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 March 31, 2001 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 April 30, 2001, there were 25,532,267 shares of the Registrant's
Common Stock outstanding.
CONCUR TECHNOLOGIES, INC.
FORM 10-Q
MARCH 31, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS...................................................... 3
Consolidated Balance Sheets as of March 31, 2001 and September 30, 2000.................... 3
Consolidated Statements of Operations for the three and six months ended March 31, 2001
and 2000................................................................................... 4
Consolidated Statements of Cash Flows for the six months ended March 31, 2001 and
2000....................................................................................... 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
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 24
ITEM 6. Exhibits and Report on Form 8-K........................................................ 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Concur Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, September 30,
---------------- ------------------
2001 2000
---------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 20,940 $ 12,224
Marketable securities 17,862 44,018
Accounts receivable, net of allowance for doubtful accounts
of $1,710 at March 31, 2001 and $973 at September 30, 2000,
respectively 6,963 11,317
Prepaid expenses and other current assets 1,697 2,338
Notes receivable from stockholders 167 167
------------- -------------
Total current assets 47,629 70,064
Equipment and furniture, net 8,936 10,469
Deposits and other assets 779 1,135
------------- -------------
Total assets $ 57,344 $ 81,668
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,589 $ 2,230
Accrued payroll and benefits 4,105 3,913
Accrued restructuring costs 1,053 1,025
Sales return reserve 625 1,326
Other accrued liabilities 4,608 3,284
Accrued commissions 862 1,317
Payable to shareholders 315 315
Current portion of long-term debt 1,841 2,942
Current portion of capital lease obligations 1,738 2,356
Deferred revenues 4,444 3,905
------------- -------------
Total current liabilities 21,180 22,613
Long-term debt, net of current portion 201 927
Capital lease obligations, net of current portion 325 959
Deferred rent expense 139 156
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 - 25,517,320 and 25,088,081
at March 31, 2001 and September 30, 2000, respectively 223,014 222,577
Deferred stock compensation (89) (179)
Accumulated deficit (187,426) (165,385)
------------- -------------
Total shareholders' equity 35,499 57,013
------------- -------------
Total liabilities and shareholders' equity $ 57,344 $ 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 Six Months Ended
March 31, March 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues, net:
License $ 2,663 $ 5,991 $ 6,538 $ 10,109
ASP 980 184 1,712 274
Service 5,380 4,661 11,176 9,460
------------- ------------- ------------- -------------
Total revenues 9,023 10,836 19,426 19,843
Cost of revenues:
License 195 289 312 517
ASP 2,097 776 3,916 1,132
Service 3,632 5,878 7,505 11,427
------------- ------------- ------------- -------------
Total cost of revenues 5,924 6,943 11,733 13,076
------------- ------------- ------------- -------------
Gross profit 3,099 3,893 7,693 6,767
Operating expenses:
Sales and marketing 6,461 10,610 13,741 19,698
Research and development 5,074 9,718 10,273 18,352
General and administrative 3,092 3,493 6,257 6,968
Restructuring and other charges 338 - 338 -
------------- ------------- ------------- -------------
Total operating expenses 14,965 23,821 30,609 45,018
------------- ------------- ------------- -------------
Loss from operations (11,866) (19,928) (22,916) (38,251)
Interest income 574 1,069 1,373 2,466
Interest expense (219) (436) (464) (740)
Other expense, net (23) (19) (34) (119)
------------- ------------- ------------- -------------
Net loss $ (11,534) $ (19,314) $ (22,041) $ (36,644)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.45) $(0.83) $(0.87) $(1.59)
============= ============= ============= =============
Shares used in calculation of basic and
diluted net loss per share 25,499 23,204 25,385 23,024
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
Concur Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
March 31,
------------------------------
2001 2000
------------ ------------
Operating activities
Net loss $ (22,041) $ (36,644)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquired in-process technology - 160
Amortization of deferred stock compensation 90 535
Depreciation 3,305 2,346
Provision for bad debts 880 319
Restructuring charge (635) -
Changes in operating assets and liabilities:
Accounts receivable 3,146 (2,684)
Prepaid expenses, deposits, and other assets 873 (645)
Accounts payable (641) (2,614)
Accrued liabilities and accrued commissions 1 (4,339)
Deferred revenues 1,708 361
------------ ------------
Net cash used in operating activities (13,314) (43,205)
------------ ------------
Investing activities
Purchases of equipment and furniture (1,484) (5,691)
Purchase (sale) of marketable securities (13,344) 20,347
Maturity of marketable securities 39,500 -
------------ ------------
Net cash (used) provided by investing activities 24,672 14,656
------------ ------------
Financing activities
Proceeds from issuance of common stock from exercise of
stock options 25 311
Issuance of common stock in connection with Employee
Stock Purchase Plan 412 1,059
Issuance of common stock, net of offering costs - 34,915
Payments on borrowings (1,827) (1,917)
Payment on capital leases (1,252) (1,228)
------------ ------------
Net cash used by financing activities (2,642) 33,140
------------ ------------
Net increase (decrease) in cash and cash equivalents 8,716 4,591
Cash and cash equivalents at beginning of period 12,224 59,815
------------ ------------
Cash and cash equivalents at end of period $ 20,940 $ 64,406
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 435 $ 696
============ ============
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
March 31, 2001
(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 for travel and entertainment expense management, Concur Payment
for employee requests for vendor payments, and Concur Time for time tracking and
reporting. 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 March 31, 2001, and for the three and six
months ended March 31, 2001 and 2000, 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 and six month periods ended March 31,
2001, 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, 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.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements as of March 31, 2001 and for the
three and six month periods ended March 31, 2001 and 2000, 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
In March 2001, the Company sold its Concur Human Resources product line to
MBH Solutions, Inc. ("MBH") to further its objective to focus its resources on
providing Corporate Expense Management solutions. The transaction consisted of
the sale of certain assets to, and the assumption of certain obligations by,
MBH. The Company received $100,000 on the closing of the transaction. In
addition, the Company will receive installment payments over three years
totaling $2.3 million. The gain related to these installment payments will be
recognized as the payments are received. This transaction resulted in a
workforce reduction of 42 employees, the majority of whom continued employment
with MBH.
As a result of this sale and related restructuring costs, the Company
recorded a net charge of $765,000 in the quarter ended March 31, 2001, the
accrued liability for which is expected to be paid or charged off by September
2001. The following is an analysis of the restructuring charge, net of gain on
sale, by category (in thousands):
Restructuring
Charge, net of
Description Gain on Sale
----------- --------------
Direct and incremental transaction fees $ 433
Gain on sale of assets to, net of obligations assumed by, MBH (178)
Facilities abandonment 341
Other 169
---------
Total $ 765
=========
Direct and incremental transaction fees include all professional fees paid
in relation to the transaction, such as legal, accounting, and consultancy
charges. The gain on sale of assets to, net of obligations assumed by, MBH
includes computer equipment and software, accounts receivable, prepaid assets
and deferred revenue on maintenance contracts, all of which were sold to or
assumed by MBH or disposed of as a result of the transaction. Of the net
restructuring charge, $140,000 was paid by March 31, 2001.
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. In connection with this decision, the Company designed a new
operating plan to reduce costs and bring expenses in line with this change in
the marketplace. Under the new
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating plan, the Company discontinued Concur Procurement(TM), its corporate
procurement application, terminated the Concur Commerce Network, and separated
its Concur Human Resources products group 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. During the quarter
ended March 31, 2001, the Company revised its estimates related to amounts
needed for severance and termination benefits, facilities, and product marketing
commitments, resulting in a reduction in the restructuring liability in the
amount of $427,000. The reduction in these estimated costs is shown as a
reduction in restructuring costs in the accompanying statement of operations.
Approximately $71,000 remained as an accrued liability at March 31, 2001, and is
expected to be paid or charged off by June 2001.
The following is an analysis of the restructuring charge by category (in
thousands):
Amounts Paid or
Restructuring Charged Off, and Accrued Balance
Charge in June Changes in at March 31,
Description 2000 Estimates 2001
- ----------- --------------- ------------------- ------------------
Severance and termination benefits $ 1,661 $ 1,651 $ 10
Write off of intangible and other assets 800 800 -
Abandoned facilities and equipment costs 328 328 -
Discontinued product marketing commitments 272 272 -
Other 346 285 61
--------- --------- --------
Total $ 3,407 $ 3,336 $ 71
========= ========= ========
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 March 31, 2001, there were outstanding warrants to purchase 5,950,000
shares of common stock and options outstanding to purchase 8,819,405 shares of
common stock. Of these warrants, 700,000 are exercisable at a price of $85.00
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 on earnings per share is anti-dilutive.
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 our
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, and future
financial condition. For example, we state our expectations about future
revenues, costs of doing business, financial condition and liquidity. 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. These forward-
looking statements involve risks and uncertainties, many of which are described
in this report and in our other filings with the SEC. 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 for
travel and entertainment expense management, Concur Payment for employee
requests for vendor payments, and Concur Time for time tracking and reporting.
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 725 companies, representing over 2 million licensed 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, two of our most significant reseller arrangements are
with ADP, Inc., a subsidiary of Automatic Data Processing, Inc., a global
payroll solutions and computing services provider, and Microsoft Great Plains
Solutions, a leading provider of business management solutions. ADP and
Microsoft Great Plains Solutions have agreed to resell and jointly market our
ASP solutions for travel and entertainment expense management directly or
indirectly to their 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.
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
9
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. On March 30, 2001, we sold our Concur Human Resources
product line to MBH Solutions, Inc. ("MBH").
In October 1999, we began offering Concur Expense under an ASP model,
principally for small and mid- size companies. Our ASP model requires limited IT
infrastructure and limited IT support by our customers. 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 by our customers.
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 objective of this operating plan is to focus
on providing Corporate Expense Management solutions and to focus on generating
positive cash flow and profitable growth.
On March 30, 2001, we signed an agreement with MBH, under which we sold our
Concur Human Resources product line. The transaction consisted of the sale of
certain assets to, and assumption of certain obligations by, MBH in exchange for
cash consideration to be paid in installments over time. This transaction
resulted in a workforce reduction of 42 employees, the majority of whom
continued employment with MBH. The primary objective of this sale was to
continue our focus on providing Corporate Expense Management solutions, in
keeping with our new operating plan.
10
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
Selected Financial Data
The following table sets forth selected 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 and six months
ended March 31, 2001 and 2000, are not necessarily indicative of the results
that may be expected for any future period.
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- ------------- -------------- ---------------
Revenues, net:
License 29.5 % 55.3 % 33.7 % 50.9 %
ASP 10.9 1.7 8.8 1.4
Service 59.6 43.0 57.5 47.7
--------------- ------------- -------------- ---------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License 2.2 2.7 1.6 2.6
ASP 23.2 7.2 20.2 5.7
Service 40.3 54.2 38.6 57.6
--------------- ------------- -------------- ---------------
Total cost of revenues 65.7 64.1 60.4 65.9
--------------- ------------- -------------- ---------------
Gross profit 34.3 35.9 39.6 34.1
Operating expenses:
Sales and marketing 71.6 97.9 70.7 99.3
Research and development 56.2 89.7 52.9 92.5
General and administrative 34.2 32.2 32.2 35.1
Restructuring and other charges 3.8 - 1.7 -
--------------- ------------- -------------- ---------------
Total operating expenses 165.8 219.8 157.5 226.9
--------------- ------------- -------------- ---------------
Loss from operations (131.5) (183.9) (117.9) (192.8)
Interest income 6.4 9.9 7.1 12.4
Interest expense (2.4) (4.0) (2.4) (3.7)
Other expense, net (0.3) (0.2) (0.2) (0.6)
--------------- ------------- -------------- ---------------
Net loss (127.8)% (178.2)% (113.4)% (184.7)%
=============== ============= ============== ===============
Revenue Recognition
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
11
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 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
Three Months Ended March 31, Six Months Ended March 31,
(dollars in 2001 2000 Change 2001 2000 Change
thousands) ------ ------- -------- ------- ------- --------
License $ 2,663 $ 5,991 (55.5)% $ 6,538 $10,109 (35.3)%
ASP 980 184 432.6 % 1,712 274 524.8 %
Service 5,380 4,661 15.4 % 11,176 9,460 18.1 %
------- ------- ------- -------
Total revenues $ 9,023 $10,836 (16.7)% $19,426 $19,843 (2.1)%
======= ======= ======= =======
We market our software and services through our direct sales organization
in the United States and the United Kingdom, and through reseller arrangements
in the United States and in international markets. Revenues from licenses and
services to customers outside the United States were $1,075,000 and $971,000 for
the three months ended March 31, 2001 and 2000, respectively, and $2,034,000 and
$1,625,000 for the six months ended March 31, 2001 and 2000, 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 three and six months ended March
31, 2001 from the three and six months ended March 31, 2000, is primarily the
result of our June 2000 strategic decision to discontinue the sale of Concur
Procurement. This decrease in license revenues also reflects our focus on
Corporate Expense Management, rather than the sale of an integrated suite of
products. We expect license revenues to increase over at least the next several
quarterly periods.
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 a significant
increase in demand for our ASP solutions since launching these product offerings
during the quarter ended December 31, 1999. We expect ASP revenues to continue
to increase over at least the next several quarterly periods.
Service Revenues. Service revenues consist of consulting service fees,
customer support fees, and training fees. Customer support fees are typically
billed annually and amortized over the period of the contract. Service revenues
represented 59.6% and 43.0% of total revenues for the three months ended March
31, 2001 and 2000, respectively, and 57.5% and 47.7% for the six months ended
March 31, 2001 and 2000, respectively. The dollar increase in service revenues,
and the increase in service revenues as a percentage of total revenues, for the
three and six months ended March 31, 2001, as compared to the three and six
months ended March 31, 2000, reflect increasing demand for consulting services
associated with sales, upgrades, and enhancements of Concur Expense. This growth
also reflects increased revenues related to customer support contracts entered
into in the current and prior periods. Despite this growth, we expect service
revenues to decrease slightly in the third quarter of fiscal 2001 as a result of
the sale of the Concur Human Resources product line, and resume growth in the
following quarters.
12
Cost of Revenues
Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
-------- -------- -------- --------- --------- ---------
License $ 195 $ 289 (32.5)% $ 312 $ 517 (39.7)%
Percentage of license revenues 7.3% 4.8% 4.8% 5.1%
ASP 2,097 776 170.2 % 3,916 1,132 245.9 %
Percentage of ASP revenues 214.0% 421.7% 228.7% 413.1%
Service 3,632 5,878 (38.2)% 7,505 11,427 (34.3)%
Percentage of service revenues 67.5% 126.1% 67.2% 120.8%
Total cost of revenues $ 5,924 $ 6,943 (14.7)% $ 11,733 $ 13,076 (10.3)%
Percentage of total revenues 65.7% 64.1% 60.4% 65.9%
Cost of License Revenues. Cost of license revenues consists 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
decreases in cost of license revenues for the three and six months ended March
31, 2001, as compared to the three and six months ended March 31, 2000, was due
primarily to the inclusion of amortization of purchased technology in the
earlier periods. To a lesser extent, the dollar decrease was 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 as well as the cost for
sub-licensing third-party software.
Cost of ASP Revenues. Cost of ASP revenues include the cost of our ASP
operations, which primarily consist of salaries, server costs and storage fees,
telecommunication charges, reseller fees and amortization of deferred set-up
costs. The dollar cost of ASP revenues for the three and six months ended March
31, 2001 increased significantly from the three and six months ended March 31,
2000, as a 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 and, to a lesser degree, sales through our reseller relationship with
ADP, which resells and jointly markets our ASP solutions. We expect that the
dollar cost of ASP revenues will increase in the future, although to a lesser
extent than the expected increase in ASP revenues.
Cost of Service Revenues. Cost of service revenues consists 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 three and six months ended March
31, 2001, as compared to the three and six months ended March 31, 2000, was
primarily due to a decrease in professional service personnel as a result of the
June 2000 restructuring, as well as a reduction in our costs to deliver such
services. In addition, we increased service revenues while decreasing our cost
of service revenues primarily as a result of 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.
Operating Expenses
Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
--------- --------- --------- --------- --------- ---------
Sales and marketing $ 6,461 $ 10,610 (39.1)% $ 13,741 $ 19,698 (30.2)%
Percentage of total revenues 71.6% 97.9% 70.7% 99.3%
Research and development 5,074 9,718 (47.8)% 10,273 18,352 (44.0)%
Percentage of total revenues 56.2% 89.7% 52.9% 92.5%
General and administrative 3,092 3,493 (11.5)% 6,257 6,968 (10.2)%
Percentage of total revenues 34.2% 32.2% 32.2% 35.1%
Restructuring and other 338 - - 338 - -
Percentage of total revenues 3.7% - 1.7% -
Total operating expenses $ 14,965 $ 23,821 (37.2)% $ 30,609 $ 45,018 (32.0)%
Percentage of total revenues 165.9% 219.8% 157.6% 226.9%
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
13
other promotional activities. The dollar and percentage decrease in the three
and six months ended March 31, 2001, as compared to the three and six months
ended March 31, 2000, were primarily due to lower payroll and related expenses,
commissions, travel costs, and recruiting expenses. The decrease in these
expenses was the result of our June 2000 restructuring and the discontinuation
of 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 decrease in the third quarter of fiscal 2001 as
a result of the sale of the Concur Human Resources product line. In addition, we
expect sales and marketing expenses to decrease as a percentage of total
revenues as we continue to improve the efficiency of our sales and marketing
efforts.
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 three and six months ended March 31, 2001, as
compared to the three and six months ended March 31, 2000, was primarily related
to a decrease in the number of outside contractors and employees utilized 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 June 2000 restructuring. 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. We expect
research and development costs to decrease in the third quarter of fiscal 2001
as a result of the sale of the Concur Human Resources product line and to
decrease as a percentage of total revenue, as we are now solely focused on
providing Corporate Expense Management solutions.
General and Administrative. General and administrative expenses include
costs associated with finance, accounting, investor relations, human resources,
legal, administration, and facilities. The decrease in these costs in the three
and six months ended March 31, 2001, as compared to the three and six months
ended March 31, 2000, 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. These
decreases were partially offset by an increase in the provision for bad debts
resulting from collection difficulties with certain customers.
Restructuring and Other Charges. Restructuring and other charges for the
three and six months ended March 31, 2001 include: (i) a reduction in the amount
accrued for our June 2000 restructuring as a result of changes in the estimated
amounts required for severance and related benefits, facilities, and product
marketing commitments, and (ii) the costs related to the sale of our Concur
Human Resources product line to MBH, net of associated gain.
Interest Income and Interest Expense
Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
-------- -------- -------- -------- -------- --------
Interest income $ 574 $ 1,069 (46.3)% $ 1,373 $ 2,466 (44.3)%
Interest expense 219 436 (49.8)% 464 740 (37.3)%
Interest Income and Interest Expense. The decrease in interest income for
the three and six months ended March 31, 2001, as compared to the three and six
months ended March 31, 2000, was due to the decrease in cash equivalents and
marketable securities upon which we earn interest, as we continue to fund our
operations with working capital. The decrease in interest expense for the three
and six months ended March 31, 2001, as compared to the three and six months
ended March 31, 2000, 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.
14
Financial Condition
Our total assets were $57.3 million and $81.7 million at March 31, 2001 and
September 30, 2000, respectively, representing a decrease of $24.4 million, or
29.9%. This decrease was primarily due to the use of cash in our operations. As
of March 31, 2001, we had $38.8 million of cash, cash equivalents and marketable
securities, compared to $56.2 million at September 30, 2000, representing a
decrease of $17.4 million, or 31.0%.
Our accounts receivable balance, net of allowance for doubtful accounts,
was $7.0 million and $11.3 million at March 31, 2001 and September 30, 2000,
respectively, representing a decrease of $4.4 million, or 38.1%. 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 71 days and 104 days for the periods ended March 31, 2001 and
September 30, 2000, respectively. We expect that DSO will fluctuate
significantly in future quarters, and may even increase.
Our total current liabilities were $21.2 million and $22.6 million as of
March 31, 2001 and September 30, 2000, respectively, representing a decrease of
$1.4 million, or 6.2%. This decrease consists primarily of a decrease in the
current portion of debt and lease liabilities, as we approach payoff on these
liabilities. This decrease is also explained by the sales return reserve, which
continues to decrease as we settle accounts affected by our June 2000
restructuring and is partially offset by the new reserve for restructuring as a
result of the March 2001 sale of our Concur Human Resources product line.
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 March 31, 2001 consisted principally of cash, cash equivalents, and
marketable securities, all totaling $38.8 million.
Net cash used in operating activities was $13.3 million and $43.2 million
during the six-month periods ended March 31, 2001 and March 31, 2000,
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 $1.5 million and $7.3 million during the six months ended March
31, 2001 and March 31, 2000, respectively.
Our financing activities used $2.6 million and provided $33.1 million in
the six months ending March 31, 2001 and March 31, 2000, 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 and stock option plans.
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%, matured on February 15, 2001. During the period ended
March 31, 2001, we paid off this outstanding indebtedness.
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 March 31, 2001, the outstanding
indebtedness under the subordinated loan agreement was $1.5 million.
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
15
monthly installments of approximately $65,000 including interest, and the note
matures in November 2001. At March 31, 2001, the outstanding indebtedness under
the subordinated loan agreement was $503,000.
In June 2000, we implemented a new operating plan to focus our resources on
the Corporate Expense Management market, bring our expenses in line with this
strategic change in focus, and achieve profitability without the need for
additional financing to fund our operations. In conjunction with this plan, we
discontinued sales of Concur Procurement in June 2000 and, more recently sold
our Concur Human Resources product line in March 2001. As a result of these
events, we are solely focused on providing Corporate Expense Management
solutions, where we have our strongest competencies.
Presently, 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.
16
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 business operations 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
March 31, 2001, we had an accumulated deficit of $187.4 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
sales of Concur Expense 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 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 with us 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. Due to the increasing costs of operating a professional services
organization, we may not be able to maintain profitability in this part of our
business.
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 quarters of fiscal 2000, our revenues did, in
fact, fall below our own and consensus securities analysts' estimates for
17
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
limited experience selling products or services under an ASP model, and our
efforts to develop this ASP business 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 they
may fail to perform those services adequately. If any service provider delivers
inadequate support or service to our customers, our reputation could be harmed.
We also 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, which
is likely to reduce our revenue.
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 companies that experience periods of volatility in the market price of
their securities, as we have experienced. We may in the future be the target of
similar litigation, which 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;
. 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;
18
. 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, and from providers of ERP software that have developed or
may be developing travel and entertainment expense management 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.
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
19
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. If we were unable to hire
or retain competent sales personnel our business would suffer. 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.
We rely on software licenced 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 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
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
20
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, 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 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. 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.
21
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 competitors;
. 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;
. 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. 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 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 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."
22
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 March 31, 2001, a one
percent increase or decrease in interest rates would result in a decrease or
increase of approximately $45,000, 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.
23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on March 8, 2001, the following
actions were taken:
1. Election of Directors
Michael J. Levinthal
For: 14,007,195 Withheld: 231,741
Jeffrey D. Brody
For: 14,004,460 Withheld: 234,476
2. Amendment to the 1998 Equity Incentive Plan
For: 12,798,966 Against: 1,403,706 Abstain: 36,264
3. Amendment to the 1998 Directors Stock Option Plan
For: 12,758,227 Against: 1,443,885 Abstain: 36,824
4. Ratification of Ernst & Young LLP as the Company's independent auditors for
fiscal year 2001
For: 14,155,958 Against: 70,452 Abstain: 12,526
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
Incorporated by Reference
-------------------------
Exhibit Date of Exhibit Filed
Number Exhibit Description Form File No. First Filing Number Herewith
- ------- ------------------- ---- -------- ------------ ------ --------
10.01 Registrant's Amended 1998 Equity Incentive Plan. -- -- -- -- X
10.02 Registrant's Amended 1998 Directors Stock Option Plan -- -- -- -- X
(b) Reports on Form 8-K:
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: May 15, 2001 CONCUR TECHNOLOGIES, INC.
By /s/ JOHN F. ADAIR
-------------------------------------
John F. Adair
Chief Financial Officer
24
EXHIBIT INDEX
Incorporated by Reference
Exhibit Date of Exhibit Filed
Number Exhibit Description Form File No. First Filing Number Herewith
- ------- ------------------- ---- -------- ------------ ------ --------
10.01 Registrant's Amended 1998 Equity Incentive Plan. -- -- -- -- X
10.02 Registrant's Amended 1998 Directors Stock Option Plan -- -- -- -- X
25