UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
_________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2000 Commission file number: 0-25137
______________
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 [X] No[_]
As of January 31, 2001, there were 25,483,073 shares of the Registrant's Common
Stock outstanding.
================================================================================
CONCUR TECHNOLOGIES, INC.
FORM 10-Q
DECEMBER 31, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and September 30, 2000....................... 3
Consolidated Statements of Operations for the three months ended December 31, 2000
and 1999......................................................................................... 4
Consolidated Statements of Cash Flows for the three months ended December 31, 2000 and
1999............................................................................................. 5
Notes to Consolidated Financial Statements....................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk................................... 23
PART II. OTHER INFORMATION.............................................................................. 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Concur Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
December 31, September 30,
------------------ ------------------
2000 2000
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents $ 22,101 $ 12,224
Marketable securities 22,872 44,018
Accounts receivable, net of allowance for doubtful accounts
of $1,441 at December 31, 2000 and $973 at September 30, 2000,
respectively 9,970 11,317
Prepaid expenses and other current assets 1,939 2,338
Notes receivable from stockholders 167 167
---------------- ------------------
Total current assets 57,049 70,064
Equipment and furniture, net 10,467 10,469
Deposits and other assets 971 1,135
---------------- ------------------
Total assets $ 68,487 $ 81,668
================ ==================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,625 $ 2,230
Accrued payroll and benefits 3,204 3,913
Accrued restructuring costs 559 1,025
Sales return reserve 927 1,326
Other accrued liabilities 4,474 3,284
Accrued commissions 869 1,317
Payable to shareholders 315 315
Current portion of long-term debt 2,410 2,942
Current portion of capital lease obligations 2,083 2,356
Deferred revenues 3,789 3,905
---------------- ------------------
Total current liabilities 20,255 22,613
Long-term debt, net of current portion 504 927
Capital lease obligations, net of current portion 609 959
Deferred rent expense 153 156
Shareholders' equity:
Convertible preferred stock, par value $0.001 per share:
Authorized shares - 5,000,000
No shares issued or outstanding - -
Common stock, par value $0.001 per share:
Authorized shares - 60,000,000
Issued and outstanding shares -25,466,960 and 25,088,081
at December 31, 2000 and September 30, 2000, respectively 222,992 222,577
Deferred stock compensation (134) (179)
Accumulated deficit (175,892) (165,385)
------------------ ------------------
Total shareholders' equity 46,966 57,013
------------------ ------------------
Total liabilities and shareholders' equity $ 68,487 $ 81,668
================== ==================
The accompanying notes are an integral part of these financial statements.
3
Concur Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
-------------------
2000 1999
-------- --------
Revenues, net:
License $ 3,875 $ 4,118
ASP 732 90
Service 5,796 4,799
-------- --------
Total revenues 10,403 9,007
Cost of revenues:
License 117 228
ASP 1,819 356
Service 3,873 5,549
-------- --------
Total cost of revenues 5,809 6,133
-------- --------
Gross profit 4,594 2,874
Operating expenses:
Sales and marketing 7,280 9,088
Research and development 5,200 8,634
General and administrative 3,165 3,475
-------- --------
Total operating expenses 15,645 21,197
-------- --------
Loss from operations (11,051) (18,323)
Interest income 799 1,397
Interest expense (245) (304)
Other expense, net (10) (100)
-------- --------
Net loss $(10,507) $(17,330)
======== ========
Basic and diluted net loss per share $ (0.42) $ (0.76)
======== ========
Shares used in calculation of basic and diluted net
loss per share 25,272 22,844
======== ========
The accompanying notes are an integral part of these financial statements.
4
Concur Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
December 31,
----------------------------------
2000 1999
------------ -----------
Operating activities
Net loss $ (10,507) $ (17,330)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquired in-process technology - 80
Amortization of deferred stock compensation 45 334
Depreciation 1,669 907
Provision for bad debts 610 120
Changes in operating assets and liabilities:
Accounts receivable 737 (1,361)
Prepaid expenses, deposits, and other assets 563 (329)
Accounts payable (605) (3,458)
Accrued liabilities and accrued commissions (1,632) (1,959)
Deferred revenues (116) 709
------------ -----------
Net cash used in operating activities (9,236) (22,287)
------------ -----------
Investing activities
Purchases of equipment and furniture (870) (2,780)
Purchase of marketable securities (354) (11,346)
Maturity of marketable securities 21,500 -
------------ -----------
Net cash (used) provided by investing activities 20,276 (14,126)
------------ -----------
Financing activities
Proceeds from issuance of common stock from exercise of
stock options 3 105
Issuance of common stock in connection with Employee
Stock Purchase Plan 412 1,059
Payments on borrowings (955) (947)
Payment on capital leases (623) (283)
------------ -----------
Net cash used by financing activities (1,163) (66)
------------ -----------
Net increase (decrease) in cash and cash equivalents 9,877 (36,479)
Cash and cash equivalents at beginning of period 12,224 59,815
------------ -----------
Cash and cash equivalents at end of period $ 22,101 $ 23,336
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 231 $ 260
============ ===========
Equipment and furniture obtained through capital leases - $ 1,609
============ ===========
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of the Company
Concur Technologies, Inc ("Concur" or the "Company") is a leading provider of
Corporate Expense Management software and service solutions that automate costly
and inefficient business processes. Concur's software solutions are sold through
a direct sales organization as well as indirect channels and include Concur
Expense(TM) for travel and entertainment expense management, Concur Payment(TM)
for employee requests for vendor payments, Concur Time(TM) for time tracking and
reporting, and Concur Human Resources(TM) for human resources self- service.
These software products are designed to meet the needs of businesses of all
sizes through license and application service provider ("ASP") models. The
Company was originally incorporated in the state of Washington on August 19,
1993 and operations commenced during 1994. On November 25, 1998, the Company was
reincorporated in the State of Delaware and completed an initial public offering
on December 16, 1998.
Unaudited Interim Financial Information
The financial information as of December 31, 2000, and for the three months
ended December 31, 2000 and 1999, is unaudited, but includes all adjustments
(consisting of normal recurring adjustments) that the Company considers
necessary for a fair presentation of its financial position at such dates and
its operations and cash flows for the periods then ended. The financial
statements should be read in conjunction with the financial statements and notes
thereto for the fiscal year ended September 30, 2000, included in the Company's
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
("SEC"). Operating results for the three months ended December 31, 2000, are not
necessarily indicative of results that may be expected for the entire fiscal
year.
The balance sheet at September 30, 2000 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 for complete
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from these estimates.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in fiscal years beginning after June 15, 2000.
SFAS 133 establishes standards for recognition and measurement of derivatives
and hedging activities and requires recognition of all derivatives on the
balance sheet at fair value. Because the Company has not used derivatives,
management has determined that the adoption of SFAS 133 will have no significant
effect on earnings or the consolidated financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes the SEC's views on applying generally accepted
accounting principles to revenue recognition and the related costs of those
revenues. The Company has reviewed the requirements of SAB 101 and believes its
policies on revenue recognition and related costs of those revenues are in
compliance with this new standard. Therefore, the Company does not believe that
SAB 101 will have a significant impact on its consolidated financial position or
results or operations. However, the Company will continue to evaluate
interpretations of the standard as they become available.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements as of December 31, 2000 and for the
three months ended December 31, 2000 and 1999, include the accounts of the
Company and its wholly owned subsidiaries, Concur Technologies (UK) Ltd., Concur
Technologies Pty. Limited, and Seeker Software, Inc. ("Seeker Software").
Seeker Software was dissolved effective March 28, 2000. All significant
intercompany accounts and transactions are eliminated in consolidation.
NOTE 3. BUSINESS RESTRUCTURING AND SALES RETURNS ACCRUAL
In June 2000, the Company made a strategic decision to focus its resources on
the Corporate Expense Management market. The Company realized the need to
reevaluate its business in order to balance the needs and requests of its
customers with its available management and financial resources. Also
considered in this decision was the shift in the Company's revenue model, which
caused to the Company's cost and expense structure to be out of alignment with
its revenue and cash stream. The Company's new operating plan is designed to
reduce costs and bring expenses in line with this change in the marketplace.
Under the new operating plan, the Company discontinued Concur Procurement(TM),
its corporate procurement application, terminated the Concur Commerce Network,
and separated its Concur Human Resources application suite into an independent
unit with its own strategic and operational focus.
As a result of this strategic decision, the Company recorded a $3.4 million
restructuring charge in the quarter ended June 30, 2000. Of the $3.4 million
restructuring charge, approximately $0.6 million remained as an accrued
liability at December 31, 2000.
The following is an analysis of the restructuring charge by category (in
thousands):
Amounts Paid or Accrued
Restructuring Charged Off as of Balance at
Charge in June December 31, December 31,
Description 2000 2000 2000
----------- ----- ---- ----
Severance and termination benefits $ 1,661 $ 1,387 $ 274
Write off of intangible and other assets 800 800 -
Abandoned facilities and equipment costs 328 299 29
Discontinued product marketing commitments 272 248 24
Other 346 114 232
------------ ------------- -------------
Total $ 3,407 $ 2,848 $ 559
============ ============= =============
As part of the new operating plan, the Company announced a workforce
reduction of 68 employees, which represented approximately 13 percent of the
Company's employee base and included employees from all areas of the Company. In
addition to the reduction in employee headcount, the Company also reduced its
utilization of contract labor. Approximately 84 percent of the costs associated
with the workforce reduction were paid or charged against the liability through
December 31, 2000. All of the 68 employees have been terminated.
Other expenses associated with the Company's new operating plan consist of
the writeoff of intangible assets relating to the Company's procurement
technology acquired in connection with its June 1998 acquisition of 7Software,
costs associated with the abandonment of facilities, including lease costs, and
equipment due to its workforce reduction, and estimated costs to terminate
product marketing programs resulting from the Company's decision to discontinue
Concur Procurement(TM). All remaining costs accrued at December 31, 2000, are
expected to be paid by the end of June 2001.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NET LOSS PER SHARE, STOCK OPTIONS AND WARRANTS
Basic and diluted net loss per common share is calculated by dividing the net
loss by the weighted average number of shares outstanding.
At December 31, 2000, there were warrants outstanding to purchase 6,650,000
shares of common stock and options outstanding to purchase 8,886,179 shares of
common stock. Of these warrants, 1,400,000 are exercisable at prices ranging
from $50.625 and $85.00 per share, with a weighted average exercise price of
$67.81 per share. The remaining warrants for 5,250,000 shares will become
exercisable if resellers of the Company's products, including SAFECO and Nortel,
achieve certain annual revenue milestones over the next five years, at a price
determined to be the greater of $30.26 per share or fifty percent of the common
stock price on the prescribed dates.
All options and warrants were excluded from the computation of diluted
earnings per share because their effect was anti-dilutive on earnings per share.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which we believe
is relevant to an assessment and understanding of our results of operations and
financial condition. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Special Note Regarding Forward-Looking Statements
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 regarding our plans,
objectives, expectations, intentions, future financial performance, future
financial condition, and other statements that are not historical facts. You
can identify these statements by our use of the future tense, or by forward-
looking words such as "may," "will," "expect," "anticipate," "believe,"
"intend," "estimate," "continue," and other similar words and phrases. Reliance
should not be placed on these forward-looking statements because they involve
substantial risks and uncertainties. Examples of such risks and uncertainties
are described in this report and in our other filings with the Securities and
Exchange Commission. You should be aware that the occurrence of any of these
risks and uncertainties may cause our actual results to differ materially from
those anticipated in our forward-looking statements, which could have a material
and adverse effect on our business, results of operations, and financial
condition. All forward-looking statements included in this document are based on
information available to us on the date of this document. We assume no
obligation or duty to update any such forward-looking statements.
Overview
Concur Technologies, Inc. is a leading provider of Corporate Expense
Management software and services that automate costly and inefficient business
processes, allowing companies to leverage their most limited resources: time,
money, knowledge, and energy. Our software products include Concur Expense(TM)
for travel and entertainment expense management, Concur Payment(TM) for employee
requests for vendor payments, Concur Time(TM) for time tracking and reporting,
and Concur Human Resources(TM) for human resources self-service. These software
products are designed to meet the needs of businesses of all sizes through
license and application service provider ("ASP") models. Since 1996, more than
650 companies, representing approximately 3.2 million employees, have selected
our software and services to reduce their costs and increase their productivity
and access to data about their internal business processes.
We sell our software and services through our direct sales organization and
through indirect channels. We also have developed a number of strategic
relationships. Currently, one of our most significant reseller arrangements is
with ADP, Inc., a subsidiary of Automatic Data Processing, Inc., a global
payroll solutions and computing services provider. ADP has agreed to resell and
jointly market our ASP solutions for travel and entertainment expense management
to ADP's existing customers and potential new customers.
We were incorporated in 1993 and commenced operations in fiscal 1994,
initially developing QuickXpense, a retail, shrink-wrapped application that
automated travel and entertainment expense reporting for individuals. We 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 travel and entertainment expense reporting
process, including back-office processing and integration to financial systems,
we significantly expanded our product development efforts and released Concur
Expense, a client-server based enterprise travel and entertainment expense
management solution in July 1996. In March 1998, we shipped an intranet-based
version of Concur Expense. Since its release, the intranet-based version has
accounted for a majority of Concur Expense license revenues.
On June 30, 1998, we acquired 7Software, Inc., a privately held software
company and the developer of Concur Procurement. 7Software was incorporated in
May 1997. 7Software was selling the initial version of its product through a
single sales representative at the time of the acquisition. After our
acquisition we continued to sell Concur Procurement until we announced on June
8, 2000 that we had discontinued offering it for sale as part of our new
operating plan.
9
On June 1, 1999, we acquired Seeker Software, Inc., a privately held
software company and developer of Concur Human Resources. The transaction was
accounted for as a pooling of interests. These consolidated financial statements
have been prepared to reflect the restatement of all periods presented to
include the accounts of Seeker Software. The historical results of the pooled
entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. Upon our acquisition of Seeker Software, we intended to integrate Concur
Human Resources with Concur Expense and Concur Procurement as a suite of
software solutions through a common user interface, known as Concur eWorkplace.
On June 8, 2000, after carefully studying the cost of this integration effort
and its related benefits, we announced that we would not integrate these
products into a single product suite, leaving Concur Human Resources as a
separate product offering.
In October 1999, we began offering Concur Expense and Concur Procurement
under an Application Service Provider ("ASP") model, principally for small and
mid- size companies. Our ASP model requires limited IT infrastructure and
limited IT support. In December 1999, we introduced an ASP offering for large
companies that want a configured solution offered on an outsourced basis with
limited IT infrastructure and support requirements.
On June 8, 2000, we announced a new operating plan, under which we
discontinued Concur Procurement and discontinued the planned integration of
Concur Human Resources with our other Corporate Expense Management solutions as
a suite of solutions through a common user interface. Additionally, we
announced a workforce reduction of 68 employees to bring our cost structure in
line with our new operating plan. The primary goals of our new operating plan
are to focus on Corporate Expense Management solutions and to focus on
generating positive cash flow and profits.
10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Certain Financial Data
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, 2000 and 1999, are not necessarily indicative of the results that
may be expected for any future period.
Three Months Ended
December 31,
---------------------------
2000 1999
--------- ---------
Revenues, net:
License 37.3% 45.7%
ASP 7.0 1.0
Service 55.7 53.3
--------- ---------
Total revenues 100.0 100.0
Cost of revenues:
License 1.1 2.5
ASP 17.5 4.0
Service 37.2 61.6
--------- ---------
Total cost of revenues 55.8 68.1
--------- ---------
Gross profit 44.2 31.9
Operating expenses:
Sales and marketing 70.0 100.9
Research and development 50.0 95.8
General and administrative 30.4 38.6
--------- ---------
Total operating expenses 150.4 235.3
--------- ---------
Loss from operations (106.2) (203.4)
Interest income 7.7 15.5
Interest expense (2.4) (3.4)
Other expense, net (0.1) (1.1)
--------- ---------
Net loss (101.0)% (192.4)%
========= =========
Revenue Recognition
Commencing with fiscal 1999, we recognize revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition," or SOP 97-2 and Statement of Position 98-9,
which amended certain provisions of SOP 97-2. Software license revenues are
recognized when a non-cancelable license agreement is signed with a customer,
the software is delivered, no significant post delivery vendor obligations
remain and collection is deemed probable. These standards generally require
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. 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 related
maintenance contract. Revenues relating to consulting and training services
provided to customers are generally recognized as such services are performed.
Revenues resulting from ASP services are recognized over the expected life of
the relationship; customer advances and billed amounts due from customer in
excess of recognizable revenue are recorded as deferred revenue. If evidence of
the fair value for any undelivered elements of the arrangement does not exist,
all revenues from the arrangement are deferred until such evidence exists or
until all elements for which there is not evidence of fair value are delivered.
In addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements ("SAB 101"). Concur
is required to adopt the provisions of SAB 101 in the fourth quarter of Fiscal
2001. The Company has reviewed the requirements of SAB 101 and believes its
11
policies on revenue recognition and related costs of those revenues are in
compliance with this new standard. Further implementation guidelines regarding
revenue recognition and changes in interpretations of such guidelines could lead
to unanticipated changes in our current revenue accounting practices that could
affect our future revenues and earnings.
Revenues
Quarters Ended December 31,
(dollars in thousands) 2000 1999 Change
---- ---- ------
License $ 3,875 $4,118 (5.9%)
ASP 732 90 713.3%
Service 5,796 4,799 20.8%
------- ------
Total revenues $10,403 $9,007 15.5%
======= ======
We market our software and services primarily through our direct sales
organization in the United States and the United Kingdom. Revenues from licenses
and services to customers outside the United States were $959,000 and $654,000
for the quarters ended December 31, 2000, and 1999, 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 our
operating results.
License Revenues. License revenues consist of license fees for software.
The dollar decrease in license revenues for the quarter ended December 31, 2000
from that ended December 31, 1999, is primarily the result of our June 8, 2000
decision to discontinue the sale of Concur Procurement and to discontinue our
planned integration of Concur Human Resources with our other Corporate Expense
Management solutions as a product suite. During the quarter ended December 31,
1999, we emphasized the marketing and selling of Concur's suite of products
which included Concur Procurement. The quarter ended December 31, 2000 did not
include any such sales.
ASP Revenues. ASP revenues consist of monthly usage fees as well as the
amortization of setup and consulting fees, which are deferred and amortized over
the expected life of the relationship. We have experienced an increased demand
for our ASP solutions since launching these product offerings during the quarter
ended December 31, 1999.
Service Revenues. Service revenues consist of consulting service fees,
customer support fees, and training fees. Service revenues represented 55.7% and
53.3% of total revenues for the periods ended December 31, 2000 and 1999,
respectively. The dollar increase in service revenues, and the increase in
service revenues as a percentage of total revenues, for the quarter ended
December 31, 2000 as compared to the quarter ended December 31, 1999, reflect
increased consulting services associated with sales, upgrades, and enhancements
of Concur Expense and, to a lesser degree, Concur Human Resources. This growth
also reflects increased revenues related to customer support contracts entered
into in the current and prior periods. Customer support fees are typically
billed annually and amortized over the period of the contract. The majority of
our license customers choose a customer support contract.
Cost of Revenues
Quarters Ended December 31,
(dollars in thousands) 2000 1999 Change
---- ---- -------
License $ 117 $ 228 (48.7%)
Percentage of license revenue 3.0% 5.5%
ASP 1,819 356 411.0%
Percentage of ASP revenue 248.5% 395.6%
Service 3,873 5,549 (30.2%)
Percentage of service revenue 66.8% 115.6%
Total cost of revenues $5,809 $6,133 (5.3%)
Percentage of total revenues 55.8% 68.1%
Cost of License Revenues. Cost of license revenues consist mainly of
royalties for sub-licensing third-party software, and, to a lesser extent, the
costs of manuals, media, and duplication for our licensed products. The dollar
and percentage decreases in cost of license revenues during the quarter ended
December 31, 2000 from the quarter
12
ended December 31, 1999 was due primarily to the inclusion of amortization of
purchased technology in the earlier quarter. To a lesser extent, the dollar and
percentage decreases were due to a decrease in the volume of manuals, media, and
duplication efforts. We expect that the cost of license revenues will continue
to fluctuate modestly in relation to changes in the overall demand for our
license products.
Cost of ASP Revenues. Cost of ASP revenues includes the cost of our ASP
operations, which primarily consist of salaries, contract labor, server costs
and housing fees, telecommunication charges, amortization of deferred set-up
costs, and reseller fees. The cost of ASP revenues for the period ended
December 31, 2000 increased significantly from the same period in the prior year
as the result of the significant increase in demand for our ASP solutions. This
increased demand is a result of the growing market acceptance of our ASP
solutions as well as, and to a lesser degree, sales through our reseller
relationship with ADP, who has agreed to resell and jointly market our ASP
solutions. We expect that the dollar cost of ASP revenues will increase in the
future depending in part on the demand for our current software products and ASP
solutions.
Cost of Service Revenues. Cost of service revenues consist mainly of the
salaries, non-reimbursable expenses, and other operating costs of employees who
provide consulting services, technical support, and product training. The
dollar decrease in cost of service revenues for the quarter ended December 31,
2000, compared to the same period in the prior year, was primarily due to the
decrease in professional service personnel. This decrease in the number of
professional service personnel is primarily related to the June 8, 2000
restructuring and the discontinuation of Concur Procurement. It was possible
for our service revenues to increase while our cost of service revenues
decreased based upon improved utilization of our service personnel. Cost of
service revenues as a percentage of service revenues may vary between periods
due to changes in the level and mix of services provided by us or by our
partners.
Operating Expenses
Quarters Ended December 31,
(dollars in thousands) 2000 1999 Change
---- ---- ------
Sales and marketing $ 7,280 $ 9,088 (19.9%)
Percentage of total revenues 70.0% 100.9%
Research and development 5,200 8,634 (39.8%)
Percentage of total revenues 50.0% 95.9%
General and administrative 3,165 3,475 (8.9%)
Percentage of total revenues 30.4% 38.6%
Total operating expenses $15,645 $21,197 (26.2%)
Percentage of total revenues 150.4% 235.3%
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel, and facility costs for our sales and
marketing personnel and, to a lesser extent, advertising, trade shows and other
promotional activities. The dollar and percentage decrease in the quarter ended
December 31, 2000 as compared to the same quarter of the prior year, were
primarily due to an decrease in payroll and related expenses, commissions,
travel costs, and recruiting expenses. The decrease in these expenses was the
result of the implementation of our new operating plan and the decision to
discontinue the sales of Concur Procurement. To a lesser extent, the decrease
was also a result of decreased spending in advertising and related costs. We
expect our sales and marketing expenses to change more modestly in relation to
fluctuations in the sales of our products.
Research and Development. Research and development expenses include
salaries and contract labor for software development, facility costs, and
expenses associated with computer software and hardware used in our software
development. The decrease in the quarter ended December 31, 2000, compared to
that of the same quarter in the prior year, was primarily related to a decrease
in the number of employees and outside contractors employed in software
engineering, program management, and quality assurance to support our product
lines and ongoing product development. The primary reason for this decrease in
personnel is related to our decision to discontinue Concur Procurement and to
discontinue our planned integration of Concur Human Resources with our other
Corporate Expense Management solutions as a product suite. In the development of
our new products and enhancements of existing products, the technological
feasibility of the software is not established until substantially all product
development is complete. Historically, software development costs eligible for
capitalization have been insignificant, and all costs related to internal
research and development have been expensed as incurred.
13
General and Administrative. General and administrative expenses include
costs associated with finance, accounting, investor relations, human resources,
legal, administration, and facilities. The slight decrease in these costs in the
quarter ended December 31, 2000 as compared to that of the same quarter in the
prior year was primarily due to a decrease in the amount incurred for contract
labor, and to a lesser degree, a decrease in certain facilities costs as well as
a decrease in amortization of deferred stock compensation based on the
termination of employment with certain employees. These decreases were partially
offset by an increase in the provision for bad debts resulting from collection
difficulties with certain customers.
Interest Income and Interest Expense
Quarters Ended December 31,
(dollars in thousands) 2000 1999 Change
----- ------ ------
Interest income $ 799 $1,397 (42.8%)
Interest expense 245 304 (194.1%)
Interest Income and Interest Expense. The decrease in interest income for the
quarter ended December 31, 2000, compared to the quarter ended December 31,
1999, was due to the decrease in cash equivalents and marketable securities as
we continue to fund our operations with working capital. The decrease in
interest expense for the quarter ended December 31, 2000 compared to the quarter
ended December 31, 1999 was primarily due to lower outstanding interest-bearing
obligations related to bank borrowings and capital lease obligations.
Provision for Income Taxes. No provision for federal and state income taxes
has been recorded because we have experienced net losses since inception that
have 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.
Financial Condition
Our total assets were $68.5 million and $81.7 million at December 31, 2000 and
September 30, 2000, respectively, representing a decrease of $13.2 million, or
16.2%. This decrease was primarily due to the use of cash in our operations. As
of December 31, 2000, we had $44.9 million of cash and cash equivalents and
marketable securities, compared to $56.2 million at September 30, 2000,
representing a decrease of $11.3 million, or 20.1%.
Our accounts receivable balance, net of allowance for doubtful accounts, was
$10.0 million and $11.3 million at December 31, 2000 and September 30, 2000,
respectively, representing a decrease of $1.3 million, or 11.6%. This decrease
was principally a result of collected balances on large, outstanding invoices
and to a lesser degree, increased reserves based upon known collection
difficulties with certain customers. Days' sales outstanding ("DSO") in accounts
receivable was 88 days and 104 days for the quarters ended December 31, 2000 and
September 30, 2000, respectively. We expect that DSO will fluctuate
significantly in future quarters, and may even increase. Deposits and other
assets were $1.0 million and $1.1 million at December 31, 2000 and September 30,
2000, respectively. Deposits and other assets decreased primarily due to
amortization of intangibles.
Our total current liabilities were $20.3 million and $22.6 million as of
December 31, 2000 and September 30, 2000, respectively, representing a decrease
of $2.4 million, or 10.4%. This decrease consists primarily of a decrease in
accounts payable, accrued liabilities, and accrued commissions. The decrease in
accounts payable was primarily due to a reduction in trade payables, while the
decrease in accrued liabilities reflects charges against, and therefore
decreases in, accrued restructuring charges and the sales return reserve.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through sales of
equity securities and, to a lesser degree, through the use of long-term debt,
notes payable to stockholders, and equipment leases. Our sources of liquidity
as of December 31, 2000 consisted principally of cash, cash equivalents, and
marketable securities, all totaling $44.9 million.
14
Net cash used in operating activities was $9.2 million and $22.3 million
during the quarters ended December 31, 2000 and December 31, 1999, respectively.
For both periods, net cash used by operating activities was primarily a result
of funding ongoing operations.
Our investing activities have consisted primarily of purchases of property
and equipment, and purchase and related maturity of marketable securities.
Property and equipment acquisitions, including those acquired under capital
leases, totaled $870,000 and $4.4 million during the quarters ended December 31,
2000 and December 31, 1999, respectively.
Our financing activities used $1.2 million and $66,000 in the quarters
ending December 31, 2000 and December 31, 1999, respectively. The net usage of
cash in financing activities was primarily the result of payments made on
existing loans and capital leases offset by the issuance of common stock in
connection with our Employee Stock Purchase Plan.
In September 1997, we entered into a $1.0 million senior term loan facility
pursuant to the terms of a security and loan agreement. In April 1998, the
senior term loan facility 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 were interest only
through February 15, 1999, at which time we started to pay off the facility in
24 equal monthly principal payments plus interest. The loan agreement contains
certain financial restrictions and covenants, with which we are currently in
compliance. As of December 31, 2000, the outstanding indebtedness under the loan
agreement was $250,000.
In July 1997, we entered into a subordinated loan and security agreement
with an equipment lessor in the principal amount of $1.5 million that bears
interest at an annual rate of 8.5%. In May 1998, this 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 we are currently in compliance. At December 31, 2000, the outstanding
indebtedness under the subordinated loan agreement was $1.9 million.
We also have an existing equipment line of credit with a bank, which is no
longer available for additional borrowings. Principal payments of approximately
$16,000, plus interest which accrues at the prime rate plus 0.75% are due
monthly through October 2001. At December 31, 2000, the outstanding indebtedness
under the equipment line of credit was $71,000.
In September 1998, we entered into an additional subordinated promissory
note agreement with an equipment lessor in the principal amount of $2.0 million.
The note bears interest at 11%, payments are due in monthly installments of
approximately $65,000 including interest, and the note matures in November 2001.
At December 31, 2000, the outstanding indebtedness under the subordinated loan
agreement was $683,000.
In June 2000, we announced a new operating plan that focuses the Company more
on the Corporate Expense Management market where we have our strongest
competencies. We believe that our existing cash, cash equivalents, and
marketable securities will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes and may seek to raise such additional funds
through private or public sales of securities, strategic relationships, bank
debt, financing under leasing arrangements, or other available means. If
additional funds are raised through the issuance of equity securities,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences, or privileges senior to those of the holders of our
common stock. There can be no assurance that additional financing will be
available on acceptable terms, or at all. If adequate funds are not available or
are not available on acceptable terms, we may be unable to develop or enhance
our products, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, financial condition, and operating results.
15
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We operate in a dynamic and rapidly changing business environment that
involves substantial risk and uncertainty. The following discussion addresses
some of the risks and uncertainties that could cause, or contribute to causing,
actual results to differ materially from expectations. Readers should pay
particular attention to the descriptions of risks and uncertainties described
below and in other sections of this report and our other filings with the
Securities and Exchange Commission.
Our Business is Difficult to Evaluate and We Have a History of Losses.
We are still in the early stages of our development and our business model is
unproven, so evaluating our business operations and our prospects is difficult.
We incorporated in 1993 and have incurred net losses in each quarter since then.
Our business model and operating plan have evolved over time and remain
unproven. Furthermore, we expect to devote substantial financial and other
resources to expanding our sales and marketing, research and development, and
professional services organizations. These investments may never produce a
profit. We incurred net losses totaling $75.7 million, $46.5 million, and $26.2
million in fiscal 2000, 1999, and 1998, respectively. As of December 31, 2000,
we had an accumulated deficit of $175.9 million. We expect to continue to incur
net losses for the foreseeable future.
We Rely Heavily On Sales of One Product.
Since 1997, we have generated substantially all of our revenues from licenses
and services related to our Concur Expense product. We believe that Concur
Expense revenues will continue to account for a large portion of our revenues
for the foreseeable future. Our future financial performance and revenue growth
will depend upon the successful development, introduction and customer
acceptance of new and enhanced versions of Concur Expense, Concur Time, Concur
Payment, Concur Human Resources, and other applications, and our business could
be harmed if we fail to deliver the enhancements to our current and future
products that customers want. There can be no assurance that our products and
services will achieve widespread market penetration or that we will derive
significant revenues or any profits from the sale of such products and services.
We Depend On Service Revenues to Increase Our Overall Revenues; Services May Not
Achieve Profitability.
Our service revenues have increased each year as a percentage of total
revenues. Service revenues represented 62.4%, 35.2%, and 34.5% of total revenues
for fiscal 2000, 1999, and 1998, respectively. We anticipate that service
revenues will continue to represent a significant percentage of total revenues.
The level of service revenues depends largely upon our consulting services and
ongoing renewals of customer support contracts by our growing installed customer
base. Our consulting revenues could decline if third-party organizations such as
systems integrators compete for the installation or servicing of our products.
In addition, our customer support contracts might not be renewed in the future.
Our ability to increase service revenues will depend in large part on our
ability to increase the scale of our services organization, including our
ability to recruit and train a sufficient number of qualified services
personnel. We formed our professional services organization in 1996. Since then,
we have not consistently achieved profitability with respect to these services.
Due to the increasing costs of operating a professional services organization,
we may not be able to attain profitability in this part of our business in the
near future, or ever.
Our Dependence On Software License Revenues Makes Our Operating Results
Difficult to Predict.
Our licensed software products, from which we derive a substantial percentage
of our revenues, are typically shipped when orders are received, so license
backlog at the beginning of any quarter in the past represented only a small
portion of that quarter's expected license revenues. This makes license revenues
in any quarter difficult to forecast because they depend on orders booked and
shipped in that quarter. Moreover, we have historically recognized a substantial
percentage of revenues in the last month of the quarter, frequently in the last
week or even the last days of the quarter, and we expect this trend to continue
for as long as our licensed software products represent a substantial part of
our overall business. Since our expenses are 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. We find it difficult to forecast quarterly license revenues
because our sales cycle, from initial evaluation to delivery of software, is
lengthy and varies substantially from customer to customer. If revenues fall
below our expectations in a particular quarter, our business could be harmed. In
the first three
16
quarters of fiscal 2000, our revenues did, in fact, fall below our own and
consensus securities analysts' estimates for those quarters and, as a result,
the price of our stock declined significantly during those periods. If our
revenues fall below our own estimates or below the consensus analysts' estimate
in an upcoming quarter, our stock price could decline further, harming our
business significantly in terms of, among other things, diminished employee
morale and public image. See "--We Are At Risk of Securities Class Action
Litigation Due to Our Stock Price Volatility."
Our Efforts to Offer Products Under an ASP Model May Fail.
In early fiscal 2000, we began to offer our software products under an
Internet-based ASP model to complement our traditional licencing of these
products. We offer our ASP offering on a subscription basis to companies seeking
to outsource their corporate expense management applications. This business
model is unproven and represents a significant departure from the strategies we
and other enterprise software vendors have traditionally employed. We have no
experience selling products or services under an ASP model, and our efforts to
develop this ASP business have diverted, and we expect will continue to divert,
our financial resources and management time and attention away from other
aspects of our business. In connection with our ASP business, we have engaged
third-party service providers to perform many of the necessary services as
independent contractors, and we are and will be responsible for monitoring their
performance. We have limited experience outsourcing services or other important
business functions in the past, and independent contractors may not perform
those services adequately. If any service provider delivers inadequate support
or service to our customers, our reputation could be harmed. We also plan to use
resellers to market our ASP offering. We have limited experience utilizing
resellers and we may not be successful in this effort. Even if our strategy of
offering products to customers over the Internet proves successful, some of
those Internet customers may be ones that otherwise might have bought our
software and services through our traditional licensing arrangements. Any such
shift in potential license revenues to the ASP model, which is unproven and
potentially less profitable, could harm our business.
Security and Other Concerns May Discourage Customers From Purchasing Under Our
ASP Model.
If customers determine that our ASP offering is not scalable, does not
provide adequate security for the dissemination of information over the
Internet, or is otherwise inadequate for Internet-based use, or if for any other
reason customers fail to accept our ASP products for use on the Internet or on a
subscription basis, our business will be harmed. As an ASP provider, we expect
to receive confidential information, including credit card, travel booking,
employee, purchasing, supplier, and other financial and accounting data, through
the Internet or extranets, and there can be no assurance that this information
will not be subject to computer break-ins, theft, and other improper activity
that could jeopardize the security of information for which we are responsible.
Any such lapse in security could expose us to litigation, loss of customers, or
other harm to our business. In addition, any person who is able to circumvent
our security measures could misappropriate proprietary or confidential customer
information or cause interruptions in our operations. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Further, a well-publicized compromise of security
could deter people from using the Internet to conduct transactions that involve
transmitting confidential information. Our failure to prevent security breaches,
or well-publicized security breaches affecting the Internet in general, could
significantly harm our business, operating results, and financial condition.
We Are At Risk of Securities Class Action Litigation Due to Our Stock Price
Volatility.
In the past, securities class action litigation has often been brought against
a company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation, either due to stock
price declines associated with our failure to meet consensus analysts' estimates
for revenues or earnings for prior fiscal periods or due to future volatility in
our stock price. This litigation could result in substantial costs and divert
management's attention and resources.
We Have Been Public for Only a Short Time and Our Stock Price has been Volatile.
We completed our initial public offering in December 1998. Since then, the
market price of our common stock has been highly volatile and subject to wide
fluctuations. We expect our stock price to continue to fluctuate:
. in response to quarterly fluctuations in our operating results;
17
. in reaction to announcements of technological innovations, new products,
or significant agreements by us or our competitors;
. in reaction to changes in prices of our products or the products of our
competitors;
. because of market conditions in our industry;
. in reaction to changes in financial estimates by securities analysts,
and our failure to meet or exceed the expectations of analysts or
investors; and
. as a result of the active trading of our stock by online day traders.
See also "--Our Dependence on Software License Revenues Makes Our Operating
Results Difficult to Predict."
We Face Significant Competition.
The market for our products is intensely competitive and rapidly changing.
Direct competition comes from other providers of travel and entertainment
expense management, human resources self-service software, and from providers of
ERP software that have developed or may be developing travel and entertainment
expense management software or human resources self-service software. Many of
our competitors have longer operating histories, significantly greater
financial, technical, marketing, and other resources, significantly greater name
recognition, and a larger installed base of customers than we do. Some of our
competitors, particularly major ERP vendors, have well-established relationships
with our current and potential customers as well as with systems integrators and
other vendors and service providers. These competitors may also be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion, and
sale of their products, than us. In addition, we anticipate the entrance of new
competitors in the future. An increase in competition could result in price
reductions and loss of market share and could have a material adverse effect on
our business, financial condition, and results of operations. We also face
indirect competition from potential customers' internal development efforts and
have to overcome their reluctance to move away from existing paper-based
systems.
Our Efforts to Manage Changing Business Conditions May Fail.
Our future operating results will depend, in part, on our ability to manage
changing business conditions. If we are unable to do so effectively, our
business, financial condition, and results of operations could be materially and
adversely affected. Our ability to manage changing business conditions depends,
in part, on our ability to attract, train, and retain a sufficient number of
qualified personnel to meet our ongoing needs. This may be particularly
difficult for us because we implemented a workforce reduction of approximately
68 employees in the third quarter of fiscal 2000. This reduction could impair
our ability to attract, train, and retain qualified personnel and may increase
our recruiting and training costs. There can be no assurance that we will be
successful in attracting, training, and retaining the required number of
qualified personnel to support our business in the future. Failure to manage our
operations with reduced staffing levels may strain our management, financial,
and other resources, and could have a material adverse effect on our business,
financial condition, and results of operations.
We May Require Additional Financing to Fund Our Operations.
Our need for additional financing will depend upon a number of factors, such
as the commercial success of our existing products and services, the timing and
success of any new products and services, the progress of our research and
development efforts, our results of operations, the status of competitive
products and services, and the timing and success of potential strategic
alliances or potential opportunities to acquire or sell technologies or assets.
In addition, since our incorporation in 1993, we have experienced uneven cash
flow and operating results and significant operating losses. If we experience
delays in our progress toward reducing losses and achieving profitability, or if
we require working capital beyond currently expected needs, we may be required
to seek additional financing or curtail operations. For example, economic and
financial market conditions may discourage potential investors. There can be no
assurance that additional financing will be available on acceptable terms, or at
all. Our failure to obtain such additional financing, if needed, could have a
material adverse effect on our business, financial condition, and results of
operations.
18
Our Lengthy Sales Cycle Could Adversely Affect Our Revenue Growth.
Because of the high costs involved, customers for enterprise software
products typically commit significant resources to an evaluation of available
software applications and require us to expend substantial time, effort, and
money educating them about the value of our products and services. Our sales
cycle, which is the time between initial contact with a potential customer and
the ultimate sale, typically ranges between three and twelve months, with the
cycle for some transactions exceeding fifteen months. As a result of our lengthy
sales cycle, we have only a limited ability to forecast the timing and size of
specific sales. In addition, customers may delay their purchases from a given
quarter to another as they elect to wait for new product enhancements. Any delay
in completing, or failure to complete, sales in a particular quarter or fiscal
year could harm our business and could cause our operating results to vary
significantly. See "--Our Dependence On Software License Revenues Makes Our
Operating Results Difficult to Predict."
We Depend Primarily On Direct Sales.
We sell our products primarily through our direct sales force. We believe
that there is significant competition for direct sales personnel with the
advanced sales skills and technical knowledge we need. Our inability to hire
competent sales personnel, or our failure to retain them, would harm our
business. In addition, by relying primarily on a direct sales model, we may miss
sales opportunities that might be available through other sales channels, such
as domestic and international resellers. In the future, we intend to continue
developing indirect distribution channels through third-party distribution
arrangements, but we may not be successful in establishing those arrangements,
or they may not increase revenues. Furthermore, we plan to continue using
resellers to market our ASP products in particular. We have limited experience
utilizing resellers to date. The failure to expand indirect channels may place
us at a competitive disadvantage.
We Have Limited Experience With Large-Scale Deployment of Our Products.
Only a limited number of large enterprise customers have deployed our
products. We think that the ability of large customers to roll out our products
across large numbers of users is critical to our success. Similarly, because
only a limited number of customers are using the ASP product offerings, we do
not have assurance that our ASP product offerings would be able to support a
large volume of users or transactions. If our customers cannot successfully
implement large-scale deployments, or they determine that our products cannot
accommodate large-scale deployments, our business would be harmed.
Our Products Might Not be Compatible With All Major Platforms, Which Could
Inhibit Sales.
We must continually modify and enhance our products to keep pace with changes
in hardware and software platforms, database technology, and electronic commerce
technical standards. As a result, uncertainties related to the timing and nature
of new product announcements or introductions, or modifications by vendors of
operating systems, back-office applications, and browsers and other Internet-
related applications, could hurt our business. In addition, our products are not
currently based upon the Java programming language, an increasingly widely-used
language for developing Internet applications. Accordingly, certain features
available to products written in Java may not be available in our products, and
this could result in reduced customer demand.
We Rely on Third-Party Software That May Be Difficult to Replace.
Some of the software we license from third parties would be difficult to
replace. In particular, we license technology from third parties in order to
offer some of our software products. This software may not continue to be
available on commercially reasonable terms, if at all. The loss or inability to
maintain any of these technology licenses could result in delays in the sale of
our products and services until equivalent technology, if available, is
identified, licensed, and integrated, which could harm our business.
It Is Important for Us to Establish and Maintain Strategic Relationships.
To offer products and services to a larger customer base than we can reach
through direct sales, telesales, and internal marketing efforts, we depend on
strategic referral relationships and reseller relationships. If we were unable
19
to maintain our existing strategic referral relationships or enter into
additional strategic referral or reseller relationships, we would have to devote
substantially more resources to the distribution, sales, and marketing of our
products and services. Our success depends in part on the ultimate success of
our strategic referral and reseller partners and their ability to market our
products and services successfully. Our existing strategic referral partners
are not obligated to refer any potential customers to us. In addition, some of
these third parties have entered, and may continue to enter, into strategic
relationships with our competitors. Further, many of our strategic partners
have multiple strategic relationships, and they may not regard us as significant
for their businesses. Our strategic partners may terminate their respective
relationships with us, pursue other partnerships or relationships, or attempt to
develop or acquire products or services that compete with our products or
services. Our strategic partners also may interfere with our ability to enter
into other desirable strategic relationships.
We May Experience Difficulties in Introducing New Products and Enhancements to
Existing Products.
Our future financial performance and revenue growth will depend, in part,
upon the successful development, introduction, and customer acceptance of new
and enhanced versions of Concur Expense, Concur Human Resources, and other
applications, and our business could be harmed if we fail to deliver
enhancements to our current and future products that customers desire. We have
experienced delays in the planned release dates of our software products and
upgrades, and we have discovered software defects in new releases after their
introduction. New product versions or upgrades may not be released according to
schedule, or may contain defects when released. Either situation could result in
adverse publicity, loss of sales, delay in market acceptance of our products, or
customer claims against us, any of which could harm our business. If we do not
deliver new product versions, upgrades, or other enhancements to existing
products on a timely and cost-effective basis, our business will be harmed.
We are also continually seeking to develop new product offerings. However, we
remain subject to all of the risks inherent in product development, including
unanticipated technical or other development problems which could result in
material delays in product introduction and acceptance or significantly
increased costs. There can be no assurance that we will be able to successfully
develop new products, or to introduce in a timely manner and gain acceptance of
such new products in the marketplace.
We May Not Meet Our Expectations for the Seeker Software Acquisition.
In June 1999, we acquired Seeker Software, Inc., which was the developer of
our Concur Human Resources product offering. We may fail to achieve our
expectations for this product offering. In particular, we may encounter
substantial difficulties and financial risks with respect to this product
offering, such as:
. difficulties in improving or selling the Concur Human Resources
software;
. problems retaining the key technical and managerial personnel;
. additional operating losses and expenses;
. difficulties in maintaining relationships with existing customers,
business partners, and employees;
. competitors having more experience and better name recognition;
. the limited experience of sales and consulting personnel; and
. limited reference accounts for the Concur Human Resources software.
In addition, recent actions and comments from the Securities and Exchange
Commission have indicated that it is scrutinizing the application of the pooling
of interest method of accounting for business combinations. While we believe we
are in compliance with the rules and related guidance as they currently exist
for the Seeker Software acquisition, we can provide no assurance that the
Commission will not challenge our conclusions and ultimately seek to treat this
transaction under the purchase method of accounting for business combinations.
This could result in the restatement of financial statements requiring the
recording of goodwill and related amortization expense and as such could have a
material negative impact on our financial results for the periods subsequent to
the acquisition.
20
We Depend on Our Key Employees.
Our success depends on the performance of our senior management, particularly
S. Steven Singh, our Chief Executive Officer and Chairman of the Board, who is
not bound by an employment agreement. The loss of Mr. Singh's services could
cause us to lose potential customers, which would harm our business. If one or
more members of our senior management or any of our key employees were to
resign, particularly to join or form a competitor, the loss of that personnel
and any resulting loss of existing or potential customers to that competitor
would harm our business.
We Must Attract and Retain Qualified Personnel.
Our success depends in large part on our ability to continue to attract,
motivate, and retain highly qualified personnel. Competition for such personnel
is intense and there can be no assurance that we will be successful in
attracting, motivating, and retaining key personnel. Many of our competitors for
experienced personnel have greater financial and other resources than us. In
particular, we compete for personnel with Microsoft Corporation, which is
located in the same geographic area as our headquarters. We also compete for
personnel with other software vendors, including ERP vendors and consulting and
professional services companies. Further, we believe stock options are an
important component for motivating and retaining our key personnel. The
significant decline in our stock price during the past year has made stock
options previously granted with higher exercise prices less valuable to our
current employees and has consequently made it more difficult for us to retain
our key personnel. The inability to hire and retain qualified personnel or the
loss of the services of key personnel would harm our business.
Our Ability to Protect Our Intellectual Property is Limited and Our Products May
be Subject to Infringement Claims by Third-Parties.
We depend upon our proprietary technology. We rely primarily on a combination
of copyright and trademark laws, trade secrets, confidentiality procedures, and
contractual provisions to protect our proprietary information. We presently have
no patents or patent applications pending. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States, and we expect
that it will become more difficult to monitor use of our products as we increase
our international presence. There can be no assurance that our means of
protecting these proprietary rights will be adequate, nor that our competitors
will not independently develop similar technology. In addition, there can be no
assurance that third parties will not claim infringement by us with respect to
current or future products or other intellectual property rights. Any such
claims could have a material adverse effect on our business, results of
operations and financial condition.
There are Risks Associated with International Operations.
Our international operations are 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;
. uncertain regulation of electronic commerce;
. compliance with multiple, conflicting and changing governmental laws
and regulations;
. longer sales cycles;
. greater difficulty in collecting accounts receivable;
. import and export restrictions and tariffs;
21
. difficulties staffing and managing foreign operations;
. multiple conflicting tax laws and regulations; and
. political and economic instability.
Our international operations also face foreign currency-related risks. To
date, most of our revenues have been denominated in U.S. Dollars, but we believe
that an increasing portion of our revenues will be denominated in foreign
currencies. In particular, we expect that an increasing portion of our
international sales may be Euro-denominated. The Euro is still a relatively new
currency and may be subject to economic risks that are not currently
contemplated. We currently do not engage in foreign exchange hedging
activities, and therefore our international revenues and expenses are currently
subject to the risks of foreign currency fluctuations.
Revenues from customers outside the United States, primarily in the United
Kingdom, Canada and Australia represented approximately $3.3 million, $932,000,
and $810,000 in fiscal 2000, 1999, and 1998, respectively. A key component of
our business strategy is to expand our sales and support operations
internationally. As of December 31, 2000, we employed 9 sales professionals in
the United Kingdom and Australia. We intend to expand our international sales
and marketing activities and enter into relationships with additional
international distribution partners. We are in the early stages of developing
our indirect distribution channels in markets outside the United States. We may
not be able to attract distribution partners that will be able to market our
products effectively.
We must also customize our products for local markets. For example, our
ability to expand into the European market will depend on our ability to develop
a travel and entertainment expense management solution (as well as human
resources self-service solutions) that incorporates the tax laws and accounting
practices followed in Germany and other European countries, and to develop
applications that support the Euro. Further, if we establish significant
operations overseas, we may incur costs that would be difficult to reduce
quickly because of employee practices in those countries.
Our Revenue Recognition Policy May Change and Affect Our Earnings.
We recognize revenues from sales of software licenses when we sign a non-
cancelable license agreement with a customer, the software is delivered, no
significant post-delivery vendor obligations remain and collection is deemed
probable. We recognize customer support revenues ratably over the contract term
(which is typically one year) and recognize revenues for consulting and training
services as such services are performed. We believe our current revenue
recognition policies and practices are consistent with applicable accounting
standards. However, current software revenue recognition accounting standards,
and accounting guidance with respect to such standards, are subject to change.
Such changes could lead to unanticipated changes in our current revenue
accounting practices, and such changes could significantly reduce our future
revenues and earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Our Effort to Offer Products Under an
ASP Model May Fail."
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our operating results are sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our cash equivalents are
invested in short-term debt instruments while certain portions of our
outstanding long-term debt bear interest at variable rates. Based on our
marketable securities portfolio and interest rates at September 30, 1999, a one
percent increase or decrease in interest rates would result in a decrease or
increase of approximately $100,000, respectively, in the fair value of the
marketable securities portfolio. Changes in interest rates may affect the fair
value of the marketable securities portfolio; however, such gains or losses
would not be realized unless the investments are sold.
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PART II. OTHER INFORMATION
None.
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 14, 2001 CONCUR TECHNOLOGIES, INC.
By /s/ JOHN F. ADAIR
------------------------------
John F. Adair
Chief Financial Officer
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