<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
COMMISSION FILE NO. 000-30207
--------------------------
SOFTWARE TECHNOLOGIES CORPORATION
(Exact name of Registrant as Specified in Its Charter)
CALIFORNIA 95-4249153
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
404 E HUNTINGTON DRIVE
MONROVIA, CALIFORNIA 91016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(626) 471-6000
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)
-------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of the registrant's Common Stock, no par value,
as of August 11, 2000 was 69,116,655.
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999..................................................................3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 1999 (unaudited)................................4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited)...............................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................14
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................33
Item 2. Changes in Securities and Use of Proceeds......................................................33
Item 6. Exhibits and Reports of Form 8-K...............................................................33
</TABLE>
Signatures
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------
In thousands, except share and per share data 2000 1999
============================================================================================================================
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 38,792 $ 1,572
Accounts receivable, net of allowances of $1,030 and $1,055 at June 30,
2000 and December 31, 1999, respectively 22,974 18,522
Prepaid expenses and other current assets 2,435 1,581
------------------------------------
Total current assets 64,201 21,675
Property and equipment, net 8,107 7,206
Related party receivable 256 256
Other assets 1,997 715
------------------------------------
Total assets $ 74,561 $ 29,852
====================================
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Bank line of credit $ - $ 3,361
Accounts payable 6,458 4,994
Compensation and related expenses 6,360 3,781
Accrued expenses 4,434 1,102
Deferred revenue 13,011 10,354
------------------------------------
Total current liabilities 30,263 23,592
Notes payable and capital lease obligation - 10,000
------------------------------------
Total liabilities 30,263 33,592
------------------------------------
Commitments and contingencies
Redeemable convertible preferred stock - 10,000,000 million shares authorized;
0 shares issued and outstanding as of June 30, 2000 and
5,452,798 shares issued and outstanding as of December 31, 1999. - 24,681
Stockholders' equity (deficit):
Common stock, par value - 200,000,000 shares authorized, 68,856,503 and
46,531,377 issued and outstanding, at June 30, 2000 and December 31,
1999, respectively. 126,267 19,519
Deferred stock compensation (12,681) (5,379)
Accumulated other comprehensive loss (359) (237)
Accumulated deficit (68,929) (42,324)
------------------------------------
Total stockholders' equity (deficit) 44,298 (28,421)
------------------------------------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit) $ 74,561 $ 29,852
====================================
</TABLE>
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<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
In thousands, except per share data 2000 1999 2000 1999
==================================================================================================== ============================
<S> <C> <C> <C> <C>
Revenues:
License $ 11,900 $ 4,919 $ 20,502 $ 8,580
Services 7,551 5,530 13,669 9,509
Maintenance 3,743 2,081 6,597 3,879
Other - 603 - 1,673
--------------------------- ----------------------------
Total revenues 23,194 13,133 40,768 23,641
--------------------------- ----------------------------
Cost of revenues:
License 166 222 231 347
Services (exclusive of stock-based compensation of $167 and $31
for the three months and $364 and $32 for the six months ended
June 30, 2000 and 1999, respectively) 6,382 5,222 12,757 9,574
Maintenance 739 451 1,620 928
Other - 352 - 1,178
--------------------------- ----------------------------
Total cost of revenues 7,287 6,247 14,608 12,027
--------------------------- ----------------------------
Gross profit 15,907 6,886 26,160 11,614
--------------------------- ----------------------------
Operating expenses:
Research and development (exclusive of stock-based compensation
of $194 and $40 for the three months and $396 and $41
for the six months ended June 30, 2000 and 1999, respectively) 4,702 3,275 8,222 6,064
Sales and marketing (exclusive of stock-based compensation of
$624 and $533 for the three months and $1,357 and $534 for the
six months ended June 30, 2000 and 1999, respectively) 17,017 6,135 28,954 12,191
General and administrative (exclusive of stock-based compensation
of $81 and $18 for the three months and $230 and $18 for the six
months ended June 30, 2000 and 1999, respectively) 3,837 2,688 7,431 4,994
Amortization of alliance warrants 2,077 - 4,271 -
Amortization of stock-based compensation 1,066 622 2,347 625
--------------------------- ----------------------------
Total operating expenses 28,699 12,720 51,225 23,874
--------------------------- ----------------------------
Loss from operations (12,792) (5,834) (25,065) (12,260)
Other income (expense), net (178) 66 (771) 11
--------------------------- ----------------------------
Loss before provision for income taxes (12,970) (5,768) (25,836) (12,249)
Provision for income taxes - - - -
--------------------------- ----------------------------
Net loss (12,970) (5,768) (25,836) (12,249)
--------------------------- ----------------------------
Accretion on preferred stock 192 683 769 1,015
--------------------------- ----------------------------
Net loss available to common stockholders $ (13,162) $ (6,451) $ (26,605) $ (13,264)
=========================== ============================
Basic and diluted net loss per share $ (0.21) $ (0.14) $ (0.49) $ (0.29)
=========================== ============================
Number of shares used in computing basic and diluted net loss per share 61,807 46,486 54,579 45,575
=========================== ============================
Pro forma basic and diluted net loss per share (unaudited) $ (0.20) $ (0.10) $ (0.40) $ (0.22)
=========================== ============================
Pro forma basic and diluted weighted average shares (unaudited) 66,464 60,458 63,894 55,665
=========================== ============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
In thousands 2000 1999
==================================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (25,836) $ (12,249)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,372 739
Provision for doubtful accounts receivable (25) -
Amortization of alliance warrants 4,271 -
Amortization of stock based compensation 2,347 625
Changes in assets and liabilities:
Accounts receivable (4,427) (345)
Prepaid expenses and other current assets (854) (227)
Accounts payable 1,464 311
Other accrued expenses 5,911 (1,592)
Deferred revenue 2,657 2,962
------------------------------------
Net cash used in operating activities (13,120) (9,776)
------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,273) (1,723)
Other (1,282) (145)
------------------------------------
Net cash used in investing activities (3,555) (1,868)
------------------------------------
Cash flows from financing activities:
Net repayments under bank line of credit (3,361) (3,179)
Proceeds from issuance of redeemable convertible preferred stock, net - 10,826
Proceeds from issuance of common stock pursuant to initial public offering, net 49,646 4,074
Proceeds from issuance of common stock pursuant to concurrent offering, net 14,100 -
Proceeds from (payments on) notes payable, net (10,000) 522
Proceeds from issuance of common stock pursuant to stock option plan 3,632 16
Other - (54)
------------------------------------
Net cash provided by financing activities 54,017 12,205
------------------------------------
Effect of exchange rate changes on cash and cash equivalents (122) (282)
------------------------------------
Net increase in cash and cash equivalents 37,220 279
Cash and cash equivalents at beginning of the period 1,572 3,225
------------------------------------
Cash and cash equivalents at end of the period $ 38,792 $ 3,504
====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Software Technologies Corporation and its wholly owned
subsidiaries (the "Company"). All material intercompany transactions have been
eliminated in consolidation. The information furnished is unaudited and reflects
all adjustments that, in the opinion of management, are necessary to provide a
fair statement of the results for the interim periods presented. The financial
statements should be read in conjunction with the financial statements for the
year ended December 31, 1999, included in the Company's Form S-1 as filed with
the Securities and Exchange Commission ("SEC"). Certain reclassifications have
been made to the 1999 information to conform to the current period's
presentation.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the
allowance for doubtful accounts, certain accrued liabilities and estimates of
future cash flows developed to determine whether conditions of impairment are
present.
SOFTWARE DEVELOPMENT COSTS
Costs related to the research and development of new software products
and enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. To date, the
Company has not capitalized any development costs related to software products
since the time period between technological feasibility and general release of a
product is not significant and related costs incurred during that time period
have not been material. Certain qualifying costs incurred in the application
development stage for software developed for internal use are capitalized and
amortized over a period of three years.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", was adopted by the company as of January 1, 1998. In
December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which requires
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting,
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<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2) vendor-specific objective evidence of fair value does not exist for one or
more of the delivered elements in the arrangement, and (3) all
revenue-recognition criteria in SOP 97-2 other than the requirement for
vendor-specific objective evidence of the fair value of each delivered element
of the arrangement are satisfied.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101, as amended, is effective for years
beginning after December 15, 1999 and is required to be reported beginning in
the quarter ended June 30, 2000. SAB 101 is not expected to have a significant
effect on the Company's consolidated results of operations, financial position
or cash flows.
The Company enters into arrangements with end users, which may include
the sale of licenses of software, maintenance and services under the arrangement
or various combinations of each element, including the sale of such elements
separately. For each arrangement, revenues are recognized when an agreement has
been signed by both parties, the fees are fixed or determinable, collection of
the fees is probable and delivery of the product has occurred and no other
significant obligations remain.
For multi-element arrangements, each element of the arrangement is
analyzed and the Company allocates a portion of the total fee under the
arrangement to the undelivered elements, primarily services and maintenance,
using vendor specific objective evidence of fair value of the element and the
remaining portion of the fee is allocated to the delivered elements (i.e.
generally the software license), regardless of any separate prices stated within
the contract for each element, under the residual method prescribed by SOP 98-9.
Vendor specific objective evidence of fair value is based on the price the
customer is required to pay when the element is sold separately (i.e. hourly
rates charged for consulting services when sold separately from a software
license and the renewal rate for maintenance arrangements). Each license
agreement offers additional maintenance renewal periods at a stated price. If
vendor specific objective evidence of fair value does not exist for the
undelivered elements, all revenue is deferred and recognized ratably over the
service period if the undelivered element is services, or over the period the
maintenance is provided if the undelivered element is maintenance, or until
sufficient objective evidence exists or all elements have been delivered.
LICENSE REVENUES: Amounts allocated to license revenues under the
residual method are recognized at the time of delivery of the software when
vendor specific objective evidence of fair value exists for the undelivered
elements, if any, and all the other revenue recognition criteria discussed above
have been met.
SERVICES REVENUES: Revenues from services are comprised of consulting
and implementation services and, to a limited extent, training. Consulting
services are generally sold on a time-and-materials or fixed fee basis and
include a range of services including installation of off-the-shelf software,
data conversion and building non-complex interfaces to allow the software to
operate in customized environments. Services are generally separable from the
other elements under the arrangement since the performance of the services are
not essential to the functionality (i.e. do not involve significant production,
modification or customization of the software or building complex interfaces) of
any other element of the
-7-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
transaction and are described in the contract such that the total price of the
arrangement would be expected to vary as the result of the inclusion or
exclusion of the services. Revenues for services are recognized as the services
are performed. Training services are sold on a per student basis and are
recognized as classes are attended.
MAINTENANCE REVENUES: Maintenance revenues consist primarily of fees
for providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term, which is typically twelve months.
Maintenance revenues are typically paid in advance and are recognized on a
straight-line basis over the term of the contract.
Revenues on sales made by our resellers are generally recognized upon
shipment of our software to the end user, if all other revenue recognition
criteria noted above are met. Under limited arrangements with certain
distributors, all the revenue recognition criteria have been met upon delivery
of the product to the distributor and, accordingly, revenues are recognized at
that time. The Company does not offer a right of return on its products.
Prior to January 1, 1998, the Company recognized revenue in accordance
with the provisions of the AICPA's SOP 91-1, "Software Revenue Recognition."
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. The measurement of deferred tax assets and liabilities is
based on provisions of the enacted tax law. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance based on the amount of
tax benefits that, based on available evidence, is not expected to be realized.
COMPREHENSIVE INCOME (LOSS)
The Company accounts for comprehensive income (loss) using SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, refers to revenues, expenses, gains and losses
that are not included in net income but rather are recorded directly in
stockholders' equity.
Total comprehensive loss was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net loss $ (12,970) $ (5,768) $ (25,836) $ (12,249)
Other comprehensive income (loss) :
Foreign translation adjustment (12) (102) (122) (227)
---------------------------- ---------------------------
Comprehensive loss $ (12,982) $ (5,870) $ (25,958) $ (12,476)
============================ ===========================
</TABLE>
-8-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
local currency. Foreign currency financial statements are converted into United
States dollars by translating asset and liability accounts at the current
exchange rate at year-end and statement of operations accounts at the average
exchange rate for the year, with the resulting translation adjustment reflected
in accumulated other comprehensive income (loss) in shareholders' equity
(deficit).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because it
does not currently hold any derivative instruments and does not engage in
hedging activities, the Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. In July 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Affective Date of FASB No. 133," was issued.
The Company adopted SFAS No. 133 in June 2000.
NOTE 3. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company's chief
operating decision maker is considered to be the Company's Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis similar to the consolidated financial statements. Therefore,
the Company has concluded that it operates primarily in one industry segment and
accordingly, has provided enterprise-wide disclosures.
The Company maintains operations in North America and seven
international territories in Europe and the Pacific Rim: United Kingdom,
Germany, France, Belgium, Italy, Australia and Japan. Information about the
Company's operations in North America and international territories for the
three months and six months ended June 30, 2000 and June 30, 1999 is presented
below.
-9-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenues by geographic area were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> C> <C>
Revenues:
North America $ 18,483 $ 9,513 $ 31,837 $ 17,798
Europe 3,360 3,081 6,478 4,873
Pacific Rim 1,351 539 2,453 970
---------------------------- ---------------------------
Total net revenues $ 23,194 $ 13,133 $ 40,768 $ 23,641
============================ ===========================
</TABLE>
No single customer accounted for more than 10% of the Company's net revenues
during the three months and six months ended June 30, 2000 and June 30, 1999.
NOTE 4. COMPUTATION OF NET LOSS PER SHARE
The following table sets forth the computations of basic and diluted
net loss per share for the periods indicated (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (12,970) $ (5,768) $ (25,836) $ (12,249)
Accretion of preferred stock (192) (683) (769) (1,015)
---------------------------- ---------------------------
Net loss available to common stockholders $ (13,162) $ (6,451) $ (26,605) $ (13,264)
============================ ===========================
Denominator:
Denominator for basic and diluted net loss per
share - weighted average shares outstanding 61,807 46,846 54,579 45,575
---------------------------- ---------------------------
Basic and diluted net loss per share $ (0.21) $ (0.14) $ (0.49) $ (0.29)
============================ ===========================
</TABLE>
Options to purchase 14,326,276 and 10,514,071 shares of common stock
were outstanding as of June 30, 2000 and June 30, 1999, respectively, but were
not included in the calculations of diluted net loss per share because their
effect would be antidilutive. Redeemable preferred convertible stock was not
included in the calculations of diluted net loss per share because its effect
would be antidilutive. Common stock warrants were not included in the
calculations of diluted net loss per share because their effect would be
antidilutive.
-10-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the three months and six months ended
June 30, 2000 and June 30, 1999 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's redeemable convertible preferred stock into shares
of common stock effective upon the closing of the Company's initial public
offering of common stock (the "IPO"), as if such conversion occurred on January
1, 1999 or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic and diluted net loss per share of 4,657,388 and 9,314,775 shares for the
three months and six months ended June 30, 2000, respectively, and 13,972,163
and 10,089,840 shares for the three months and six months ended June 30, 1999,
respectively. The pro forma effects of these transactions are unaudited and have
been reflected in the loss per share information in the accompanying pro forma
Statement of Operations for the three months and six months ended June 30, 2000
and June 30, 1999.
NOTE 5. COMMITMENTS, CONTINGENCIES AND DEBT
BANK LINE OF CREDIT AND NOTES PAYABLE
As of June 30, 2000, the Company had a $10.0 million senior line of
credit facility (the "Line") with a lending institution that bears interest at
an annual rate of prime plus 2% (payable monthly) and expires on February 1,
2001. At June 30, 2000, there were no borrowings outstanding under the line. The
Line is secured by accounts receivable and certain other assets and is subject
to certain borrowing base restrictions. The Line contains no financial
covenants, with the exception of restrictions on related party transactions and
restrictions on incurring additional debt.
During the three months ending June 30, 2000, the Company repaid in
its entirety a $10.0 million long-term note payable with the same lending
institution.
LEGAL PROCEEDINGS
The Company is party to claims and suits brought against it in the
ordinary course of business. In the opinion of management, such claims should
not have any material adverse effect upon the results of operation, cash flows
or the financial position of the Company.
NOTE 6. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
In February 2000, the Company authorized 10,000,000 shares of
undesignated preferred stock, none of which was outstanding as of June 30, 2000.
COMMON STOCK
In February 2000, the Company increased its authorized shares of common
stock to 200,000,000 and effected a three-for-two split of the Company's common
stock. All shares and per share amounts have been restated for all periods
presented to reflect this stock split.
-11-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INITIAL PUBLIC OFFERING
In May 2000, the Company completed its IPO of 4,600,000 shares of
common stock at $12 per share and realized proceeds, net of underwriting
discounts, commissions and issuance costs, of approximately $49.6 million.
CONCURRENT OFFERING
Concurrent with the IPO, the Company completed the sale of 1,200,000
shares of common stock to a purchaser in a private transaction (the "Concurrent
Offering") at a price of $12 per share and realized proceeds, net of
underwriting discounts, commissions and issuance costs, of approximately $14.1
million.
CONVERSION OF CONVERTIBLE PREFERRED STOCK
In May 2000, upon the closing of the Company's IPO, the outstanding
shares of the Company's redeemable convertible preferred stock converted into
13,972,162 shares of common stock.
UNEARNED STOCK-BASED COMPENSATION
When the exercise price of an employee stock option is less than the
deemed fair value of the underlying stock on the date of grant, deferred
compensation is recognized and amortized to expense in accordance with the
aggregation methodology prescribed by the Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the individual option grants
which is generally four years.
In connection with the grant of certain stock options through April 27,
2000, the Company has recorded deferred stock compensation representing the
difference between the exercise price of the option and the estimated fair value
of the Company's common stock on the date of grant. Amortization of deferred
stock compensation was approximately $1,066,000 and $622,000 for the three month
periods and $2,347,000 and $625,000 for the six month periods ended June 30,
2000 and June 30, 1999, respectively.
WARRANT GRANTS
In January 2000, the Company issued a warrant (the "January 2000
Alliance Warrant") to a strategic alliance partner to purchase up to 1,200,000
shares of common stock at $6.67 per share. The January 2000 Alliance Warrant
vests contingently upon the achievement of certain milestones, primarily the
generation of license revenue for the Company, and expires on July 31, 2002. The
fair value of the January 2000 Alliance Warrant was determined using the Black
Scholes pricing model, assuming a risk free interest rate of 5.3%, a volatility
factor of 0.6 and an estimated fair value at the time of grant of $9.25 per
common share.
In March 2000, the Company issued a warrant (the "March 2000 Alliance
Warrant") to another strategic alliance partner to purchase up to 1,200,000
shares of common stock at $14.00 per share. The March 2000 Alliance Warrant
vests contingently upon the achievement of certain milestones, primarily the
creation of e*Gate market offerings and the generation of license revenue for
the Company, and expires on September 22, 2002. Both the January 2000 Alliance
Warrant and the March 2000 Alliance Warrant contain a significant disincentive
for non-performance, and, accordingly, the fair value of these warrants
-12-
<PAGE>
SOFTWARE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
was measured at the date of grant in accordance with Emerging Issues Task Force
No. 96-18. The fair value of the March 2000 Alliance Warrant was determined
using the Black Scholes pricing model, assuming a risk free interest rate of
5.3%, a volatility factor of 0.6 and an estimated fair value at the time of
grant of $11.08 per common share.
EMPLOYEE STOCK PURCHASE PLAN
In February 2000, the Board of Directors approved the Company's 2000
Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on April
28, 2000. A total of 2,250,000 shares of common stock are initially available
for issuance under the ESPP. The number of shares of common stock available for
issuance under the ESPP will be increased on the first day of each calendar year
during the term of the ESPP to 2,250,00 shares of common stock.
The ESPP, which is intended to qualify under Section 423 of the IRS
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods, other than the first offering
period, commencing on or about May 16 and November 16 of each year. Each
offering period will consist of four consecutive purchase periods of
approximately six months' duration, and at the end of each offering period, an
automatic purchase will be made for participants. The initial offering period
commenced on April 28, 2000 and will end on May 15, 2002; the initial purchase
period began on April 28, 2000 and will end on November 15, 2000. Participants
generally may not purchase more than 1,500 shares in any calendar year or stock
having a value measured at the beginning of the offering period greater than
$25,000 in any calendar year.
The purchase price per share will be 85% of the lower of (1) the fair
market value of our common stock on the purchase date and (2) the fair market
value of a share of our common stock on the last trading day before the offering
date, or, in the case of the first offering period under the plan, the price at
which one share of our common stock is offered to the public in the Company's
IPO.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", the negative of these
terms or other comparable terminology are intended to identify forward-looking
statements. Actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statement.
Factors that might cause or contribute to such a discrepancy include, but are
not limited to, those discussed below and under the heading "Risk Factors".
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date hereof to conform these statements to
actual results or to changes in our expectations.
OVERVIEW
We are a leading provider of e-Business integration software that
enables the seamless flow of information within and among enterprises on a
global basis. We were founded in 1989 and sold our first products and services
in 1991. From 1991 to 1998, our sales and marketing efforts were primarily
focused on customers in the healthcare industry. In 1998, we began to
significantly increase our sales and marketing expenses to target customers in
other vertical markets, such as financial services/insurance, manufacturing,
retail/e-Commerce/services and telecommunications/utilities. In November 1999,
we launched the fourth generation of our primary product with the introduction
of e*Gate 4.0 and changed the name of this product from DataGate to e*Gate. In
anticipation of this release, we accelerated the growth of our product
development, services and sales and marketing organizations.
We derive revenues primarily from three sources: licenses, services and
maintenance. We market our products and services on a global basis through our
direct sales force, and augment our marketing efforts through relationships with
systems integrators, and in other instances, through value-added resellers and
technology vendors. Our products are typically licensed directly to customers
for a perpetual term, with pricing based on the number of systems or
applications the customer is integrating or connecting with our products. We
record license revenues when both parties have signed a license agreement, the
fee is fixed or determinable, collection of the fee is probable, delivery of our
products has occurred and no other significant obligations remain. Payments for
licenses, services and maintenance received in advance of revenue recognition
are recorded as deferred revenue.
In 1994, we opened our first international sales office in Belgium, and
we completed our first international sale in 1995. We currently have sales
offices in seven countries outside of the United States. Revenues derived from
international sales were 20% for the six months ended June 30, 2000. We believe
that international revenues will continue to be significant in future periods.
To date, we have not
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experienced significant seasonality of revenues. However, we expect that our
future results will fluctuate in response to the fiscal or quarterly budget
cycles of our customers.
Revenues from services include consulting and implementation services
and training. A majority of our customers use third-party systems integrators to
implement our products. Customers also typically purchase additional consulting
services from us to support their implementation activities. These consulting
services are generally sold on a time and materials or fixed fee basis, and
services revenues are recognized as the services are performed. We also offer
training services, which are sold on a per student basis and for which revenues
are recognized as the classes are attended.
Customers who license our products normally purchase maintenance
contracts. These contracts provide unspecified software upgrades and technical
support over a fixed term, which is typically 12 months. Maintenance contracts
are usually paid in advance, and revenues from these contracts are recognized
ratably over the term of the contract.
In the past, we offered our healthcare customers our expertise in
configuring hardware and software systems in conjunction with their purchase of
our products. In these instances, we would sell third-party hardware and
software to our customers in addition to our products. Other revenues for the
three months and six months ended June 30, 1999 consist of these sales of
third-party hardware and software. We discontinued offering this service to our
customers during the fourth quarter of 1999.
For 1997 and prior years, we recognized revenues in accordance with
American Institute of Certified Public Accountants Statement of Position, or SOP
91-1 "Software Revenue Recognition". Commencing in 1998, we began recognizing
revenues in accordance with American Institute of Certified Public Accountants
SOP 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9.
To date, our adoption of these new standards has not had any material effect on
our revenue recognition.
Cost of revenues consists of cost of license revenues, cost of services
revenues, cost of maintenance revenues and cost of other revenues. Cost of
license revenues includes the cost of third-party licensed software embedded or
bundled with our products. Cost of services revenues consists of compensation
and related overhead costs for personnel engaged in implementation consulting
and services and training. Cost of maintenance revenues includes compensation
and related overhead costs for personnel engaged in maintenance and support
activities. Cost of other revenues for the three months and six months ended
June 30, 1999 consists of the cost of third-party hardware and software sales.
Our operating expenses are classified as research and development,
sales and marketing and general and administrative. Each category includes
related expenses for salaries, employee benefits, incentive compensation,
bonuses, travel, telephone, communications, rent and allocated facilities and
professional fees. Our sales and marketing expenses include additional
expenditures specific to the marketing group, such as public relations and
advertising, trade show, and marketing collateral materials and expenditures
specific to the sales group, such as commissions. To date, all software product
development costs have been expensed as incurred. Also included in our operating
expenses are the amortization of alliance warrants and the amortization of stock
compensation.
In order to increase both our company's and our products' market
presence, we entered into strategic alliances with Andersen Consulting in
November 1999, EDS in January 2000 and CSC in March 2000. We granted each of
these strategic partners a warrant to purchase up to 1,200,000 shares of our
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common stock which becomes exercisable upon the achievement of various
milestones, which include the creation of e*Gate market offerings in the case of
Andersen Consulting and CSC and the generation of STC license revenues in the
case of EDS and CSC. These warrants expire from July 2002 to November 2003, and
have a per share exercise price of $5.33 for Andersen Consulting, $6.67 for EDS
and $14.00 for CSC. These warrants contain a significant economic disincentive
for non-performance, and accordingly, the fair value of these warrants was
measured at the date of grant in accordance with Emerging Issues Task Force No.
96-18. Using the Black-Scholes option pricing model, we valued the warrants
granted to Andersen Consulting in 1999 at $3.3 million as of December 31, 1999.
This amount is included in common stock and is being amortized by charges to
operations over the vesting periods of the warrants. In the first quarter of
2000, we recorded an additional $10.1 million related to the valuation of the
remaining warrants to purchase 2,400,000 shares granted to EDS and CSC, based on
an exercise price of $14.00 per share for the warrants granted to CSC. We valued
these warrants using the Black-Scholes option pricing model. We recognized
amortization of $814,000 for 1999 and $2,077,000 and $4,271,000 for the three
months and six months ended June 30, 2000, and we will recognize additional
amortization of approximately $2.5 million in the remainder of 2000, $5.1
million in 2001 and $0.7 million in 2002, based on an exercise price of $14.00
per share for the warrants granted to CSC. The amortization of the alliance
warrants is classified as a separate component of operating expenses in our
consolidated statement of operations.
In connection with stock option grants to our employees, we have
recorded deferred stock compensation totaling $8.5 million, of which
approximately $5.7 million remains to be amortized. This amount represents the
difference between the exercise price and the estimated fair value of our common
stock on the date the options were granted multiplied by the number of option
shares granted. This amount is included as a component of shareholders' equity
and is being amortized by charges to operations over the vesting period of the
options, consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28. The amortization of the remaining deferred stock
compensation at June 30, 2000 will result in additional charges to operations
through 2004. The amortization of stock compensation is classified as a separate
component of operating expenses in our consolidated statement of operations.
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RESULTS OF OPERATIONS
The following table sets forth our results of operations for the three
months and six months ended June 30, 2000 and June 30, 1999 expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
License 51% 37% 50% 36%
Services 33 42 34 40
Maintenance 16 16 16 17
Other - 5 - 7
--------------------------- ---------------------------
Total Revenues 100 100 100 100
Cost of revenues:
License 1 2 1 1
Services 27 40 31 40
Maintenance 3 3 4 3
Other - 3 - 5
--------------------------- ---------------------------
Gross Profit 69 52 64 49
Operating expenses
Research and development 20 25 20 26
Sales and marketing 73 47 71 51
General and administrative 17 20 18 21
Amortization of alliance warrants 9 - 10 -
Amortization of stock-based compensation 5 5 6 3
--------------------------- ---------------------------
Total operating expenses 124 97 125 101
Loss from operations (55) (45) (61) (52)
Other income (expense), net (1) 1 (2) -
--------------------------- ---------------------------
Loss before provision for income taxes (56) (44) (63) (52)
Provision for income taxes - - - -
--------------------------- ---------------------------
Net loss (56)% (44)% (63)% (52)%
=========================== ===========================
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30,
1999:
REVENUES
Total revenues for the three months ended June 30, 2000 increased 77%
from the same period last year, from $13.1 million to $23.2 million.
LICENSE REVENUES. License revenues for the three months ended June 30,
2000, increased 143% from the same period last year, from $4.9 million to $11.9
million. License revenues for the three months ended June 30, 2000, as a
percentage of total revenues were 51%, as compared to 37% for the same period
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in the previous year. These increases were due primarily to the introduction of
e*Gate 4.0 in November 1999 and the expansion of our sales and marketing force.
SERVICES REVENUES. Services revenues for the three months ended June
30, 2000, increased 37% from the same period in the previous year, from $5.5
million to $7.6 million. Services revenues for the three months ended June 30,
2000, as a percentage of total revenues decreased to 33%, as compared to 42% for
the same period in the previous year. The increase in the absolute dollar amount
in services revenues primarily was due primarily to increases in professional
services staff and the growth of consulting revenues associated with increased
licensing revenues.
MAINTENANCE REVENUES. Maintenance revenues for the three months ended
June 30, 2000, increased 76% from the same period in the previous year, from
$2.1 million to $3.7 million. Maintenance revenues for the three months ended
June 30, 2000, as a percentage of total revenues were 16%, the same as the three
months ended June 30, 1999. The increase in the amount of maintenance revenues
was due primarily to increased licensed sales of our products and the renewals
of prior period maintenance contacts.
OTHER REVENUES. Other revenues for the three months ended June 30,
2000, were $0, compared to $603,000 in the same period in the previous year. The
decrease in other revenues was due to the Company discontinuing in the fourth
quarter of 1999 the sale of third party hardware with our software to certain
customers.
COST OF REVENUES
Total cost of revenues for the three months ended June 30, 2000,
increased 18% from the same period last year, from $6.2 million to $7.3 million.
Gross margin for the three months ended June 30, 2000, was 69% as compared to
52% for the same period in the previous year. This increase was due primarily to
an increase in license revenue and a decrease in services revenues as a
percentage of total revenues.
COST OF LICENSE REVENUES. Cost of license revenues for the three months
ended June 30, 2000, was $166,000 or 1% of revenues, compared to $222,000 or 1%
of revenues in the same period in the previous year.
COST OF SERVICES REVENUES. Cost of services revenues for the three
months ended June 30, 2000, increased 23% from the same period in the previous
year, from $5.2 million to $6.4 million. This increase was due primarily to an
increase in professional services staff and the related increase in services
revenues. Cost of services revenues as a percentage of total revenues was 28%
for the three months ended June 30, 2000, as compared to 40% for the same period
in the previous year. This decrease was due primarily to the decrease in
services revenues as a percentage of total revenues.
COST OF MAINTENANCE REVENUES. Cost of maintenance revenues for the
three months ended June 30, 2000, increased 64% from the same period in the
previous year, from $451,000 to $739,000. Cost of maintenance revenues as a
percentage of total revenues was 3% for the three months ended June 30, 2000,
consistent with the same period in the previous year. The increase in the amount
of cost of maintenance revenues is due to the increase in the amount of
maintenance revenues.
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COST OF OTHER REVENUES. Cost of other revenues for the three months
ended June 30, 2000, was $0, compared to $352,000 in the same period in the
previous year. The decrease in cost of other revenues was due to the Company
discontinuing in the fourth quarter of 1999 the provision of third party
hardware with our software to certain customers.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the three months ended June 30, 2000, increased 42% from the same period in
the previous year, from $3.3 to $4.7 million. The increase in the absolute
dollar amount in research and development expenses was due primarily to the
increase in the number of software developers and quality assurance personnel to
support our product development and documentation and testing activities related
to the development and release of the latest versions of our products. Research
and development expenses as a percentage of total revenues were 20% for the
three months ended June 30, 2000, as compared to 25% for the same period in the
previous year. This decrease was due primarily to the increase in total revenues
for the three months ended June 30, 2000, as compared to the same period in the
previous year. We anticipate that research and development expenses will
continue to increase in absolute dollars for the foreseeable future as we
continue to add to our research and development staff.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the
three months ended June 30, 2000, increased 179% from the same period in the
previous year, from $6.1 million to $17.0 million. Sales and marketing expenses
as a percentage of total revenues for the three months ended June 30, 2000, was
73%, as compared to 47% for the same period in the previous year. The increase
in sales and marketing expense was due primarily to the expansion of our
domestic and international direct sales forces, and the increase in marketing
staff and promotional and public relations activities and the initiation of
product and corporate communications. We anticipate that our sales and marketing
expense will increase in absolute dollars for the foreseeable future as we
continue to expand our domestic and international sales forces, expand our
marketing staff and develop marketing and awareness campaigns for both the
company and our products and increase promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended June 30, 2000, increased 41% from the same
period in the previous year, from $2.7 million to $3.8 million. General and
administrative expenses as a percentage of total revenues for the three months
ended June 30, 2000, was 17%, as compared to 20% for the same period in the
previous year. The increase in the absolute dollar amount of general and
administrative expenses was due primarily to hiring additional executive,
finance, information technologies and administrative personnel to support the
growth of our business and worldwide infrastructure during these periods. We
expect that general and administrative expenses will increase in absolute
dollars for the foreseeable future as a result of the expansion of our
operations and the expenses associated with operating as a public company.
AMORTIZATION OF ALLIANCE WARRANTS. Amortization of alliance warrants
for the three months ended June 30, 2000, was $2.1 million, compared to $0 for
the same period in the prior year. The increase in amortization of alliance
warrants was due to the issuance, from November 1999 through March 2000, of
warrants to purchase common stock to certain strategic alliance partners.
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AMORTIZATION OF STOCK BASED COMPENSATION. In connection with the grant
of stock options to employees and non-employee directors, we recorded deferred
compensation, representing the difference between the deemed fair value of our
common stock at the date of grant and the exercise price of such options.
Amortization of stock based compensation for the three months ended June 30,
2000, was $1.1 million, compared to $0.6 million for the same period in the
previous year. The increase is due to additional options granted during the
period between March 31, 1999 and April 27, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest expense.
Other income (expense), net for the three months ended June 30, 2000, was
($178,000), compared to $66,000 for the same period last year. The increase
primarily was due to financing fees related to common stock warrants issued in
connection with the company's $10.0 million note payable and $10.0 million
asset-based line of credit and an increase in interest expense due to increased
borrowings under the line of credit.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES
Total revenues for the six months ended June 30, 2000 increased 73%
from the same period last year, from $23.6 million to $40.8 million.
LICENSE REVENUES. License revenues for the six months ended June 30,
2000, increased 138% from the same period last year, from $8.6 million to $20.5
million. License revenues for the six months ended June 30, 2000, as a
percentage of total revenues were 50%, as compared to 36% for the same period in
the previous year. These increases were due primarily to the introduction of
e*Gate 4.0 in November 1999 and the expansion of our sales and marketing force.
SERVICES REVENUES. Services revenues for the six months ended June 30,
2000, increased 44% from the same period in the previous year, from $9.5 million
to $13.7 million. Services revenues for the six months ended June 30, 2000, as a
percentage of total revenues were 34%, as compared to 40% for the same period in
the previous year. The increase in the absolute dollar amount in services
revenues primarily was due primarily to increases in professional services staff
and the growth of consulting revenues associated with increased licensing
revenues.
MAINTENANCE REVENUES. Maintenance revenues for the six months ended
June 30, 2000, increased 69% from the same period in the previous year, from
$3.9 million to $6.6 million. Maintenance revenues for the six months ended June
30, 2000, as a percentage of total revenues were 16%, as compared to 17% for the
same period in the previous year. The increase in the absolute dollar amount of
maintenance revenues was due primarily to increased licensed sales of our
products and the renewals of prior period maintenance contacts.
OTHER REVENUES. Other revenues for the six months ended June 30, 2000,
decreased by $1.7 million from the same period in the previous year. The
decrease in other revenues was due to the Company discontinuing in the fourth
quarter of 1999 the sale of third party hardware with our software to certain
customers.
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COST OF REVENUES
Total cost of revenues for the six months ended June 30, 2000,
increased 22% from the same period last year, from $12.0 million to $14.6
million. Gross margin for the six months ended June 30, 2000, was 64% as
compared to 49% for the same period in the previous year. This increase was due
primarily to an increase in license revenue and a decrease in services revenues
as a percentage of total revenues.
COST OF LICENSE REVENUES. Cost of license revenues for the six months
ended June 30, 2000, was $231,000 or 1% of revenues, as compared to $347,000 or
1% of revenue for the same period in the previous year.
COST OF SERVICES REVENUES. Cost of services revenues for the six months
ended June 30, 2000, increased 33% from the same period in the previous year,
from $9.6 million to $12.8 million. This increase was due primarily to an
increase in professional services staff and the related increase in services
revenues. Cost of services revenues as a percentage of total revenues was 31%
for the six months ended June 30, 2000, as compared to 40% for the same period
in the previous year. This decrease was due primarily to the decrease in
services revenues as a percentage of total revenues.
COST OF MAINTENANCE REVENUES. Cost of maintenance revenues for the six
months ended June 30, 2000, increased 78% from the same period in the previous
year, from $0.9 million to $1.6 million. Cost of maintenance revenues as a
percentage of total revenues was 4% for the six months ended June 30, 2000, as
compared to 3% for the same period in the previous year. The increase in the
absolute dollar amount of cost of maintenance revenues is due to the increase in
the amount of maintenance revenues.
COST OF OTHER REVENUES. Cost of other revenues for the six months ended
June 30, 2000, decreased from the same period in the previous year by $1.2
million. The decrease in cost of other revenues was due to the Company
discontinuing in the fourth quarter of 1999 the provision of third party
hardware with our software to certain customers.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the six months ended June 30, 2000, increased 34% from the same period in
the previous year, from $6.1 to $8.2 million. The increase in amount in research
and development expenses was due primarily to the increase in the number of
software developers and quality assurance personnel to support our product
development, documentation and testing activities related to the development and
release of the latest versions of our products. Research and development
expenses as a percentage of total revenues were 20% for the six months ended
June 30, 2000, as compared to 26% for the same period in the previous year. This
percentage decrease was due primarily to the increase in total revenues for the
six months ended June 30, 2000, as compared to the same period in the previous
year. We anticipate that research and development expenses will continue to
increase in absolute dollars for the foreseeable future as we continue to add to
our research and development staff.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the six
months ended June 30, 2000, increased 138% from the same period in the previous
year, from $12.2 million to $29.0 million. Sales and marketing expenses as a
percentage of total revenues for the six months ended June 30, 2000, was 71%, as
compared to 51% for the same period in the previous year. The increase in sales
and
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marketing expense was due primarily to the expansion of our domestic and
international direct sales forces, and the increase in marketing staff and
promotional and public relations activities and the initiation of product and
corporate communications. We anticipate that our sales and marketing expense
will increase in absolute dollars for the foreseeable future as we continue to
expand our domestic and international sales forces, expand our marketing staff
and develop marketing and awareness campaigns for both the company and our
products and increase promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the six months ended June 30, 2000, increased 48% from the same
period in the previous year, from $5.0 million to $7.4 million. General and
administrative expenses as a percentage of total revenues for the six months
ended June 30, 2000, was 18%, as compared to 21% for the same period in the
previous year. The increase in the amount of general and administrative expenses
was due primarily to hiring additional executive, finance, information
technologies and administrative personnel to support the growth of our business
and worldwide infrastructure during these periods. We expect that general and
administrative expenses will increase in absolute dollars for the foreseeable
future as a result of the expansion of our operations and the expenses
associated with operating as a public company.
AMORTIZATION OF ALLIANCE WARRANTS. Amortization of alliance warrants
for the six months ended June 30, 2000, was $4.3 million, compared to $0 for the
same period in the prior year. The increase in amortization of alliance warrants
was due to the issuance, from November 1999 through March 2000, of warrants to
purchase common stock to certain strategic alliance partners.
AMORTIZATION OF STOCK BASED COMPENSATION. In connection with the grant
of stock options to employees and non-employee directors, we recorded deferred
compensation, representing the difference between the deemed fair value of our
common stock at the date of grant and the exercise price of such options.
Amortization of stock based compensation for the six ended June 30, 2000, was
$2.3 million, compared to $0.6 million for the same period in the previous year.
The increase is due to additional options granted during the period between
March 31, 1999 and April 27, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest expense.
Other income (expense), net for the six months ended June 30, 2000, was
($771,000), compared to other income of $11,000 for the same period last year.
The increase primarily was due to financing fees related to common stock
warrants issued in connection with the company's $10.0 million note payable and
$10.0 million asset-based line of credit and an increase in interest expense due
to increased borrowings under the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash and cash equivalents of $38.8
million, an increase of $37.2 million from $1.6 million of cash and cash
equivalents held as of December 31, 1999.
Net cash used in operating activities was $13.1 million during the six
months ended June 30, 2000, as compared with $9.8 million in the same period in
the previous year. This period over period increase in cash used in operating
activities reflects an increase in net loss and increases in accounts receivable
and prepaid expenses and other current assets, offset by an increase in accounts
payable, other accrued expenses and deferred revenue.
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Net cash used in investing activities was $3.6 million during the six
months ended June 30, 2000, as compared with $1.9 million in the same period in
the previous year. The increase primarily was due to an increase in capital
expenditures as a result of the expansion of the Company's office facilities and
the headcount expansion in research and development and sales and marketing.
Net cash provided by financing activities was $54.0 million during the
six months ended June 30, 2000, as compared with $12.2 million in the same
period in the previous year. This increase was due primarily to the completion
of the Company's IPO and its concurrent offering in May 2000, offset by the
repayment of its line of credit and note payable during the quarter.
In May 2000, the Company completed its IPO of 4,600,000 shares of
common stock at $12 per share and realized proceeds, net of underwriting
discounts, commissions and issuance costs, of approximately $49.6 million.
Concurrent with the IPO, the Company completed the sale of 1,200,000 shares of
common stock to a purchaser in a private placement at a price of $12 per share
and realized proceeds, net of underwriting discounts, commissions and issuance
costs, of approximately $14.1 million.
The Company has a $10.0 million senior line of credit facility that
bears interest at a rate of prime plus 2%, payable monthly, and expires on
February 1, 2001. As of June 30, 2000, the Company had no borrowings outstanding
against the line of credit. In May 2000, the Company used a portion of the
proceeds from its recent IPO to repay the then outstanding balance on the line
of credit in its entirety.
In June 2000, the Company also repaid in its entirety a $10.0 million
note payable it had with a financial institution, using a portion of the
proceeds from its recent IPO.
The Company anticipates continued growth in its operating expenses for
the foreseeable future, particularly in sales and marketing expenses and, to a
lesser extent, research and development and general and administrative expenses.
As a result, the Company expects its operating expenses and capital expenditures
to constitute the primary uses of its cash resources. In addition, the Company
may require cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. The Company believes that its current
cash and cash equivalents and its expected cash from operations, will be
sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months. Thereafter, the Company
may need to raise additional funds, and it cannot be certain that it will be
able to obtain additional debt or equity financing on favorable terms, if at
all.
EURO CURRENCY CONVERSION
The Euro currency ("Euro") was introduced on January 1, 1999, and the
eleven participating European Monetary Union member countries established
irrevocable fixed conversion rates between their local currencies and the Euro.
However, the local currencies in those countries will continue to be used as
legal tender through January 1, 2002. Thereafter, the local currencies will be
canceled and Euro bills and coins will be used for cash transactions in the
participating countries. From January 1, 1999 to December 31, 2001, companies
will be allowed to transact noncash transactions in either Euro or the local
currency.
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The Company and certain of its European subsidiaries are currently
evaluating the Euro conversion and the potential impact on their operations. At
the present time, the Company believes the necessary changes and costs incurred
thus far, and expected to be incurred in the future, are not significant.
RISK FACTORS
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES AND WE MAY
NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since 1998 as we increased funding
of the development of our products and technologies and expanded our sales and
marketing organization. As of June 30, 2000, we had an accumulated deficit of
$68.9 million. We intend to continue to invest heavily in sales and marketing
and research and development. As a result, we expect to incur losses in 2000 and
2001, and we will need to significantly increase our quarterly revenues to
achieve profitability. We cannot predict when we will operate profitably, if at
all.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A
NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our products are often used by our customers throughout their
organizations to address critical business problems. Customers generally
consider a wide range of issues before committing to purchase our products,
including product benefits, the ability to operate with existing and future
computer systems, the ability to accommodate increased transaction volumes and
product reliability. Many customers are addressing these issues for the first
time when they consider whether to buy our products and services. As a result,
we or other parties, including systems integrators, must educate potential
customers on the use and benefits of our products and services. In addition, the
purchase of our products generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products and approval at a number of
management levels within a customer's organization. Our sales cycle may vary
based on the industry in which the potential customer operates and is difficult
to predict for any particular license transaction. The length and variability of
our sales cycle makes it difficult to predict whether particular sales will be
concluded in any given quarter. If one or more of our license transactions are
not consummated in a given quarter, our results of operations for that quarter
may be below our expectations and the expectations of analysts and investors.
OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON LICENSE REVENUES FROM ONE
SOFTWARE SUITE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS
THAT ADVERSELY AFFECT THE PRICING AND DEMAND FOR THIS SOFTWARE SUITE.
Substantially all of our license revenues have been, and are expected
to continue to be, derived from the license of our e*Xchange software suite.
Accordingly, our future operating results will depend on the demand for
e*Xchange by future customers, including new and enhanced releases that are
subsequently introduced. Our core technology engine, e*Gate version 4.0, was
completed in September 1999 and commercially launched in November 1999. If our
competitors release new products that are superior to e*Xchange in performance
or price, or if we fail to enhance e*Xchange and introduce new products in a
timely manner, demand for our products may decline, and we may have to reduce
the pricing of our products. A decline in demand or pricing for e*Xchange as a
result of these or other factors would significantly reduce our revenues.
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In the past, we have experienced delays in the commencement of
commercial releases of our e*Xchange software suite. To date, these delays have
not had a material impact on our revenues. In the future, we may fail to
introduce or deliver new products on a timely basis. If new releases or products
are delayed or do not achieve market acceptance, we could experience customer
dissatisfaction or a delay or loss of revenues. For example, the introduction of
new enterprise and business applications requires us to introduce new e*Ways
adapters to support the integration of these applications. Our failure to
introduce these or other modules in a timely manner could cause our revenues and
market share to decline. In addition, customers may delay purchases of our
products in anticipation of future releases. If customers defer material orders
in anticipation of new releases or new product introductions, our revenues may
decline.
Moreover, as we release enhanced versions of our products, we may not
be successful in upgrading our customers who purchased previous versions of
e*Xchange to the current version. We also may not be successful in selling
add-on modules for our products to existing customers. Any failure to continue
to upgrade existing customers' products or sell new modules, if and when they
are introduced, could negatively impact customer satisfaction and our revenues.
WE MUST CONTINUE TO SUCCESSFULLY SELL OUR PRODUCTS TO COMMERCIAL
CUSTOMERS OUTSIDE OF THE HEALTHCARE INDUSTRY OR OUR REVENUES MAY
DECLINE.
Since 1998, we have invested a significant amount of our sales and
marketing resources to target various commercial markets outside of the
healthcare industry, particularly for business-to-business integration. As a
result, license revenues from customers in the healthcare industry accounted for
approximately 25% of total license revenues in the six months ended June 30,
2000, down from approximately 57% of total license revenues for the same period
in 1999. We expect that license revenues for non-healthcare customers will
continue in the near future to increase as a percentage of license revenues as a
result of this continued investment. A license to a commercial customer is
expected to involve a longer sales cycle and higher revenues compared to a
license to a healthcare customer. We must continue to increase the size of our
direct sales force to implement our strategy of increased sales to commercial
customers. In addition, because the healthcare industry, which has historically
represented our largest customer base, has generally not required
business-to-business capabilities, e*Xchange has been deployed to a greater
extent in intra-enterprise environments than in business-to-business
environments. We cannot assure you that e*Xchange will be commercially
successful for business-to-business environments, and we expect to devote
significant resources to the continued development, support, sales and marketing
of e*Xchange for these environments. If we fail to increase our sales force or
to penetrate additional commercial accounts in a meaningful way, our operating
results will suffer.
The revenue potential from the healthcare market and the various
commercial markets may fluctuate due to industry-specific conditions. For
example, in 1999 the healthcare market reduced spending on IT systems because of
a downturn in the healthcare industry. Given our limited market penetration and
experience in other commercial markets, such as financial services,
telecommunications and manufacturing, and the high degree of competition and the
rapidly changing environment in these industries, we cannot assure you that we
will be able to expand sales with respect to these markets. If we fail to
successfully penetrate commercial accounts in these markets, we may experience
decreased sales in future periods. Moreover, if we penetrate additional markets,
our results of operations may fluctuate with the economic conditions in those
markets.
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OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND MAINTAIN
SUCCESSFUL RELATIONSHIPS WITH OUR SYSTEMS INTEGRATION PARTNERS, AND
THESE SYSTEMS INTEGRATORS ALSO HAVE RELATIONSHIPS WITH OUR COMPETITORS.
We entered into agreements with Andersen Consulting, EDS and CSC for
them to install and deploy our products and perform custom integration of
systems and applications. These systems integrators will also engage in joint
marketing and sales efforts with us. If these relationships fail, we will have
to devote substantially more resources to the sales and marketing, and
implementation and support of our products than we would otherwise, and our
efforts may not be as effective as those of the systems integrators. In many
cases, these parties have extensive relationships with our existing and
potential customers and influence the decisions of these customers. We rely upon
these firms to recommend our products during the evaluation stage of the
purchasing process, as well as for implementation and customer support services.
These systems integrators are not contractually required to implement
our products, and competition for these resources may preclude us from obtaining
sufficient resources to provide the necessary implementation services to support
our needs. If the number of installations of our products exceeds our access to
the resources provided by these systems integrators, we will be required to
provide these services internally, which would increase our expenses and
significantly limit our ability to meet our customers' implementation needs. A
number of our competitors have stronger relationships with some of these systems
integrators and, as a result, these systems integrators might be more likely to
recommend competitors' products and services instead of ours. In addition, a
number of our competitors have relationships with a greater number of these
systems integrators or have stronger systems integrator relationships based on
specific vertical markets and, therefore, have access to a broader base of
customers.
Our failure to establish or maintain systems integrator relationships
would significantly harm our ability to license and successfully implement our
software products. In addition, we rely on the industry expertise and customer
contacts of these firms in order to market our products more effectively.
Therefore, any failure of these relationships would also harm our ability to
increase revenues in key commercial markets. We are currently investing, and
plan to continue to invest, significant resources to develop these
relationships. Our operating results could be adversely affected if these
efforts do not generate license and service revenues necessary to offset this
investment.
OUR MARKETS ARE HIGHLY COMPETITIVE AND, IF WE DO NOT COMPETE
EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND
LOSS OF MARKET SHARE.
The market for our products is intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. As a result of increased competition, we may have to
reduce the price of our products and services, and we may experience reduced
gross margins and loss of market share, any one of which could significantly
reduce our future revenues and operating results. Our current competitors
include vendors offering enterprise application integration, or EAI, and
traditional electronic data interchange, or EDI, software products, as well as
"in house" information technology departments of potential customers that have
developed or may develop systems that provide some or all of the functionality
of our e*Xchange product suite. We may also encounter competition from major
enterprise software developers in the future.
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Many of our existing and potential competitors have more resources,
broader customer relationships and better-established brands than we do. In
addition, many of these competitors have extensive knowledge of our industry.
Some of our competitors have established or may establish cooperative
relationships among themselves or with third parties to offer a single solution
and increase the ability of their products to address customer needs.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
SYSTEMS AND RESOURCES. IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
MARKET AND SELL OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY BE HARMED.
We must plan and manage our growth effectively in order to offer our
products and services and achieve revenue growth and profitability in a rapidly
evolving market. We continue to increase the scope of our operations
domestically and internationally and have recently added a number of employees.
Our growth has and will continue to place a significant strain on our management
systems and resources, and we may not be able to effectively manage our growth
in the future.
Furthermore, if our relationships with systems integrators succeed and
we are able to penetrate additional commercial markets, we will need additional
sales and marketing and professional services resources to support these
customers. The growth of our customer base will require us to invest significant
resources in the training and development of our employees and our systems
integration partners. If these organizations fail to keep pace with the number
and demands of the customers that license our products, our ability to market
and sell our products and services and our ability to develop new products and
services will be harmed. For us to effectively manage our growth, we must
continue to:
- expand our direct sales force;
- expand our professional services organization;
- hire and retain qualified software engineers;
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- enhance our management and information control systems; and
- expand, train and motivate our workforce.
In addition, in September 1999, we opened an office in Redwood Shores,
California, where our sales and marketing organization is located. This move has
resulted and will continue to result in higher expenses and will require us to
coordinate these activities with our other operations in Monrovia, California.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED
DECLINE IN REVENUES OR GROSS MARGIN MAY DISAPPOINT SECURITIES ANALYSTS
OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the
past and may vary significantly in the future. We believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.
Our revenues and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, a
substantial portion of revenues in a given quarter has been recorded in the
final month of that quarter, with a concentration of these revenues in the last
two weeks of the final month. We expect this trend to continue and, therefore,
any failure or delay in the
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closing of orders would have a material adverse effect on our quarterly
operating results. Since our operating expenses are based on anticipated
revenues and because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenues from one or more license transactions could
cause significant variations in operating results from quarter to quarter and
cause a decline in our stock price. We realize substantially higher gross
margins on our license revenues compared to our services and maintenance
revenues. Thus, our margins for any particular quarter will be highly dependent
on our revenue mix in that quarter. In our international markets, we have
experienced some seasonality of revenues, with lower revenues in the summer
months. Although this seasonality has not had a material impact on our operating
results in the past, we cannot assure you that our operating results will not
fluctuate in the future as a result of these and other international trends.
We record as deferred revenue payments from customers that do not meet
our revenue recognition policy requirements. Since only a small portion of our
revenues each quarter is recognized from deferred revenue, our quarterly results
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts may not result in revenues in the quarter in which the
contract was signed, and we may not be able to predict accurately when revenues
from these contracts will be recognized. If our operating results are below the
expectations of securities analysts or investors for these or other reasons, our
stock price would likely decline, perhaps substantially.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO
COMPETE WILL BE HARMED.
We depend on the continued service of our key technical, sales and
senior management personnel, including our founder and Chief Executive Officer,
James T. Demetriades. None of these persons is bound by an employment agreement,
and we do not maintain key person life insurance on any of these persons, other
than Mr. Demetriades. The loss of any of our senior management or other key
research and development or sales and marketing personnel could adversely affect
our future operating results. We recently hired a senior executive to oversee
our European operations. In addition, we must attract, retain and motivate
highly skilled employees, including sales personnel and software engineers. We
face significant competition for individuals with the skills required to
develop, market and support our products and services. We cannot assure you that
we will be able to recruit and retain sufficient numbers of these highly skilled
employees. If we fail to do so, our ability to compete will be significantly
harmed.
OUR SUBSTANTIAL AND EXPANDING INTERNATIONAL OPERATIONS ARE SUBJECT TO
UNCERTAINTIES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Revenues from the sale of our products and services outside the United
States accounted for 15.0% of our total revenues in 1997, 20.3% of our total
revenues in 1998, 27.1% of our total revenues in 1999 and 22% for the six months
ended June 30, 2000. Revenues from the sale of our products and services in the
United Kingdom as a percent of total revenues were 8.9% in 1997, 9.9% in 1998,
9.7% in 1999 and 9.1% for the six months ended June 30, 2000, while revenues
from the sale of our products and services in Germany as a percent of total
revenues were 2.7% in 1997, 5.6% in 1998, 10.6% in 1999 and 4.2% for the six
months ended June 30, 2000. We believe that revenues from sales outside the
United States will continue to account for a material portion of our total
revenues for the foreseeable future. We are exposed to several risks inherent in
conducting business internationally, such as:
- fluctuations in currency exchange rates, which could result in
increased expenses;
- unexpected changes in regulatory requirements, including
imposition of currency exchange controls, applicable to our
business or to the Internet, which could result in increased
costs of doing business overseas;
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- difficulties and costs of staffing and managing international
operations;
- political and economic instability, which could result in
increasing governmental ownership or regulation of businesses
or other instrumentalities of commerce, wage and price
controls, higher interest rates and spiraling inflation; and
- reduced protection for intellectual property rights in some
countries.
Any of these factors could adversely affect our international
operations and, consequently, our operating results.
WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF NEW VERSIONS OR
RELEASES OF OUR PRODUCTS CONTAIN ERRORS OR DEFECTS.
Our products and their interactions with customers' software
applications and IT systems are complex and, accordingly, there may be
undetected errors or failures when products are introduced or as new versions
are released. In the past we have discovered software errors in our new releases
and new products after their introduction, which has resulted in additional
research and development expenses. To date, these additional expenses have not
been material. These errors have resulted in product release delays, delayed
revenues and customer dissatisfaction. In the future we may discover errors,
including performance limitations, in new releases or new products after the
commencement of commercial shipments. Since many customers are using our
products for mission-critical business operations, any of these occurrences
could seriously harm our business and generate negative publicity, which could
have a negative impact on future sales. Although we maintain product liability
and errors and omissions insurance, we cannot assure you that these policies
will be sufficient to compensate for losses caused by any of these occurrences.
IF OUR PRODUCTS DO NOT OPERATE WITH THE MANY HARDWARE AND SOFTWARE
PLATFORMS USED BY OUR CUSTOMERS AND KEEP PACE WITH TECHNOLOGICAL
CHANGE, OUR BUSINESS MAY FAIL.
We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. If our
products fail to gain broad market acceptance due to an inability to support a
variety of these platforms, our operating results may suffer. Our business
depends on a number of factors, including the following:
- our ability to integrate our products with multiple platforms
and existing, or legacy, systems and to modify our products as
new versions of software applications are introduced;
- the portability of our products, particularly the number of
operating systems and databases that our products can source
or target;
- our ability to anticipate and support new standards,
especially Internet standards;
- the integration of additional software modules under
development with our existing products; and
- our management of software being developed by third parties
for our customers for use with our products.
Our industry is characterized by very rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. We have also found that the technological life
cycles of our products are difficult to estimate. We believe that we must
continue to enhance our current products and concurrently develop and introduce
new products that
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anticipate emerging technology standards and keep pace with competitive and
technological developments. Failure to do so will harm our ability to compete.
As a result, we are required to continue to make substantial product development
investments.
THE MARKET FOR E-BUSINESS INTEGRATION SOFTWARE MAY NOT GROW AS QUICKLY
AS WE ANTICIPATE, WHICH WOULD CAUSE OUR REVENUES TO FALL BELOW
EXPECTATIONS.
The market for e-Business integration software is rapidly evolving. We
earn substantially all of our license revenues from sales of our e*Xchange
software suite. We expect to earn substantially all of our revenues in the
foreseeable future from sales of e*Xchange and related products and services.
Our future financial performance will depend on continued growth in the number
of organizations demanding software and services for application integration and
e-Business solutions and seeking outside vendors to develop, manage and maintain
this software for their critical applications. Many of our potential customers
have made significant investments in internally developed systems and would
incur significant costs in switching to third-party products, which may
substantially inhibit the growth of the market for e-Business integration
software. If this market fails to grow, or grows more slowly than we expect, our
revenues will be adversely affected.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE
THESE RIGHTS AND OUR BUSINESS MAY BE SERIOUSLY HARMED.
We depend upon our ability to develop and protect our proprietary
technology and intellectual property rights to distinguish our product from our
competitors' products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as
proprietary. Accordingly, we cannot be certain that we will be able to protect
our proprietary rights against unauthorized third party copying or use.
Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
CAUSING COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Third parties may claim that we have infringed their current or future
intellectual property rights. We expect that software developers in our market
will increasingly be subject to infringement claims as the number of products in
different software industry segments overlap. Any claims, with or without merit,
could be time-consuming, result in costly litigation, prevent product shipment
or cause delays, or require us to enter into royalty or licensing agreements,
any of which could harm our business. Patent litigation in particular has
complex technical issues and inherent uncertainties. In the event an
infringement claim against us is successful and we cannot obtain a license on
acceptable terms, license a substitute technology or redesign our products to
avoid infringement, our business would be harmed. Furthermore, former employers
of our current and future employees may assert that our employees have
improperly disclosed to us or are using their confidential or proprietary
information.
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FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD
REDUCE OUR ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that our current cash and cash equivalents and our expected
cash from operations will be sufficient to meet our anticipated cash
requirements for working capital on capital expenditures for at least the next
12 months. After that, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional debt or equity financing on
favorable terms, or at all. If we raise additional equity financing, our
shareholders may experience significant dilution of their ownership interests
and the per share value of our common stock could decline. If the we engage in
debt financing, we may be required to accept terms that restrict our ability to
incur additional indebtedness and that force us to maintain specified liquidity
or other ratios, any of which could harm our business. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to, among
other things:
- develop or enhance our products and services;
- continue to expand our sales and marketing organizations;
- acquire complementary technologies, products or businesses;
- expand operations, in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated working
capital requirements.
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
WE MAY BE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. In the future, we may be the
target of similar litigation. Securities litigation could result in substantial
costs and divert our management's attention and resources, and could seriously
harm our business. The market price of the common stock may fluctuate
significantly in response to the following factors, most of which are beyond our
control, including:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- loss of a major customer or failure to complete significant
license transactions;
- additions or departures of key personnel; and
- fluctuations in stock market price and volume, which are
particularly common among securities of software and
Internet-oriented companies.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We develop products in the United States and sell them in North
America, Europe, Africa and the Pacific Rim. 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. If any of the events described
above were to occur, our revenues could be seriously impacted, since a
significant portion of our revenues are derived from international customers. In
1999, we incurred net gains of approximately $12,000 due to foreign currency
fluctuations, as compared to net losses of ($22,000) in 1998 and ($1,000) in
1997. For the three months ended June 30, 2000, we have not incurred any
significant foreign currency gains or losses. Revenues from international
customers represented 27.1% of total revenues in 1999 and 24.0% for the three
months ended June 30, 2000. Our line of credit and note payable carry floating
interest rates based on prime plus 2%. Accordingly, we are subject to the risk
of incurring additional interest expense should the prime interest rate increase
in the future. The interest rate on our line of credit and note payable as of
June 30, 2000 was 11.0%.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in
the ordinary course of business including disputes arising over the ownership of
intellectual property rights and collection matters. In the opinion of
management, the outcome of such routine claims will not have a material adverse
effect on the Company's business, financial condition or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) MODIFICATION OF CONSTITUENT INSTRUMENTS
Not applicable.
(b) CHANGE IN RIGHTS
Not applicable
(c) CHANGES IN SECURITIES
Not applicable.
(d) USE OF PROCEEDS
On May 3, 2000, the Company completed the initial public offering of
its common stock. The managing underwriters in the offering were Morgan Stanley
Dean Witter, Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette. The shares of
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (No. 333-30648). The
Securities and Exchange Commission declared the Registration Statement effective
on April 27, 2000. The net offering proceeds have been and will be used for
general corporate purposes.
Net offering proceeds that have not been used in the above described
manner have been invested in money market funds and investment grade securities.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 14, 2000
SOFTWARE TECHNOLOGIES CORPORATION
/s/ BARRY J. PLAGA SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
---------------------- ------------------------------------------------------
Barry J. Plaga (Principal Financial Officer)
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