- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 000-29799
CROSSWORLDS SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3240149
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
577 Airport Boulevard
Burlingame, CA 94010
(Address, including zip code, of registrant's principal executive offices)
(650) 685-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] ____ No [ ]
- --------------------------------------------------------------------------------
The number of shares outstanding of the Registrant's Common Stock, par value
$0.001, as of July 31, 2001 was 26,775,214.
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets (Unaudited) as of June 30, 2001 and
December 31, 2000 ............................................................ 3
Consolidated Condensed Statements of Operations (Unaudited) for the three and
six months ended June 30, 2001 and 2000 ...................................... 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the six months
ended June 30, 2001 and 2000 ................................................. 5
Notes to the Consolidated Condensed Financial Statements (Unaudited) ......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................... 22
Item 2. Changes in Securities and Use of Proceeds ............................... 22
Item 3. Defaults Upon Senior Securities ......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ..................... 22
Item 5. Other Information ....................................................... 22
Item 6. Exhibits and Reports on Form 8-K ........................................ 23
Signature ............................................................................. 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2001 2000
------ ----
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 22,645 $ 22,532
Short-term investments ........................ 2,021 17,060
Accounts receivable, net ...................... 21,867 24,798
Prepaid and other current assets .............. 5,615 3,723
--------- ---------
Total current assets ........................ 52,148 68,113
Property and equipment, net ................... 7,483 6,310
Deposits and other assets ..................... 1,011 1,345
--------- ---------
Total assets ................................ $ 60,642 $ 75,768
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 4,288 $ 2,970
Accrued payroll and related expenses .......... 5,394 6,036
Accrued commissions ........................... 2,485 4,379
Other accrued liabilities ..................... 4,971 5,801
Current portion of capital lease obligations .. 481 477
Borrowings .................................... 2,404 2,936
Deferred revenue .............................. 21,022 30,011
--------- ---------
Total current liabilities ................... 41,045 52,610
Other long-term liabilities ................... 330 114
Capital lease obligations, less current portion 89 325
--------- ---------
Total liabilities ........................... 41,464 53,049
--------- ---------
Stockholders' equity:
Common stock .................................. 27 26
Additional paid-in capital .................... 156,966 156,934
Deferred stock-based compensation ............. (1,325) (2,645)
Accumulated deficit ........................... (136,490) (131,596)
--------- ---------
Total stockholders' equity .................. 19,178 22,719
--------- ---------
Total liabilities and stockholders' equity .. $ 60,642 $ 75,768
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
------ ------ ------ ----
Revenue:
Software license ........................... $ 7,045 $ 5,031 $ 16,115 $ 8,214
Service, maintenance and other ............. 13,099 6,348 25,685 10,863
-------- -------- -------- --------
Total revenue ............................ 20,144 11,379 41,800 19,077
-------- -------- -------- --------
Cost of revenue:
Software license and royalties ............. 224 204 433 325
Service, maintenance and other (1) ......... 7,361 5,716 14,637 10,244
-------- -------- -------- --------
Total cost of revenue .................... 7,585 5,920 15,070 10,569
-------- -------- -------- --------
Gross profit ........................... 12,559 5,459 26,730 8,508
-------- -------- -------- --------
Operating expenses:
Research and development (2) ............... 3,973 4,114 8,746 7,889
Sales and marketing (3) .................... 7,335 8,242 15,807 14,630
General and administrative (4) ............. 2,980 2,436 6,746 5,089
Amortization of deferred stock-based
compensation ............................. 95 852 393 1,560
-------- -------- -------- --------
Total operating expenses ................. 14,383 15,644 31,692 29,168
-------- -------- -------- --------
Operating loss ......................... (1,824) (10,185) (4,962) (20,660)
Other income (expense), net ..................... 95 (1,029) 68 (1,412)
-------- -------- -------- --------
Net loss ............................... $ (1,729) $(11,214) $ (4,894) $(22,072)
======== ======== ======== ========
Net loss per share:
Basic and diluted .......................... $ (0.06) $ (1.06) $ (0.18) $ (3.11)
Weighted average shares used in computation 26,654 10,619 26,542 7,097
(1) Excludes stock-based compensation of $48 and $120 for the three months
ended June 30, 2001 and 2000, and $23 and $206 for the six months ended
June 30, 2001 and 2000, respectively.
(2) Excludes stock-based compensation of $(37) and $188 for the three months
ended June 30, 2001 and 2000, and $118 and $367 for the six months ended
June 30, 2001 and 2000, respectively.
(3) Excludes stock-based compensation of $68 and $440 for the three months
ended June 30, 2001 and 2000, and $179 and $820 for the six months ended
June 30, 2001 and 2000, respectively.
(4) Excludes stock-based compensation of $16 and $104 for the three months
ended June 30, 2001 and 2000, and $73 and $167 for the six months ended
June 30, 2001 and 2000, respectively.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
--------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss ........................................ $ (4,894) $(22,072)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ............................... 1,912 1,541
Amortization of warrants for financing
commitment ............................. -- 1,406
Amortization of deferred stock-based
compensation ............................. 393 1,560
Changes in operating assets and liabilities:
Accounts receivable ...................... 2,931 (8,332)
Prepaid and other current assets ......... (1,892) (694)
Other assets ............................. 334 (1,489)
Accounts payable ......................... 1,318 649
Accrued payroll and related expenses ..... (642) 1,078
Accrued commissions ...................... (1,894) 1,108
Other accrued liabilities ................ (913) 2,184
Deferred revenue ......................... (8,989) 11,628
Other long-term liabilities .............. 216 (9)
-------- --------
Net cash used in operating activities .. (12,120) (11,442)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............ (3,081) (1,358)
Disposals of property and equipment ............ 65 --
Purchases of short-term investments ............ (2,021) --
Redemptions of short-term investments .......... 17,060 --
-------- --------
Net cash provided by (used in)
Investing activities ................. 12,023 (1,358)
-------- --------
Cash flows from financing activities:
Repayments of capital lease obligation and long-
term debt...................................... (3,070) (1,656)
Proceeds from revolving credit facility ......... 2,320 --
Proceeds from issuance of common stock, net ..... 960 53,395
-------- --------
Net cash provided by financing
activities ........................... 210 51,739
-------- --------
Net increase in cash and cash equivalents ......... 113 38,939
Cash and cash equivalents at beginning of period .. 22,532 12,506
-------- --------
Cash and cash equivalents at end of period ........ $ 22,645 $ 51,445
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated condensed statements of operations
for the three and six months ended June 30, 2001 and 2000, statements of cash
flows for the six months ended June 30, 2001 and 2000, and balance sheets at
June 30, 2001 and December 31, 2000 have been prepared by CrossWorlds Software,
Inc. (the "Company") on the same basis as the audited consolidated financial
statements and reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present fairly the financial position and
the results of operations for the interim periods presented. These unaudited
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes included in the Company's 2000
Annual Report on Form 10-K. The results of operations for the three- and
six-month periods ended June 30, 2001 are not necessarily indicative of results
for the entire fiscal year.
(2) Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition." When contracts contain multiple elements,
wherein vendor-specific objective evidence exists for all undelivered elements,
the Company accounts for the delivered elements using the "residual method"
prescribed by AICPA Statement of Position 98-9, "Software Revenue Recognition,
with Respect to Certain Arrangements." The Company's software arrangements
typically involve significant production, customization, or modification of the
software, or services that are essential to the functionality of the software
and, as a result, software license revenue for the entire arrangement is
generally recognized using the percentage-of-completion method. Progress toward
completion is measured by achieving certain standard and objectively verifiable
milestones present in each project. In certain instances, the Company may
recognize software license revenue upon delivery when persuasive evidence of an
arrangement exists, the fee is fixed and determinable, acceptance is certain,
collection is probable, and the Company is not involved in significant
production, customization, or modification of the software or services that are
essential to the functionality of the software. In the event costs to complete a
contract are expected to exceed anticipated revenue, a loss is accrued. To date,
no such losses have been accrued. In certain circumstances where the Company is
unable to estimate the amount of effort required to customize or implement the
software license, revenue is recognized using the completed contract method. To
date, no amounts have been recognized under the completed contract method.
Consulting and training revenue is recognized as the services are performed.
Maintenance revenue from customer support and product upgrades, including
maintenance bundled with original software licenses, is deferred and recognized
ratably over the term of the maintenance agreement, typically twelve months.
When the Company enters into software arrangements with resellers, the Company
does not recognize revenue until the reseller demonstrates it has entered into
an arrangement with an end user that satisfies the Company's revenue recognition
criteria. When the Company's services are essential to the end user
implementation of the software sold by the reseller, the software license
revenue for the arrangement is recognized using the percentage-of-completion
method.
(3) Comprehensive Income (Loss)
The Company had no material components of other comprehensive income (loss)
for any of the periods presented.
(4) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method,
6
and from convertible securities using the as-if converted method. All potential
common shares have been excluded from the computation of diluted net loss per
share for all periods presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands) (In thousands)
Stock options and warrants .............. 58 4,099 111 1,235
Common stock subject to repurchase....... 44 101 44 101
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands except (In thousands except
per share amounts) per share amounts)
Net loss ...................................... $ (1,729) $(11,214) $ (4,894) $(22,072)
Weighted average shares of common stock
outstanding ................................ 26,698 10,720 26,586 7,198
Less: weighted average common shares
subject to repurchase ...................... (44) (101) (44) (101)
-------- -------- -------- --------
Weighted average shares used in computing
basic and diluted net loss per common share 26,654 10,619 26,542 7,097
Basic and diluted net loss per share .......... $ (0.06) $ (1.06) $ (0.18) $ (3.11)
(5) Initial Public Offering
In June 2000, the Company completed its initial public offering ("IPO") of
4.6 million shares of its common stock, including the exercise of 0.6 million
shares of underwriters' over-allotment option, at $10.00 per share. Upon the
closing date of the IPO, all of the convertible preferred stock outstanding
prior to the IPO was converted into approximately 16.5 million shares of common
stock. The Company realized aggregate net proceeds from the IPO of approximately
$40.9 million, after deducting IPO underwriting discounts and commissions of
$3.2 million and offering expenses of approximately $1.9 million. From the
effective date of the registration statement through June 30, 2001, $21.2
million of the net proceeds from the offering have been used to fund working
capital, general corporate purposes, sales and marketing efforts, additional
research and development, and capital expenditures made in the ordinary course
of business. In addition, the Company applied $7.3 million towards the purchase
and installation of equipment, software and leasehold improvements. $12.4
million of the net offering proceeds remain in cash and short-term investments.
7
(6) Supplemental Cash Flow Information
Six months ended
June 30,
--------
2001 2000
---- ----
(In thousands)
Cash paid during the period for interest............. $ 161 $ 401
Non-cash investing and financing activities:
Issuance of common stock warrants for financing
commitment...................................... -- 1,406
Equipment acquired through equipment lease
facility........................................ -- 301
(7) Segment Reporting
The Company is organized in a single operating segment for purposes of
making operating decisions and assessing performance. The chief operating
decision maker evaluates performance, makes operating decisions and allocates
resources based on financial data consistent with the presentation in the
accompanying consolidated financial statements.
The following table presents geographical information about the Company's
revenues:
Three months ended Six months ended
June 30, June 30,
-------- --------
In thousands 2001 2000 2001 2000
- ------------ ------ ------- ------ -------
North America.................................... $13,844 $7,416 $28,677 $12,700
Europe........................................... 6,184 3,963 12,901 6,377
Other............................................ 116 -- 222 --
------- ------- ------- -------
Total......................................... $20,144 $11,379 $41,800 $19,077
======= ======= ======= =======
The following table presents geographical information about the Company's
long-lived assets:
June 30, December 31,
In thousands 2001 2000
- -------------- -------- -----------
North America............................................... $15,396 $12,879
Europe...................................................... 1,022 1,049
------- -------
Total.................................................... $16,418 $13,928
======= =======
(8) Restructuring and Related Expenses
In April 2001, The Company announced a restructuring plan to streamline
operations and reduce costs. Overall expense reductions were necessary to
align the Company's cost structure with changing market conditions and to
create a more flexible and efficient organization. The plan resulted in a
reduction in total staff of approximately 7% and termination of office
expansion plans.
The following table summarizes the components of the restructuring and
other non-recurring expenses, by geographic region (in thousands):
8
Severance
and
Benefits Facilities Other Total
-------- ---------- ----- -----
United States............................... $252 $67 $3 $322
Europe...................................... 51 17 11 79
---- --- --- ----
Total.................................... $303 $84 $14 $401
==== === === ====
During October 2000, the Company entered into a lease agreement for an
additional 44,455 square feet of office space. The term of the 8-year lease is
expected to commence on August 15, 2001. As a result of the reduction in
workforce, the Company does not expect to immediately occupy the space. The
Company is exploring various alternatives with regards to the structure of the
lease of the building, including plans to sublease the extra office space.
However, due to the dramatic decline in lease rates and the increase in
available lease space in the San Francisco Bay Area commercial real estate
market, the Company may not be able to find a suitable sub-lessee for this space
or a sub-lessee willing to pay a price equal to or greater than the rates
required to be paid by the Company. Pending the outcome of possible
alternatives, the Company may be required to record a loss on this space in the
future.
(9) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 provides guidance on the accounting
for a business combination at the date a business combination is completed. The
statement requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, thereby eliminating use of the
pooling-of-interest method. SFAS 142 provides guidance on how to account for
goodwill and intangible assets after an acquisition is completed. The most
substantive change is that goodwill will no longer be amortized but instead will
be tested for impairment periodically. This statement will apply to existing
goodwill and intangible assets, beginning with fiscal years starting after
December 15, 2001. The Company expects to adopt this statement at the beginning
of fiscal 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and the related notes that appear
elsewhere in this document.
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 12E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to business and economic risks and uncertainties, as well as assumptions
that, if they never materialize or prove incorrect, could cause the results of
CrossWorlds Software, Inc. and its consolidated subsidiaries ("CrossWorlds" or
the "Company") to differ materially from those expressed or implied by such
forward-looking statements. Statements and information contained herein
concerning markets for CrossWorlds' products and trends in financial results,
and all other statements that include the word "may," "will," "should,"
"believe," "anticipate," "intend," "estimate," "expect," "project," "plan,"
"predict," "potential," "continue," "strategy" and other similar expressions
constitute forward-looking statements. CrossWorlds' actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons, including the factors and the risks to our business set forth herein
and in our other Securities Exchange Commission Filings. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.
Overview
Business
CrossWorlds provides a business integration platform both for integrating
internal operations and extending these operations over the Internet.
CrossWorlds' products help businesses work more efficiently with customers and
suppliers through end-to-end business processes. The CrossWorlds platform
enhances competitiveness and reduces information technology costs by decreasing
long-term maintenance costs and enabling faster business application integration
than traditional approaches.
Revenues
Revenues to date have been derived from the sale of our business
infrastructure software, maintenance and support fees, and consulting and
training services. Customers who license our software generally purchase
maintenance contracts, typically covering a twelve-month period. Customers may
also purchase consulting services, which are customarily billed by us at a fixed
daily or hourly rate plus out-of-pocket expenses. We also offer training
services that are billed on a per student or per class session basis.
Revenue recognition policy
Our software arrangements typically involve significant customization or
implementation services. As a result, software license revenue is generally
recognized using the percentage-of-completion method over the project
implementation cycle, which typically ranges from three to nine months. In
circumstances where we are unable to estimate the amount of effort required to
customize or implement the software, software license revenue is recognized
using the completed contract method. To date, we have not encountered any
circumstances where we have recognized revenue under the completed contract
method.
We have recognized upon shipment, and may in the future recognize upon
shipment, revenues for projects when our services are not essential to the
functionality of the software. Consulting and service revenue is recognized as
the services are performed. Maintenance revenue from customer support and
product upgrades, including maintenance bundled with original software licenses,
is deferred and recognized ratably over the term of the maintenance agreement.
When we enter into software arrangements with resellers, we do not recognize
revenue until the reseller demonstrates it has an arrangement with the end user
that satisfies our revenue recognition criteria.
10
Our revenue recognition policy complies with the American Institute of Certified
Public Accountants' Statement of Position 97-2, "Software Revenue Recognition."
Revenue mix
As a result of our revenue recognition policy, which generally requires us
to defer and recognize license revenue over the software customization or
implementation period, the mix of license, service and other revenue for the
current quarter does not necessarily reflect the mix in sales activities for the
current quarter. For example, revenues recognized during the quarter ended June
30, 2001 generally resulted from sales made during the fourth quarter of fiscal
2000 and first quarter of fiscal 2001.
Results of Operations
The following table sets forth the results of operations for the three
months and six months ended June 30, 2001 and 2000 expressed as a percentage of
total revenue.
Three months Six months
ended June 30, ended June 30,
------------------ -------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue:
Software license...................................... 35.0% 44.2% 38.6% 43.1%
Service, maintenance and other........................ 65.0 55.8 61.4 56.9
---- ---- ---- ----
Total revenue......................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
Software license and royalties........................ 1.1 1.8 1.0 1.7
Service, maintenance and other........................ 36.6 50.2 35.1 53.7
---- ---- ---- ----
Total cost of revenue................................. 37.7 52.0 36.1 55.4
---- ---- ---- ----
Gross margin..................................... 62.3 48.0 63.9 44.6
---- ---- ---- ----
Operating expenses:
Research and development.............................. 19.7 36.2 20.9 41.3
Sales and marketing................................... 36.4 72.4 37.8 76.7
General and administrative............................ 14.8 21.4 16.2 26.7
Amortization of deferred stock-based
Compensation....................................... 0.5 7.5 0.9 8.2
--- --- --- ---
Total operating expenses.............................. 71.4 137.5 75.8 152.9
---- ----- ---- -----
Operating loss................................... (9.1) (89.5) (11.9) (108.3)
Other income (expense), net................................ 0.5 (9.0) 0.2 (7.4)
---- ------ ---- -----
Net loss......................................... (8.6)% (98.5)% (11.7)% (115.7)%
===== ====== ====== =======
Software license revenue. Total license revenue for the second quarter
ended June 30, 2001 was $7.0 million, an increase of 40% over the same period in
fiscal 2000. For the first half of fiscal 2001, license revenue was $16.1
million, an increase of 96% over the first half of 2000. The increase in license
revenue resulted from progress towards project completion on increased sales to
new and existing customers due in part to increased acceptance of our expanded
product offering in the marketplace.
Service, maintenance and other revenue. Service, maintenance and other
revenue for the second quarter ended June 30, 2001 was $13.1 million, an
increase of 106% over the same period in fiscal 2000. For the first half of
fiscal 2001, service, maintenance and other revenue was $25.7 million, an
increase of 136% compared to the first half of fiscal 2000. The increase was due
to the increase in consulting, maintenance, and training fees associated with
the increased number of licenses sold, and a larger installed license base.
11
Cost of software license revenue and royalties. Cost of software license
revenue and royalties consists of royalty payments to third parties for
technology incorporated into our products. Cost of software license revenue and
royalties for the three months ended June 30, 2001 was $0.2 million and 1.1% of
total revenue compared to $0.2 million and 1.8% of total revenue for the same
period in fiscal 2000. For the first half of fiscal 2001, cost of software
license revenue and royalties was $0.4 million and 1.0% of total revenue
compared to $0.3 million and 1.7% of total revenue for the same period in 2000.
The percentage of revenue decreased year over year as a result of sales to
repeat customers for which no additional royalties are due with certain third
party technology vendors.
Cost of service, maintenance and other revenue. Cost of service,
maintenance and other revenues consists primarily of personnel, third-party
consulting, and travel costs associated with implementation, support and
training activities. Cost of service, maintenance and other revenue was $7.4
million and 36.6% of total revenue for the second quarter of fiscal 2001
compared to $5.7 million and 50.2% of total revenue for the same period in
fiscal 2000. For the first half of fiscal 2001, cost of services, maintenance
and other revenue was $14.6 million and 35.1% of total revenue versus $10.2
million and 53.7% of total revenue for the corresponding period in fiscal 2000.
The percentage decrease year over year was due to higher revenues resulting from
higher utilization of services personnel and rate increases for services and
maintenance.
Research and development expenses. Research and development expenses
consist primarily of personnel and related costs incurred in the advancement and
quality assurance activities related to our products. Research and development
expenses were $4.0 million for the three months ended June 30, 2001, a decrease
of 3% over the same period in fiscal 2000. The decrease was primarily due to
lower contractor spending. For the first half of fiscal 2001, research and
development expenses were $8.7 million, an increase of 11% compared to the first
half of fiscal 2000. The increase was primarily due to an increase in personnel
and third-party contractor costs associated with new product initiatives during
the first quarter of 2001. Research and development expenses as a percentage of
total revenue for the first quarter in fiscal 2001 were 19.7% compared to 36.2%
for the same period in fiscal 2000. For the first half of fiscal 2001, research
and development expenses as a percentage of total revenue were 20.9% versus
41.3% for the same period in fiscal 2000. The decrease as a percentage of total
revenue was the result of growth in total revenue.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of personnel and related costs of our direct sales force and marketing
staff and the cost of marketing programs, including trade shows and conferences
and promotional materials. Sales and marketing expenses for the second quarter
of fiscal 2001 were $7.3 million, a decrease of 11% over the same period in
fiscal 2000. The decrease is primarily the result of reduced average commission
and bonus rates in the second quarter of 2001. For the first half of fiscal
2001, sales and marketing expenses were $15.8 million, an increase of 8%
compared to the same period in fiscal 2000. The increase was primarily the
result of an increase in the number of sales and marketing employees and the new
branding campaign launched in the first quarter of 2001. Sales and marketing
expenses as a percentage of total revenue were 36.4% in the three months ended
June 30, 2001 compared to 72.4% in the same period in fiscal 2000. For the first
half of fiscal 2001, sales and marketing expenses as a percentage of total
revenue were 37.8% versus 76.7% for the same period in fiscal 2000. The decline
in sales and marketing expenses as a percentage of total revenue was the result
of growth in total revenue.
General and administrative expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate functions
including executive, legal, finance, accounting, human resources, facilities,
and information systems as well as bad debt expense. General and administrative
expenses for the second quarter of fiscal 2001 were $3.0 million, an increase of
22% over the same period in fiscal 2000. For the first half of fiscal 2001,
general and administrative expenses were $6.7 million, an increase of 33% over
the same period in fiscal 2000. The increase was primarily a result of increased
personnel costs, professional services, insurance and other costs necessary to
support a public company. General and administrative expenses as a percentage of
total revenue were 14.8% in the three months ended June 30, 2001 versus 21.4%
for the same period in fiscal 2000. For the first half of fiscal 2001, general
and administrative expenses as a percentage of total revenue were 16.2% compared
to 26.7% in the same period in fiscal 2000. The decline in general and
administrative expenses as a percentage of total revenue was the result of
growth in total revenue.
12
Amortization of deferred stock-based compensation. Deferred stock-based
compensation represents the difference between the exercise price and the deemed
fair value of our common stock on the date certain stock options were granted.
The difference is amortized on a straight-line basis over the vesting periods of
the applicable options. Deferred stock-based compensation for the second quarter
of fiscal 2001 was $95,000, a decrease of 89% over the same period in fiscal
2000. For the first half of fiscal 2001, deferred stock-based compensation was
$0.4 million, a decrease of 75% compared to the same period in fiscal 2000. The
decrease of this expense reflects employee attrition and no stock options being
granted below fair value during 2001.
Other income (expense), net. Other income and expense includes interest,
foreign currency, and other miscellaneous income and expense items. Net other
income for the second quarter ended June 30, 2001 was $95,000 compared to net
other expense of $1.0 million during the same period in 2000. For the first half
of fiscal 2001, net other income was $68,000 versus net other expense of $1.4
million during the same period in fiscal 2000. The increase in net other income
was primarily due to the absence of amortization of a funding commitment that
existed in the first and second quarters of fiscal 2000.
Provision for income taxes. We incurred net operating losses in the three
and six months ended June 30, 2001 and 2000 and when the likelihood of realizing
the benefit of the net operating loss carryforward was considered, we incurred
no income taxes or benefit in these periods.
Liquidity and Capital Resources
In June 2000, we completed an initial public offering ("IPO") of 4.6
million shares of our common stock, including the exercise of 0.6 million shares
of underwriters' over-allotment option, at a price of $10.00 per share. The
Company also completed a sale of 0.9 million shares of its common stock in
private placements concurrent with the IPO at $9.30 per share. The aggregate net
proceeds realized from the IPO and private placements were approximately $49.7
million. Prior to the IPO, we had financed our operations through private sales
of preferred equity securities, totaling $85.7 million and commercial bank loans
and equipment leases. As of June 30, 2001, we had $24.7 million in cash and
short-term investments and $11.1 million in working capital.
Net cash used in operating activities was $12.1 million for the six months
ended June 30, 2001 and $11.4 million for the same period in fiscal 2000.
Compared with the same period a year ago, the increase in net cash used in
operations primarily reflects a decrease in deferred revenue, accrued
commissions, and other accrued liabilities, offset by a decrease in net loss and
accounts receivable.
Net cash provided by investing activities was $12.0 million for the six
months ended June 30, 2001 and $1.4 million used in the corresponding period in
fiscal 2000. Cash provided by investing activities in the six months ended June
30, 2001 primarily reflect the net redemption of short-term high-grade
investments previously purchased using our IPO cash proceeds. Net cash used by
investing activities in the six months ended June 30, 2000 primarily reflect the
net purchase of capital equipment. In April 1999, we began leasing equipment
through a $1.5 million master lease agreement with a lender. As of June 30,
2001, we have used $0.6 million of this lease line.
Net cash provided by financing activities was $0.2 million for the six
months ended June 30, 2001. Net cash provided by financing activities of $51.7
million for the six months ended June 30, 2000 was primarily from the net
proceeds of our initial public offering, offset by repayments of subordinated
debt and equipment loans.
As of June 30, 2001, outstanding borrowings including capital leases were
$3.0 million, which are payable through 2003. We have a revolving line of credit
that provides for borrowings of up to $10.0 million based on 65% of eligible
accounts receivable. Borrowings under this line of credit accrue interest that
is payable monthly at 0.5% above prime rate. As of June 30, 2001, we had
borrowings of $2.3 million against this line of credit. Borrowings are secured
by all of our assets, and we have agreements that require us to comply with
financial covenants. As of June 30, 2001, we were in compliance with these
financial covenants.
We believe that our current cash and investment balances and available
borrowings under existing line of credit will be sufficient to satisfy our
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. After that we may require additional funds to support
our working capital requirements, or for other purposes. We may also seek to
raise additional funds
13
through public or private equity financings or from other sources. However,
there can be no assurance that we will be able to obtain adequate financing on
favorable terms, if at all, at that time. Also, financing may dilute shareholder
interests.
A portion of our cash may be used to acquire or invest in complementary
businesses, products, or technologies. We have no current plans, agreements or
commitments of this nature, and we are not currently engaged in any negotiations
involving a transaction of this nature.
Factors That Could Affect Future Results
BECAUSE OF OUR LIMITED OPERATING HISTORY, IT IS DIFFICULT FOR US TO PREDICT AND
PLAN FOR CHALLENGES. AS A RESULT, OUR FUTURE PERFORMANCE MAY BE HARMED.
We were incorporated in March 1996 and shipped our first products in
November 1997. Because our operating history is limited, our future operating
results and our future stock price are difficult to predict. We may not foresee
trends that may emerge and harm our business, and we cannot forecast operating
expenses based on our historical results. It is also difficult to plan to meet
the challenges we face in the future, specifically:
o expanding our customer base;
o competing effectively with:
o other software vendors that offer business infrastructure products,
o systems integrators that develop customized solutions, and
o internal information technology departments of potential customers;
and
o managing expanding operations.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT FUTURE LOSSES.
We have experienced operating losses in each quarterly and annual period
since March 1996, and we expect to incur losses in the future. Despite our
history of losses, we may increase our research and development and sales and
marketing expenses. If expenditures related to the expansion of our operations
are not accompanied or shortly followed by significantly increased revenue, our
losses could be even greater than expected until we are able to delay or reduce
these expenditures.
BECAUSE OUR QUARTERLY REVENUE IS BASED ON OUR CUSTOMERS' IMPLEMENTATION
SCHEDULES, WE MAY DISAPPOINT INVESTORS' EXPECTATIONS OR MAY NOT FULFILL THE
EXPECTATIONS OF THE FINANCIAL MARKETS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
We generally recognize license revenue from orders on a
percentage-of-completion basis as the customer reaches milestones in its project
implementation using our products. We also recognize services revenue as we
perform implementation services. As a consequence, the timing of our revenue
depends on the continued progress of our customers' implementation cycles. Each
customer has unique integration requirements and, because our products solve a
complex problem, we must integrate a variety of enterprise applications in each
implementation. Our product implementation schedules take up to nine months or
more and span multiple quarterly periods. If we fail to achieve continued
progress on anticipated implementation schedules, or our customers delay,
suspend or terminate their implementation efforts, we may not recognize the
expected revenue on these orders until subsequent quarters.
14
BECAUSE OUR QUARTERLY SALES ORDERS FLUCTUATE DUE TO THE NATURE OF OUR SALES
CYCLE AND SEASONALITY, WE MAY DISAPPOINT INVESTORS' EXPECTATIONS OR MAY NOT
FULFILL THE EXPECTATIONS OF THE FINANCIAL MARKETS, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE.
Our sales cycle varies typically from one to nine months because:
o our business integration solutions are expensive, with high average
selling prices,
o our products solve complex problems and to generate sales we must
spend significant time educating our potential customers about the uses and
benefits of our products, and
o some of our prospective customers evaluate our products on a trial
basis before entering a sales contract.
This lengthy sales cycle makes it difficult to predict the quarter in which
expected orders will occur. Delays in the execution of orders could cause some
or all of the new business from those orders to be shifted from the expected
quarter to a subsequent quarter or quarters.
Additionally, we have experienced, and expect to continue to experience,
seasonality in software orders. For example, we generally have experienced
higher demand for our products in the fourth quarter than the third quarter. We
believe this seasonality is a result, in part, of year-end pressures influencing
our customer's buying patterns, our direct sales force's efforts to meet or
exceed year-end sales quotas, and the summer vacation schedules of our customers
and sales force. Both our sales cycle and seasonality cause unpredictable
fluctuations in our deferred revenue, which could adversely affect our quarterly
operating results.
BECAUSE A SUBSTANTIAL MAJORITY OF OUR REVENUE HAS BEEN DERIVED FROM A SMALL
NUMBER OF SELECTED INDUSTRIES, A DECLINE IN DEMAND FOR OUR SOFTWARE IN THESE
INDUSTRIES COULD HURT OUR OPERATIONS.
We derive a large majority of our revenue from sales of our software and
related services to customers in the complex industrial manufacturing, process
manufacturing, financial services, and telecommunications industries. Any
significant decline in the demand for, and market acceptance of, our software in
these industries, or any failure to increase our sales to industries other than
complex industrial manufacturing, process manufacturing, financial services, and
telecommunications could hurt the results of our operations. We expect that
sales of our software and related services to customers in the complex
industrial manufacturing, process manufacturing, financial services, and
telecommunications industries will continue to account for a majority of our
revenue.
OUR REVENUE WILL LIKELY DECLINE OR FAIL TO GROW IF WE DO NOT DEVELOP AND
MAINTAIN SUCCESSFUL RELATIONSHIPS WITH SYSTEMS INTEGRATORS.
We engage in joint sales, marketing and/or implementation efforts with a
number of large systems integrators including Deloitte Consulting,
PricewaterhouseCoopers, EDS, and Accenture. In many cases, these parties have
extensive relationships with our existing and potential customers and influence
the decisions of these customers. We rely on these firms to:
o recommend our products during the evaluation stage of the purchasing
process,
o provide industry expertise for developing products aimed at specific
industries,
o refer prospective customers to us,
o provide access to customers' executive-level decision makers, and
15
o provide implementation services for our products.
If systems integrators are not appropriately trained on our products, our
reputation with existing and prospective customers could be harmed. Our failure
to establish or maintain these relationships could significantly harm our
ability to license and successfully implement our business integration software
products. Our competitors may have stronger relationships than us with some
systems integrators and, as a result, those systems integrators may be more
likely to work with competitors and recommend competitors' products.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR REVENUES
TO DECLINE OR FAIL TO GROW.
The market for business integration software is relatively new and rapidly
evolving, and there is a variety of integration products and methods available
to prospective customers. We do not know if customers in our target markets will
prefer our products to other products and methods available. If we are unable to
establish a sufficient base of customer references in our target markets,
prospective customers may be less likely to buy our products and our ability to
license our products to additional customers may be significantly reduced.
THE MARKET FOR BUSINESS INTEGRATION SOLUTIONS IS COMPETITIVE AND NEW COMPETITORS
MAY INCREASE COMPETITIVE PRESSURES. AS A RESULT, WE MAY LOSE SALES AND MAY BE
FORCED TO LOWER OUR PRICES, WHICH WOULD CAUSE A DECLINE IN OUR REVENUE.
The market for our products is intensely competitive. It is expected to
become increasingly competitive as current competitors enhance and expand their
product offerings and new competitors enter the market. Competition could result
in:
o price reductions,
o reduced gross margins, and
o loss of market share.
Any one of these results could significantly reduce our future revenues. Our
current competitors include a number of companies offering alternative business
infrastructure solutions.
To date, we have faced competition from:
o internal information technology departments of potential customers,
o systems integrators and other information technology service
providers, and
o software vendors targeting one or more segments of our market,
including Vitria Technology, Inc., webMethods, Inc., SeeBeyond Technology
Corporation, TIBCO Software, Inc., and IBM Corporation.
New competitors, including Oracle Corporation, BEA Systems, Inc.,
Hewlett-Packard Company, Sun Microsystems, Inc. and Microsoft Corporation, are
emerging and may rapidly acquire significant market share. Alliances among
competitors may also pose a threat.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES. IF WE LOSE OUR RIGHT TO
USE LICENSED TECHNOLOGY, OUR REVENUE COULD BE HARMED AND OUR COSTS COULD
INCREASE.
Our software products incorporate technology licensed to us by third
parties, including BEA Systems, Inc., IBM Corporation, Borland Software
Corporation and others, that provides important messaging, connectivity and
16
other functionality. We depend on these third parties to deliver and support
reliable products, and to enhance their products in response to industry trends
and other technological changes. If we are unable to license such technology on
commercially reasonable terms, it could harm our business by disrupting our
operations, increasing our costs, impeding or delaying our sales and hindering
our ability to support our existing customers.
THE LOSS OF, OR INABILITY TO ATTRACT, SENIOR MANAGEMENT AND OTHER KEY PERSONNEL
COULD HARM OUR BUSINESS AND DECREASE THE VALUE OF YOUR INVESTMENT.
Our future success depends on the skills, experience and performance of our
senior management team and other key personnel, and their ability to operate
effectively, both individually and as a group. The intense competition for
qualified personnel in our industry and geographic region could harm our ability
to replace any of the members of our senior management team if we were to lose
their services in the future. If we do not succeed in attracting new management
and key personnel, or retaining and motivating existing management and key
personnel, our business will be harmed. In particular, the services and
expertise of our senior management team could be difficult to replace.
OUR SUCCESS DEPENDS UPON OUR SALES, CONSULTING, BUSINESS DEVELOPMENT, MARKETING,
CUSTOMER SUPPORT AND TECHNICAL PERSONNEL. IF WE FAIL TO ATTRACT AND RETAIN THESE
PERSONNEL, OUR BUSINESS MAY BE UNABLE TO GROW AND REVENUES COULD DECLINE.
If we fail to retain or expand our direct sales force, or our consulting,
business development, marketing, customer support and technical staffs, we may
not be able to increase revenue or achieve increased market acceptance of our
products. To date, we have sold our products primarily through our direct sales
force, have supported our customers through our consulting and customer support
staff and alliance partners, and have developed and maintained our new products
and product enhancements through our technical personnel. We believe that
attracting and retaining these personnel may be challenging for us because:
o the market for business integration software is still emerging,
o we have not yet achieved broad market acceptance of our products,
o the sales cycle for our product can be lengthy and, therefore,
challenging for sales personnel, and
o there is demand for such qualified personnel in the greater San
Francisco metropolitan area.
OUR RECENT GROWTH AND CHANGES IN OUR PERSONNEL LEVELS MAY STRAIN OUR EXISTING
RESOURCES. ANY FAILURE TO MANAGE THIS GROWTH EFFECTIVELY MAY CAUSE OUR REVENUES
TO DECLINE OR FAIL TO GROW.
Our recent growth, changes in personnel levels and our future sales growth
plans may strain our personnel, management systems and resources, which could
harm our business. To effectively manage and support our operations, we will be
required to:
o integrate, train, motivate and manage our work force,
o continue to improve our operational, financial and management controls,
reporting systems and procedures, and
o maintain close coordination among our executive, engineering, accounting,
finance, marketing, sales and operations organizations.
If we fail to manage and support our operations, our business will be harmed and
our operating losses could increase.
17
OUR INTERNATIONAL OPERATIONS ARE EXPENSIVE AND CHALLENGING. IF OUR INTERNATIONAL
OPERATIONS DO NOT PERFORM AS PROJECTED, OUR OPERATING LOSSES MAY INCREASE.
Revenues from international sales represented 32% of total revenue for the
three months ended June 30, 2001 and 35% for the six months ended June 30, 2001,
and we expect to continue growing our international operations. We have
committed resources to the opening of international offices and the expansion of
international sales and support channels in advance of revenue. We expect to
incur expenses for localizing our software for foreign markets. If our
international expansion strategy does not generate sufficient revenue to offset
these expenditures, our operating losses may increase.
IF WE FAIL TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE WHICH CHARACTERIZES OUR
MARKET, WE COULD LOSE MARKET SHARE OR OUR PRODUCTS COULD BECOME OBSOLETE.
The market for business integration software is characterized by:
o rapid technological change,
o frequent new product introductions and enhancements,
o uncertain product life cycles,
o changing customer requirements, and
o evolving industry standards including Extensible Markup Language, or
XML, Java 2 Enterprise Edition, or J2EE, and security-related standards.
The introduction of products embodying new technologies and the emergence of new
industry standards could make our existing products obsolete and unmarketable,
which could harm our revenue. Our future success depends upon our ability to
develop and introduce a variety of new products and product enhancements, in a
timely fashion and at our planned release dates, to address the increasingly
sophisticated needs of our customers.
IF OUR PRODUCTS DO NOT WORK WITH MULTIPLE HARDWARE, SOFTWARE AND NETWORKING
PLATFORMS, SOME CUSTOMERS MAY NOT BUY OUR PRODUCTS, AND OUR REVENUE MAY BE
HARMED.
We currently serve a customer base with a wide variety of constantly
changing hardware, software and networking platforms. If we are unable to
provide and support our products on these multiple platforms, some prospective
customers will not buy our products and our business may suffer.
IF WE ARE UNABLE TO BUILD AND MAINTAIN RELATIONSHIPS WITH APPLICATION SOFTWARE
VENDORS, WE COULD BE UNABLE TO CREATE, MAINTAIN AND SUPPORT OUR CONNECTIVITY
PRODUCTS AND OUR REVENUE COULD BE HARMED.
We have relationships with a number of application software vendors,
including SAP AG, Oracle Corporation, Siebel Systems, Inc., Nortel Networks
Corporation, i2 Technologies, Inc., BroadVision, Inc., Portal Software, Inc. and
MetaSolv Software, Inc. and plan to establish more of these relationships in the
future. These vendors provide access to their software, technical support and
documentation, which enables us to develop, maintain and support connectivity
solutions that are compatible with their products. If these relationships are
terminated or restricted, or we are unsuccessful in establishing relationships
with other vendors, our ability to develop connectivity solutions to integrate
new and existing versions of these vendors' packaged enterprise applications may
be harmed.
18
THE COST AND COMPLEXITY OF IMPLEMENTING OUR PRODUCTS COULD HARM OUR REPUTATION,
WHICH MAY DIMINISH OUR REVENUES.
Business integration software is often implemented as part of complex, time
consuming and expensive customer projects. If our customers are dissatisfied
with the implementation process, our ability to license further products to
these customers could be harmed, our reputation may be harmed, and these
customers may be reluctant to recommend our products to prospective customers.
DEFECTS IN OR SLOW PERFORMANCE OF OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND
FOR OUR PRODUCTS AND CAUSE COSTLY LIABILITY, WHICH WOULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
Our software products may contain undetected errors that cause slow
performance or other defects, especially when first introduced or when new
versions are released. Any such errors or defects could result in:
o loss of revenue,
o delay in market acceptance,
o diversion of development and other resources,
o distraction of management,
o damage to our customer relationships or reputation,
o increased service and warranty cost, and/or
o costly litigation defense.
In particular, legal damages sought by our customers for loss of data, lost
revenue, systems costs or other harm they may suffer could be high because our
software products are critical to our customers' business operations.
BECAUSE OUR PRODUCTS COULD INTERFERE WITH OUR CUSTOMERS' OTHER SOFTWARE
APPLICATIONS AND HARDWARE, WE MAY BE SUBJECT TO CLAIMS BY THESE CUSTOMERS, WHICH
MAY BE COSTLY AND MAY NOT BE ADEQUATELY COVERED BY INSURANCE.
Our business integration software is integrated with our customers' other
software and their networks. Customers or others may bring product liability or
warranty claims based on damage to, or interference with, these networks or
applications. Any of these claims could result in costly litigation and/or
divert resources and management's attention. Our current insurance coverage may
be insufficient to protect us from liability that may be imposed for these types
of claims.
OUR FAILURE TO SAFEGUARD OUR INTELLECTUAL PROPERTY COULD REDUCE OUR REVENUES, OR
CAUSE US TO INCUR COSTLY LITIGATION.
The value of our software products arises from the intellectual property in
those products. We rely primarily on a combination of:
o patents,
o copyrights,
19
o trademarks,
o trade secrets, and
o contractual obligations with employees and third parties to protect
the proprietary aspects of our technology.
The legal protection provided by these means is limited. Unauthorized parties
may copy aspects of our products and obtain and use information that we believe
is proprietary. Other parties may breach confidentiality agreements or other
protective contracts they have made with us. The laws of many foreign countries
do not protect our intellectual property rights to the same extent as the laws
of the United States. Litigation may be necessary to enforce our intellectual
property rights. Intellectual property litigation has an uncertain outcome and
could result in substantial costs and diversion of resources and management's
attention.
BECAUSE OUR MARKET IS NEW, COMPETITIVE AND DEPENDENT UPON INTELLECTUAL PROPERTY
RIGHTS, WE COULD FACE COSTLY LITIGATION BROUGHT BY THIRD PARTIES FOR
INFRINGEMENT OF THEIR RIGHTS.
We may be subject to legal proceedings and claims for alleged infringement
of third party proprietary rights, including patents, trademarks or copyrights.
Any litigation could result in substantial costs and diversion of resources and
management's attention. Parties making infringement claims against us may obtain
judgments against us, which could prevent us from selling our products or
require us to enter into royalty or license agreements which are disadvantageous
to us.
BECAUSE THE MARKET FOR STOCKS OF TECHNOLOGY COMPANIES HAS EXPERIENCED EXTREME
PRICE AND VOLUME FLUCTUATIONS, OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD HARM
THE MARKET PRICE OF OUR COMMON STOCK AND LEAD TO SECURITIES LITIGATION.
Many factors, including the following, could cause the market price of our
common stock to fluctuate:
o variations in quarterly results by us, our competitors, or other high-
technology companies,
o announcements of technological innovations by us or by our competitors,
o introductions of new products or new pricing policies by us or by our
competitors,
o acquisitions or strategic alliances by us or by our competitors,
o departure or recruitment of key personnel,
o the gain or loss of significant customers,
o changes in the estimates of our operating performance or changes in
recommendations by securities analysts, and
o market conditions in the industry and the economy as a whole.
Furthermore, the market for stocks of technology companies has experienced
extreme price and volume fluctuations sometimes unrelated to these companies'
operating performance. Such fluctuations could harm the market price of our
common stock regardless of our actual operating performance.
In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
20
litigation could result in substantial costs and divert resources and
management's attention, which could harm our business.
FAILURE TO RAISE ADDITIONAL CAPITAL, OR TO GENERATE THE SUBSTANTIAL CAPITAL
REQUIRED TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS, COULD REDUCE OUR
ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
In the future, we may need to raise additional funds to:
o develop or enhance our software or services,
o acquire technologies or businesses,
o expand operations, or
o respond to competitive pressures or unexpected capital requirements.
We cannot be sure that we will be able to obtain such funding, on favorable
terms or at all. If we are unable to do so on a timely basis, our business could
be harmed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of risks, including changes in interest rates
affecting the return on our investments and foreign currency fluctuations. We
have established policies and procedures to manage our exposure to fluctuations
in interest rates and foreign currency exchanges rates.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. The majority of our investments are in short-term
investments principally consisting of commercial paper, government bonds and
money-market institutions. We place our investments with high credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
We have no investments denominated in foreign country currencies and therefore
are not subject to foreign currency risk on such investments.
We develop products in the United States and sell primarily in North
America and Europe. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Substantially all of sales are currently made in
U.S. dollars; as a result, a strengthening of the dollar could make our products
less competitive in foreign markets.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use Of Proceeds.
In June 2000, the Company completed its initial public offering ("IPO") of
4.6 million shares of its common stock, including the exercise of 0.6 million
shares of underwriters' over-allotment option, at a $10.00 per share pursuant to
a Registration Statement on Form S-1 declared effective on June 1, 2000 by the
Securities and Exchange Commission (File No. 333-96055). The Company realized
aggregate net proceeds from the IPO of approximately $40.9 million. From the
effective date of the registration statement through June 30, 2001, $21.2
million of the net proceeds from the offering have been used to fund working
capital, general corporate purposes, sales and marketing efforts, additional
research and development and capital expenditures made in the ordinary course of
business. In addition, the Company applied proceeds of $7.3 million towards the
purchase and installation of equipment, software and leasehold improvements.
$12.4 million of the net offering proceeds remain in cash and short-term
investments. The Company may use a portion of the net proceeds to acquire or
invest in complementary businesses, products and technologies. The Company has
no current plans, agreements or commitments of this nature, and is not currently
engaged in any negotiations involving a transaction of this nature. Pending
these uses, the Company intends to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission Of Matters to a Vote Of Security Holders.
At the Company's Annual Meeting on May 22, 2001, the stockholders approved
the following two items:
1. The election of the following individuals as directors of the Company:
For Withheld
---------- ----------
Alfred J. Amoroso 16,462,041 164,669
Katrina A. Garnett 16,447,174 179,536
Terence J. Garnett 16,445,174 181,536
Andrew K. Ludwick 16,590,500 36,210
Albert A. Pimentel 16,590,700 36,010
Colin F. Raymond 16,590,700 36,010
2. The ratification and appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 2001.
For: 16,617,660
Against: 5,265
Abstain: 3,785
Item 5. Other Information.
None.
22
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.34 Fourth Amendment, dated as of July 17, 2000, to lease between
CrossWorlds and EOP-Bay Park Plaza, L.L.C., dated as of
December 6, 1996.
10.35 Fifth Amendment, dated as of August 15, 2000, to lease
between CrossWorlds and EOP-Bay Park Plaza, L.L.C., dated as
of December 6, 1996.
10.36 Sixth Amendment, dated as of October 13, 2000, to lease
between CrossWorlds and EOP-Bay Park Plaza, L.L.C., dated as
of December 6, 1996.
10.38 Seventh Amendment, dated as of March 13, 2001, to lease
between CrossWorlds and EOP-Bay Park Plaza, L.L.C., dated as
of December 6, 1996.
10.39 Loan Modification Agreement, dated as of March 26, 2001,
between CrossWorlds and Silicon Valley Bank
10.40 Loan Modification Agreement, dated as of April 27, 2001,
between CrossWorlds and Silicon Valley Bank
10.41 Loan Modification Agreement, dated as of June 18, 2001,
between CrossWorlds and Silicon Valley Bank
(b) Reports on Form 8-K:
None.
23
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Burlingame, state of
California on August 13, 2001.
CROSSWORLDS SOFTWARE, INC.
(Registrant)
By: /s/JAMES W. BUDGE
--------------------------------------
James W. Budge
Chief Financial Officer (Principal
Financial and Accounting Officer)
24