4. Net Loss per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during each period. Since we have a net loss
for all periods presented, net loss per share on a diluted basis is equivalent
to basic net loss per share. Common shares issuable upon exercise of stock
options and warrants and upon conversion of convertible preferred stock are
excluded because the effect would be anti-dilutive. A reconciliation of the
numerator and denominator (both in thousands) used in the calculation of basic
and diluted net loss per share follows:
<TABLE>
<CAPTION>
Three months ended
----------------------
Sept. 30, Sept. 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Numerator:
Net loss......................................... $(25,275) $(5,253)
Beneficial conversion feature of Series I
redeemable convertible preferred stock......... (5,977) -
-------- -------
Net loss attributable to common stockholders..... $(31,252) $(5,253)
======== =======
Denominator:
Weighted average common shares................... 26,244 4,189
Weighted average unvested common shares
subject to repurchase.......................... (5,455) (2,154)
-------- -------
Shares used in computing basic and diluted
net loss per share............................. 20,789 2,035
======== =======
</TABLE>
At September 30, 2000 and 1999, the weighted-average exercise price of
outstanding stock options was $6.20 and $0.66, respectively. The weighted-
average purchase price of restricted stock subject to repurchase was $2.22 and
$0.42 as of September 30, 2000 and 1999, respectively.
Note 5. Change in Par Value
On August 15, 2000, the Company's Board of Directors approved a change in par
value of common stock from $0.01 to $0.001 per share. The change in par value
has been reflected in our consolidated condensed financial statements for all
periods presented.
Note 6. Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," that
requires companies to record derivative financial instruments on their balance
sheets as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative instrument and whether it qualifies for
hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," that amends SFAS No. 133 to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB No. 133." SFAS 138 amends the accounting and
reporting standards for certain derivatives and hedging activities such as net
settlement contracts, foreign currency translations and intercompany
derivatives. Management adoption of SFAS 133 did not have a material effect on
our consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the
8
<PAGE>
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We have complied with the guidance in SAB 101 for all
periods presented.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation," an
interpretation of Accounting Principles Board ("APB") Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for the definition of employee for
purposes of applying Opinion 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective July 1, 2000, but certain conclusions cover
specific events that occurred after either December 15, 1998, or January 12,
2000. The adoption of certain of the provisions of FIN 44 prior to March 31,
2000 did not have a material impact on the consolidated financial statements.
We do not expect that the adoption of the remaining provisions will have a
material effect on our consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with the interim
unaudited condensed financial statements and related notes included in this
report, and with Management's Discussion and Analysis of Financial Condition and
Results of Operations and related financial information contained in the
Company's Registration Statement on Form S-1 (Registration No. 333-32796).
Except for historical information, this Report may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses. Our actual results may
differ significantly from those projected in the forward-looking statements.
Factors that might cause or contribute to these differences include, but are not
limited to those discussed in the section below entitled "Factors That May
Affect Future Results of Operations." You should carefully review the risks
described in our Registration Statement filed on Form S-1 under "Risk Factors."
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Quarterly Report on Form 10-Q. We
undertake no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this document.
Overview
We are a leading provider of Internet-based end-to-end solutions for automating
professional service organizations. Our ServiceSphere software suite integrates
and steamlines the core processes that are critical to professional services
organizations; managing project opportunities, professional resources and
service delivery. We license our Evolve ServiceSphere solution directly to
services organizations and provide related implementation, integration,
training, maintenance and hosting services.
Evolve was founded in February 1995. From our inception through December 1998
our activities, funded by the capital we raised, consisted primarily of building
our business infrastructure, recruiting personnel and developing our software
and service offerings. The Evolve ServiceSphere product suite was first made
commercially available in March 1999 and we recognized our first revenues from
ServiceSphere sales during the quarter ended March 31, 1999. Our revenues
increased during each sequential quarter for the remainder of 1999 and 2000. We
have incurred substantial losses since inception and we anticipate that we will
continue to incur operating losses as we make the investments necessary to
expand our business. Our accumulated deficit at September 30, 2000, was $135.6
million.
Our headcount increased from 58 employees at January 1, 1999 to 343 employees at
September 30, 2000, as we continued to invest in developing our technology and
building a direct sales force, a marketing group and a professional services
organization. Our infrastructure expenditures also increased significantly in
1999 and 2000, as we expanded our facilities and enhanced our information
systems.
In August 2000, we completed an initial public offering of 5,750,000 shares of
our common stock. Proceeds to us from the offering totaled approximately $46.5
million, net of offering costs.
9
<PAGE>
Results of Operations
Three months ended September 30, 2000 and 1999
Revenues
Total revenues were $7.0 million for the three months ended September 30, 2000,
as compared to revenues of $533,000 for the comparable 1999 period. The increase
in revenues reflects the growth of sales of our software and services subsequent
to the first commercial sale of ServiceSphere during the quarter ending March
31, 1999.
Solutions revenue principally consists of software licenses and implementation
services while Subscriptions revenue is principally composed of applications and
maintenance subscriptions. For the three months ended September 30, 2000,
Solutions revenues and Subscriptions revenues were $5.0 million, or 73% of total
revenues, and $1.9 million, or 27% of total revenues, respectively. For the
three months ended September 30, 1999, Solutions revenues and Subscriptions
revenues were $338,000, or 63% of total revenues, and $195,000, or 37% of total
revenues, respectively. The increase in Solutions revenue as a percentage of
total revenues is attributable to the increase in sales to new customers of
licenses and product implementations relative to prior year. Offsetting this
percentage increase was an increase in Subscriptions revenue resulting from
growth in our application service provider ("ASP") customer base during the
current year.
Cost of Revenues
Our cost of revenues includes the costs associated with our Solutions and
Subscriptions revenues. The cost of our Solutions revenues consists principally
of payroll-related costs for employees and consultants involved in providing
services for implementation, training and consulting. The cost of our Solutions
revenues also includes royalties due to third parties for integrated technology,
printing costs of product documentation, duplication costs for software media
and shipping costs. The cost of our Subscriptions revenues consists primarily of
the payroll-related costs for employees involved in providing support services
to customers under maintenance contracts as well as payroll costs for employees
and consultants involved in providing services for implementation, training and
consulting for customers under subscription.
Total cost of revenues was $4.0 million for the three months ended September 30,
2000. Cost of Solutions revenues was $2.9 million and the cost of Subscriptions
revenues was $1.1 million for the three months ended September 30, 2000. For the
quarter ended September 30, 1999, total cost of revenues was $646,000. Cost of
Solutions revenues was $185,000 and the cost of Subscriptions revenues was
$461,000 for the quarter ended September 30, 1999. The increase in cost of
Solutions revenues between the three months ended September 30, 2000 and
September 30, 1999 was primarily due to increased costs associated with
employees and consultants involved in providing implementation, training and
consulting services to our expanded customer base. The increase in total cost of
Subscriptions revenues between the three months ended September 30, 2000 and
September 30, 1999 was primarily due to increased payroll costs for employees
and third-party consultants involved in providing support services to customers
under maintenance contracts and software subscriptions contracts.
Gross profit margin increased to 43% for the quarter ended September 30, 2000
compared to a gross loss margin of (21%) for the same prior year period. The
improvement in gross margins is attributable to the growth in our revenue base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of advertising,
public relations, website development, trade shows, seminars, promotional
materials and other sales and marketing programs. Additionally, sales and
marketing expenses include costs of service personnel that have not been treated
as part of cost of revenues. Sales and marketing expenses increased to $11.0
million for the quarter ended September 30, 2000, from $2.0 million
10
<PAGE>
for the quarter ended September 30, 1999. The increase in sales and marketing
expenses resulted primarily from building our domestic and international direct
sales force, investing in our sales and marketing infrastructure and increasing
our marketing initiatives. The number of employees in our sales and marketing
organization has increased from 22 as of September 30, 1999 to 107 as of
September 30, 2000. Additionally we spent $2.0 million in major marketing
initiatives during the quarter ended September 30, 2000 compared to $169,000 for
the comparable period in 1999. We expect that the absolute dollar amount of
sales and marketing expenses will continue to increase due to the planned growth
of our sales force which includes the establishment of sales offices in
additional domestic and international locations.
Research and Development. Research and development expenses consist primarily
of personnel and related costs associated with our product development efforts,
including fees paid to third parties for consulting services. Research and
development expenses increased to $3.8 million for the three months ended
September 30, 2000, from $1.6 million for three months ended September 30, 1999.
The increase in research and development expenses related primarily to an
increase in research and development personnel from 35 at September 30, 1999 to
74 at September 30, 2000. Fees paid to third party consultants increased in
2000 as development work required specialized technical expertise. We believe
that an essential part of our future success is the investment we make in our
research and development organization. We expect that the absolute dollar amount
of research and development expenses will increase in future periods.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and expenses related to executive, finance and
administrative personnel. General and administrative expenses increased to $2.5
million for the three months ended September 30, 2000, from $667,000 for the
three months ended September 30, 1999. The increase in general and
administrative expenses resulted primarily from the addition of executive,
finance and administrative personnel to support the growth of our business. The
number of executive, finance and administrative employees increased to 42 as of
September 30, 2000 from 13 as of September 30, 1999. We expect general and
administrative expenses to increase in absolute dollars in the future.
Amortization of Goodwill and Other Intangible Assets. In connection with the
acquisition of InfoWide, Inc. on March 31, 2000, we recorded $32.6 million in
goodwill, purchased technology and other intangible assets including in-process
technology of $3.1 million. During the quarter ended September 30, 2000, we
expensed $2.7 million associated with the amortization of these and other
intangible assets which are being amortized over periods not exceeding 36
months.
Stock-Based Charges. Stock-based charges consist of amortization of deferred
compensation in connection with stock option grants and sales of restricted
stock to our employees at exercise or sales prices below the deemed fair market
value of our common stock. We recorded stock-based charges of $9.0 million for
the quarter ended September 30, 2000 and $816,000 for the quarter ended
September 30, 1999. Stock-based charges were allocated to the following items
in the consolidated condensed statements of operations (in thousands):
<TABLE>
<CAPTION>
Three months ended
---------------------
Sept. 30, Sept. 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Cost of revenues:
Solutions............................. $ 744 $ 1
Operating expenses:
Sales and marketing................... 2,620 73
Research and development.............. 1,523 41
General and administrative............ 4,063 701
------ ------
Totals............................. $8,950 $ 816
====== ======
</TABLE>
11
<PAGE>
Other Income (Expense), net. Other net income increased to $795,000 for the
quarter ended September 30, 2000, compared to an expense of ($49,000) for the
quarter ended September 30, 1999. The increase in other income was primarily
attributable to interest income derived from increased cash balances resulting
from the completion of our Series I Preferred Stock issuances in June and July
2000 and our initial public offering in August 2000.
Liquidity And Capital Resources
Net cash used by operations for the three months ended September 30, 2000 was
$17.8 million compared to net cash used by operations of $2.8 million for the
comparable period of the prior year. Net cash used by operating activities for
the three months ended September 30, 2000 resulted primarily from net losses
during the period and, to a lesser extent, decreases in working capital.
Net cash used by investing activities for the quarter ended September 30, 2000
was $8.8 million compared to net cash used by investing activities of $153,000
for the same period in 1999. Cash used by investing activities in 2000 resulted
primarily from the purchase of short-term investments of $4.9 million, and the
purchase of property and equipment of $3.2 million. Additions to property and
equipment were primarily related to a move of our corporate offices to a new
facility in August 2000.
Net cash provided from financing activities for the three months ended September
30, 2000 was $60.2 million compared to $24.6 million in the same prior year
period. Current year activity was primarily attributable to proceeds from the
issuance of common stock in our initial public offering completed in August of
2000, and to a lesser extent from issuance of preferred shares under our Series
I funding round in July, 2000.
At September 30, 2000, we had cash, cash equivalents and investments of $57.2
million. We believe that our current cash and investment balances and cash flow
from operations will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months. We may also
utilize cash to acquire or invest in complementary businesses or to obtain the
right to use complementary technologies.
Factors That May Affect Future Results of Operations
Our business is difficult to evaluate because our operating history is limited.
It is difficult to evaluate our business and our prospects because our revenue
and income potential are unproven. We commenced recognizing sales revenues in
the first quarter of 1999. Because of our limited operating history, there may
not be an adequate basis for forecasts of future operating results, and we have
only limited insight into the trends that may emerge in our business and affect
our financial performance.
We have incurred losses since inception, and we may not be able to achieve
profitability.
We have incurred net losses and losses from operations since our inception in
1995, and we may not be able to achieve profitability in the future. As of
September 30, 2000, we had an accumulated deficit of approximately $135.6
million. Since inception, we have funded our business primarily from the sale of
our stock and by borrowing funds, not from cash generated by our business. We
expect to continue to incur significant sales and marketing, research and
development, and general and administrative expenses. As a result, we expect to
experience continued losses and negative cash flows from operations. If we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future.
Our future operating results may not follow past trends due to many factors, and
any of these could cause our stock price to fall.
We believe that quarter-to-quarter comparisons of our operating results are not
a good indication of future performance. Although our operating results have
generally improved from quarter to quarter in the recent past, our future
operating results may not follow past trends. It is likely that in some future
quarters our
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operating results may be below the expectations of public market analysts and
investors due to factors beyond our control, and as a result, the price of our
common stock may fall.
Factors that may cause our future operating results to be below expectations and
cause our stock price to fall include:
. the lack of demand for and acceptance of our products, product
enhancements and services; for instance, as we expand our target
customer focus beyond the information technology sector and into
overseas markets, we may encounter increased resistance to adoption of
our business process automation solutions;
. unexpected changes in the development, introduction, timing and
competitive pricing of our products and services or those of our
competitors;
. any inability to expand our direct sales force and indirect marketing
channels both domestically and internationally;
. difficulties in recruiting and retaining key personnel in a highly
competitive recruiting environment;
. unforeseen reductions or reallocations of our customers' information
technology infrastructure budgets;
. any delays or unforseen costs incurred in integrating technologies and
businesses we may acquire.
We plan to significantly increase our operating expenses to expand our
administration, information technology infrastructure, consulting and training,
maintenance and technical support, research and development and sales and
marketing groups. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. If revenues fall below our
expectations in any quarter and we are not able to quickly reduce our spending
in response, our operating results for that quarter would be lower than expected
and our stock price may fall.
We may lose existing customers or be unable to attract new customers if we do
not develop new products or enhance our existing products.
If we are not able to maintain and improve our product line and develop new
products, we may lose existing customers or be unable to attract new customers.
We may not be successful in developing and marketing product enhancements or new
products on a timely or cost-effective basis. These products, if developed, may
not achieve market acceptance. As an example, we have added service delivery
management functions to our ServiceSphere suite and we have built enhanced
delivery management functionality in part through integration of the technology
of InfoWide, Inc. However, we have only recently made these enhancements
generally available, and we cannot be certain that any of these enhancements
will meet the needs or expectations of our customers.
Some of our customers expect us to develop product enhancements that may address
their specific needs. For instance, we have shared with our customers our
internal product roadmap which includes delivery of enhanced time and expense
management functions in future releases of our software. If we fail to deliver
these enhancements on a timely basis, we risk damaging our relationship with
these customers. We have experienced delays in the past in releasing new
products and product enhancements and may experience similar delays in the
future. These delays or problems in the installation or implementation of our
new releases may cause customers to forego purchases of our products or to
purchase those of our competitors.
If the market for process automation solutions for professional services
organizations does not continue to grow, the growth of our business will not be
sustainable.
The future growth and success of our business is contingent on growing
acceptance of, and demand for, business process automation solutions for
professional services organizations. All of our historical revenues
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have been attributable to the sale of automation solutions for professional
services organizations. This is a relatively new enterprise application solution
category, and it is uncertain whether major services organizations will choose
to adopt process automation systems. While we have devoted significant resources
to promoting market awareness of our products and the problems our products
address, we do not know whether these efforts will be sufficient to support
significant growth in the market for process automation products. Accordingly,
the market for our products may not continue to grow or, even if the market does
grow in the immediate term, that growth may not be sustainable.
If we fail to expand our relationships with third-party resellers and
integrators, our ability to grow revenues could be harmed.
In order to grow our business, we must establish, maintain and strengthen
relationships with third parties, such as information technology ("IT")
consultants and systems integrators as implementation partners and hardware and
software vendors as marketing partners. If these parties do not provide
sufficient, high-quality service or integrate and support our software
correctly, our revenues may be harmed. In addition, these parties may offer
products of other companies, including products that compete with our products.
Our contracts with third parties may not require these parties to devote
resources to promoting, selling and supporting our solutions. Therefore we may
have little control over these third parties. We cannot assure you that we can
generate and maintain relationships that offset the significant time and effort
that are necessary to develop these relationships, or that, even if we are able
to develop such relationships, these parties will perform adequately.
Our services revenues have a substantially lower margin than our software
license revenues, and an increase in services revenues relative to license
revenues could harm our gross margins.
A significant shift in our revenue mix away from license revenues to service
revenues would adversely affect our gross margins. Revenues derived from
services we provide have substantially lower gross margins than revenues we
derive from licensing our software. The relative contribution of services we
provide to our overall revenues is subject to significant variation based on the
structure and pricing of arrangements we enter into with customers in the
future, and the extent to which our partners provide implementation,
integration, training and maintenance services required by our customers. An
increase in the percentage of total revenues generated by the services we
provide could adversely affect our overall gross margins.
Difficulties with third-party services and technologies could disrupt our
business, and many of our communication systems do not have backup systems.
Many of our communications and hosting systems do not have backup systems
capable of mitigating the effect of service disruptions. Our success in
attracting and retaining customers for our ServiceSphere application service
provider ("ASP") offering and convincing them to increase their reliance on this
solution depends on our ability to offer customers reliable, secure and
continuous service. This requires that we provide continuous and error-free
access to our systems and network infrastructure. We rely on third parties to
provide key components of our networks and systems. For instance, we rely on
third-party Internet service providers to host applications for customers who
purchase our solutions on a subscription basis. We also rely on third-party
communications services providers for the high-speed connections that link our
Web servers and office systems to the Internet. Any Internet or communications
systems failure or interruption could result in disruption of our service or
loss or compromise of customer orders and data. These failures, especially if
they are prolonged or repeated, would make our services less attractive to
customers and tarnish our reputation.
Our markets are highly competitive and competition could harm our ability to
sell products and services and reduce our market share.
Competition could seriously harm our ability to sell additional software
solutions and subscriptions on prices and terms favorable to us. The markets for
our products are intensely competitive and subject to rapidly changing
technology. We currently compete against providers of automation solutions for
professional services organizations, such as Changepoint and Niku. In addition,
we may in the future face competition from providers of enterprise application
software or electronic marketplaces. Companies in
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each of these areas may expand their technologies or acquire companies to
support greater professional services automation functionality and capabilities.
In addition, "in-house" information technology departments of potential
customers have developed or may develop systems that substitute for some of the
functionality of our product line.
Some of our competitors' products may be more effective than our products at
performing particular functions or be more customized for particular customer
needs. Even if these functions are more limited than those provided by our
products, our competitors' software products could discourage potential
customers from purchasing our products. A software product that provides some of
the functions of our software solutions, but also performs other tasks may be
appealing to these vendors' customers because it would reduce the number of
different types of software necessary to effectively run their businesses.
Further, many of our competitors may be able to respond more quickly than we can
to changes in customer requirements.
Some of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Our
competitors have made and may also continue to make strategic acquisitions or
establish cooperative relationships among themselves or with other software
vendors. They may also establish or strengthen cooperative relationships with
our current or future partners, limiting our ability to promote our products
through these partners and limiting the number of consultants available to
implement our software.
Our lengthy and unpredictable sales cycles for our products and resistance to
adoption of our software could cause our operating results to fall below
expectations.
Our operating results for future periods could be adversely affected because of
unpredictable increases in our sales cycles. Our products and services have
lengthy and unpredictable sales cycles varying from as little as three months to
as much as nine months, which could cause our operating results to be below the
expectations of analysts and investors. Since we are unable to control many of
the factors that will influence our customers' buying decisions, it is difficult
for us to forecast the timing and recognition of revenues from sales of our
solutions.
Customers in our target market often take an extended time evaluating our
products before purchasing them. Our products may have an even longer sales
cycle in international markets. During the evaluation period, a variety of
factors, including the introduction of new products or aggressive discounting by
competitors and changes in our customers' budgets and purchasing priorities, may
lead customers to not purchase or to scale down orders for our products.
As we target industry sectors and types of organizations beyond our core market
of IT services organizations, we may encounter increased resistance to use of
business process automation solutions, which may further increase the length of
our sales cycles, increase our marketing costs and reduce our revenues. Because
we are pioneering a new solution category, we often must educate our prospective
customers on the use and benefit of our solutions, which may cause additional
delays during the evaluation process. These companies may be reluctant to
abandon investments they have made in other systems in favor of our solution. In
addition, IT departments of potential customers may resist purchasing our
solutions for a variety of other reasons, particularly the potential
displacement of their historical role in creating and running software and
concerns that packaged software products are not sufficiently customizable for
their enterprises.
Our revenues depend on orders from our top customers, and if we fail to complete
one or more orders, our revenues will be reduced.
Historically, we have received a significant portion of our revenues from a
small number of customers. For the quarter ended September 30, 1999, three
customers had revenues that represented 10% or more of total revenues.
Cumulatively their revenues accounted for 81% of our total revenues. For the
quarter ended September 30, 2000, one customer accounted for 11% of our total
revenues. No other customers accounted for more than 10% of total revenues for
the three months ended September 30, 2000. Our operating results
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may be harmed if we are not able to complete one or more substantial product
sales in any future period or attract new customers.
We depend on the continued services of our executive officers, and the loss of
key personnel or any inability to attract and retain additional personnel could
affect our ability to successfully grow our business.
If we are unable to hire and retain a sufficient number of qualified personnel,
particularly in sales, marketing, research and development, service and support,
our ability to grow our business could be affected. Competition for qualified
personnel in high technology is intense, particularly in the San Francisco Bay
Area where our principal office is located. The loss of the services of our key
engineering, sales, service or marketing personnel would harm our operations.
For instance, loss of sales and customer service representatives could harm our
relationship with the customers they serve, loss of engineers and development
personnel could impede the development of product releases and enhancements and
decrease our competitiveness, and departure of senior management personnel could
result in a loss of confidence in our company by customers, suppliers and
partners. None of our key personnel is bound by an employment agreement, and we
do not maintain key person insurance on any of our employees. Because we, like
many other technology companies, rely on stock options as a component of our
employee compensation, if the market price of our common stock decreases or
increases substantially, some current or potential employees may perceive our
equity incentives as less attractive. In that case, our ability to attract and
retain employees may be adversely affected.
Our future success depends upon the continued service of our executive officers,
particularly John Bantleman, our President and Chief Executive Officer, who is
critical to determining our broad business strategy. None of our executive
officers is bound by an employment agreement for any specific term. Our business
could be harmed if we lost the services of one or more of our executive officers
or key employees, or if one or more of them decide to join a competitor or
otherwise compete directly or indirectly with us.
If our products do not stay compatible with widely used software programs, our
revenues may be adversely affected.
Our software products must work with widely used software programs. If these
software programs and operating environments do not remain widely used, or we do
not update our software to be compatible with newer versions of these programs
and systems, we may lose customers.
Our software only operates on both a computer server running the Microsoft
Windows NT or Sun Solaris operating system and a computer server running
database software from Microsoft or Oracle. In order to increase the flexibility
of our solution and expand our client base, we must be able to successfully
adapt it to work with other applications and operating systems. For example, we
are in the early stages of customer deployment on the Sun Solaris operating
system. Because this development effort is not complete, we cannot be certain
that we will avoid significant technical difficulties which could delay or
prevent completion of the development effort.
Our software connects to and uses data from a variety of our customers' existing
software systems, including systems from Oracle and SAP. If we fail to enhance
our software to connect to and use data from new systems of these products, we
may lose potential customers.
The cost and difficulties of implementing our products could significantly harm
our reputation with customers and harm our future sales.
If our customers encounter unforeseen difficulties or delays in deploying our
products and integrating them with their other systems, they may reverse their
decision to use our solutions, which would reduce our future revenues and
potentially damage our reputation. Factors which could delay or complicate the
process of deploying our solutions include:
. customers may need to modify significant elements of their existing IT
systems in order to effectively integrate them with our solutions;
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. customers may need to purchase and deploy significant additional
hardware and software resources and may need to make significant
investments in consulting and training services; and
. customers may rely on third-party systems integrators to perform all
or a portion of the deployment and integration work, which reduces the
control we have over the implementation process and the quality of
customer service provided to the customer.
Our sales are concentrated in the IT services industry, and if our customers in
this industry decrease their infrastructure spending, or we fail to penetrate
other industries, our revenues may decline.
We expect to continue to direct our sales and marketing efforts primarily toward
companies in the IT services industry. Sales to customers in the IT services
industry accounted for substantially all of our revenues in fiscal 1999 and
2000. Given the high degree of competition and the rapidly changing environment
in this industry, there is no assurance that we will be able to continue sales
in this industry at current levels. Declines in the stock prices of potential
customers in the IT services sector may also limit the ability of IT service
providers to invest in their infrastructure. In addition, we intend to market
our products to professional services organizations in other industries.
Customers in these new industries are likely to have different requirements and
may require us to change our product design or features, sales methods, support
capabilities or pricing policies. If we fail to successfully address the needs
of these customers, we may experience decreased sales in future periods.
If we lose key licenses, we may be required to develop or license alternatives
which may cause delays or reductions in sales or shipments.
We rely on software that we have licensed from third parties, including Poet
Software and Inprise/Borland, to perform key functions of our Evolve
ServiceSphere ePlatform, and we rely on these and other third parties to support
their products for our development and customer support efforts. These companies
could terminate our licenses if we breach our agreements with them, or they
could discontinue support of the products we license from them. This could
result in delays or reductions of sales or shipments of our ePlatform until
alternative software can be developed or licensed.
If our products contain significant defects or our services are not perceived as
high quality, we could lose potential customers or be subject to damages.
Our products are complex and may contain currently unknown errors, defects or
failures, particularly since new versions are frequently released. In the past
we have discovered software errors in some of our products after introduction.
We may not be able to detect and correct errors before releasing our products
commercially. If our commercial products contain errors, we may:
. need to expend significant resources to locate and correct the errors;
. be required to delay introduction of new products or commercial
shipment of products; or
. experience reduced sales and harm to our reputation from dissatisfied
customers.
Our customers also may encounter system configuration problems that require us
to spend additional consulting or support resources to resolve these problems.
Because our software products are used for critical operational and decision-
making processes by our customers, product defects may also give rise to product
liability claims. Although our license agreements with customers typically
contain provisions designed to limit our exposure, some courts may not enforce
all or part of these limitations. Although we have not experienced any product
liability claims to date, we may encounter these claims in the future. Product
liability claims, whether or not they have merit, could:
. divert the attention of our management and key personnel from our
business;
. be expensive to defend; and
. result in large damage awards.
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We do not have product liability insurance, and even if we obtain product
liability insurance, it may not be adequate to cover all of the expenses
resulting from such a claim. In addition, if our customers do not find our
services to be of high quality, they may elect to use other training, consulting
and product integration firms rather than contract for our services. If
customers are dissatisfied with our services, we may lose revenues.
Our business may suffer if we are not able to protect our intellectual property.
Our success is dependent on our ability to develop and protect our proprietary
technology and intellectual property rights. We seek to protect our software,
documentation and other written materials primarily through a combination of
patent, trade secret, trademark and copyright laws, confidentiality procedures
and contractual provisions. While we have attempted to safeguard and maintain
our proprietary rights, we do not know whether we have been or will be
completely successful in doing so. Further, our competitors may independently
develop or patent technologies that are substantially equivalent or superior to
ours.
We have two patent applications pending in the United States with respect to the
"Team Builder" functionality in our Resource Manager module, and the enablement
of dynamically configurable software systems by our ServiceSphere software
server. While the former application has not been issued, we have received
notice from the U.S. Patent Office that the latter application has been allowed.
However, there can be no assurance that either application would survive a legal
challenge to its validity or provide significant protection to us. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult. While we
are unable to determine the extent to which piracy of our software products
exists, software piracy can be expected to be a persistent problem, particularly
in foreign countries where the laws may not protect proprietary rights as fully
as in the United States. We can offer no assurance that our means of protecting
its proprietary rights will be adequate or that our competitors will not reverse
engineer or independently develop similar technology.
If others claim that we are infringing their intellectual property, we could
incur significant expenses or be prevented from selling our products.
We cannot provide assurance that others will not claim that we are infringing
their intellectual property rights or that we do not in fact infringe those
intellectual property rights. We have not conducted a search for existing
intellectual property registrations, and we may be unaware of intellectual
property rights of others that may cover some of our technology.
Any litigation regarding intellectual property rights could be costly and time-
consuming and divert the attention of our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements.
We may not be able to obtain royalty or license agreements on terms acceptable
to us, or at all. We also may be subject to significant damages or an injunction
against use of our products. A successful claim of patent or other intellectual
property infringement against us would have an immediate material adverse effect
on our business and financial condition.
We have grown very quickly, and if we fail to manage our growth, our ability to
generate new revenues and achieve profitability would be harmed.
We have grown significantly since our inception and will need to grow quickly in
the future. Any failure to manage this growth could impede our ability to
increase revenues and achieve profitability. Evolve has increased its number of
employees from 58 at January 1, 1999 to 343 employees as of September 30, 2000.
In order to manage growth effectively, we must:
. hire, train and integrate new personnel;
. continue to augment our management information systems;
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. manage our sales and services operations, which are in several
locations; and
. expand and improve our systems and facilities.
We intend to further expand operations internationally, but we may encounter a
number of problems in doing so which could limit our future growth.
We may not be able to successfully market, sell, deliver and support our
products and services internationally. Any failure to build and manage effective
international operations could limit the future growth of our business.
Expansion into international markets will require significant management
attention and financial resources to open additional international offices and
hire international sales and support personnel. Localizing our products is
difficult and may take longer than we anticipate due to difficulties in
translation and delays we may experience in recruiting and training
international staff. We currently have no experience in developing local
versions of our products, and limited experience in marketing, selling and
supporting our products and services overseas. Doing business internationally
involves greater expense and many additional risks, particularly:
. differences and unexpected changes in regulatory requirements, taxes,
trade laws, tariffs, intellectual property rights and labor
regulations;
. changes in a specific country's or region's political or economic
conditions;
. greater difficulty in establishing, staffing and managing foreign
operations; and
. fluctuating exchange rates.
Security concerns, particularly related to the use of our software on the
Internet, may limit the effectiveness of and reduce the demand for our products.
Despite our efforts to protect confidential and proprietary information of our
customers stored on Services.com or our ServiceSphere ASP offering via virtual
private networks and other security devices, there is a risk that this
information will be disclosed to unintended third-party recipients. To the
extent our ability to implement secure private networks on our Services.com site
or for our ServiceSphere ASP service is impaired by technical problems, or by
improper or incomplete procedural diligence by either ourselves or our
customers, sensitive information could be exposed to inappropriate third parties
such as competitors of our customers, which may in turn expose us to liability
and detrimentally impact our customers' confidence in Services.com or our ASP
service.
Services.com, the online applications portal business model, may not achieve
customer acceptance.
Our Services.com online applications portal was launched in March 2000. We
currently anticipate earning recurring monthly subscription fees for use of
applications offered on Services.com. However, we cannot be certain that
current or future customers will choose to use Services.com, and we do not
anticipate that such fees, or lack thereof, will have a material impact on our
revenue.
Resistance to online use of personal information regarding employees and
consultants may hinder the effectiveness of and reduce demand for our products
and services.
Companies store information on the Services.com site, our ASP offering and on
online networks created by our customers, which may include personal information
of their employees, including employee backgrounds, skills, and other details.
These employees may object to online compilation, transmission and storage of
such information, or, despite our efforts to keep such personal information
secure, this information may be delivered unintentionally to inappropriate third
parties such as recruiters. Enterprise applications like ServiceSphere have
always run on secure company intranets. The information contained in
ServiceSphere databases will be exposed to the unpredictable security of the
Internet, which may create unforeseen liabilities for us. ServiceSphere is
currently targeted primarily to the North American market, but to the extent
that European companies and customers will have access to it (given the global
nature of the Internet), and to the extent that our services are utilized by
Europeans, legal action grounded in
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European privacy laws could prevent Services.com and our ASP service from
succeeding in the European market.
Potential imposition of governmental regulation or taxation on electronic
commerce could limit our growth.
The adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our solutions, increase our cost of doing business or otherwise have
a material adverse impact on our business. Few laws or regulations currently
directly apply to access to commerce on the Internet. Federal, state, local and
foreign governments are considering a number of legislative and regulatory
proposals relating to Internet commerce. As a result, a number of laws or
regulations may be adopted regarding Internet user privacy, taxation, pricing,
quality of products and services and intellectual property ownership. How
existing laws will be applied to the Internet in areas such as property
ownership, copyright, trademark, trade secret and defamation is uncertain. The
recent growth of Internet commerce has been attributed by some to the lack of
sales and value-added taxes on interstate sales of goods and services over the
Internet. Numerous state and local authorities have expressed a desire to impose
such taxes on sales to businesses in their jurisdictions. The Internet Tax
Freedom Act of 1998 prevents imposition of such taxes through October 2001. If
the federal moratorium on state and local taxes on Internet sales is not
renewed, or if it is terminated before its expiration, sales of goods and
services over the Internet could be subject to multiple overlapping tax schemes,
which could substantially hinder the growth of Internet-based commerce,
including use of our Services.com offering.
If we need additional financing to maintain and expand our business, financing
may not be available on favorable terms, if at all.
We expect to incur net losses before amortization charges for the foreseeable
future. We may need additional funds to expand or meet all of our operating
needs. If we need additional financing, we cannot be certain that it will be
available on favorable terms, if at all. Further, if we issue additional shares
of our capital stock, stockholders will experience additional dilution, which
may be substantial. If we need funds and cannot raise them on acceptable terms,
we may not be able to continue our operations at the current level or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
foreign currency exchange rates, interest rates, and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, all our product sales have been made in North America and to a smaller
extent, Europe. As a result of our international operations, our financial
results could be affected by a variety of factors, including changes in foreign
currency exchange rates or weak economic conditions in foreign markets. The
strengthening of the U.S. dollar could make our products less competitive in
foreign markets given that sales are currently made in U.S. dollars.
Interest Rate Risk
As of September 30, 2000, we had $57.2 million of cash, cash equivalents and
investments, which excludes restricted cash of $2.0 million. Declines in
interest rates over time would reduce our interest income. As of September 30,
2000, we had total short-term debt outstanding of $4.0 million, which accrued
interest at the prime rate. A portion of the outstanding short-term debt
amounts were repaid in October and November 2000.
Funds in excess of current operating requirements are invested in obligations of
the U.S. government
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and its agencies and investment grade obligations of state and local governments
and large corporations. Due to the nature of our investments, we have concluded
that there is no material market risk exposure. Therefore, no quantitative
tabular disclosures are presented.
The basic objectives of our investment program are to ensure:
. safety and preservation of capital,
. sufficient liquidity to meet cash flow requirements,
. attainment of a market rate of return on invested funds consistent,
and
. avoiding inappropriate concentrations of investments.
Equity Risk
We do not own any marketable equity securities. Therefore, we are not subject to
any direct equity price risk.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. In January 2000 PeopleSoft, Inc.
filed an action in the California Superior Court, Alameda County, alleging
claims arising out of our employment of former employees of PeopleSoft, and
seeking preliminary and permanent injunctions to preclude additional hiring of
PeopleSoft employees. PeopleSoft's claims include our inducing breach of
contract of their employees and unfair competition. PeopleSoft filed a motion
for preliminary injunction enjoining us from recruiting additional PeopleSoft
employees or disclosing any PeopleSoft trade secrets. The court denied this
motion in July 2000 due to PeopleSoft's failure to show that it was neither
likely to succeed in the litigation on the merits of their complaint nor had it
shown that it would be harmed if the injunction were not issued. PeopleSoft has
appealed the court's ruling on the motion. We do not believe that the motion,
even if granted on appeal, will have a material impact on our business. The
parties conducted a mediation in September 2000 but were unable to reach an
agreeable settlement. We continue to believe that PeopleSoft's claims are
without merit, and continue to contest these claims. However, this litigation,
whether or not determined or settled in our favor, may be costly and may divert
the efforts and attention of our management from normal business operations. We
believe that there are no other claims or actions pending or threatened against
us, the ultimate disposition of which would have a material adverse effect on
us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(d):
In August 2000, we completed the sale of an aggregate of 5,750,000 shares of our
common stock, par value $0.001 per share, at a price of $9.00 per share in a
firm commitment underwritten public offering. The offering was effected
pursuant to a Registration Statement on Form S-1 (Registration No. 333-32796),
which the United States Securities and Exchange Commission declared effective on
August 9, 2000. Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc., and Wit SoundView Corporation were the lead underwriters for
the offering.
Of the $51.75 million in aggregate proceeds we raised in the offering, (i)
approximately $3.6 million was paid to underwriters in connection with the
underwriting discount, and (ii) approximately $1.6 million was paid in
connection with offering expenses, printing fees, filing fees, and legal fees.
There were no direct or indirect payments to directors or officers of the
Company or any other person or entity.
21
<PAGE>
We also expect to use the proceeds for general corporate purposes, including
working capital and the funding of expected operating losses. A portion of the
proceeds may also be used to pursue possible acquisitions of complementary
businesses, technologies or products. Pending such uses, we are investing the
proceeds in short-term, interest-bearing, investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
As of September 19, 2000, Evolve retained a new transfer agent and registrar for
its common stock, Computershare Investor Services, LLC. Computershare's address
is 515 South Figueroa Street, Suite 1020, Los Angeles, California, 90071.
Computershare's phone number is 213.362.4913 and facsimile number is
213.632.4916.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
Incorporated by Reference
Exhibit -------------------------------- Filed
Number Exhibit Description Form Date Number Herewith
------------- ------------------------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
27.01 Financial Data Schedule X
(Available in EDGAR version only)
</TABLE>
(b) Reports on Form 8-K
No reports were filed on Form 8-K or Form 8-K/A during the quarter ended
September 30, 2000
22
<PAGE>
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.
EVOLVE SOFTWARE, INC.
Date: November 13, 2000 By: /s/ John P. Bantleman
---------------------------------------
John P. Bantleman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 By: /s/ Douglas S. Sinclair
---------------------------------------
Douglas S. Sinclair
Chief Financial Officer,
Corporate Secretary and Treasurer
(Principal Financial Officer)
23
<PAGE>
EXHIBITS
As required under Item 6 - Exhibits and Reports on Form 8-K, the exhibits filed
as part of this report are provided in this separate section. The exhibits
included in this section is as follows:
Exhibit
Number Exhibit Description
--------- ---------------------------------------------------------------
27.01 Financial Data Schedule (Available in EDGAR version only)
24
