================================================================================
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 June 30, 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 July 31, 2001, there were 25,826,768 shares of the Registrant's
Common Stock outstanding.
================================================================================
CONCUR TECHNOLOGIES, INC.
FORM 10-Q
JUNE 30, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and September 30, 2000.................... 3
Consolidated Statements of Operations for the three and nine months ended June 30, 2001
and 2000.................................................................................. 4
Consolidated Statements of Cash Flows for the nine months ended June 30, 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 1. Legal Proceedings.......................................................................... 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)
June 30, September 30,
------------------- ------------------
2001 2000
------------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 23,312 $ 12,224
Marketable securities 6,986 44,018
Accounts receivable, net of allowance for doubtful accounts
of $1,577 at June 30, 2001 and $973 at September 30, 2000,
respectively 5,702 11,317
Prepaid expenses and other current assets 1,821 2,338
Notes receivable from stockholders 167 167
------------------- ------------------
Total current assets 37,988 70,064
Equipment and furniture, net 7,787 10,469
Deposits and other assets 600 1,135
------------------- ------------------
Total assets $ 46,375 $ 81,668
=================== ==================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,543 $ 2,230
Accrued payroll and benefits 2,523 3,913
Accrued restructuring costs 268 1,025
Sales return reserve 20 1,326
Other accrued liabilities 5,396 3,284
Accrued commissions 906 1,317
Payable to shareholders 315 315
Current portion of long-term debt 1,474 2,942
Current portion of capital lease obligations 1,183 2,356
Deferred revenues 4,548 3,905
------------------- ------------------
Total current liabilities 18,176 22,613
Long-term debt, net of current portion - 927
Capital lease obligations, net of current portion 64 959
Deferred rent expense 120 156
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 - 25,812,913 and 25,088,081
at June 30, 2001 and September 30, 2000, respectively 223,243 222,577
Deferred stock compensation (45) (179)
Accumulated deficit (195,183) (165,385)
------------------- ------------------
Total shareholders' equity 28,015 57,013
------------------- ------------------
Total liabilities and shareholders' equity $ 46,375 $ 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 Nine Months Ended
June 30, June 30,
--------------------------------------- ---------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Revenues, net:
License $ 3,054 $ 98 $ 9,592 $ 10,208
ASP 1,214 211 2,926 484
Service 5,223 5,632 16,399 15,092
----------------- ----------------- ----------------- -----------------
Total revenues 9,491 5,941 28,917 25,784
Cost of revenues:
License 127 592 439 1,109
ASP 2,471 779 6,387 1,911
Service 3,466 5,520 10,971 16,947
----------------- ----------------- ----------------- -----------------
Total cost of revenues 6,064 6,891 17,797 19,967
----------------- ----------------- ----------------- -----------------
Gross profit 3,427 (950) 11,120 5,817
Operating expenses:
Sales and marketing 5,448 10,767 19,189 30,465
Research and development 3,210 7,658 13,483 26,010
General and administrative 2,681 4,847 8,938 11,815
Merger and acquisition cost - (1,240) - (1,240)
Restructuring charges - 3,407 338 3,407
----------------- ----------------- ----------------- -----------------
Total operating expenses 11,339 25,439 41,948 70,457
----------------- ----------------- ----------------- -----------------
Loss from operations (7,912) (26,389) (30,828) (64,640)
Interest income 375 1,286 1,748 3,752
Interest expense (185) (358) (649) (1,098)
Other expense, net (35) (32) (69) (151)
----------------- ----------------- ----------------- -----------------
Net loss $(7,757) $(25,493) $(29,798) $(62,137)
================= ================= ================= =================
Basic and diluted net loss per share $(0.30) $(1.03) $(1.17) $(2.63)
================= ================= ================= =================
Shares used in calculation of basic and
diluted net loss per share 25,713 24,854 25,494 23,634
================= ================= ================= =================
The accompanying notes are an integral part of these financial statements.
4
Concur Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
June 30,
---------------------------------------
2001 2000
----------------- ----------------
Operating activities
Net loss $(29,798) $(62,137)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquired in-process technology - 240
Amortization of deferred stock compensation 134 717
Depreciation 4,873 4,190
Provision for bad debts 780 1,604
Restructuring charge, net of merger and acquisition costs (635) (186)
Changes in operating assets and liabilities:
Accounts receivable 4,507 (1,737)
Prepaid expenses, deposits, and other assets 928 (1,013)
Accounts payable (687) (2,930)
Accrued liabilities and accrued commissions (2,158) (2,113)
Deferred revenues 1,812 523
----------------- ----------------
Net cash used in operating activities (20,244) (62,842)
----------------- ----------------
Investing activities
Purchases of equipment and furniture (1,903) (7,418)
Purchase of marketable securities (13,468) (38,504)
Maturity of marketable securities 50,500 54,000
----------------- ----------------
Net cash provided by investing activities 35,129 8,078
----------------- ----------------
Financing activities
Proceeds from issuance of common stock from exercise of
stock options 30 350
Issuance of common stock in connection with Employee
Stock Purchase Plan 636 2,826
Issuance of common stock, net of offering costs - 34,915
Payments on borrowings (2,395) (2,843)
Payment on capital leases (2,068) (1,824)
----------------- ----------------
Net cash provided/(used) by financing activities (3,797) 33,424
----------------- ----------------
Net increase/(decrease) in cash and cash equivalents 11,088 (21,340)
Cash and cash equivalents at beginning of period 12,224 59,815
----------------- ----------------
Cash and cash equivalents at end of period $ 23,312 $ 38,475
================= ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 180 $ 1,006
================= ================
Equipment and furniture obtained through capital leases $ - $ 1,609
================= ================
Adjustment to deferred stock compensation for options cancelled on
employee termination $ - $ 499
================= ================
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 services that automate costly and
inefficient business processes. The Company's software and services 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, and Concur Time(TM) 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 June 30, 2001, and for the three and nine
months ended June 30, 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 nine month periods ended June 30,
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 has no significant
effect on earnings or the consolidated financial position of the Company through
June 30, 2001.
In December 1999, the 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, and must be adopted by the
Company by September 30, 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. 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 include the accounts of Concur
Technologies Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
NOTE 3. BUSINESS RESTRUCTURING
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 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 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 restructuring charge in the
quarter ended June 30, 2000 in the amount of $3.4 million. 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 reversal of restructuring charges previously
recorded 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 for the nine months ended June 30, 2001. All liabilities related to
this restructuring have been paid or charged off as of June 30, 2001.
In March 2001, the Company sold its Concur Human Resources product line to
MBH Solutions, Inc. ("MBH") to further its objective of focusing its resources
on the Corporate Expense Management market. The transaction consisted of the
sale of certain assets to, and the assumption of certain obligations by, MBH.
Under the terms of the transaction, the Company received $100,000 on the closing
of the transaction, and recorded it as a gain on sale, and is to receive future
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 transaction and related restructuring costs, the
Company recorded a net charge of $765,000 in the quarter ended March 31, 2001
which consisted of estimated restructuring liabilities in the amount of $943,000
net of a gain on the sale of assets to, and assumption of liabilities by MBH, in
the amount of $178,000. Assets purchased by MBH included computer equipment and
software and certain accounts receivable. Additionally, MBH assumed obligations
to provide post contract customer support to certain customers. A detail of
estimated restructuring costs by category, less amounts paid or reclassed from
the balance sheet against the liability, as of June 30, 2001 follows (in
thousands):
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued Amounts Paid or
Restructuring Reclassed Against Accrued Balance
Description Liability Liability at June 30, 2001
----------- ------------- ----------------- ----------------
Direct and incremental transaction fees $ 433 $(406) $ 27
Gain on sale of assets to, net of obligations
assumed by, MBH (178) 178 -
Facilities abandonment 341 (158) 183
Other 169 (111) 58
--------------------------------------------------------
Total $ 765 $(497) $268
========================================================
Direct and incremental transaction fees include all professional fees paid
in relation to the transaction, such as legal, accounting, and consulting
charges. All remaining accrued liabilities are expected to be paid by September
30, 2001.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Litigation
In July 2001, the Company and several of its current and former officers
were named as defendants in a purported securities class-action lawsuit filed in
the United States District Court for the Southern District of New York. The
complaint generally alleges claims against the underwriters of the Company's
initial public offering in December 1998 (the "Underwriters") under Section
12(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Act
of 1934, as amended, based on disclosures of underwriting terms in the
prospectus for our initial public offering. The complaint also alleges claims
against the Underwriters, the Company, and several of the Company's current and
former executives under Sections 11 and 15 of the Securities Act of 1933, as
amended. The plaintiffs in this lawsuit seek damages in an unspecified amount.
No amounts have been provided for this matter in the accompanying consolidated
financial statements. The Company believes this lawsuit is without merit and is
vigorously defending against it.
NOTE 5. 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 June 30, 2001, there were outstanding warrants to purchase 5,950,000
shares of common stock and options outstanding to purchase 9,723,898 shares of
common stock. Of these warrants, 700,000 were 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 was 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 under "Factors That May Affect Results of Operations and
Financial Condition" 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(TM)
for travel and entertainment expense management, Concur Payment(TM) for employee
requests for vendor payments, and Concur Time(TM) 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 800 companies, representing over 2.2 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. Currently, two of our most significant strategic
relationships are with ADP, Inc., a subsidiary of Automatic Data Processing,
Inc., a global payroll solutions and computing services provider, and Microsoft
Great Plains Business Solutions, a leading provider of business management
solutions. We have entered into agreements with ADP and Microsoft Great Plains
Business Solutions to 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.
9
On June 1, 1999, we acquired Seeker Software, Inc., a privately held
software company and developer of Concur Human Resources software. On June 8,
2000, we announced that we would not pursue our original plan to integrate
Concur Human Resources with Concur Expense and Concur Procurement into a suite
of applications with a single user interface, 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 in an ASP model,
primarily for mid-size companies. Our ASP model requires limited IT
infrastructure and limited IT support by our customers. In December 1999, we
introduced an ASP version of Concur Expense for larger companies that desire a
configured solution offered on an outsourced basis.
On June 8, 2000, we announced a new operating plan, under which we
discontinued Concur Procurement and 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 was to focus on
providing Corporate Expense Management solutions and generating positive cash
flow and profitable growth.
On March 30, 2001, we sold our Concur Human Resources product line to MBH.
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. The 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 further our focus on the Corporate Expense
Management market, in keeping with our new operating plan.
10
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 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 net revenues,
for the periods indicated. The operating results for the three and nine months
ended June 30, 2001 and 2000, are not necessarily indicative of the results that
may be expected for any future period.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
Revenues, net:
License 32.2 % 28.2 % 32.7 % 44.3 %
ASP 12.8 2.6 10.2 1.7
Service 55.0 69.2 57.1 54.0
--------------- --------------- -------------- ---------------
Gross revenues 100.0 100.0 100.0 100.0
Sales returns and allowances - (27.0) 0.7 (7.9)
--------------- --------------- -------------- ---------------
Net revenues 100.0 73.0 100.7 92.1
Cost of revenues:
License 1.3 7.3 1.5 4.0
ASP 26.0 9.6 22.3 6.8
Service 36.5 67.8 38.2 60.6
--------------- --------------- -------------- ---------------
Total cost of revenues 63.8 84.6 62.0 71.4
--------------- --------------- -------------- ---------------
Gross profit 36.2 (11.7) 38.7 20.7
Operating expenses:
Sales and marketing 57.4 132.3 66.9 108.9
Research and development 33.8 94.1 47.0 92.9
General and administrative 28.3 59.5 31.1 42.2
Merger, acquisition and
restructuring charges - 26.6 1.2 7.7
--------------- --------------- -------------- ---------------
Total operating expenses 119.5 312.5 146.2 251.7
--------------- --------------- -------------- ---------------
Loss from operations (83.3) (324.2) (107.5) (231.0)
Interest income 4.0 15.8 6.1 13.4
Interest expense (2.0) (4.4) (2.3) (3.9)
Other expense, net (0.4) (0.4) (0.2) (0.5)
--------------- --------------- -------------- ---------------
Net loss (81.7)% (313.2)% (103.9)% (222.0)%
=============== =============== ============== ===============
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. 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. The
revenues allocated to software products, including specified upgrades or
enhancements, generally are recognized upon
11
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 customers in excess of recognizable revenue are recorded
as deferred revenue.
In addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements ("SAB 101"). We are
required to adopt the provisions of SAB 101 in the fourth quarter of fiscal
2001. We have reviewed the requirements of SAB 101 and believe that our 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 June 30, Nine Months Ended June 30,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
------ ------- ------------ ------- ------- ------------
License $3,054 $ 2,298 32.9 % $ 9,377 $12,408 (24.4)%
ASP 1,214 211 475.4 % 2,926 484 504.5 %
Service 5,223 5,632 (7.3) % 16,399 15,092 8.7 %
------ ------- ------- -------
Gross revenues 9,491 8,141 16.6 % 28,702 27,984 2.6 %
Sales returns & allowances - (2,200) 100.0 % 215 (2,200) 109.8 %
------ ------- ------- -------
Net revenues $9,491 $ 5,941 59.8 % $28,917 $25,784 12.2 %
====== ======= ======= =======
We market our software and services through our direct sales organization
in the United States and the United Kingdom, and through strategic referral and
reseller arrangements in the United States and in international markets.
Revenues from licenses and services to customers outside the United States were
$604,000 and $796,000 for the three months ended June 30, 2001 and 2000,
respectively, and $2.6 million and $2.4 million for the nine months ended June
30, 2001 and 2000, respectively.
License Revenues. License revenues consist of license fees for software.
The increase in license revenues for the three months ended June 30, 2001 from
the three months ended June 30, 2000 was primarily due to reduced revenues as a
result of our June 2000 restructuring announcement in the three months ended
June 30, 2000. The decrease in license revenues for the nine months ended June
30, 2001 from the nine months ended June 30, 2000 was due to the discontinuance
of the sale of the Concur Procurement products in June 2000 and the sale of the
Concur Human Resources product line to MBH in March 2001. This year-to-date
decrease in license revenues also reflects our focus on the sale of Corporate
Expense Management products and services, rather than the sale of an integrated
suite of applications with a single user interface. The sales returns and
allowances reserve was booked in relation to the decision to discontinue the
sale of Concur Procurement in June 2000, and to cover any product returns as a
result of that decision. A small portion of that reserve was reversed as a
result of a change in estimate during the quarter ended March 2001.
ASP Revenues. ASP revenues consist of monthly usage fees as well as the
amortization of setup and consulting fees, which are collected at the time of
sale but 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,
which has in part been driven by the introduction of sales through our strategic
relationship with ADP, which markets our ASP solutions directly or indirectly to
its existing customers and potential new customers.
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. The dollar
decrease in service revenues for the three months ended June 30, 2001, as
compared to the three months ended June 30, 2000, is a reflection of reduced
implementation fees as a result of the discontinuance of the sale of Concur
Procurement products, and the sale of the Concur Human Resources product line,
over the past year. In addition, this decrease is the result of the
introduction in early fiscal 2001 of our "express implementation" program, which
decreases the time and effort required to implement our products. The moderate
increases in service revenues for the nine months ended June 30, 2001, as
compared to the nine months ended June 30, 2000, reflect increasing demand
12
for consulting services associated with sales, upgrades, and enhancements of
Concur Expense. This growth also reflects increased revenues related to annual
customer support contracts entered into in the current and prior periods. We
expect consulting service revenues to fluctuate based on new sales of our
products and the related services provided, as well as the demand for upgrades
and enhancements to Concur Expense.
Cost of Revenues
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------- ---------------------------
(dollars in thousands) 2001 2000 Change 2001 2000 Change
------ ------ ------- ------- ------- ------
License $ 127 $ 592 (78.5)% $ 439 $ 1,109 (60.4)%
Percentage of gross license revenues 4.2% 25.8% 4.6% 10.9%
ASP 2,471 779 217.2 % 6,387 1,911 234.2 %
Percentage of ASP revenues 203.5% 369.2% 218.3% 394.8%
Service 3,466 5,520 (37.2)% 10,971 16,947 (35.3)%
Percentage of service revenues 66.4% 98.0% 66.9% 112.3%
Total cost of revenues $6,064 $6,891 (12.0)% $17,797 $19,967 (10.9)%
Percentage of gross revenues 63.9% 84.6% 61.5% 77.4%
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
decreases in cost of license revenues for the three and nine months ended June
30, 2001, as compared to the three and nine months ended June 30, 2000, was due
primarily to the amortization of purchased technology in the earlier periods.
This amortization was completed in the period ended June 30, 2000. To a lesser
extent, the dollar decrease was due to a decrease in the volume of manuals,
media, and duplication expenditures. 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 consists mainly of salaries,
server costs and storage fees, telecommunication charges, strategic referral and
reseller fees, and amortization of deferred set-up costs. The dollar cost of ASP
revenues for the three and nine months ended June 30, 2001 increased
significantly from the three and nine months ended June 30, 2000, as a result of
a substantial increase in the number of customers using 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 strategic relationship with
ADP, which markets our ASP solutions directly or indirectly to its existing
customers and potential new customers.
Cost of Service Revenues. Cost of service revenues consists mainly of
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 nine months ended
June 30, 2001, as compared to the three and nine months ended June 30, 2000, was
primarily due to a decrease in professional service personnel as a result of the
June 2000 restructuring and the March 2001 sale of our Concur Human Resources
product line, as well as an overall reduction in our costs to deliver such
services. 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 June 30, Nine Months Ended June 30,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
------- ------- ------- ------- ------- ------
Sales and marketing $ 5,448 $10,767 (49.4)% $19,189 $30,465 (37.0)%
Percentage of gross revenues 57.4% 132.3% 66.9% 108.9%
Research and development 3,210 7,658 (58.1)% 13,483 26,010 (48.2)%
Percentage of gross revenues 33.8% 94.1% 47.0% 92.9%
General and administrative 2,681 4,847 (44.7)% 8,938 11,815 (24.4)%
Percentage of gross revenues 28.2% 59.5% 31.1% 42.2%
Merger, acquisition and restructuring charges - 2,167 (100.0)% 338 2,167 (84.4)%
Percentage of gross revenues - 26.6% 1.2% 7.7%
Total operating expenses $11,339 $25,439 (55.4)% $41,948 $70,457 (40.5)%
Percentage of gross revenues 119.5% 312.5% 146.2% 251.8%
13
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 decreases in the three and nine months ended June
30, 2001, as compared to the three and nine months ended June 30, 2000, were
primarily due to lower payroll and related expenses, commissions, travel costs,
and advertising expenses. The decrease in these expenses was primarily the
result of our restructuring and discontinuation of sales of Concur Procurement
in June 2000, the sale of our Concur Human Resources product line in March 2001,
and an overall reduction in our cost of providing such services.
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 nine months ended June 30, 2001, as
compared to the three and nine months ended June 30, 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. This decrease in personnel was
primarily due to our restructuring in June 2000 and the sale of the Concur Human
Resources product line in March 2001. Historically, software development costs
eligible for capitalization have been insignificant, and all costs related to
internal research and development have been expensed as incurred.
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 nine months ended June 30, 2001, as compared to the three and nine months
ended June 30, 2000, was primarily due to a decrease in the amount incurred for
contract labor, a decrease in the provision for bad debts, and, to a lesser
degree, a decrease in certain facility costs and amortization of deferred stock
compensation.
Merger, Acquisition and Restructuring Charges. Restructuring charges for
the nine months ended June 30, 2001 include: (i) the costs related to the sale
of our Concur Human Resources product line to MBH, net of associated gain, and
(ii) 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. Restructuring charges
for the three and nine months ended June 30, 2000 include a charge for the June
2000 restructuring including amounts required for severance and related
benefits, facilities, and product marketing commitments. Merger and acquisition
costs for the three and nine months ended June 30, 2000 were comprised of a
reduction in the amount accrued as a result of a revision in estimated costs
relating to the acquisition of Seeker Software in June 1999.
Interest Income and Interest Expense
Three Months Ended June 30, Nine Months Ended June 30,
(dollars in thousands) 2001 2000 Change 2001 2000 Change
----- ------ ------------ ------ ------ -------------
Interest income $ 375 $1,286 (70.8)% $1,748 $3,752 (53.4)%
Interest expense 185 358 (48.3)% 649 1,098 (40.9)%
Interest Income and Interest Expense. The decrease in interest income for
the three and nine months ended June 30, 2001, as compared to the three and nine
months ended June 30, 2000, was due to the decrease in cash equivalents and
marketable securities upon which we earn interest, and to a lesser extent, a
lower interest rate earned on our investment portfolio. The decrease in interest
expense for the three and nine months ended June 30, 2001, as compared to the
three and nine months ended June 30, 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 $46.4 million and $81.7 million at June 30, 2001 and
September 30, 2000, respectively, representing a decrease of $35.3 million, or
43.2%. This decrease was primarily due to the use of cash in our operations. As
of June 30, 2001, we had $30.3 million of cash, cash equivalents and marketable
securities, compared to $56.2 million at September 30, 2000, representing a
decrease of $25.9 million, or 46.1%.
Our accounts receivable balance, net of allowance for doubtful accounts,
was $5.7 million and $11.3 million at June 30, 2001 and September 30, 2000,
respectively, representing a decrease of $5.6 million, or 49.6%. This decrease
was principally a result of collected balances on large, outstanding invoices.
Days' sales outstanding ("DSO") in accounts receivable was 54 days and 104 days
for the periods ended June 30, 2001 and September 30, 2000, respectively. We
expect that DSO will fluctuate in future quarters, and may increase.
Our total current liabilities were $18.2 million and $22.6 million as of
June 30, 2001 and September 30, 2000, respectively, representing a decrease of
$4.4 million, or 19.5%. This decrease consisted primarily of a decrease in the
current portion of debt and lease liabilities, as we pay off such liabilities.
This decrease also was the result of a reduction of the sales return reserve,
which was utilized to settle accounts affected by our June 2000 restructuring
and was partially offset by the 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 June 30, 2001 consisted principally of cash, cash equivalents, and
marketable securities, all totaling $30.3 million.
Net cash used in operating activities was $20.2 million and $62.8 million
during the nine-month periods ended June 30, 2001 and June 30, 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 $1.9 million and $7.4 million during the nine months ended June
30, 2001 and June 30, 2000, respectively.
Our financing activities used $3.8 million and provided $33.4 million in
the nine months ended June 30, 2001 and June 30, 2000, respectively. The net
usage of cash in financing activities in the nine months ended June 30, 2001 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. Net cash provided by financing activities
for the nine months ended June 30, 2000 was primarily the result of proceeds
received from a private placement of our common stock.
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 products 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 products and services, a market in which 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
15
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,
our 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 fund our operations. 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 June 30, 2001,
we had an accumulated deficit of $195.2 million. We expect to continue to incur
net losses for at least the next 12 months.
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 products and services. 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; Service Revenues and Service Revenue Margins May
Decline.
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 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.
We Depend On Software License Revenues, Which 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 those
quarters and, as a result, the price of our stock declined significantly during
those periods. If our revenues fall
17
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."
Our ASP Product Offerings May Fail.
In early fiscal 2000, we began to offer our software products under an
Internet-based ASP model to complement our traditional licensing of these
products. We offer our ASP solutions 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 and strategic referral partners to market our ASP
offering. We have limited experience utilizing resellers and strategic referral
partners 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.
In July 2001, we and several of our current and former officers were named as
defendants in a purported securities class-action lawsuit filed in the United
States District Court for the Southern District of New York. The complaint
generally alleges claims against the underwriters of our initial public offering
in December 1998 (the "Underwriters") under Section 12(a)(2) of the Securities
Act of 1933 and Section 10(b) of the Securities Act of 1934, as amended, based
on disclosures of underwriting terms in the prospectus for our initial public
offering. The complaint also alleges claims against the Underwriters, Concur,
and several of our current and former executives under Sections 11 and 15 of the
Securities Act of 1933, as amended. The plaintiffs in this lawsuit seek damages
in an unspecified amount. We believe this lawsuit is without merit and are
vigorously defending against it. Although no estimate of any outcome of this
lawsuit can currently be made, an unfavorable resolution of such suit could
significantly harm our business, operating results, and financial condition.
In addition, 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.
18
We Have Been Public For 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;
. 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 "--We Depend On Software License Revenues, Which 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 enterprise resource planning 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 enterprise resource
planning 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. 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
19
additional financing or curtail operations. 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 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 "--We Depend On Software License Revenues, Which Makes Our
Operating Results Difficult to Predict."
We Depend Significantly On Direct Sales.
We sell our licensed 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 and strategic referral arrangements. 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 and strategic referral partners to market our ASP
products in particular. We have limited experience utilizing resellers and
referral partners to date. The failure to expand indirect channels may place us
at a competitive disadvantage.
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 or reseller 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.
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.
20
We rely on software licensed 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 is either developed by us, or, if
available, is identified, licensed, and integrated, which could harm our
business.
We May Not Successfully Develop or Introduce New Products Or 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 existing and 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, or 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
21
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 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 ASP Product Offering 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 June 30, 2001, a one
percent increase or decrease in interest rates would result in a decrease or
increase of approximately $10,000, 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 1. LEGAL PROCEEDINGS
In July 2001, we and several of our current and former officers were named
as defendants in a purported securities class-action lawsuit filed in the United
States District Court for the Southern District of New York. The complaint
generally alleges claims against the underwriters of our initial public offering
in December 1998 (the "Underwriters") under Section 12(a)(2) of the Securities
Act of 1933 and Section 10(b) of the Securities Act of 1934, as amended, based
on disclosures of underwriting terms in the prospectus for our initial public
offering. The complaint also alleges claims against the Underwriters, Concur,
and several of our current and former executives under Sections 11 and 15 of the
Securities Act of 1933, as amended. The plaintiffs in this lawsuit seek damages
in an unspecified amount. We believe this lawsuit is without merit and are
vigorously defending against it. Although no estimate of any outcome of this
lawsuit can currently be made, an unfavorable resolution of such suit could
significantly harm our business, operating results, and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
None.
(b) Reports on Form 8-K:
On April 23, 2001, the registrant filed a Current Report on Form 8-K
reporting under Item 5 the adoption on April 17, 2001 of a shareholder rights
plan and amendments to the registrant's bylaws, and reporting the filing of
exhibits under Item 7.
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: August 14, 2001 CONCUR TECHNOLOGIES, INC.
By /s/ JOHN F. ADAIR
--------------------------------------
John F. Adair
Chief Financial Officer
24