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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 0-25137
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CONCUR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1608052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6222 185TH AVENUE NE
REDMOND, WASHINGTON 98052
(Address of principal executive offices)
(425) 702-8808
(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 [ ] No [X]
As of February 5, 1999, there were 17,037,010 shares of the Registrant's
Common Stock outstanding.
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Concur Technologies, Inc.
Form 10-Q
December 31, 1998
Index Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
- Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998 .......................................................3
- Consolidated Statements of Operations for the three months
ended December 31, 1998 and 1997 .............................................4
- Consolidated Statement of Stockholders' Equity (Deficit)
for the three months ended December 31, 1998 .................................5
- Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1997 .............................................6
- Notes to Consolidated Financial Statements ...................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...........................................................9
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds ..................................... 26
ITEM 6. Exhibits and Reports on Form 8-K .............................................. 26
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
................................................................................
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 53,277 $ 15,629
Accounts receivable, net of allowance for doubtful accounts
of $597 and $547 in fiscal 1999 and 1998, respectively 3,172 4,988
Prepaid expenses and other current assets 313 536
Note receivable from stockholders 167 167
-------- --------
Total current assets 56,929 21,320
Equipment and furniture, net 2,263 2,162
Deposits and other assets 2,551 336
Note receivable from stockholders, net of current portion 333 333
Capitalized technology and other intangible assets 801 880
-------- --------
TOTAL ASSETS $ 62,877 $ 25,031
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,540 $ 1,838
Accrued liabilities 6,214 3,850
Accrued commissions 1,007 902
Current portion of accrued payment to stockholders 167 167
Current portion of long-term debt 2,470 2,033
Current portion of capital lease obligations 1,288 1,004
Deferred revenues 3,328 3,052
-------- --------
Total current liabilities 17,014 12,846
-------- --------
NONCURRENT LIABILITIES
Accrued payment to stockholders, net of current portion 333 333
Long-term debt, net of current portion 5,040 5,632
Capital lease obligations, net of current portion 1,978 2,127
Deferred rental expense 183 183
Redeemable convertible preferred stock:
no shares and 10,213,553 shares issued and outstanding at
December 31, 1998 and September 30, 1998, respectively -- 29,685
Redeemable convertible preferred stock warrants -- 444
Commitments -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, par value $0.001 per share,
60,000,000 shares authorized; 17,029,732 and 3,098,543
shares issued and outstanding at December 31,
1998 and September 30, 1998, respectively 76,398 6,276
Deferred stock compensation (384) (452)
Accumulated deficit (37,685) (32,043)
-------- --------
Total stockholders' equity (deficit) 38,329 (26,219)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 62,877 $ 25,031
======== ========
................................................................................
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
................................................................................
THREE MONTHS ENDED DECEMBER 31,
1998 1997
------------ ------------
Revenues, net:
Licenses $ 4,045 $ 2,036
Services 1,960 1,079
------------ ------------
Total revenues 6,005 3,115
Cost of revenues:
Licenses 224 82
Services 2,453 1,097
------------ ------------
Total cost of revenues 2,677 1,179
------------ ------------
Gross profit 3,328 1,936
Operating expenses:
Sales and marketing 4,687 2,206
Research and development 2,612 1,083
General and administrative 1,637 837
------------ ------------
Total operating expenses 8,936 4,126
------------ ------------
Loss from operations (5,608) (2,190)
Interest income 225 54
Interest expense (222) (135)
Other expense, net (37) (12)
------------ ------------
NET LOSS $ (5,642) $ (2,283)
============ ============
Basic and diluted net loss per share $ (1.01) $ (0.99)
============ ============
Shares used in calculation of basic and diluted net
loss per share 5,569,708 2,298,189
============ ============
Pro forma basic and diluted net loss per share $ (0.40) $ (0.21)
============ ============
Shares used in calculation of pro forma basic and diluted
net loss per share 13,967,518 10,862,981
============ ============
................................................................................
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
................................................................................
TOTAL
COMMON STOCK DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 3,098,543 $ 6,276 $ (452) $ (32,043) $ (26,219)
Proceeds from initial public offering,
net of offering costs 3,365,000 37,369 -- -- 37,369
Conversion of redeemable convertible
preferred stock into common stock 10,213,553 29,685 -- -- 29,685
Conversion of redeemable convertible
preferred warrants into common stock
warrants -- 444 -- -- 444
Proceeds from issuance of common
stock from exercise of common
stock warrants 225,000 2,616 -- -- 2,616
Issuance of common stock from net
exercise of common stock warrants 33,537 -- -- -- --
Issuance of common stock from
exercise of stock options 94,099 8 -- -- 8
Amortization of deferred stock
compensation -- -- 68 -- 68
Net loss -- -- -- (5,642) (5,642)
---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 17,029,732 $ 76,398 $ (384) $ (37,685) $ 38,329
========== ========== ========== ========== ==========
................................................................................
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
................................................................................
THREE MONTHS ENDED DECEMBER 31,
1998 1997
-------- --------
OPERATING ACTIVITIES
Net loss $ (5,642) $ (2,283)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of acquired in-process technology 79 --
Amortization of deferred stock compensation 68 --
Depreciation 277 124
Provision for bad debts 50 33
Changes in operating assets and liabilities:
Accounts receivable 1,766 146
Prepaid expenses and other current assets 223 (86)
Deposits and other assets (2,215) 43
Accounts payable 702 (657)
Accrued liabilities 2,469 637
Deferred revenues 276 (274)
-------- --------
Net cash used in operating activities (1,947) (2,317)
-------- --------
INVESTING ACTIVITIES
Purchases of equipment and furniture (6) (24)
-------- --------
Net cash used in investing activities (6) (24)
-------- --------
FINANCING ACTIVITIES
Net proceeds from initial public offering 37,369 --
Proceeds from exercise of preferred stock warrants 2,616 --
Proceeds from sales leaseback transaction -- 192
Payments on borrowings (155) (82)
Payments on capital leases (237) (22)
Issuance of common stock 8 3
-------- --------
Net cash provided by financing activities 39,601 91
-------- --------
Net increase (decrease) in cash and cash equivalents 37,648 (2,250)
Cash and cash equivalents at beginning of period 15,629 6,695
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,277 $ 4,445
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 180 $ 62
Equipment and furniture obtained through capital leases $ 372 $ 478
Conversion of redeemable convertible preferred stock and redeemable
convertible preferred stock warrants into common stock and common
stock warrants $ 29,992 $ --
................................................................................
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
Concur Technologies, Inc. (the "Company") is a leading provider of
Intranet-based employee-facing applications that extend automation to employees
throughout the enterprise and to partners, vendors and service providers in the
extended enterprise. The Company's Xpense Management Solution ("XMS") and
CompanyStore products automate the preparation, approval, processing and data
analysis of travel and entertainment ("T&E") expense reports and front-office
procurement requisitions. The Company was originally incorporated in the State
of Washington on August 19, 1993, and on December 18, 1998, the Company was
re-incorporated in the State of Delaware. The Company's operations commenced in
fiscal 1994.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the Company's opinion, the financial statements
include all adjustments, consisting only of normal recurring adjustments, which
the Company considers necessary to fairly state the Company's financial position
and the results of operations, stockholders' equity (deficit) and cash flows.
The balance sheet at September 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended September 30, 1998
included in the Company's Prospectus, dated December 16, 1998, filed with the
Securities and Exchange Commission in connection with the Company's initial
public offering. The results of the Company's operations for any interim period
are not necessarily indicative of the results of the Company's operations for
any other interim period or for a full fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION POLICY
The Company generates revenues from licensing the rights to use its
software products directly to end users. The Company also generates revenues
from sales of customer support contracts, integration services performed for
customers who license the software, and training services.
During the year ended September 30, 1998 and previously, the Company
recognized revenue in accordance with Statement of Position 91-1, "Software
Revenue Recognition". In October 1997, the American Institute of Certified
Public Accountants issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). The Company adopted SOP 97-2 beginning in fiscal
1999. SOP 97-2 generally requires revenues earned on software arrangements
involving multiple elements such as software products, upgrades, enhancements,
post-contract customer support, installation and training to be allocated to
each element based on the relative fair values of the elements. The fair value
of an element must be based on evidence that is specific to the vendor. Evidence
of the fair value of each element is based on the price charged when the element
is sold separately or, if the element is not being sold separately, the price
for each element established by management having relevant authority. The
revenues allocated to software products, including specified upgrades or
enhancements, generally are recognized upon delivery of the products. The
revenues allocated to unspecified upgrades, updates and other post-contract
customer support generally are recognized ratably over the term of the contract.
If evidence of the fair value for all elements of the arrangement does not
exist, all revenues from the arrangement are deferred until such evidence exists
or until all elements are delivered. SOP 97-2 has been subject to certain
modifications and interpretations since its release in October of 1997. Most
recently, in December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" which has been adopted by
the Company without any significant effect on revenue recognition.
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Further implementation guidelines relating to SOP 97-2 and related modifications
may result in unanticipated changes in the Company's revenue recognition
practices.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in interim and annual
financial statements. This statement is effective for the Company's 1999 Annual
Report, however the Company does not anticipate a material effect, if any, of
this statement on the disclosures in the consolidated annual financial
statements.
NOTE 3. INITIAL PUBLIC OFFERING ("IPO")
On December 16, 1998, the Company issued 3,365,000 shares of its Common
Stock (including 465,000 shares issued upon the exercise of the underwriters'
over allotment option) at an initial public offering price of $12.50 per share.
The net proceeds to the Company from the offering, net of offering costs were
approximately $37.4 million. In connection with the IPO, warrants were exercised
to purchase 225,000 shares of common stock at a price of $11.625 per share,
resulting in additional capital proceeds to the Company totaling $2.6 million.
Concurrent with the IPO, each outstanding share of the Company's redeemable
convertible preferred stock was automatically converted into one share of Common
Stock and remaining preferred stock warrants for 2,237,454 shares were
automatically converted into warrants for the purchase of 2,237,454 shares of
common stock.
NOTE 4. NET LOSS PER SHARE
Basic and diluted net loss per common share is calculated by dividing
the net loss by the weighted average number of common shares outstanding. Pro
forma net loss per share is computed using the weighted average number of shares
used for basic and diluted per share amounts and the weighted average
convertible redeemable preferred stock outstanding as if such shares were
converted to common stock at the time of issuance.
Three Months Ended December 31,
-----------------------------------
1998 1997
----------- -----------
(In thousands, except share data)
Net loss $ (5,642) $ (2,283)
=========== ===========
Basic and diluted net loss per common share $ (1.01) $ (0.99)
=========== ===========
Weighted average number of common shares used for basic
and diluted per share amounts 5,569,708 2,298,189
=========== ===========
Weighted average common shares issuable upon pro forma
conversion of preferred stock 8,397,810 8,564,792
=========== ===========
Weighted average number of shares used for pro forma per
share amounts 13,967,518 10,862,981
=========== ===========
Pro forma basic and diluted net loss per share $ (0.40) $ (0.21)
=========== ===========
Options to purchase 2,228,293 shares of Common Stock with exercise
prices of $0.03 to $12.50 per share and warrants to purchase 2,237,454 shares of
common stock at a range of $3.65 to $85.00 per share were outstanding as of
December 31, 1998. These options and warrants were excluded from the computation
of diluted earnings per share because their effect was anti-dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. These forward-looking statements involve risks and
uncertainties, including those identified in the section of this Form 10-Q
entitled "Risk Factors That May Affect Results of Operations and Financial
Conditions," which may cause actual results to differ materially from those
discussed in such forward-looking statements. When used in this document, the
words "believes," "expects," "anticipates," "intends," "plans" and similar
expressions, are intended to identify certain of these forward-looking
statements. However, these words are not the exclusive means of identifying such
statements. In addition, any statements which refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. The cautionary statements made in this document should be read as
being applicable to all related forward-looking statements wherever they appear
in this document. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed in the Company's
Prospectus, dated December 16, 1998, a copy of which is on file at the
Securities and Exchange Commission (www.sec.gov). We undertake no obligation to
release publicly the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring
subsequent to the filing of this Form 10-Q with the SEC. Readers are urged to
review and carefully consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the SEC that attempt
to advise interested parties of the risks and factors that may affect the
Company's business.
OVERVIEW
The Company is a leading provider of Intranet-based employee-facing
applications that extend automation to employees throughout the enterprise and
to partners, vendors and service providers in the extended enterprise. The
Company's Xpense Management Solution ("XMS") and CompanyStore products automate
the preparation, approval, processing and data analysis of travel and
entertainment ("T&E") expense reports and front-office procurement requisitions.
The Company believes it is the leading provider of T&E expense management
solutions, based on a combination of the number of customers it serves and the
features its solutions provide. Since the introduction of XMS in 1996, the
Company has licensed its products to over 150 enterprise customers for use by
over 800,000 end users. Through its June 1998 acquisition of 7Software, Inc.
("7Software"), the Company added the CompanyStore front-office procurement
application to its product suite. By automating manual, paper-based processes,
the Company's products reduce processing costs and enable customers to
consolidate purchases with preferred vendors and negotiate vendor discounts.
The Company was incorporated in 1993 and commenced operations in fiscal
1994, initially developing QuickXpense, a retail, shrink-wrapped application
that automated T&E expense reporting for individuals. The Company first shipped
QuickXpense in fiscal 1995 and sold QuickXpense through a combination of retail
channels and direct marketing, utilizing a small sales force and no consulting
or implementation staff. In response to inquiries from businesses seeking to
automate the entire T&E expense reporting process, including back-office
processing and integration to financial systems, the Company significantly
expanded its product development efforts and released XMS, a client-server based
enterprise T&E expense management solution, in July 1996. In March 1998, the
Company shipped an Intranet-based version of XMS. While the Company continues to
sell the client-server version of XMS, since its release the Intranet-based
version has accounted for a majority of XMS license revenues and the Company
expects to continue to focus its product development efforts on the
Intranet-based versions of its products. Concur is currently developing
Employee Desktop(TM), which is a Web-based employee business portal to automate
costly, inefficient business processes across the corporate enterprise.
Employee Desktop integrates Concur's market leading suite of employee facing
applications, including XMS for travel expense automation, and CompanyStore for
automating front-office procurement.
On June 30, 1998, the Company acquired 7Software, a privately-held
software company and the developer of CompanyStore. 7Software was incorporated
in May 1997. 7Software was selling the initial version of its product through a
single sales representative at the time the Company acquired it. The Company's
existing sales force and consulting services group sells and services both XMS
and CompanyStore, and the Company's research and development activities have
expanded to develop a common technology platform, the Concur Common Platform,
for both XMS and CompanyStore. In connection with the acquisition, the Company
issued 708,918 shares of its Common Stock in exchange for all of the outstanding
shares of 7Software, converted all of 7Software's outstanding options into
options to purchase up to 123,921 shares of the Company's Common Stock, paid
$130,000 to 7Software, and agreed to pay $500,000 to certain shareholders of
7Software, resulting in a total purchase price valued at $6.2 million, including
direct costs of the acquisition. The total purchase price was determined by the
Company's management and Board of Directors based on an assessment of the value
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of 7Software and as a result of negotiations with 7Software. In determining the
purchase price, the Company estimated the fair value of the Company's Common
Stock and the Company's stock options issued in the transaction. The Company
also entered into employment and bonus agreements with certain officers of
7Software. The acquisition was recorded under the purchase method of accounting
and the results of operations of 7Software and the fair value of the assets
acquired and liabilities assumed were included in the Company's consolidated
financial statements beginning on the acquisition date.
The Company expects that for the foreseeable future the significant
majority of its revenues will continue to be derived from its XMS product line
and related services. The Company's revenues, which consist of software license
revenues and service revenues, were $6.0 million and $3.1 million for the three
months ended December 31, 1998 and 1997, respectively. Substantially all of the
Company's revenues for the three months ended December 31, 1998 and 1997 were
derived from licenses of XMS and services. The Company's product pricing is
based on the number of users or employees of the purchasing enterprise. Service
revenues consist of consulting, customer support and training.
The Company markets its software and services primarily through its
direct sales organization in the United States, Canada, the United Kingdom and
Australia. Revenues from XMS licenses and services to customers outside the
United States were approximately $548,000 and $126,000 for the three months
ended December 31, 1998 and 1997, respectively. Historically, as a result of the
relatively small amount of international sales, fluctuations in foreign currency
exchange rates have not had a material effect on the Company's business, results
of operations and financial condition.
For fiscal 1998 and prior years, the Company recognized revenues in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 91-1 ("SOP 91-1"). Software license revenues were
recognized when a non-cancelable license agreement was signed with a customer,
the software was shipped, no significant post delivery vendor obligations
remained and collection was deemed probable. Maintenance revenues were
recognized ratably over the contract term, typically one year. Revenues for
consulting services were recognized as such services were performed. Commencing
with fiscal 1999, the Company recognizes revenue in accordance with AICPA
Statement of Position 97-2, "Software Revenue Recognition" and related
amendments and interpretations ("SOP 97-2"). SOP 97-2 has been subject to
certain modifications and interpretations since its release in October of 1997.
Most recently, in December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" which has been adopted by
the Company without any significant effect on revenue recognition. Further
implementation guidelines relating to SOP 97-2 and related modifications may
result in unanticipated changes in the Company's revenue recognition practices.
Since its inception, the Company has incurred substantial research and
development costs and has invested heavily in the expansion of its sales,
marketing and professional services organizations to build an infrastructure to
support its long-term growth strategy. The number of the Company's full-time
employees increased from 135 as of December 31, 1997 to 251 as of December 31,
1998, representing an increase of 116, or 86%. As a result of investments in the
Company's infrastructure, the Company has incurred net losses in each fiscal
quarter since inception and, as of December 31, 1998, had an accumulated deficit
of $37.7 million. The Company anticipates that its operating expenses will
increase substantially for the foreseeable future as it expands its product
development, sales and marketing, and professional services staff. Accordingly,
the Company expects to incur net losses for the foreseeable future.
The Company has recorded aggregate deferred stock compensation of
$861,000. Deferred stock compensation is amortized over the life of the options,
generally four years. The Company recorded deferred stock amortization expense
of $68,000 for the three months ended December 31, 1998. To date, the Company
has recorded total amortization expense of $477,000.
The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as indicative of future
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. There
can be no assurance the Company will be successful in addressing such risks and
difficulties. In addition, although the Company has experienced significant
revenue growth recently, there can be no assurance that such revenue growth will
continue or that the Company will achieve or maintain profitability in the
future.
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RESULTS OF OPREATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth certain financial data, derived from the
Company's unaudited statements of operations, as a percentage of total revenues
for the periods indicated. The operating results for the three months ended
December 31, 1998 and 1997 are not necessarily indicative of the results that
may be expected for any future period.
THREE MONTHS ENDED DECEMBER 31,
1998 1997
------- ------
Revenues, net:
Licenses 67.4 % 65.4 %
Services 32.6 34.6
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Licenses 3.7 2.6
Services 40.9 35.3
----- -----
Total cost of revenues 44.6 37.9
----- -----
Gross margin 55.4 62.1
----- -----
Operating expenses:
Sales and marketing 78.0 70.8
Research and development 43.5 34.8
General and administrative 27.3 26.9
----- -----
Total operating expenses 148.8 132.5
----- -----
Loss from operations (93.4) (70.4)
Other expense, net (0.6) (2.9)
----- -----
Net loss (94.0)% (73.3)%
===== =====
REVENUES
The Company's revenues are derived from software licenses and related
services. The Company's revenues were $6.0 million and $3.1 million for the
three months ended December 31, 1998 and 1997, respectively, representing an
increase of $2.9 million, or 93%. International revenues were $548,000 and
$126,000 for the three months ended December 31, 1998 and 1997, respectively.
The Company's license revenues were $4.0 million and $2.0 million for
the three months ended December 31, 1998 and 1997, respectively, representing an
increase of $2.0 million, or 99%. License revenues represented 67.4% and 65.4%
of total revenues for the three months ended December 31, 1998 and 1997,
respectively. This increase consists of increased sales of XMS, reflecting the
increased market acceptance of XMS, an increase in the size and productivity of
the sales force, and the sales related to referrals attributable to the
Company's December 1997 strategic marketing alliance agreement with American
Express Company ("American Express").
The Company's service revenues were $2.0 million and $1.1 million for
the three months ended December 31, 1998 and 1997, respectively, representing an
increase of $881,000, or 82%. Service revenues consist primarily of consulting
and implementation service fees, maintenance and, to a lesser extent, training
services, associated with the increase in licenses of XMS during these periods.
Service revenues represented 32.6% and 34.6% of total revenues for the three
months ended December 31, 1998 and 1997, respectively. The increase in service
revenues for the three months ended December 31, 1998 over the three months
ended December 31, 1997 reflects increased licenses of XMS in fiscal 1999 as
well as revenues recognized with respect to licenses entered into in prior
periods. The Company believes that the percentage of total revenues represented
by service revenues in prior fiscal periods is not indicative of levels to be
expected in future periods. Due to its limited experience selling CompanyStore,
the Company is uncertain how recognition of service revenues associated with
such sales will affect its results of operations in the future. In addition, the
Company expects that its proportion of service revenues to total revenues will
fluctuate in the future, depending in part on the Company's use of third-party
consulting and implementation service providers as well as market acceptance of
the Company's outsource enterprise service provider ("ESP") solution.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues includes license fees
for sub-licensing third-party software, product media, product duplication,
manuals and amortization of capitalized technology and other intangible assets.
The Company's cost of license revenues was $224,000 and $82,000 for the three
months ended December 31, 1998 and 1997, respectively, representing an increase
of $142,000, or 173%. This increase was principally a result of the amortization
of capitalized technology and other intangible assets recorded in connection
with the June 1998 acquisition of 7Software, increased expenses associated with
sub-licensing of third party software due to increased sales of XMS, and the
costs of
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production, manuals and other media associated with the November 1998 release of
XMS 4.0. Cost of license revenues represented 5.5% and 4.0% of license revenues
for the three months ended December 31, 1998 and 1997, respectively. The Company
expects that the cost of license revenues may increase significantly as a
percentage of total revenues and as a percentage of license revenues upon the
introduction of the Company's outsource ESP solution and will fluctuate in the
future depending in part on the demand for the Company's current products and
its outsource ESP solution.
Cost of Service Revenues. Cost of service revenues includes personnel
and other costs related to consulting services, technical support, training and
warranty reserves. The Company's cost of service revenues was $2.5 million and
$1.1 million for the three months ended December 31, 1998 and 1997,
respectively, representing an increase of $1.4 million, or 124%. This increase
was primarily due to an increase in professional service support personnel to
manage and support the Company's growing customer base. Consulting services
personnel increased from 21 as of December 31, 1997 to 47 as of December 31,
1998, representing an increase of 26, or 124%. Technical support personnel
increased from 3 as of December 31, 1997 to 10 as of December 31, 1998,
representing an increase of 7, or 233%. Cost of service revenues was 125% and
102% of service revenues for the three months ended December 31, 1998 and 1997,
respectively. Cost of service revenues as a percentage of service revenues may
vary between periods due to the mix of services provided by the Company and the
resources used to provide such services.
COSTS AND EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, lead
referral fees, travel and entertainment and promotional expenses. The Company's
sales and marketing expenses were $4.7 million and $2.2 million for the three
months ended December 31, 1998 and 1997, respectively, representing an increase
of $2.5 million, or 113%. This increase primarily reflects the Company's
investment in its sales and marketing infrastructure, which included significant
personnel-related costs to recruit and hire sales management, sales
representatives and sales engineers, trade show expenses, and sales referral
fees under the Company's agreements with its referral partners, principally
American Express. In addition, the Company signed a referral and joint marketing
agreement with ADP in December 1998, whereby ADP agreed to market and refer XMS
to its clients and prospects. Marketing and other expenses associated with this
transaction were insignificant for the quarter. Sales and marketing employees
increased from 43 as of December 31, 1997 to 79 as of December 31, 1998,
representing an increase of 36, or 84%. Sales and marketing expenses represented
78.1% and 70.8% of total revenues for the three months ended December 31, 1998
and 1997, respectively. The Company believes that a significant increase in its
sales and marketing efforts is essential for it to maintain its market position
and further increase acceptance of its products. Accordingly, the Company
anticipates it will continue to invest significantly in sales and marketing for
the foreseeable future, and sales and marketing expenses will increase in future
periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside contractors. The Company's
research and development expenses were $2.6 million and $1.1 million for the
three months ended December 31, 1998 and 1997, respectively, representing an
increase of $1.5 million, or 141%. This increase was primarily related to the
increase in software developers, program management and documentation personnel
and outside contractors to support the Company's product development of XMS,
CompanyStore, and Employee Desktop. The Company's research and development
employees increased from 40 as of December 31, 1997 to 69 as of December 31,
1998, representing an increase of 29, or 73%. Research and development costs
represented 43.5% and 34.8% of total revenues for the three months ended
December 31, 1998 and 1997, respectively. The Company believes that a
significant increase in its research and development investment is essential for
it to maintain its market position, to continue to expand its product line and
to develop a common technology platform for its suite of products. Accordingly,
the Company anticipates that it will continue to invest significantly in product
research and development for the foreseeable future, and research and
development expenses are likely to increase in future periods. In the
development of the Company's new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Accordingly, software
development costs eligible for capitalization were insignificant, and all costs
related to internal research and development have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for the Company's executive,
finance, administrative, business development and information services
personnel. The Company's general and administrative expenses were $1.6 million
and $837,000 for the three months ended December 31, 1998 and 1997,
respectively, representing an increase of $800,000, or 96%. This increase was
primarily the result of additional finance, executive, information services and
human resources personnel to support the growth of the Company's business, an
increase of outside contractors expense associated with increased recruiting
efforts
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and expanded human resources programs, and an increase in the allowance for
doubtful accounts related to the Company's increase in revenues. General and
administrative costs represented 27.3% and 26.9% of the Company's total revenues
for the three months ended December 31, 1998 and 1997, respectively. The Company
believes that its general and administrative expenses will continue to increase
as a result of the continued expansion of the Company's administrative staff and
expenses associated with becoming a public company, including but not limited to
annual and other public reporting costs, director's and officer's liability
insurance, investor relations programs and professional services fees.
Interest Income and Interest Expense. Interest income was $225,000 and
$54,000 for the three months ended December 31, 1998 and 1997, respectively,
representing an increase of $171,000, or 317%. This increase reflects the higher
cash and short-term investment base as a result of proceeds received in December
1998 by the Company from its IPO. Interest expense was $222,000 and $135,000 for
the three months ended December 31, 1998 and 1997, respectively, representing an
increase of $87,000, or 64%. This increase was due to additional bank borrowings
and higher capital lease obligations during the three months ended December 31,
1998.
Provision for Income Taxes. No provision for federal and state income
taxes has been recorded because the Company has experienced net losses since
inception which has resulted in deferred tax assets. A valuation allowance has
been recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
The Company's quarterly operating results have fluctuated significantly in
the past, and will continue to fluctuate in the future, as a result of a number
of factors, many of which are outside the Company's control. These factors
include: demand for the Company's products and services; size and timing of
specific sales; level of product and price competition; timing and market
acceptance of new product introductions and product enhancements by Concur and
its competitors; changes in pricing policies by Concur or its competitors;
Concur's ability to hire, train and retain sales and consulting personnel to
meet the demand, if any, for XMS and CompanyStore; the length of sales cycles;
Concur's ability to establish and maintain relationships with third-party
implementation services providers and strategic partners; delay of customer
purchases caused by announcement of new hardware or enterprise resource planning
("ERP") platforms or otherwise; the mix of products and services sold, including
an anticipated shift to providing its solutions as an ESP; mix of distribution
channels through which products are sold; mix of international and domestic
revenues; changes in the Company's sales force incentives; software defects and
other product quality problems; personnel changes; changes in the Company's
strategy, including the anticipated development of an ESP strategy; general
domestic and international economic and political conditions; and budgeting
cycles of the Company's customers. The Company has in the past experienced
delays in the planned release dates of new software products or upgrades, and
has discovered software defects in new products after their introduction. There
can be no assurance that new products or upgrades will be released according to
schedule, or that when released they will not contain defects. Either of these
situations could result in adverse publicity, loss of revenues, delay in market
acceptance or claims by customers brought against the Company, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the timing of individual sales
has been difficult for the Company to predict, and large individual sales have,
in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales will not have a material adverse effect on the Company's
quarterly operating results.
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FINANCIAL CONDITION
Total assets were $62.9 million and $25.0 million as of December 31,
1998 and September 30, 1998, respectively, representing an increase of $37.9
million, or 151%. This increase was primarily due to cash proceeds raised from
the sale of the Company's Common Stock in its IPO. As of December 31, 1998, the
Company had $53.3 million of cash and cash equivalents, compared to $15.6
million as of September 30, 1998, representing an increase of $37.7 million, or
241%. During December 1998, the Company issued 3,365,000 shares of its Common
Stock in connection with its IPO, netting the Company total proceeds of
approximately $37.4 million. In connection with the IPO, the Company also
received proceeds totaling $2.6 million from the exercise of a warrant to
purchase 225,000 shares of the Company's Common Stock.
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Accounts receivable was $3.2 million and $5.0 million as of December 31,
1998 and September 30, 1998, respectively, representing a decrease of $1.8
million, or 36%. This decrease was principally a result of significant cash
collections during the three months ended December 31, 1998. Days' sales
outstanding ("DSO") in accounts receivable was 70 days and 79 days as of
December 31, 1998 and September 30, 1998, respectively. The Company expects that
DSO will fluctuate significantly in future quarters, and most likely will
increase. Deposits and other assets increased primarily due to a prepayment for
a sales referral, marketing, and business partnership.
Total current liabilities were $17.0 million and $12.8 million as of
December 31, 1998 and September 30, 1998, respectively, representing an increase
of $4.2 million, or 32%. This increase consists primarily of an increase in
accounts payable and accrued liabilities of $3.1 million. The increase in
accounts payable and accrued liabilities was primarily due to expenses incurred
but unpaid as of December 31, 1998 relating to the IPO, as well as increased
growth and business activities of the Company.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
private sales of equity securities and the use of long-term debt and equipment
leases. In December 1998, the Company completed its IPO and issued 3,365,000
shares of its Common Stock at an initial public offering price of $12.50 per
share. The Company received approximately $37.4 million in cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
with the closing of the IPO, each outstanding share of the Company's preferred
stock was automatically converted into one share of Common Stock. In connection
with the IPO, the Company also received proceeds totaling $2.6 million from
the exercise of a warrant to purchase 225,000 shares of the Company's Common
Stock in December 1998.
Net cash used by operations for the three months ended December 31, 1998
was $1.9 million compared with $2.3 million for the three months ended December
31, 1997. For such periods, net cash used by operating activities was primarily
a result of funding ongoing operations. In addition to its available cash and
cash equivalents balance of $53.3 million, the Company had approximately $1.5
million of available borrowings under a bank line of credit.
Capital expenditures, including those under capital leases, were
$378,000 and $354,000 for the three months ended December 31, 1998 and 1997,
respectively, representing an increase of $24,000, or 7%. Capital leases are
used to finance the acquisition of property and equipment, primarily computer
hardware and software, for the Company's increasing employee base as well as for
the Company's management information systems. The Company anticipates that it
will experience increases in its capital expenditures and lease commitments
consistent with its anticipated growth in operations, infrastructure and
personnel.
The Company's financing activities provided $39.6 million and $91,000
for the three months ended December 31, 1998 and 1997, respectively. During the
three months ended December 31, 1998, the Company received approximately $37.4
million in cash from the IPO, net of underwriting discounts, commissions and
other offering costs. In connection with the IPO, the Company also received
proceeds totaling $2.6 million from the exercise of a warrant to purchase
225,000 shares of the Company's Common Stock. During the three months ended
December 31, 1998, the Company made principal payments on long term debt of
$155,000 and payments on capital lease obligations of $237,000.
The Company has a line of credit with a bank for $2.0 million, which
bears interest at the lending bank's prime rate plus 1.5%. Borrowings are
limited to the lesser of 80% of eligible accounts receivable or $2.0 million,
and are secured
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by substantially all of the Company's non-leased assets. As of December 31,
1998, the Company had not borrowed under the line of credit; however, there were
approximately $500,000 in standby letters of credit outstanding. Available
borrowing under this line was approximately $1.5 million as of December 31,
1998. This credit facility expires on January 15, 1999, and the Company expects
to extend or replace such credit facility under substantially similar terms.
In September 1997, the Company entered into a $1.0 million senior term
loan facility with the same bank with which the Company has the line of credit,
pursuant to the terms of a Security and Loan Agreement (the "Loan Agreement").
In April 1998, the Loan Agreement was amended to allow for additional borrowings
up to a total of $3.0 million. The facility, which bears interest at the lending
bank's prime rate less 1.0%, matures on February 15, 2001. Payments are interest
only through February 15, 1999 -- at which time the facility will be repaid in
24 equal monthly payments of principal and interest. The Loan Agreement contains
certain financial restrictions and covenants, with which the Company is
currently in compliance. As of December 31, 1998, the outstanding indebtedness
under the Loan Agreement was $3.0 million.
In July 1997, the Company entered into a Subordinated Loan and Security
Agreement with an equipment lessor in the principal amount of $1.5 million which
bears interest at an annual rate of 8.5% (the "Subordinated Loan Agreement"). In
May 1998, the Subordinated Loan Agreement was amended to allow for additional
borrowings of $5.0 million bearing interest at an annual rate of 11% on the
first $3.5 million and 12.5% on the remaining $1.5 million, which expired on
December 31, 1998. The notes are due in varying monthly installments through
April 2002 and contain certain restrictions and covenants, with which the
Company is currently in compliance. As of December 31, 1998, the outstanding
indebtedness under the Subordinated Loan Agreement was $4.5 million.
On August 11, 1998, the Company issued a warrant to American Express
Travel Related Services Company, Inc. ("TRS") to purchase shares of the
Company's Series E Preferred Stock which, in connection with the IPO, was
subsequently converted into a warrant to purchase 2,325,000 shares of common
stock. In December 1998, TRS exercised the warrant to purchase 225,000 shares of
the Company's Common Stock at $11.625 per share. Additionally, under the
warrant, TRS may acquire 700,000 shares at any time on or before October 15,
1999 at a cash purchase price of $33.75 per share, 700,000 shares at any time on
or before January 15, 2001 at a cash purchase price of $50.625 per share, and
700,000 shares at any time on or before January 15, 2002 at a cash purchase
price of $85.00 per share.
The Company is using the net proceeds raised in the IPO for working
capital and general corporate purposes, including increased domestic and
international sales and marketing expenditures, increased research and
development expenditures and capital expenditures made in the ordinary course of
business. The Company also intends to use these proceeds for possible
acquisitions of businesses, products and technologies that are complementary to
those of the Company. Although the Company has not identified any specific
businesses, products or technologies that it may acquire, and there are no
current agreements or understandings with respect to any such transactions, the
Company does from time to time evaluate such opportunities. Pending such uses,
the net proceeds will be invested in short-term, investment-grade,
interest-bearing instruments.
The Company currently anticipates that for the foreseeable future it
will continue to experience significant growth in its operating expenses related
to augmenting its sales and marketing operations, increasing research and
development and extending its professional service capabilities, as well as
developing new distribution channels, improving its operational and financial
systems and entering new markets for the Company's products and services. Such
operating expenses will be a material use of the Company's cash resources.
However, the Company believes that its existing cash and cash equivalents and
available bank borrowings will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
Thereafter, the Company may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. There
can be no assurance that such sources will be adequate, will be obtainable on
terms favorable to the Company or will not be dilutive.
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YEAR 2000 COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES
Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates because such systems were developed using two digits rather than four to
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determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using `00' as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
STATE OF READINESS
The Company's business is dependent on the operation of numerous systems
that could potentially be affected by Year 2000-related problems. Those systems
include, among others: hardware and software systems used by the Company to
deliver products and services to its customers (including the Company's
proprietary software systems as well as software supplied by third parties);
communications networks such as the Internet and private Intranets; the internal
systems of the Company's customers and suppliers; software products sold to
customers; the hardware and software systems used internally by the Company in
the management of its business; and non-information technology systems and
services used by the Company in the management of its business, such as power,
telephone systems and building systems.
The Company has established a Year 2000 Compliance Task Force (the "Task
Force"), composed of high-level representatives of the product, management and
information systems and legal departments. The Task Force has been charged with
the responsibility of formulating and implementing the Company's Year 2000
readiness and is applying a phased approach to analyzing the Company's
operations and relationships as they relate to the Year 2000 problem. The phases
of the Company's Year 2000 program are as follows: (1) establishment of a Year
2000 Task Force; (2) assignment of responsibility for external issues (products
licensed by the Company), internal issues (systems, facilities, equipment,
software) and legal audit; (3) inventory of all aspects of the Company's
operations and relationships subject to the Year 2000 problem; (4) comprehensive
analysis (including impact analysis and cost analysis) of the Company's Year
2000 readiness; and (5) remediation and testing.
The Company has tested its software products and has determined that the
current versions of all of its software products to be Year 2000 compliant,
consistent with the Year 2000 compliance specifications established by the
British Standards Institute's DISC PD-2001. Concur plans to continue to test its
current and future products, applying its Year 2000 compliance criteria and to
include any modifications that are incorporated into the compliance process
during its implementation. The Company has completed Phases 1 and 2 of its
program and has substantially completed Phase 3, and it anticipates completing
Phase 3 in February 1999 and Phases 4 and 5 by April 1999 and June 1999,
respectively.
RISKS RELATED TO YEAR 2000 ISSUES
Based on the Company's assessment to date, the Company believes the
current versions of its software products are "Year 2000 compliant." However,
the Company's products are generally integrated into enterprise systems
involving sophisticated hardware and complex software products which may not be
Year 2000 compliant. In addition, in some cases even certain earlier Year 2000
compliant versions of the Company's software, while compatible with earlier,
non-Year 2000 compliant versions of other software products with which Concur's
software is integrated, are not compatible with certain more recent Year 2000
compliant versions of such other software providers. While the Company does not
believe it has any obligation under this circumstance given that these customers
using the Company's older versions of its software products would in any case be
required to upgrade in order to be compatible with newer versions of other
companies products, there can be no assurance that the Company will not be
subject to claims or complaints by its customers. Success of the Company's Year
2000 compliance efforts may depend on the success of its customers in dealing
with their Year 2000 issues. The Company sells its products to companies in a
variety of industries, each of which is experiencing different Year 2000
compliance issues. Customer difficulties with Year 2000 issues might require the
Company to devote additional resources to resolve underlying problems. Although
the Company has not been a party to any litigation or arbitration proceeding to
date involving its products or services and related to Year 2000 compliance
issues, there can be no assurance that the Company will not in the future be
required to defend its products or services in such proceedings, or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, regardless of the merits of such disputes,
and any liability of the Company for Year 2000-related damages, including
consequential damages, would have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company believes that purchasing patterns of customers and potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct or upgrade their current software systems for Year 2000 compliance or
defer additional software purchases until after 2000. As a result, some
customers and potential customers may have more limited budgets available to
purchase software products such as those offered by the Company, and others may
choose to refrain from changes in their information technology environment until
after 2000. To
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the extent Year 2000 issues cause significant delay in, or cancellation of,
decisions to purchase the Company's products or services, the Company's
business, results of operations and financial condition would be materially
adversely affected.
The Company and the Task Force are also reviewing the Company's internal
management information and other systems in order to identify any products,
services or systems that are not Year 2000 compliant, in order to take
corrective action. To date, the Company has not encountered any material Year
2000 problems with its computer systems or any other equipment that might be
subject to such problems. The Company's plan for the Year 2000 calls for
compliance verification of external vendors supplying software and information
systems to the Company and communication with significant suppliers to determine
the readiness of third parties' remediation of their own Year 2000 issues. As
part of its assessment, the Company is evaluating the level of validation it
will require of third parties to ensure their Year 2000 Compliance and expects
to circulate letters to its suppliers and other business partners requesting
their Year 2000 Compliance status. The Company is taking steps with respect to
new supplier agreements to ensure that the suppliers' products and internal
systems are Year 2000 compliant. In the event that any such third parties'
products, services or systems do not meet the Year 2000 requirements on a timely
basis, the Company's business, results of operations and financial condition
could be materially adversely affected. The Company could also experience
material adverse effects on its business, results of operations and financial
condition if it fails to identify all Year 2000 dependencies in its systems and
in the systems of its suppliers, customers and financial institutions.
Therefore, the Company plans to develop contingency plans for continuing
operations in the event such problems arise, but does not presently have a
contingency plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence. The Company has not completed its Year 2000
investigation, and there can be no assurance that the total cost of Year 2000
compliance will not be material to the Company's business, results of operations
and financial condition. There can be no assurance that the Company will
identify and remediate all significant Year 2000 problems on a timely basis,
that remediation efforts will not involve significant time and expense, or that
unremediated problems will not have a material adverse effect on the Company's
business, results of operations and financial condition.
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RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIMITED OPERATING HISTORY; FUTURE OPERATING RESULTS UNCERTAIN; HISTORY
OF LOSSES
The Company's prospects must be viewed in light of the risks and
uncertainties inherent in a software company in the early stages of development,
particularly in light of the evolving and highly competitive market in which the
Company operates. To compete effectively, the Company believes that it will be
necessary to devote substantial resources to expanding its sales and marketing,
professional services and research and development organizations and that it
will make significant investments in these areas without assurance of any
related income. For example, the Company's professional services organization is
newly established, and has been unprofitable since it was organized, and there
can be no assurance that it will ever become profitable. Further, there can be
no assurance that any of the Company's business strategies will be successful or
that the Company's revenues will increase in future periods, or that the Company
will become or remain profitable on a quarterly or annual basis in the future.
The Company incurred net losses of $5.0 million, $5.5 million and $18.1 million
for fiscal 1996, 1997 and 1998, respectively. As of December 31, 1998, the
Company had an accumulated deficit of $37.6 million. The Company anticipates
that it will incur net losses for the foreseeable future. Although the Company
had substantial net operating loss carryforwards as of December 31, 1998, the
use of these net operating loss carryforwards may be limited.
UNPREDICTABLE FLUCTUATIONS AND SEASONAL PATTERNS IN QUARTERLY RESULTS
The Company's quarterly operating results have fluctuated significantly
in the past, and will continue to fluctuate in the future, as a result of a
number of factors, many of which are outside the Company's control. In addition,
the Company's software products are typically shipped when orders are received,
and consequently, license backlog at the beginning of any quarter has in the
past represented only a small portion of that quarter's expected license
revenues. As a result, license revenues in any quarter are difficult to forecast
because they are substantially dependent on orders booked and shipped in that
quarter. Moreover, the Company typically recognizes a substantial amount of its
revenues in the last month of the quarter, frequently in the last week or even
days of the quarter. Since the Company's expenses are generally relatively fixed
in the near term, any shortfall from anticipated revenues or any delay in the
recognition of revenues could result in significant variations in operating
results from quarter to quarter. Quarterly license revenues are also difficult
to forecast because the Company's sales cycle, from initial evaluation to
delivery of software, is generally lengthy and varies substantially from
customer to customer. If revenues fall below the Company's expectations in a
particular quarter, the Company's business, results of operations and financial
condition would be materially adversely affected.
The Company has experienced, and expects to continue to experience, a
high degree of seasonality. The Company's products involve relatively large
expenditures by enterprise customers, and XMS tends to be more expensive than
competing applications. In addition, the purchase of the Company's products is
typically a discretionary matter for such customers and from time to time
customers' priorities may shift. For example, the Company may experience reduced
sales of its products as potential customers put a priority on correcting Year
2000 problems associated with their other systems, or defer purchases of
software products until after 2000. Accordingly, demand for the Company's
products may be particularly volatile and unpredictable.
Based on the foregoing and the risks identified herein, the Company
believes that its future revenues, expenses and operating results are likely to
vary significantly from quarter to quarter. In particular, as the Company
expands its sales force, professional services personnel and research and
development staff, operating expenses will continue to rise. As a result,
quarter-to-quarter comparisons of operating results are not necessarily
meaningful or indicative of future performance. Further, the Company believes it
is likely that in some future quarter or quarters the Company's operating
results will not meet or exceed the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would be materially adversely
affected.
EMERGING MARKET FOR EMPLOYEE-FACING APPLICATIONS; MARKET ACCEPTANCE
The market for employee-facing applications is newly emerging.
Enterprises have historically performed the processes addressed by
employee-facing applications themselves, whether through manual processes or
internally-developed development applications. Accordingly, the Company's future
success will depend upon, among other factors, the extent to which companies
adopt third-party employee-facing applications, particularly T&E expense
management and front-office procurement solutions, and the extent to which
companies purchase products or utilize the services of third-party providers,
such as the Company, for such solutions. In addition, companies that have
already invested substantial
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resources in other methods of automating enterprise processes may be reluctant
to adopt a new strategy that may limit or compete with their existing
investments. Even if companies implement employee-facing applications, they may
still choose to design, develop or manage all or part of their process
automation internally. There can be no assurance that the use of employee-facing
applications will increase significantly in the future or that the Company's
products or services will achieve commercial success. Any failure of
employee-facing applications, and in particular T&E expense management and
front-office procurement applications, to gain market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition.
PRODUCT CONCENTRATION
Since 1997, the Company has generated substantially all of its revenues
from licenses and services related to XMS, and the Company believes that such
revenues will continue to account for a substantial majority of its revenues for
the foreseeable future. The Company's future financial performance will depend,
in significant part, upon the successful development, introduction and customer
acceptance of new and enhanced versions of XMS, CompanyStore and any new
products or services that the Company may develop or acquire. There can be no
assurance that the Company will be successful in upgrading and continuing to
market XMS or CompanyStore, or that any new products or services the Company may
develop or acquire will achieve market acceptance. Any such lack of success or
failure to achieve market acceptance could have a material adverse effect on the
Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH EXPANSION INTO NEW MARKET
The Company recently added the CompanyStore front-office procurement
application to its product line. As of December 31, 1998, this initial version
of CompanyStore has been licensed to only two customers. The Company's future
revenue growth is substantially dependent upon current development efforts to
integrate this recently acquired technology with the Company's current
technology platform, market acceptance of CompanyStore, and the Company's
ability to license CompanyStore to new customers and its existing base of XMS
customers. Potential and existing customers may not purchase CompanyStore for a
number of reasons, including: an absence of required or desired functionality;
the costs of and time required for implementation; the failure of CompanyStore
to be competitive with other front-office procurement applications; possible
software defects; a customer's lack of the necessary hardware, software or
Intranet infrastructure; and any failure by the Company or its products to meet
customer expectations for other reasons. In addition, the Company plans to
target its existing and potential XMS customers as potential customers for the
enhanced version of CompanyStore that is currently under development, but there
can be no assurance that such customers will purchase CompanyStore. Further, the
Company must overcome certain significant obstacles in its expansion into the
front-office procurement automation market, including: competitors that have
more experience and better name recognition than the Company; the limited
experience of the Company's sales and consulting personnel in the front-office
procurement automation market; and the Company's limited existing reference
accounts in the front-office procurement automation market. If, for any reason,
the Company is unable to complete the development efforts necessary to integrate
the recently acquired CompanyStore technology with its technology platform and
to market CompanyStore successfully, such failure would have a material adverse
effect on the Company's business, results of operations and financial condition.
Moreover, if the Company fails to meet the expectations of market analysts or
investors with regard to sales of CompanyStore, the market price of its Common
Stock would be materially adversely affected.
RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW VERSIONS OF EXISTING PRODUCTS
The Company expects to add new employee-facing applications to its
product suite by acquisition or internal development. In the past, the Company
has experienced delays in the planned release dates of new software products and
upgrades, and has discovered software defects in new products after their
introduction. There can be no assurance that new products or upgrades will be
released according to schedule, or that when released they will not contain
defects. Either of these situations could result in adverse publicity, loss of
revenues, delay in market acceptance or claims by customers brought against the
Company, all of which could have a material adverse effect on the Company's
business, results of operations and financial condition. If the Company is
unable to develop, license or acquire new software products or enhancements to
existing products on a timely and cost-effective basis, or if such new products
or enhancements do not achieve market acceptance, the Company's business,
results of operations and financial condition will be materially adversely
affected.
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new
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industry standards can render existing products obsolete and unmarketable. As a
result, the Company's future success will depend, in significant part, upon its
ability to develop and introduce new products and to enhance existing products
to keep pace with technological developments, satisfy customer requirements and
achieve market acceptance. There can be no assurance that the Company will
successfully identify new product opportunities, develop or bring to market new
products, or adopt or incorporate new technologies in a timely and
cost-effective manner. Nor can there be any assurance that products,
capabilities or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive or shorten the life cycles
of the Company's products.
RISKS ASSOCIATED WITH UNPROVEN ENTERPRISE SERVICE PROVIDER MODEL
In addition to licensing its software, the Company plans to offer its
solutions as an Internet-based ESP, pricing its solutions on a per-transaction
basis, to companies seeking to outsource their employee-facing business
applications. This business model is unproven and represents a significant
departure from the strategies traditionally employed by enterprise software
vendors and the Company. The Company has no experience selling products or
services as an ESP, and any such ESP business may significantly divert Company
revenues and management time and attention from its existing business. The
Company may at any time discontinue its plans to provide products or services as
an ESP. In connection with its planned ESP business model, the Company will
engage, for an indeterminate period, third-party service providers to perform
many of the services related to such business as independent contractors, and
will be responsible for monitoring their performance. The Company has not
outsourced any of its services or other important business functions in the
past, and there can be no assurance that independent contractors will perform
those services adequately. In the event that any service provider provides
inadequate support or service to the Company's customers, the Company's
reputation could be seriously damaged. In addition, the Company plans to use
resellers to market its ESP products; the Company has no experience utilizing
resellers and there can be no assurance it will be successful doing so in
connection with its ESP products. There can be no assurance that the Company's
ESP strategy will be implemented effectively, or, even if it is implemented
effectively, that it will not have a material adverse effect on the Company's
business, results of operations and financial condition. If customers determine
that the Company's products are not scalable, do not provide adequate security
for the dissemination of information over the Internet, or are otherwise
inadequate for Internet-based use, or if for any other reason customers fail to
accept the Company's products for use on the Internet or on a per-transaction
basis, the Company's business, results of operations and financial condition
will be materially adversely affected. In particular, as an outsource ESP
provider, the Company will regularly receive large amounts of confidential
information (including credit card, travel booking and other financial and
accounting data) and, particularly in light of the Company's lack of experience
administering this information as an ESP, there can be no assurance that this
information will not be subject to computer break-ins and other disruptions that
jeopardize the security of information for which the Company is responsible.
Even if the Company's strategy of offering its products to customers over the
Internet is successful, certain customers or potential customers that would
otherwise acquire software and services through the Company's licensing
arrangements may elect to utilize the Company's applications through the
Internet-based ESP. Any such shift in potential license revenues to the ESP
model, which is an unproven and potentially less profitable or unprofitable
business model, could have a material adverse effect on the Company's business,
results of operations and financial condition.
RISKS ASSOCIATED WITH THE INTERNET
The success of the Company's products will depend, in large part, on
the continued broad acceptance of the Internet itself as a viable commercial
marketplace. It is difficult to predict with any assurance whether the Internet
will continue to be considered a viable commercial marketplace or whether the
demand for Internet-related products and services will increase or decrease in
the future. The Internet may cease to be considered a viable commercial
marketplace for several reasons, including potentially inadequate development
of necessary infrastructure as use of the Internet grows, such as a reliable
network backbone with the necessary speed, data capability and security, or
failure of enabling technologies to be developed in a timely manner. There can
be no assurance that the Internet infrastructure will be able to support the
demands placed on it by growth in use and bandwidth requirements of users. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity or due to increased governmental regulation.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, data corruption, cost, ease of use,
accessibility and quality of service) remain unresolved and may negatively
affect commerce and communication on the Internet. Changes in, or insufficient
availability of, telecommunications services to support the Internet could also
result in slower response times and could adversely affect the use of the
Internet generally. If critical issues concerning the commercial use of the
Internet are not favorably resolved, if the necessary infrastructure and
complementary products are not developed on a timely basis, or if use of the
Internet experiences a significant decline, the Company's business, results of
operations and financial condition will be materially and adversely affected.
LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENT
Although the Company believes that XMS and CompanyStore can accommodate
thousands of users, to date a limited number of customers have deployed XMS, and
no customer has deployed CompanyStore, on such a large scale. If the Company's
customers cannot successfully implement large-scale deployments, or they
determine for any other reason that the Company's products cannot accommodate
large-scale deployments or that such products are not appropriate for such
widespread use, the Company's business, results of operations and financial
condition would be materially adversely affected.
MANAGEMENT OF GROWTH
The Company's historical growth has placed, and any further growth is
likely to continue to place, a significant strain on the Company's managerial,
operational, financial and other resources. The Company has grown from 65
full-time employees as of September 30, 1996 to 251 full-time employees as of
December 31, 1998. The Company's future success will depend, in part, upon the
ability of its senior management to manage growth effectively. This will require
the Company to implement additional management information systems, to develop
further its operating, administrative, financial and accounting systems and
controls, to hire additional personnel, to develop additional levels of
management within the Company, to locate additional office space in the United
States and internationally, and to maintain close coordination among its
development, accounting, finance, marketing, sales, customer support and
professional services organizations. In particular, the Company expects to need
additional office space as soon as the second half of calendar
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1999. The real estate market in the Seattle area, where the Company's
headquarters is located, is extremely competitive, and the Company may find it
difficult to locate suitable space on terms acceptable to the Company. In
addition, each customer for the Company's products generally purchases
consulting and implementation services in connection with licenses of those
products. The Company believes that it is currently the only provider of such
services for its products. It is difficult and expensive to recruit, train and
retain qualified personnel to perform such services, and the Company may from
time to time have inadequate levels of staffing to perform required services. As
a result, the Company's growth could be limited due to its lack of capacity to
provide such services, or the Company could experience deterioration in service
levels or decreased customer satisfaction, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition. The failure of the Company to manage its historic and future growth
successfully would have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION
The market for the Company's products is intensely competitive and
rapidly changing. The Company's primary sources of direct competition come from
independent software vendors of T&E expense management and front-office
procurement applications, and enterprise resource planning ("ERP") providers
that have or may be developing T&E expense management and front-office
procurement products. The Company also faces indirect competition from potential
customers' internal development efforts and from potential customers' reluctance
to move away from existing paper-based systems.
NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS
An important business strategy of the Company is to enter into strategic
relationships to offer products and services to a larger customer base than can
be reached through direct sales, telesales and internal marketing efforts. The
Company has established a significant strategic marketing relationship with
American Express and its subsidiary TRS, as well as ADP, a subsidiary of
Automatic Data Processing, Inc. There can be no assurance that the Company will
be able to enter into additional strategic relationships or to maintain its
strategic relationships on commercially reasonable terms, if at all. If the
Company were unable to maintain its existing strategic relationships or enter
into additional strategic relationships, it would be required to devote
substantially more resources to the distribution, sale and marketing of its
products and services than it plans to do and would not receive the customer
introductions and co-marketing benefits that it anticipates receiving from such
strategic relationships. As a result of the Company's emphasis on strategic
relationships, the Company's success will depend both on the ultimate success of
the other parties to such relationships and on the ability of these parties to
market the Company's products and services successfully. Failure of one or more
of the companies with which the Company has a strategic relationship to promote
the Company's products or services could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's existing strategic relationships generally do not, and any
future strategic relationships may not, afford the Company any exclusive
marketing or distribution rights. Many of the Company's strategic partners have
multiple strategic relationships, and there can be no assurance that the
Company's strategic partners regard their relationships with the Company as
significant for their own businesses or that they will regard it as significant
in the future. In addition, there can be no assurance that such parties will not
pursue other partnerships or relationships, or attempt to develop or acquire
products or services that compete with the Company's products or services either
on their own or in collaboration with others, including the Company's
competitors. Further, the Company's existing strategic relationships may
interfere with its ability to enter into other desirable strategic
relationships. Any future inability of the Company to maintain its strategic
relationships or to enter into additional strategic relationships will have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS ASSOCIATED WITH 7SOFTWARE ACQUISITION
In June 1998, the Company acquired 7Software, a privately-held
front-office procurement software development company and the developer of
CompanyStore. The Company is currently in the process of integrating the
7Software business with the Company's business, including product development
efforts focused on integrating CompanyStore with XMS in a suite of
employee-facing applications. Such integration is subject to risk of loss of key
personnel of the acquired company, difficulties associated with assimilating the
personnel and operations of the acquired company, potential disruption of the
Company's ongoing business, and the ability of the Company's sales force,
consultants and development staff to adapt to the new product line. There can be
no assurance that the Company will be successful in overcoming these risks or
any other problems encountered in connection with its acquisition of 7Software.
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RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY
In order to remain competitive, the Company may find it necessary to
acquire additional businesses, products or technologies that could complement or
expand the Company's business. In the event that the Company identifies an
appropriate acquisition candidate, there can be no assurance that the Company
would be able to negotiate the terms of any such acquisition successfully,
finance such acquisition, or integrate such acquired business, products or
technologies into the Company's existing business and operations. Further, the
negotiation of potential acquisitions, as well as the integration of an acquired
business, would cause significant diversions of management time and resources.
There can be no assurance that a given acquisition, whether or not consummated,
will not materially adversely affect the Company's business, results of
operations and financial condition.
LENGTHY SALES CYCLE
Sales of the Company's software products generally require the Company
to engage in a lengthy sales effort. Because of the costs involved, customers
for enterprise products such as the Company's typically commit significant
resources to an evaluation of available software applications and require the
Company to expend substantial time, effort and money educating them about the
value of the Company's products and services. The Company's sales cycle
typically ranges between six and nine months. Sales of the Company's products
require an extensive sales effort throughout a customer's organization because
decisions to license and deploy such software generally involve the evaluation
of the software by a significant number of employees in various functional
areas, each often having specific and conflicting requirements. A variety of
factors, including many over which the Company has little or no control, such as
customers' investments in Year 2000 systems compliance, may cause potential
customers to favor competing products or to delay or forego a purchase. As a
result of the length of its sales cycle, the Company has a limited ability to
forecast the timing and amount of specific sales. The delay or failure to
complete one or more sales in a particular quarter or fiscal year could have a
material adverse effect on the Company's business, results of operations and
financial condition and could cause the Company's operating results to vary
significantly from quarter to quarter.
DEPENDENCE ON KEY EMPLOYEES
The Company's success depends on the performance of the Company's senior
management, particularly S. Steven Singh, who is not bound by an employment
agreement. Although the Company maintains key person life insurance on Mr. Singh
in the amount of $1 million, the loss of the services of Mr. Singh would have a
material adverse effect on the Company's business, results of operations and
financial condition. If one or more members of the Company's senior management
or any of the Company's key employees were to resign from the Company,
particularly to join a competitor or to form a competitor of the Company, the
loss of such personnel and any resulting loss of existing or potential customers
to any such competitor would have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, there can
be no assurance that, in such an event, the Company would be able to recruit
personnel to replace such senior management on terms that are acceptable to the
Company. In the event of the loss of any key personnel, there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its technical knowledge, practices, procedures or customer lists by a
former employee or that such disclosure or use would not have a material adverse
effect on the Company's business, results of operations and financial condition.
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's success depends to a significant degree on its ability to
attract and retain qualified, experienced employees. There is currently, and the
Company expects there will continue to be, substantial competition for
experienced engineering, sales and consulting personnel, particularly in the
market segments in which the Company competes. Many of the companies with which
the Company competes for experienced personnel have greater financial and other
resources than the Company. In particular, the Company competes for product
development personnel with Microsoft Corporation, which is located in the same
geographic area as the Company's headquarters and which hires significant
numbers of software engineers each year. The Company also competes for personnel
with major ERP and other independent software vendors that hire substantial
numbers of sales and consulting personnel, and with consulting and professional
services companies (such as Andersen Consulting and other systems integration
and consulting divisions of major accounting firms), which recruit a significant
portion of the pool of available and qualified consulting personnel. In
addition, customers for the Company's products generally purchase consulting and
implementation services in connection with licenses of those products. While the
Company has recently established relationships with certain third-party
providers of these consulting and implementation services, the Company continues
to be the primary provider of such services for its products. It is difficult
and expensive to recruit, train and retain qualified personnel to perform such
services, and the Company may from time to time have inadequate levels of
staffing to perform such services. As a result, the Company's growth could be
limited due to its lack of capacity to provide such services, or the Company
could experience deterioration
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in service levels or decreased customer satisfaction, any of which would have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may in the future experience difficulty in
recruiting and retaining sufficient numbers of qualified individuals to meet its
needs, and the costs associated with such hirings, such as bonuses and
recruiting expenses, may have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON DIRECT SALES MODEL
The Company has sold, and intends to continue to sell, its products
primarily through its direct sales force. The Company's financial success will
depend in large part on the ability of the Company's direct sales force to
increase sales to levels necessary to attain and sustain profitability. As a
consequence of this strategy, the Company's ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting, training and retaining additional direct sales personnel and on the
continued success of the direct sales force. The Company believes that there is
a shortage of, and significant competition for, direct sales personnel with the
advanced sales skills and technical knowledge necessary to sell the Company's
products. The Company's inability to hire competent sales personnel, or its
failure to retain them, would have a material adverse effect on the Company's
business, results of operations and financial condition.
In addition, by relying primarily on a direct sales model, the Company
may miss sales opportunities that might be available through other sales
distribution channels, such as domestic and international resellers and
value-added resellers. In the future, the Company intends to develop indirect
distribution channels through third-party distribution arrangements, but there
can be no assurance that the Company will be successful in establishing such
arrangements, or that any such expansion of the Company's indirect distribution
channels will result in increased revenues. The failure to develop such indirect
channels may place the Company at a significant competitive disadvantage.
The Company plans to use resellers to market its ESP products. The
Company has no experience utilizing resellers and there can be no assurance it
will be successful doing so in connection with its ESP products.
DEPENDENCE ON SERVICE REVENUES
The Company licenses software and provides related consulting, customer
support and training services. The Company's total revenues have increased from
year to year, and service revenues have increased each year as a percentage of
total revenues. Service revenues represented 12.4%, 23.3%, 31.8% and 32.6% of
total revenues for fiscal 1996, 1997, 1998 and the three months ended December
31, 1998, respectively. Maintenance constitutes a significant proportion of
service revenues. The Company anticipates that service revenues will continue to
represent a significant percentage of total revenues. To a large extent, the
level of service revenues is dependent upon the ongoing renewals of customer
support contracts by the Company's growing installed customer base, and there
can be no assurance that such customer support contracts will be renewed. In
addition, if third-party organizations such as systems integrators become
proficient in installing or servicing the Company's products, consulting
revenues as a percentage of total revenues could decline. If service revenues
are lower than anticipated, the Company's business, results of operations and
financial condition could be materially adversely affected. The Company's
ability to increase its service revenues will depend in large part on its
ability to increase the scale of its services organization, including its
ability to successfully recruit and train a sufficient number of qualified
services personnel. There can be no assurance that the Company will be able to
successfully expand its professional services organization in this way.
INTERNATIONAL OPERATIONS
The Company's international operations are generally subject to a number
of risks, including costs of customizing products for foreign countries, laws
and business practices favoring local competition, dependence on local vendors,
compliance with multiple, conflicting and changing governmental laws and
regulations, longer sales cycles, greater difficulty or delay in accounts
receivable collection, import and export restrictions and tariffs, difficulties
in staffing and managing foreign operations, multiple and conflicting tax laws
and regulations, and political and economic instability. In recent months the
level of worldwide economic instability has increased significantly. The Company
is unable to predict what effect this instability will have on its efforts to
expand internationally or sell domestically. It is possible that the spreading
economic uncertainty in the world will have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's international operations also face foreign
currency-related risks. To date, a significant majority of the Company's
revenues have been denominated in U.S. Dollars, but the Company believes that in
the future, an increasing portion of the Company's revenues will be denominated
in foreign currencies. In particular, the Company expects that
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following the introduction of the Euro in January 1999, an increasing portion of
the Company's international sales may be Euro-denominated. The Euro is an
untested currency and may be subject to economic risks that are not currently
contemplated. There can be no assurance that fluctuations in the value of the
Euro or other foreign currencies will not have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
currently does not engage in foreign exchange hedging activities, and therefore
its international revenues are currently subject to the risks of foreign
currency fluctuations. In addition, the Company expects that its products will
not support Euro-denominated transactions until at least the second half of
1999, which could materially adversely affect demand for such products and, as a
result, the Company's business, results of operations and financial condition.
Revenues from licenses and services to customers outside the United
States, primarily in the United Kingdom, Canada and Australia, were
insignificant prior to fiscal 1997, and represented approximately $1.3 million
and $810,000 in fiscal 1997 and 1998, respectively. For the three months ended
December 31, 1998, revenues from customers outside the United States was
$548,000. As a key component of its business strategy, the Company intends to
expand its sales and support operations internationally. The Company employs
sales professionals in London, Toronto and Sydney and intends to establish
additional international sales offices, expand its international management,
sales and support organizations, and enter into relationships with additional
international remarketers where appropriate. The Company is in the early stages
of developing its indirect distribution channels in certain markets outside the
United States. There can be no assurance that the Company will be able to
attract remarketers that will be able to market the Company's products
effectively or will be qualified to provide timely and cost-effective customer
support and service.
The Company must also customize its products for local markets. For
example, the Company's ability to expand into the European market will depend on
the Company's ability to develop a T&E expense management solution that
incorporates the tax laws and accounting practices followed in Germany and other
European countries, and to develop employee-facing applications that support the
Euro. Further, the differing employment policies of countries outside the United
States potentially reduce the Company's flexibility in managing staffing levels
and, in turn, managing personnel-related expenses. To the extent that the
Company is unable to address the risks associated with these international sales
in a timely and cost-effective manner, the Company's sales growth
internationally, if any, will be limited, operating margins could be reduced by
increases in personnel-related expenses without corresponding increases in
revenues, and the Company's business, results of operations and financial
condition could be materially adversely affected. Even if the Company is able to
expand its international operations successfully, there can be no assurance that
the Company will be able to maintain or increase international market demand for
its products.
LIMITED INTEROPERABILITY
The Company's products are designed to operate on a variety of hardware
and software platforms employed by its customers. The Company must continually
modify and enhance its products to keep pace with changes in hardware and
software platforms and database technology. As a result, uncertainties related
to the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems (particularly Microsoft), by
vendors of back-office applications (particularly SAP, Oracle and PeopleSoft)
and by vendors of browsers and other Internet-related applications (particularly
Netscape and Microsoft) could materially adversely affect the Company's
business, results of operations and financial condition. In addition, the
Company's products are not currently based upon the Java programming language
("Java"), an increasingly widely-used language for developing Internet
applications. The Company has made a strategic decision not to develop a fully
Java-based product at this time. There can be no assurance that future versions
of the Company's products will be developed in Java. Accordingly, certain
features available to products written in Java may not be available in the
Company's products. The failure of the Company's products to operate effectively
across the various existing and evolving versions of hardware and software
platforms, programming languages, database environments, and ERP and accounting
systems employed by customers would have a material adverse effect on the
Company's business, results of operations and financial condition.
PRODUCT LIABILITY RISKS
Because customers rely on the Company's products for certain
business-critical processes, any significant defects or errors in the Company's
products or services, or in the products of third parties that are embedded in
or bundled with the Company's products, might discourage utilization of the
Company's products and services or result in tort or warranty claims against the
Company, which could have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential liability for damages arising out of use of or
defects in the Company's products, it is possible that such limitation of
liability provisions may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any such product liability claims to
date, there can be no assurance that the Company will not be subject to such
claims in the future. Further, although the Company maintains errors and
omissions insurance, there can be no assurance that such insurance coverage will
adequately cover the Company for such claims. A successful product liability
claim brought against the Company could have a material adverse effect on the
Company's business, results of operations and financial condition. Moreover,
defending such a suit, regardless of its merits, could entail substantial
expense and require the time and attention of key management personnel, either
of which could have a material adverse effect on the Company's business, results
of operations and financial condition.
RISKS RELATED TO REVENUE RECOGNITION POLICY
The Company recognizes software license revenues when a non-cancelable
license agreement has been signed with a customer, the software is shipped, the
fee is fixed and determinable, and collection is deemed probable. The Company
recognizes customer support revenues ratably over the contract term--typically
one year--and recognizes revenues for consulting services as such services are
performed. The Company believes its current revenue recognition policies and
practices are consistent with applicable accounting standards in all material
respects. SOP 97-2 has been subject to certain modifications and interpretations
since its release in October of 1997. Most recently, in December 1998, the
American Institute of Certified Public Accountants issued SOP 98-9 "Modification
of SOP 97-2, Software Revenue Recognition, With
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Respect to Certain Transactions" which has been adopted by the Company without
any significant effect on revenue recognition. Further implementation guidelines
relating to SOP 97-2 and related modifications may result in unanticipated
changes in the Company's revenue recognition practices.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, market conditions in the
enterprise software industry, changes in financial estimates by securities
analysts, failure of the Company to meet or exceed analyst estimates, and other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has experienced significant price and volume fluctuations that
have particularly affected the market prices of equity securities of many
software companies and that often have been unrelated or disproportionate to the
operating performance of such companies, and a number of publicly-traded
software companies have current market prices below their initial public
offering price. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the marketplace for a company's securities, securities class
action litigation often has been instituted. Any such litigation against the
Company could result in substantial costs and a diversion of management
attention and resources, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS.
On December 16, 1998, the Company commenced and completed its IPO. The
managing underwriters in the IPO were BancBoston Robertson Stephens Inc.,
Hambrecht & Quist LLC and Piper Jaffray Inc. (the "Underwriters"). The shares of
Common Stock sold in the IPO were registered under the Securities Act of 1933,
as amended, on a Registration Statement on Form S-1 (No. 333-62299), which was
declared effective by the Securities and Exchange Commission on December 15,
1998. The Company sold a total of 3,365,000 shares of Common Stock registered
under the Registration Statement (including 465,000 shares sold pursuant to the
exercise of the Underwriters' over-allotment option). An additional 200,000
shares of Common Stock were sold on behalf of certain selling stockholders as
part of the same offering. The initial public offering price was $12.50 per
share for an aggregate initial public offering of $44,562,500. After deducting
the underwriting discounts and commissions and the IPO expenses, the net
proceeds to the Company and the selling stockholders from the IPO were
$37,368,453 and $2,325,000, respectively. In connection with the offering, the
Company also received proceeds totaling $2,615,625 from the exercise of a
warrant to purchase 225,000 shares of the Company's Common Stock.
From the time of receipt through December 31, 1998, the Company has
applied the proceeds of the IPO and the warrant exercise to working capital and
general corporate purposes. The Company has not used any of the net offering
proceeds for construction of a plant, building or facilities, purchases of real
estate, or repayment of indebtedness. None of the net offering proceeds were
paid, and none of the IPO expenses were for payments, directly or indirectly to
directors, officers or general partners of the Company or their associates,
persons owning 10% or more of any class of the Company's securities, or
affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description of Exhibit
- - ----------- ----------------------
10.01 1998 Directors Stock Option Plan.
27.01 Financial Data Schedule.
Report on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the registrant and as
the principal financial officer thereof.
Dated February 19, 1999 CONCUR TECHNOLOGIES, INC.
By /s/ Sterling R. Wilson
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Sterling R. Wilson
Chief Financial Officer and
Executive Vice President
of Operations
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