-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EZDj19TDr32I7jy/czkh7indeHgvRonTtWbdE6kfY8SgDfuGiMfTT+3bZvcHtcmU ctgisK5QFYHH9S6kzuEM/Q== 0000891618-98-005035.txt : 19981119 0000891618-98-005035.hdr.sgml : 19981119 ACCESSION NUMBER: 0000891618-98-005035 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19981118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCUR TECHNOLOGIES INC CENTRAL INDEX KEY: 0001066026 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 911608052 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-62299 FILM NUMBER: 98754923 BUSINESS ADDRESS: STREET 1: 6222 185TH AVE NE CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 4257028808 MAIL ADDRESS: STREET 1: 6222 185TH AVE NE CITY: REDMOND STATE: WA ZIP: 98052 FORMER COMPANY: FORMER CONFORMED NAME: PORTABLE SOFTWARE CORP DATE OF NAME CHANGE: 19980714 S-1/A 1 AMENDMENT NO.2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1998 REGISTRATION NO. 333-62299 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CONCUR TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 91-1608052 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
6222 185TH AVENUE NE REDMOND, WASHINGTON 98052 (425) 702-8808 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) S. STEVEN SINGH PRESIDENT AND CHIEF EXECUTIVE OFFICER 6222 185TH AVENUE NE REDMOND, WASHINGTON 98052 (425) 702-8808 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MATTHEW P. QUILTER, ESQ. THOMAS A. BEVILACQUA, ESQ. HORACE L. NASH, ESQ. CURTIS L. MO, ESQ. KRISTINA R. WILKEN, ESQ. PATRICIA MONTALVO TIMM, ESQ. KEVIN S. CHOU, ESQ. BROBECK, PHLEGER & HARRISON LLP FENWICK & WEST LLP TWO EMBARCADERO PLACE TWO PALO ALTO SQUARE 2200 GENG ROAD PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94303 (650) 494-0600 (650) 424-0160
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE(3) - ------------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value 3,565,000 $11.50 $40,997,500 $12,027 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
- --------------- (1) Includes 465,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) of the Securities Act of 1933. (3) $10,915 of the Registration Fee was previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1998 LOGO 3,100,000 SHARES COMMON STOCK Of the 3,100,000 shares of Common Stock offered hereby, 2,900,000 shares are being sold by Concur Technologies, Inc. ("Concur" or the "Company") and 200,000 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $9.50 and $11.50 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "CNQR." ------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ UNDERWRITING DISCOUNTS AND PROCEEDS TO PROCEEDS TO PRICE TO PUBLIC COMMISSIONS COMPANY(1) SELLING STOCKHOLDERS - ------------------------------------------------------------------------------------------------------------------ Per Share.................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total(2)..................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $900,000. (2) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 465,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------------ The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the delivery of such shares will be made through the offices of BancBoston Robertson Stephens Inc., San Francisco, California, on or about , 1998. BANCBOSTON ROBERTSON STEPHENS HAMBRECHT & QUIST PIPER JAFFRAY INC. THE DATE OF THIS PROSPECTUS IS , 1998 3 Concur, Concur Technologies, Xpense Management Solution, XMS, CompanyStore, Employee Desktop, and the Company's logo are trademarks of the Company. QuickXpense(R) is a registered trademark of the Company. Trade names, service marks or trademarks of other companies appearing in this Prospectus are the property of their respective holders. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 No dealer, sales representative or other person has been authorized to give any information or to make any representations in connection with the Offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, by any Selling Stockholder or by any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the registered securities to which it relates, or an offer to, or the solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary..................................................... 4 Risk Factors................................................ 7 Use of Proceeds............................................. 21 Dividend Policy............................................. 21 Capitalization.............................................. 22 Dilution.................................................... 23 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 38 Management.................................................. 54 Certain Transactions........................................ 65 Principal and Selling Stockholders.......................... 68 Description of Capital Stock................................ 71 Shares Eligible for Future Sale............................. 74 Underwriting................................................ 76 Legal Matters............................................... 77 Experts..................................................... 77 Additional Information...................................... 78 Index to Financial Statements............................... F-1
The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements examined by its independent auditors. Quarterly reports containing unaudited consolidated financial statements for the first three quarters of each fiscal year will be available upon request. The Company was incorporated in Washington in August 1993 under the name Moorea Software Corporation and commenced operations in 1994. The Company changed its name to Portable Software Corporation in 1994 and to Concur Technologies, Inc. in 1998, and is expected to be reincorporated in Delaware in November 1998. Unless the context otherwise requires, references in this Prospectus to "Concur," "Concur Technologies" and the "Company" refer to Concur Technologies, Inc., a Delaware corporation, its predecessors, 7Software, Inc., its wholly-owned California subsidiary, Concur Technologies (UK) Ltd., its wholly-owned subsidiary located in the United Kingdom, and Concur Technologies Pty. Limited, its wholly-owned subsidiary located in Australia, collectively. The Company's principal executive offices are located at 6222 185th Avenue NE, Redmond, Washington 98052 and its telephone number is (425) 702-8808. Information contained on the Company's Web site does not constitute a prospectus or part of this Prospectus. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Concur is a leading provider of Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. The Company's Xpense Management Solution ("XMS") and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment ("T&E") expense reports and front-office procurement requisitions. Concur believes it is the leading provider of T&E expense management solutions, based on a combination of the number of customers it serves and the features its solutions provide. Since the introduction of XMS in 1996, the Company has licensed its products to over 150 enterprise customers for use by over 800,000 end users. Through its June 1998 acquisition of 7Software, Inc., the Company added the CompanyStore front-office procurement application to its product suite. By automating manual, paper-based processes, the Company's products reduce processing costs and enable customers to consolidate purchases with preferred vendors and negotiate vendor discounts. In response to increasingly competitive conditions worldwide, businesses are seeking cost savings and productivity gains by using enterprise applications to automate business processes. While these applications have traditionally targeted discrete functional or department level business processes involving relatively few employees, businesses are now seeking similar applications for "employee-facing" business processes including T&E expense management, front-office procurement, human resources self-service, time and billing, and facilities management. The emergence of the Internet and corporate Intranets has made it possible to deploy applications that reach all employees in the enterprise and connect the enterprise to corporate partners, vendors and service providers. In addition, in contrast to traditional client-server applications, Intranet-based applications can be deployed rapidly throughout the enterprise and on a cost-effective basis. Customers employing the Company's products can realize significant operating cost savings through reduced processing costs, consolidated purchases with preferred vendors and negotiated vendor discounts. Based on the results of the 1997 American Express T&E Management Process Study, businesses using best- in-class automation that process 1,000 to 5,000 T&E expense reports per month can achieve savings from $300,000 to $1.5 million per year in processing costs alone. After conducting case studies and surveys of its customers, American Express Company ("American Express") concluded that, factoring in costs such as employee time required to complete expense reports, management approvals and administrative processing of expense reports, corporations on average spend $36 per T&E expense report processed, but can reduce such costs to as little as $8 through best-in-class automation. The Company believes its customers can achieve these cost savings rapidly because the products are designed to minimize burdens on IT professionals and to maximize employees' ease of use. Because the Company's Intranet-based products are designed to deploy rapidly, scale enterprise-wide and integrate easily with an organization's existing IT infrastructure, a customer's IT personnel can deliver and support solutions quickly and cost-effectively. For example, one Concur customer deployed XMS to over 25,000 employees within 90 days after the customer began its rollout, and has since deployed XMS to a total of over 50,000 employees. Employees readily adopt the Company's solutions because they are easy to use, reduce time spent preparing expense reports and supply requisitions, and accelerate reimbursement and fulfillment process cycles. The Company believes that as a result of the substantial potential savings from processing cost reductions and vendor management, and the emergence of Intranet technologies, strong demand exists for employee-facing applications. Concur's objective is to be the leading provider of Intranet-based employee-facing applications. In order to meet this goal, the Company's strategy is to extend and leverage its leadership in T&E expense management and front-office procurement applications, expand and integrate its product suite, enhance the 4 6 functionality of its products, increase its international presence, develop new relationships with strategic third-parties, and offer its solutions as an outsourced enterprise service provider. The Company sells its products primarily through its direct sales organization and has developed a number of strategic referral relationships such as its relationship with American Express. Under this relationship, American Express can refer corporate charge card customers that seek a T&E expense management solution to Concur. In August 1998, a subsidiary of American Express completed a minority equity investment in the Company, as a result of which American Express became an affiliate of the Company. In addition to its Intranet-based product lines in T&E expense management and front-office procurement, the Company offers a client-server based T&E expense management solution for those clients who lack an Intranet infrastructure. Given the broad applicability of its products, Concur has licensed its applications to numerous customers in a wide range of industries. The Company's customers include AT&T, American Airlines, Anheuser-Busch, Case Corporation, Computer Sciences Corporation, DuPont, Eastman Kodak, Exxon, Gillette, Guardian Industries, Hewlett-Packard, J.C. Penney, Lehman Brothers, Levi Strauss, Lucent Technologies, Monsanto, The New York Times, Northrop Grumman, Pfizer, Pharmacia & Upjohn, Seagate Technology, Solutia, Sprint, Texaco, Texas Instruments and Visio. RECENT DEVELOPMENT The Company recently entered into a non-binding letter of intent, and is presently negotiating a definitive agreement, regarding a strategic marketing and referral arrangement with ADP, Inc., a subsidiary of Automatic Data Processing, Inc. ("ADP"). Under the proposed arrangement, ADP and the Company plan to jointly market Concur's products to ADP customers and ADP will refer potential customers for T&E expense reporting products and services exclusively to Concur. The Company has agreed to pay ADP a referral fee for ADP customers and leads who become the Company's customers. In addition, the Company intends to acquire the rights to certain ADP technology. Russell P. Fradin, ADP's Group President, Employer Services, has agreed to serve as a member of the Company's Board of Directors. 5 7 THE OFFERING Common Stock offered by the Company......... 2,900,000 shares Common Stock offered by the Selling Stockholders................................ 200,000 shares Common Stock to be outstanding after the Offering(1)................................. 16,245,412 shares Use of Proceeds............................. For working capital and general corporate purposes. The Company intends to use approximately $11.0 million for increased sales and marketing expenditures and $5.0 million each for increased research and development and for professional services expenditures. See "Use of Proceeds." Proposed Nasdaq National Market Symbol...... CNQR SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ----------------------------------------------- 1994 1995 1996 1997 1998 ------ ------- ------- ------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues, net............................................. $ -- $ 2,128 $ 1,959 $ 8,270 $ 17,159 Loss from operations(2)................................... (602) (2,895) (4,958) (5,505) (17,760) Net loss.................................................. (602) (2,890) (4,953) (5,524) (18,074) Pro forma basic and diluted net loss per share(3)......... $ (1.58) Shares used in calculation of pro forma basic and diluted net loss per share(3)................................... 11,419
SEPTEMBER 30, 1998 ------------------------------------------ ACTUAL PRO FORMA(4) AS ADJUSTED(5) -------- ------------ -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital........................................... $ 8,474 $ 8,474 $35,892 Total assets.............................................. 25,031 25,031 52,449 Long-term obligations, net of current portion............. 8,092 8,092 8,092 Redeemable convertible preferred stock and warrants....... 30,129 -- -- Total stockholders' equity (deficit)...................... (26,219) 3,910 31,328
- --------------- (1) Based on shares outstanding as of October 31, 1998. Does not include: (i) 1,432,715 shares of Common Stock issuable upon the exercise of outstanding options granted under the Company's 1994 Stock Option Plan with a weighted average per share exercise price of $1.10; (ii) 349,851 shares of Common Stock available for future grant as of October 31, 1998 under the 1994 Stock Option Plan; (iii) 110,306 shares of Common Stock issuable upon exercise of outstanding options granted under the 1997 Stock Option Plan of 7Software, Inc. ("7Software") assumed by the Company in connection with the Company's June 1998 acquisition of 7Software, with a weighted average per share exercise price of $0.025; (iv) 2,287,453 shares of Common Stock issuable upon the exercise of outstanding warrants to purchase shares of preferred stock; and (v) 3,800,000 shares of Common Stock reserved immediately after the Offering for future grant or issuance under the Company's 1998 Equity Incentive Plan, 1998 Directors Stock Option Plan and 1998 Employee Stock Purchase Plan. See "Management--Employee Benefit Plans" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial Statements. (2) In June 1998, the Company acquired 7Software, resulting in a charge for acquired in-process technology. See Note 3 of Notes to Consolidated Financial Statements. The Financial Statements of 7Software are included elsewhere herein. (3) See Note 13 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. (4) Pro forma to give effect to (i) the conversion of all outstanding shares of preferred stock into 10,213,553 shares of Common Stock and (ii) the conversion of all outstanding warrants to purchase preferred stock into warrants to purchase 2,329,578 shares of Common Stock. (5) Pro forma amounts as adjusted to reflect: (i) the sale of the 2,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price per share of $10.50 and the receipt of the net proceeds therefrom, after deducting the estimated underwriting discounts and commissions and offering expenses; and (ii) the net exercise of warrants to purchase 31,900 shares of Common Stock with an average exercise price of $2.55 per share, based on an assumed initial public offering price per share of $10.50. See "Capitalization," "Use of Proceeds" and "Certain Transactions." ------------------------ Unless otherwise indicated or the context otherwise requires, all information in this Prospectus (i) reflects the conversion of all outstanding shares of preferred stock of the Company into shares of Common Stock upon the consummation of the Offering, (ii) assumes that the Underwriters' over-allotment option will not be exercised, and (iii) gives effect to the Company's reincorporation in Delaware and a 1-for-2.5 reverse split of its Common Stock, which will occur prior to the completion of the Offering. 6 8 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Common Stock offered by this Prospectus. LIMITED OPERATING HISTORY; FUTURE OPERATING RESULTS UNCERTAIN; HISTORY OF LOSSES An investment in the Company should be viewed in light of the risks and uncertainties inherent in a software company in the early stages of development, particularly in light of the evolving and highly competitive market in which the Company operates. Concur was incorporated in 1993 and has incurred net losses in each quarter since its incorporation. The Company shipped its first product in fiscal 1995, and since fiscal 1997 has derived substantially all of its revenues from licenses of XMS -- the Company's T&E expense management product -- and related services. To compete effectively, the Company believes that it will be necessary to devote substantial resources to expanding its sales and marketing, professional services and research and development organizations and that it will make significant investments in these areas without assurance of any related income. For example, the Company's professional services organization is newly established, and has been unprofitable since it was organized, and there can be no assurance that it will ever become profitable. Further, there can be no assurance that any of the Company's business strategies will be successful or that the Company's revenues will increase in future periods, or that the Company will become or remain profitable on a quarterly or annual basis in the future. The Company incurred net losses of $5.0 million, $5.5 million and $18.1 million for fiscal 1996, 1997 and 1998, respectively. As of September 30, 1998, the Company had an accumulated deficit of $32.0 million. The Company anticipates that it will incur net losses for the foreseeable future. Although the Company had substantial net operating loss carryforwards as of September 30, 1998, the Internal Revenue Code (the "Code"), contains provisions that may limit the use in any future period of net operating loss carryforwards upon the occurrence of certain events, including a significant change in ownership interests. See "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Competition." UNPREDICTABLE FLUCTUATIONS AND SEASONAL PATTERNS IN QUARTERLY RESULTS The Company's quarterly operating results have fluctuated significantly in the past, and will continue to fluctuate in the future, as a result of a number of factors, many of which are outside the Company's control. Many of these factors are listed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." In addition, the Company's software products are typically shipped when orders are received, and consequently, license backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's expected license revenues. As a result, license revenues in any quarter are difficult to forecast because they are substantially dependent on orders booked and shipped in that quarter. Moreover, the Company typically recognizes a substantial amount of its revenues in the last month of the quarter, frequently in the last week or even days of the quarter. Since the Company's expenses are generally relatively fixed in the near term, any shortfall from anticipated revenues or any delay in the recognition of revenues could result in significant variations in operating results from quarter to quarter. Quarterly license revenues are also difficult to forecast because the Company's sales cycle, from initial evaluation to delivery of software, is generally lengthy and varies substantially from customer to customer. If revenues fall below the Company's expectations in a particular quarter, the Company's business, results of operations and financial condition would be materially adversely affected. See "--Lengthy Sales Cycle." The Company has experienced, and expects to continue to experience, a high degree of seasonality, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." Concur's products involve relatively large expenditures by enterprise customers, and XMS tends to be more expensive than competing applications. In addition, the purchase of the Company's products is typically a discretionary matter for such customers and from time to time customers' 7 9 priorities may shift. For example, the Company may experience reduced sales of its products as potential customers put a priority on correcting Year 2000 problems associated with their other systems, or defer purchases of software products until after 2000. Accordingly, demand for the Company's products may be particularly volatile and unpredictable. Based on the foregoing and the risks identified herein, the Company believes that its future revenues, expenses and operating results are likely to vary significantly from quarter to quarter. In particular, as the Company expands its sales force, professional services personnel and research and development staff, operating expenses will continue to rise. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Further, the Company believes it is likely that in some future quarter or quarters the Company's operating results will not meet or exceed the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to the Company's business or generally, the market price of the Company's Common Stock would be materially adversely affected. See "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Competition." EMERGING MARKET FOR EMPLOYEE-FACING APPLICATIONS; MARKET ACCEPTANCE The market for employee-facing applications is newly emerging. Enterprises have historically performed the processes addressed by employee-facing applications themselves, whether through manual processes or internally-developed development applications. Accordingly, the Company's future success will depend upon, among other factors, the extent to which companies adopt third-party employee-facing applications, particularly T&E expense management and front-office procurement solutions, and the extent to which companies purchase products or utilize the services of third-party providers, such as the Company, for such solutions. In addition, companies that have already invested substantial resources in other methods of automating enterprise processes may be reluctant to adopt a new strategy that may limit or compete with their existing investments. Even if companies implement employee-facing applications, they may still choose to design, develop or manage all or part of their process automation internally. There can be no assurance that the use of employee-facing applications will increase significantly in the future or that the Company's products or services will achieve commercial success. Any failure of employee-facing applications, and in particular T&E expense management and front-office procurement applications, to gain market acceptance would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Industry Background." PRODUCT CONCENTRATION Since 1997, the Company has generated substantially all of its revenues from licenses and services related to XMS, and the Company believes that such revenues will continue to account for a substantial majority of its revenues for the foreseeable future. The Company's future financial performance will depend, in significant part, upon the successful development, introduction and customer acceptance of new and enhanced versions of XMS, and of CompanyStore and any new products or services that the Company may develop or acquire. There can be no assurance that the Company will be successful in upgrading and continuing to market XMS or CompanyStore, or that any new products or services the Company may develop or acquire will achieve market acceptance. Any such lack of success or failure to achieve market acceptance could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH EXPANSION INTO NEW MARKET The Company recently added the CompanyStore front-office procurement application to its product line. This initial version of CompanyStore has been licensed to only two customers. The Company's future revenue growth is substantially dependent upon current development efforts to integrate this recently acquired technology with the Company's current technology platform, market acceptance of CompanyStore, and the Company's ability to license CompanyStore to new customers and its existing base of XMS customers. 8 10 Potential and existing customers may not purchase CompanyStore for a number of reasons, including: an absence of required or desired functionality; the costs of and time required for implementation; the failure of CompanyStore to be competitive with other front-office procurement applications; possible software defects; a customer's lack of the necessary hardware, software or Intranet infrastructure; and any failure by the Company or its products to meet customer expectations for other reasons. In addition, the Company plans to target its existing and potential XMS customers as potential customers for the enhanced version of CompanyStore that is currently under development, but there can be no assurance that such customers will purchase CompanyStore. Further, the Company must overcome certain significant obstacles in its expansion into the front-office procurement automation market, including: competitors that have more experience and better name recognition than the Company; the limited experience of the Company's sales and consulting personnel in the front-office procurement automation market; and the Company's limited existing reference accounts in the front-office procurement automation market. If, for any reason, the Company is unable to complete the development efforts necessary to integrate the recently acquired CompanyStore technology with its technology platform and to market CompanyStore successfully, such failure would have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, if the Company fails to meet the expectations of market analysts or investors with regard to sales of CompanyStore, the market price of its Common Stock would be materially adversely affected. See "--Risks Associated with Unproven Enterprise Service Provider Model," "--Risks Associated with the Internet," "--No Prior Public Market for Common Stock; Possible Volatility of Stock Price" and "Business--Competition." RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW VERSIONS OF EXISTING PRODUCTS The Company expects to add new employee-facing applications to its product suite by acquisition or internal development. The Company has in the past experienced delays in the planned release dates of new software products and upgrades, and has discovered software defects in new products after their introduction. There can be no assurance that new products or upgrades will be released according to schedule, or that when released they will not contain defects. Either of these situations could result in adverse publicity, loss of revenues, delay in market acceptance or claims by customers brought against the Company, all of which could have a material adverse effect on the Company's business, results of operations and financial condition. If the Company is unable to develop, license or acquire new software products or enhancements to existing products on a timely and cost-effective basis, or if such new products or enhancements do not achieve market acceptance, the Company's business, results of operations and financial condition will be materially adversely affected. RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE The market for the Company's products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, the Company's future success will depend, in significant part, upon its ability to develop and introduce new products and to enhance existing products to keep pace with technological developments, satisfy customer requirements and achieve market acceptance. There can be no assurance that the Company will successfully identify new product opportunities, develop or bring to market new products, or adopt or incorporate new technologies in a timely and cost-effective manner. Nor can there be any assurance that products, capabilities or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive or shorten the life cycles of the Company's products. See "Business--Competition" and "--Product Development." RISKS ASSOCIATED WITH UNPROVEN ENTERPRISE SERVICE PROVIDER MODEL In addition to licensing its software, the Company plans to offer its solutions as an Internet-based enterprise service provider ("ESP"), pricing its solutions on a per-transaction basis, to companies seeking to outsource their employee-facing business applications. This business model is unproven and represents a 9 11 significant departure from the strategies traditionally employed by enterprise software vendors and the Company. The Company has no experience selling products or services as an ESP, and any such ESP business may significantly divert Company revenues and management time and attention from its existing business. The Company may at any time discontinue its plans to provide products or services as an ESP. In connection with its planned ESP business model, the Company will engage, for an indeterminate period, third-party service providers to perform many of the services related to such business as independent contractors, and will be responsible for monitoring their performance. The Company has not outsourced any of its services or other important business functions in the past, and there can be no assurance that independent contractors will perform those services adequately. In the event that any service provider provides inadequate support or service to the Company's customers, the Company's reputation could be seriously damaged. In addition, the Company plans to use resellers to market its ESP products; the Company has no experience utilizing resellers and there can be no assurance it will be successful doing so in connection with its ESP products. There can be no assurance that the Company's ESP strategy will be implemented effectively, or, even if it is implemented effectively, that it will not have a material adverse effect on the Company's business, results of operations and financial condition. If customers determine that the Company's products are not scalable, do not provide adequate security for the dissemination of information over the Internet, or are otherwise inadequate for Internet-based use, or if for any other reason customers fail to accept the Company's products for use on the Internet or on a per-transaction basis, the Company's business, results of operations and financial condition will be materially adversely affected. In particular, as an outsourced ESP provider, the Company will regularly receive large amounts of confidential information (including credit card, travel booking and other financial and accounting data) and, particularly in light of the Company's lack of experience administering this information as an ESP, there can be no assurance that this information will not be subject to computer break-ins and other disruptions that jeopardize the security of information for which the Company is responsible. Even if the Company's strategy of offering its products to customers over the Internet is successful, certain customers or potential customers that would otherwise acquire software and services through the Company's licensing arrangements may elect to utilize the Company's applications through the Internet-based ESP. Any such shift in potential license revenues to the ESP model, which is an unproven and potentially less profitable or unprofitable business model, could have a material adverse effect on the Company's business, results of operations and financial condition. See "--Risks of Software Defects or Security Breaches," "--Product Liability Risks" and "Business--Products and Technology." RISKS ASSOCIATED WITH THE INTERNET The success of the Company's products will depend, in large part, on the continued broad acceptance of the Internet itself as a viable commercial marketplace. It is difficult to predict with any assurance whether the Internet will continue to be considered a viable commercial marketplace or whether the demand for Internet-related products and services will increase or decrease in the future. The Internet may cease to be considered a viable commercial marketplace for several reasons, including potentially inadequate development of necessary infrastructure as use of the Internet grows, such as a reliable network backbone with the necessary speed, data capability and security, or failure of enabling technologies to be developed in a timely manner. There can be no assurance that the Internet infrastructure will be able to support the demands placed on it by growth in use and bandwidth requirements of users. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity or due to increased governmental regulation. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, data corruption, cost, ease of use, accessibility and quality of service) remain unresolved and may negatively affect commerce and communication on the Internet. Changes in, or insufficient availability of, telecommunications services to support the Internet could also result in slower response times and could adversely affect the use of the Internet generally. If critical issues concerning the commercial use of the Internet are not favorably resolved, if the necessary infrastructure and complementary products are not developed on a timely basis, or if use of the Internet experiences a significant decline, the Company's business, results of operations and financial condition will be materially and adversely affected. 10 12 LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENT Although the Company believes that XMS and CompanyStore can accommodate thousands of users, to date a limited number of customers have deployed XMS, and no customer has deployed CompanyStore, on such a large scale. If the Company's customers cannot successfully implement large-scale deployments, or they determine for any other reason that the Company's products cannot accommodate large-scale deployments or that such products are not appropriate for such widespread use, the Company's business, results of operations and financial condition would be materially adversely affected. MANAGEMENT OF GROWTH The Company's historical growth has placed, and any further growth is likely to continue to place, a significant strain on the Company's managerial, operational, financial and other resources. The Company has grown from 65 full-time employees as of September 30, 1996 to 231 full-time employees as of October 31, 1998. The Company's future success will depend, in part, upon the ability of its senior management to manage growth effectively. This will require the Company to implement additional management information systems, to develop further its operating, administrative, financial and accounting systems and controls, to hire additional personnel, to develop additional levels of management within the Company, to locate additional office space in the United States and internationally, and to maintain close coordination among its development, accounting, finance, marketing, sales, customer support and professional services organizations. In particular, the Company expects to need additional office space as soon as the second half of calendar 1999. The real estate market in the Seattle area, where the Company's headquarters is located, is extremely competitive, and the Company may find it difficult to locate suitable space on terms acceptable to the Company. In addition, each customer for the Company's products generally purchases consulting and implementation services in connection with licenses of those products. The Company believes that it is currently the only provider of such services for its products. It is difficult and expensive to recruit, train and retain qualified personnel to perform such services, and the Company may from time to time have inadequate levels of staffing to perform required services. As a result, the Company's growth could be limited due to its lack of capacity to provide such services, or the Company could experience deterioration in service levels or decreased customer satisfaction, any of which would have a material adverse effect on the Company's business, results of operations and financial condition. The failure of the Company to manage its historic and future growth successfully would have a material adverse effect on the Company's business, results of operations and financial condition. See "--Risks Associated with Acquisitions Generally," "--Need to Attract and Retain Qualified Personnel," "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The market for the Company's products is intensely competitive and rapidly changing. The Company's primary sources of direct competition come from independent software vendors of T&E expense management and front-office procurement applications, and enterprise resource planning ("ERP") providers that have or may be developing T&E expense management and front-office procurement products. The Company also faces indirect competition from potential customers' internal development efforts and from potential customers' reluctance to move away from existing paper-based systems. See "Business--Competition." NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS An important business strategy of the Company is to enter into strategic relationships to offer products and services to a larger customer base than can be reached through direct sales, telesales and internal marketing efforts. The Company has established a significant strategic marketing relationship with American Express and its subsidiary, American Express Travel Related Services Company, Inc. ("TRS"), under which American Express can refer to the Company (on a non-exclusive basis) their corporate charge card customers that seek a T&E expense management solution, and TRS will market a co-branded ESP version of XMS containing special features. Since entering into this relationship, a significant number of the Company's new sales have come through referrals from American Express. In August 1998, TRS purchased 645,161 shares of the Company's 11 13 Series E Preferred Stock and a warrant to purchase additional shares of Series E Preferred Stock. The Company also has established other strategic referral relationships. The Company recently entered into a non-binding letter of intent, and is presently negotiating a definitive agreement, regarding a strategic marketing and referral agreement with ADP, Inc., a subsidiary of ADP. There can be no assurance that the Company will be able finalize its arrangements with ADP, to enter into additional strategic relationships or to maintain its strategic relationships on commercially reasonable terms, if at all. If the Company were unable to maintain its existing strategic relationships or enter into additional strategic relationships, it would be required to devote substantially more resources to the distribution, sale and marketing of its products and services than it plans to do and would not receive the customer introductions and co-marketing benefits that it anticipates receiving from such strategic relationships. As a result of the Company's emphasis on strategic relationships, the Company's success will depend both on the ultimate success of the other parties to such relationships and on the ability of these parties to market the Company's products and services successfully. Failure of one or more of the entities with which the Company has a strategic relationship to promote the Company's products or services could have a material adverse effect on the Company's business, results of operations and financial condition. See "Summary--Recent Development" and "Certain Transactions." The Company's existing strategic relationships generally do not, and any future strategic relationships may not, afford the Company any exclusive marketing or distribution rights. Many of the Company's strategic partners have multiple strategic relationships, and there can be no assurance that the Company's strategic partners regard their relationships with the Company as significant for their own businesses or that they will regard it as significant in the future. In addition, there can be no assurance that such parties will not pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with the Company's products or services either on their own or in collaboration with others, including the Company's competitors. Further, the Company's existing strategic relationships may interfere with its ability to enter into other desirable strategic relationships. Any future inability of the Company to maintain its strategic relationships or to enter into additional strategic relationships will have a material adverse effect on the Company's business, results of operations and financial condition. See "--Competition," "Business--Strategy," "--Sales" and "--Marketing." RISKS ASSOCIATED WITH 7SOFTWARE ACQUISITION In June 1998, the Company acquired 7Software, a privately-held front-office procurement software development company and the developer of CompanyStore. The Company is currently in the process of integrating the 7Software business with the Company's business, including product development efforts focused on integrating CompanyStore with XMS in a suite of employee-facing applications. Such integration is subject to risk of loss of key personnel of the acquired company, difficulties associated with assimilating the personnel and operations of the acquired company, potential disruption of the Company's ongoing business, and the ability of the Company's sales force, consultants and development staff to adapt to the new product line. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with its acquisition of 7Software. RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY In order to remain competitive, the Company may find it necessary to acquire additional businesses, products or technologies that could complement or expand the Company's business. In the event that the Company identifies an appropriate acquisition candidate, there can be no assurance that the Company would be able to negotiate the terms of any such acquisition successfully, finance such acquisition, or integrate such acquired business, products or technologies into the Company's existing business and operations. The Company has completed only one acquisition to date, the acquisition of 7Software. There can be no assurance that the Company will be able to manage or absorb any future acquisitions successfully, particularly acquisitions of companies larger than 7Software or publicly held companies. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, would cause significant diversions of management time and resources. There can be no assurance that a given acquisition, whether or not consummated, will not materially adversely affect the Company's business, results of operations and financial 12 14 condition. If the Company were to proceed with one or more significant acquisitions in which the consideration included cash, the Company could be required to use a substantial portion of the Company's available cash (including proceeds of the Offering) to consummate any such acquisition. If the Company consummates one or more significant acquisitions in which the consideration consists of stock or other securities, stockholders of the Company could suffer significant dilution of their interests in the Company. See "--Management of Growth," "-- Broad Discretion Over Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LENGTHY SALES CYCLE Sales of the Company's software products generally require the Company to engage in a lengthy sales effort. Because of the costs involved, customers for enterprise products such as the Company's typically commit significant resources to an evaluation of available software applications and require the Company to expend substantial time, effort and money educating them about the value of the Company's products and services. The Company's sales cycle typically ranges between six and nine months. Sales of the Company's products require an extensive sales effort throughout a customer's organization because decisions to license and deploy such software generally involve the evaluation of the software by a significant number of employees in various functional areas, each often having specific and conflicting requirements. A variety of factors, including many over which the Company has little or no control, such as customers' investments in Year 2000 systems compliance, may cause potential customers to favor competing products or to delay or forego a purchase. As a result of the length of its sales cycle, the Company has a limited ability to forecast the timing and amount of specific sales. The delay or failure to complete one or more sales in a particular quarter or fiscal year could have a material adverse effect on the Company's business, results of operations and financial condition and could cause the Company's operating results to vary significantly from quarter to quarter. See "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results" and "--Year 2000 Compliance." DEPENDENCE ON KEY EMPLOYEES The Company's success depends on the performance of the Company's senior management, particularly S. Steven Singh, who is not bound by an employment agreement. Although the Company maintains key person life insurance on Mr. Singh in the amount of $1 million, the loss of the services of Mr. Singh would have a material adverse effect on the Company's business, results of operations and financial condition. If one or more members of the Company's senior management or any of the Company's key employees were to resign from the Company, particularly to join a competitor or to form a competitor of the Company, the loss of such personnel and any resulting loss of existing or potential customers to any such competitor would have a material adverse effect on the Company's business, results of operations and financial condition. In addition, there can be no assurance that, in such an event, the Company would be able to recruit personnel to replace such senior management on terms that are acceptable to the Company. In the event of the loss of any key personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its technical knowledge, practices, procedures or customer lists by a former employee or that such disclosure or use would not have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Competition," "--Employees" and "Management." NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL The Company's success depends to a significant degree on its ability to attract and retain qualified, experienced employees. There is currently, and the Company expects there will continue to be, substantial competition for experienced engineering, sales and consulting personnel, particularly in the market segments in which the Company competes. Many of the companies with which the Company competes for experienced personnel have greater financial and other resources than the Company. In particular, the Company competes for product development personnel with Microsoft Corporation, which is located in the same geographic area as the Company's headquarters and which hires significant numbers of software engineers each year. The Company also competes for personnel with major ERP and other independent software vendors that hire substantial numbers of sales and consulting personnel, and with consulting and professional services 13 15 companies (such as Andersen Consulting and other systems integration and consulting divisions of major accounting firms), which recruit a significant portion of the pool of available and qualified consulting personnel. In addition, customers for the Company's products generally purchase consulting and implementation services in connection with licenses of those products. While the Company has recently established relationships with certain third-party providers of these consulting and implementation services, Concur continues to be the primary provider of such services for its products. It is difficult and expensive to recruit, train and retain qualified personnel to perform such services, and the Company may from time to time have inadequate levels of staffing to perform such services. As a result, the Company's growth could be limited due to its lack of capacity to provide such services, or the Company could experience deterioration in service levels or decreased customer satisfaction, any of which would have a material adverse effect on the Company's business, results of operations and financial condition. The Company may in the future experience difficulty in recruiting and retaining sufficient numbers of qualified individuals to meet its needs, and the costs associated with such hirings, such as bonuses and recruiting expenses, may have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Employees." DEPENDENCE ON DIRECT SALES MODEL The Company has sold, and intends to continue to sell, its products primarily through its direct sales force. The Company's financial success will depend in large part on the ability of the Company's direct sales force to increase sales to levels necessary to attain and sustain profitability. As a consequence of this strategy, the Company's ability to achieve significant revenue growth in the future will depend in large part on its success in recruiting, training and retaining additional direct sales personnel and on the continued success of the direct sales force. The Company believes that there is a shortage of, and significant competition for, direct sales personnel with the advanced sales skills and technical knowledge necessary to sell the Company's products. The Company's inability to hire competent sales personnel, or its failure to retain them, would have a material adverse effect on the Company's business, results of operations and financial condition. See "--Dependence on Key Employees" and "--Need to Attract and Retain Qualified Personnel." In addition, by relying primarily on a direct sales model, the Company may miss sales opportunities that might be available through other sales distribution channels, such as domestic and international resellers and value-added resellers. In the future, the Company intends to develop indirect distribution channels through third-party distribution arrangements, but there can be no assurance that the Company will be successful in establishing such arrangements, or that any such expansion of the Company's indirect distribution channels will result in increased revenues. The failure to develop such indirect channels may place the Company at a significant competitive disadvantage. See "Business--Competition" and "--Sales." The Company plans to use resellers to market its ESP products; the Company has no experience utilizing resellers and there can be no assurance it will be successful doing so in connection with its ESP products. DEPENDENCE ON SERVICE REVENUES The Company licenses software and provides related consulting, customer support and training services. The Company's total revenues have increased from year to year, and service revenues have increased each year as a percentage of total revenues. Service revenues represented 12.4%, 23.3% and 31.8% of total revenues for fiscal 1996, 1997 and 1998, respectively. Maintenance constitutes a significant proportion of service revenues. The Company anticipates that service revenues will continue to represent a significant percentage of total revenues. To a large extent, the level of service revenues is dependent upon the ongoing renewals of customer support contracts by the Company's growing installed customer base, and there can be no assurance that such customer support contracts will be renewed. In addition, if third-party organizations such as systems integrators become proficient in installing or servicing the Company's products, consulting revenues as a percentage of total revenues could decline. If service revenues are lower than anticipated, the Company's business, results of operations and financial condition could be materially adversely affected. The Company's ability to increase its service revenues will depend in large part on its ability to increase the scale of its services organization, including its ability to successfully recruit and train a sufficient number of qualified services personnel. There can be no assurance that the Company will be able to successfully expand its professional 14 16 services organization in this way. See "--Management of Growth," "--Dependence on Key Employees," "--Need to Attract and Retain Qualified Personnel" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTERNATIONAL OPERATIONS The Company's international operations are generally subject to a number of risks, including costs of customizing products for foreign countries, laws and business practices favoring local competition, dependence on local vendors, compliance with multiple, conflicting and changing governmental laws and regulations, longer sales cycles, greater difficulty or delay in accounts receivable collection, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, multiple and conflicting tax laws and regulations, and political and economic instability. In recent months the level of worldwide economic instability has increased significantly. The Company is unable to predict what effect this instability will have on its efforts to expand internationally or sell domestically. It is possible that the spreading economic uncertainty in the world will have a material adverse effect on the Company's business, results of operations and financial condition. The Company's international operations also face foreign currency-related risks. To date, a significant majority of the Company's revenues have been denominated in U.S. Dollars, but the Company believes that in the future, an increasing portion of the Company's revenues will be denominated in foreign currencies. In particular, the Company expects that following the introduction of the Euro in January 1999, an increasing portion of the Company's international sales may be Euro-denominated. The Euro is an untested currency and may be subject to economic risks that are not currently contemplated. There can be no assurance that fluctuations in the value of the Euro or other foreign currencies will not have a material adverse effect on the Company's business, results of operations and financial condition. The Company currently does not engage in foreign exchange hedging activities, and therefore its international revenues are currently subject to the risks of foreign currency fluctuations. In addition, the Company expects that its products will not support Euro- denominated transactions until at least the second half of 1999, which could materially adversely affect demand for such products and, as a result, the Company's business, results of operations and financial condition. See "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Revenues from licenses and services to customers outside the United States, primarily in the United Kingdom, Canada and Australia, were insignificant prior to fiscal 1997, and represented approximately $1.3 million and $810,000 in fiscal 1997 and 1998, respectively. As a key component of its business strategy, the Company intends to expand its sales and support operations internationally. The Company employs sales professionals in London, Toronto and Sydney and intends to establish additional international sales offices, expand its international management, sales and support organizations, and enter into relationships with additional international remarketers where appropriate. The Company is in the early stages of developing its indirect distribution channels in certain markets outside the United States. There can be no assurance that the Company will be able to attract remarketers that will be able to market the Company's products effectively or will be qualified to provide timely and cost-effective customer support and service. The Company must also customize its products for local markets. For example, the Company's ability to expand into the European market will depend on the Company's ability to develop a T&E expense management solution that incorporates the tax laws and accounting practices followed in Germany and other European countries, and to develop employee-facing applications that support the Euro. Further, the differing employment policies of countries outside the United States potentially reduce the Company's flexibility in managing staffing levels and, in turn, managing personnel-related expenses. To the extent that the Company is unable to address the risks associated with these international sales in a timely and cost-effective manner, the Company's sales growth internationally, if any, will be limited, operating margins could be reduced by increases in personnel-related expenses without corresponding increases in revenues, and the Company's business, results of operations and financial condition could be materially adversely affected. Even if the Company is able to expand its international operations successfully, there can be no assurance that the Company will be able to maintain or increase international market demand for its products. See "Business--Sales." 15 17 LIMITED INTEROPERABILITY The Company's products are designed to operate on a variety of hardware and software platforms employed by its customers. The Company must continually modify and enhance its products to keep pace with changes in hardware and software platforms and database technology. As a result, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems (particularly Microsoft), by vendors of back-office applications (particularly SAP, Oracle and PeopleSoft) and by vendors of browsers and other Internet-related applications (particularly Netscape and Microsoft) could materially adversely affect the Company's business, results of operations and financial condition. In addition, the Company's products are not currently based upon the Java programming language ("Java"), an increasingly widely-used language for developing Internet applications. The Company has made a strategic decision not to develop a fully Java-based product at this time. There can be no assurance that future versions of the Company's products will be developed in Java. Accordingly, certain features available to products written in Java may not be available in the Company's products. The failure of the Company's products to operate effectively across the various existing and evolving versions of hardware and software platforms, programming languages, database environments, and ERP and accounting systems employed by customers would have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Products and Technology." RELIANCE ON THIRD-PARTY SOFTWARE The Company relies upon the licensing of certain software from third parties, including security technologies from online analytical processing business intelligence tools from Cognos Incorporated, ODBC drivers from Intersolv, Inc., and Internet translation applications from Chili!Soft, Inc. There can be no assurance that the Company's third-party technology licenses will continue to be available to the Company on commercially reasonable terms, if at all. The loss or inability to maintain any of these technology licenses could result in delays in the sale of the Company's products and services until equivalent technology, if available, is identified, licensed and integrated, which could have a material adverse effect on the Company's business, results of operations and financial condition. RISKS OF SOFTWARE DEFECTS OR SECURITY BREACHES Products as complex as those offered by the Company frequently contain defects or errors that may be detected at any point in the product's life. There can be no assurance that defects or errors will not occur in existing or new products. Further, the Company often renders implementation, consulting and other technical services in connection with licensing of the Company's products. The performance of these services typically involves working with sophisticated software, computing and networking systems, and the Company could fail to meet project milestones in a timely manner or to meet customer expectations for services as a result of any such defects. Although the Company's products contain security features, the Company's software products may be vulnerable to break-ins and similar disruptive problems. Such computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the Company's customers. Break-ins often involve hackers bypassing fire walls and misappropriating confidential information. Problems caused by product defects, security breaches or failure to meet project milestones for services could result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, harm to the Company's reputation, increased insurance costs or increased service and warranty costs. Addressing these problems may require significant expenditures of capital and resources by the Company, which would have a material adverse effect on the Company's business, results of operations and financial condition. PRODUCT LIABILITY RISKS Because customers rely on the Company's products for certain business-critical processes, any significant defects or errors in the Company's products or services, or in the products of third parties that are embedded in or bundled with the Company's products, might discourage utilization of the Company's products and services or result in tort or warranty claims against the Company, which could have a material adverse effect on the Company's business, results of operations and financial condition. Although the Company's license 16 18 agreements with its customers typically contain provisions designed to limit the Company's exposure to potential liability for damages arising out of use of or defects in the Company's products, it is possible that such limitation of liability provisions may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any such product liability claims to date, there can be no assurance that the Company will not be subject to such claims in the future. Further, although the Company maintains errors and omissions insurance, there can be no assurance that such insurance coverage will adequately cover the Company for such claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, defending such a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel, either of which could have a material adverse effect on the Company's business, results of operations and financial condition. LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT The Company is dependent upon its proprietary technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary information. The Company has also taken steps to avoid disclosure of its proprietary technology, including contractually restricting customer access to the Company's source code and requiring all employees to enter into confidentiality and invention assignment agreements. However, certain of the Company's former technical personnel did not execute such agreements. Further, the Company only recently began requiring contractors and temporary employees to execute the Company's confidentiality agreement rather than executing the confidentiality agreements maintained by temporary agencies or not executing any such agreements. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States, and the Company expects that it will become more difficult to monitor use of the Company's products as the Company increases its international presence. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate, nor that the Company's competitors will not independently develop similar technology. In addition, there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. Any such claims could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Intellectual Property Rights." RISKS RELATED TO REVENUE RECOGNITION POLICY The Company recognizes software license revenues when a non-cancelable license agreement has been signed with a customer, the software is shipped, no significant post-delivery vendor obligations remain and collection is deemed probable. The Company recognizes customer support revenues ratably over the contract term--typically one year--and recognizes revenues for consulting services as such services are performed. The Company believes its current revenue recognition policies and practices are consistent with applicable accounting standards in all material respects. It is not anticipated that there will be a material change to the Company's accounting for revenues as a result of the adoption of SOP 97-2 and related amendments and interpretations. However, full guidelines for this standard have not yet been issued. Once available, such guidance could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could materially adversely affect the Company's future revenues and earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Overview." 17 19 YEAR 2000 COMPLIANCE Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in little more than one year, computer systems and software used by many companies and organizations in a wide variety of industries will experience operating difficulties unless they are modified or upgraded to process information related to the century change. Significant uncertainty exists in the software and other industries concerning the scope and magnitude of problems associated with the century change. Based on the Company's assessment to date, the Company believes the current versions of its software products are "Year 2000 compliant"-- that is, they are capable of adequately distinguishing 21st century dates from 20th century dates. However, the Company's products are generally integrated into enterprise systems involving sophisticated hardware and complex software products, which may not be Year 2000 compliant. The Company may in the future be subject to claims based on Year 2000 problems in others' products, or issues arising from the integration of multiple products within an overall system. In addition, earlier versions of the Company's current products were not Year 2000 compliant, and the Company does not intend to render them Year 2000 compliant. Other Year 2000 compliance issues facing the Company include the need to ensure Year 2000 compliance of its own internal computer and other systems, to continue testing its software products, to audit the Year 2000 compliance status of its suppliers and business partners, and to conduct a legal audit. The Company has not completed its Year 2000 investigation, and there can be no assurance that the total cost of Year 2000 compliance will not be material to the Company's business, results of operations and financial condition. There can also be no assurance that the Company and its customers and suppliers will identify and remediate all significant Year 2000 problems on a timely basis, that remediation efforts will not involve significant time and expense, or that unremediated problems will not have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." RISKS ASSOCIATED WITH NAME CHANGE In August 1998, the Company changed its name from Portable Software Corporation to Concur Technologies, Inc. The Company believes that developing and strengthening the Concur brand is important to its marketing efforts, particularly to convey the fact that the Company's business strategy involves products beyond its original T&E expense management applications. Concur believes that it had developed significant market identification between its T&E expense management applications and its former name. There can be no assurance that the change of name will not have a material adverse effect on the Company's name recognition within its existing target market. Moreover, while the Company has expended substantial resources in establishing brand recognition of its new name, there can be no assurance that such efforts will be successful or that the Company will be able to enforce rights related to the Concur name, that it will be free to use that name in all jurisdictions, or that it will not be required to expend significant resources in defending the use of that name. NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price will be determined by negotiation among the Company and the representatives of the underwriters based upon a number of factors and may not be indicative of the market price of the Common Stock following the Offering. The market price of the Company's Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, market conditions in the enterprise software industry, changes in financial estimates by securities analysts, failure of the Company to meet or exceed analyst estimates, and other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many software companies and that often have been unrelated or disproportionate to the operating performance of such companies, and a number of publicly-traded software companies have current market prices below their initial public offering price. 18 20 These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the marketplace for a company's securities, securities class action litigation often has been instituted. Any such litigation against the Company could result in substantial costs and a diversion of management attention and resources, which would have a material adverse effect on the Company's business, results of operations and financial condition. CONTROL BY EXISTING STOCKHOLDERS Immediately after the closing of the Offering (based on shares outstanding as of October 31, 1998 and assuming the net exercise of warrants to purchase 31,900 shares of Common Stock), 74.3% of the outstanding Common Stock (72.2% if the underwriters' over-allotment option is exercised in full) will be beneficially owned by the directors, director nominees and executive officers of the Company, together with the entities affiliated with them, assuming no exercise of outstanding stock options. If all options owned by the directors and executive officers of the Company as of October 31, 1998 were to be exercised, the directors and executive officers of the Company, together with the entities affiliated with them, would own 13,044,604 shares of Common Stock, or 75.8% of the outstanding Common Stock of the Company following the Offering. As a result, these stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of all directors and approval of significant corporate transactions. In addition, upon completion of the Offering, TRS will hold a warrant to purchase up to 1,925,000 shares of the Company's Common Stock at prices ranging from $33.75 to $85.00, and expiring in three tranches through January 2002. TRS also holds a warrant to purchase 225,000 shares of Common Stock, at an exercise price per share equal to the per share price to the public in the Offering less 7%, that expires upon effectiveness of the Offering ("TRS Warrant Initial Tranche"). See "Principal and Selling Stockholders" and "Certain Transactions." ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS, DELAWARE LAW AND CERTAIN AGREEMENTS Certain provisions of the Company's Certificate of Incorporation and Bylaws and certain provisions of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. The authorized but unissued capital stock of the Company immediately following the Offering will include 5,000,000 shares of preferred stock. The Board of Directors is authorized, subject to any limitations prescribed by Delaware law, to issue the preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and to designate any qualifications, limitations or restrictions thereon, and to decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the stockholders. Accordingly, the Company may in the future issue a series of preferred stock, without further stockholder approval, that will have preference over the Common Stock with respect to the payment of dividends and upon liquidation, dissolution or winding-up of the Company. Certain other provisions of the Company's Certification of Incorporation and Bylaws, including provisions that divide the Board of Directors into three classes to serve staggered three-year terms, prohibit the stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings, may also make it more difficult for a third party to acquire a majority of the Company's voting stock or effect a change in control of the Company. In addition, Section 203 of the General Corporation Law of the State of Delaware, which is applicable to the Company, prohibits certain business combinations with certain stockholders for a period of three years after they acquire 15% or more of the outstanding voting stock of a corporation. Certain agreements with American Express also contain provisions making it more difficult for certain third parties to acquire a substantial amount of the Company's voting stock or effect a change in control of the Company. Any of the foregoing could adversely affect holders of the Common Stock or discourage or make difficult any attempt to obtain control of the Company. See "Management--Executive Officers and Directors," "Description of Capital Stock" and "Certain Transactions." 19 21 SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE OF THE COMMON STOCK Sales of a substantial number of shares of Common Stock after the Offering could adversely affect the market price of the Common Stock and could impair the Company's ability to raise capital through the sale of equity securities. Upon completion of the Offering, the Company will have outstanding 16,245,412 shares of Common Stock (16,710,412 shares if the underwriters' over-allotment option is exercised in full), assuming no exercise of options after October 31, 1998 and no exercise of the TRS Warrant Initial Tranche. Of these shares, the 3,100,000 shares offered hereby (3,565,000 shares if the underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144"). The remaining 13,145,412 shares of Common Stock outstanding upon completion of the Offering are "restricted securities" as that term is defined in Rule 144. Upon the expiration of lock-up agreements between certain of the Company's stockholders and the underwriters (the "Lock-Up Agreements") beginning 180 days after the date of this Prospectus, 199,013 shares will become eligible for sale pursuant to Rule 701 under the Securities Act ("Rule 701") and 10,588,821 shares held by certain affiliates of the Company will become eligible for sale pursuant to the volume, manner of sale and notice requirements of Rule 144. The remaining 2,357,578 shares outstanding will become eligible for sale from time to time more than 180 days after the date of this Prospectus. In addition to the foregoing, as of October 31, 1998, there were outstanding options to purchase an aggregate of 1,543,021 shares of Common Stock which will be eligible for sale in the public market from time to time, subject to vesting and the expiration of Lock-Up Agreements. The Company intends to file a registration statement on Form S-8 under the Securities Act within 180 days after the completion of the Offering to register 5,692,874 shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock and stock option plans upon effectiveness of the Offering, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. The representatives of the underwriters have informed the Company that the underwriters reserve the right without announcement to release shares from the Lock-Up Agreements prior to expiration of the 180-day term of such agreements. Any request for release would be evaluated by the representatives of the underwriters, and the decision whether or not to permit early release of shares would be made dependent upon the facts and circumstances existing at the time of the request. See "Shares Eligible for Future Sale." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience an immediate dilution of $8.63 per share in the pro forma net tangible book value of their Common Stock from the assumed initial public offering price of $10.50 per share. To the extent outstanding warrants or options are exercised, there may be further dilution. See "Dilution." BROAD DISCRETION OVER USE OF PROCEEDS The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes. These will include increased sales and marketing expenditures, increased expenditures for professional services capabilities, increased research and development expenditures, and capital expenditures made in the ordinary course of business. The Company may also use a portion of the net proceeds for possible acquisitions of additional businesses, products and technologies or the establishment of joint ventures that are complementary to the current or future business of the Company, as determined by management in its sole discretion. The Company may change the allocation of net proceeds among the various uses described above. Accordingly, investors in the Offering will rely upon the judgment of the Company's management with respect to the use of proceeds, with only limited information concerning management's specific intentions. See "Use of Proceeds." 20 22 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,900,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $27.4 million ($32.0 million if the Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $10.50 and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The primary purposes of the Offering are to increase the Company's equity capital, to create a public market for the Company's Common Stock and to facilitate future access by the Company to public equity markets. The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes. These will include increased domestic and international sales and marketing expenditures, increased research and development expenditures and capital expenditures made in the ordinary course of business. The Company intends during fiscal 1999 to use approximately $11.0 million from the net proceeds of the Offering to increase its domestic and international sales and marketing capabilities, approximately $5.0 million for increased research and development, and approximately $5.0 million for expanded professional services capabilities. The Company has no other specific plans as to the use of the net proceeds from the Offering. The Company may also use a portion of the net proceeds for possible acquisitions of businesses, products and technologies or the establishment of joint ventures that are complementary to the current and future business of the Company. Although the Company has not identified any specific businesses, products or technologies that it may acquire, and there are no current agreements or understandings with respect to any such transactions, the Company does from time to time evaluate such opportunities. Pending such uses, the net proceeds of the Offering will be invested in short-term, investment-grade, interest-bearing instruments. None of the net proceeds of the Offering will be paid to NASD members, affiliates, or associated or related persons thereof. The foregoing represents the Company's best estimate of its allocation of the net proceeds of the Offering. Future events, as well as changes in economic, regulatory or competitive conditions or in the Company's business and the results of its activities, may make changes in the allocation of funds within the described categories or to other purposes necessary or desirable. Management has broad discretion as to the allocation of the net proceeds of the Offering. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and does not expect to do so in the foreseeable future. The Company anticipates that any future earnings will be retained by the Company to develop and expand its business. Any future determination with respect to the payment of dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's operating results, financial condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant. In addition, the terms of certain of the Company's credit facilities prohibit the payment of cash dividends without the lender's consent. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 21 23 CAPITALIZATION The following table sets forth, as of September 30, 1998, (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company after giving effect to the conversion of all outstanding shares of redeemable convertible preferred stock into Common Stock and the conversion of all outstanding preferred stock warrants into warrants to purchase Common Stock, and (iii) the pro forma capitalization as adjusted to give effect to the sale of the 2,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.50 per share (after deducting estimated underwriting discounts and commissions and offering expenses) and the receipt of the estimated net proceeds therefrom and the net exercise of warrants to purchase 31,900 shares of Common Stock at an assumed initial public offering price of $10.50 per share.
SEPTEMBER 30, 1998 ------------------------------ PRO AS ACTUAL FORMA ADJUSTED -------- -------- -------- (IN THOUSANDS) Long-term obligations, net of current portion............... $ 8,092 $ 8,092 $ 8,092 Redeemable convertible preferred stock, no par value, 10,457,716 shares authorized, 10,213,553 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or as adjusted..................... 29,685 -- -- Redeemable convertible preferred stock warrants............. 444 -- -- Stockholders' equity (deficit): Preferred Stock, $.001 par value, no shares authorized, issued and outstanding, actual or pro forma; 5,000,000 shares authorized, no shares issued or outstanding, as adjusted............................................... -- -- -- Common Stock, $.001 par value; 60,000,000 shares authorized; 3,098,543 shares issued and outstanding, actual; 13,312,096 shares issued and outstanding, pro forma; and 16,243,996 shares issued and outstanding, as adjusted(1)............................................ 6,276 36,405 63,823 Deferred stock compensation............................... (452) (452) (452) Accumulated deficit....................................... (32,043) (32,043) (32,043) -------- -------- -------- Total stockholders' equity (deficit)................... (26,219) 3,910 31,328 -------- -------- -------- Total capitalization.............................. $ 12,002 $ 12,002 $ 39,420 ======== ======== ========
- --------------- (1) Excludes: (i) 1,539,521 shares issuable upon the exercise of stock options outstanding (of which options to purchase 498,378 shares were exercisable) under the Company's stock option plans, at a weighted average exercise price of $0.95 per share; (ii) 3,800,000 shares reserved for issuance under the Company's stock and stock option plans upon consummation of the Offering; (iii) 354,768 shares of Common Stock available for future grant under the 1994 Plan; (iv) 110,306 shares issuable upon exercise of outstanding options (74,202 of which are subject to vesting) assumed by the Company in connection with the acquisition of 7Software, at a weighted average exercise price of $0.025 per share; (v) 137,453 shares issuable upon exercise of outstanding warrants with a weighted average exercise price of $5.73 per share; and (vi) 1,925,000 shares issuable upon the exercise of a warrant issued to TRS at prices ranging from $33.75 to $85.00, expiring in three tranches through January 2002. Also excludes the 225,000 shares issuable upon exercise of the TRS Warrant Initial Tranche at a price of $9.765 per share. Upon effectiveness of the Offering, no further options will be granted under the 1994 Stock Option Plan. See "Management--Director Compensation," "--Employee Benefit Plans," "Certain Transactions" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial Statements. 22 24 DILUTION The pro forma net tangible book value of the Company as of September 30, 1998, giving effect to the conversion of all outstanding shares of preferred stock into Common Stock, the conversion of all outstanding warrants to purchase preferred stock into warrants to purchase Common Stock and the net exercise of warrants to purchase 31,900 shares of Common Stock upon or prior to the completion of the Offering was $3,030,000, or approximately $0.23 per share. Pro forma net tangible book value per share represents the amount of total tangible assets of the Company less total liabilities, divided by the number of shares of Common Stock outstanding on an as-if-converted basis as adjusted for the incremental shares from the net exercise of warrants referred to above. Dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after the Offering. After giving effect to the sale of 2,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.50 per share (after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company) and the receipt of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of September 30, 1998 would have been $30,448,000, or $1.87 per share. This represents an immediate increase in pro forma net tangible book value of $1.64 per share to existing stockholders and an immediate dilution of $8.63 per share to purchasers of Common Stock in the Offering. The following table illustrates the per share dilution. Assumed initial public offering price per share............. $10.50 Pro forma net tangible book value per share as of September 30, 1998..................................... $ 0.23 Increase per share attributable to new investors.......... 1.64 ------ Pro forma net tangible book value per share after the Offering.................................................. 1.87 ------ Dilution per share to new investors......................... $ 8.63 ======
The following table summarizes, as of September 30, 1998 on the pro forma basis described above, the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by the new investors pursuant to the Offering, before deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company at an assumed initial public offering price of $10.50 per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders(1)........................ 13,343,996 82.1% $36,478,000 54.5% $2.73 New investors(1)(2)............................. 2,900,000 17.9 30,450,000 45.5 10.50 ---------- ----- ----------- ------ Total................................. 16,243,996 100.0% $66,928,000 100.0% ========== ===== =========== ======
- --------------- (1) Sales by the Selling Stockholders in the Offering will reduce the number of shares held by existing stockholders to 13,143,996, or 80.9% (78.7% if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to 3,100,000, or 19.1% (18.5% if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock outstanding after the Offering. See "Principal and Selling Stockholders." (2) Excludes (i) 1,539,521 shares subject to outstanding options as of September 30, 1998 at a weighted average exercise price of $0.95 per share, (ii) 354,768 shares reserved for issuance under the 1994 Stock Option Plan, (iii) 3,800,000 shares reserved for issuance under the Company's stock and stock option plans upon consummation of the Offering, and (iv) 1,925,000 shares issuable upon exercise of a warrant held by American Express, at prices ranging from $33.75 to $85.00 expiring in three tranches through January 2002. Also excludes the shares issuable upon exercise of the TRS Warrant Initial Tranche. To the extent outstanding options or warrants are exercised, there may be further dilution to new investors. See "Management--Director Compensation," "--Employee Benefit Plans," "Certain Transactions" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial Statements. 23 25 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data are qualified by reference to and should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The consolidated statement of operations data for the years ended September 30, 1996, 1997 and 1998, and the consolidated balance sheet data as of September 30, 1997 and 1998, are derived from consolidated financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this Prospectus. The consolidated statement of operations data for the year ended September 30, 1995 and the consolidated balance sheet data as of September 30, 1995 and 1996 are derived from audited consolidated financial statements that are not included in this Prospectus. The consolidated statement of operations data for the year ended September 30, 1994, and the consolidated balance sheet data as of September 30, 1994, are derived from unaudited consolidated financial statements not included in this Prospectus. Historical results are not necessarily indicative of future results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations."
YEAR ENDED SEPTEMBER 30, ------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues, net: Licenses.................................................. $ -- $ 2,104 $ 1,717 $ 6,347 $ 11,696 Services.................................................. -- 24 242 1,923 5,463 ------- ------- ------- -------- -------- Total revenues...................................... -- 2,128 1,959 8,270 17,159 ------- ------- ------- -------- -------- Cost of revenues: Licenses.................................................. -- 728 386 394 558 Services.................................................. -- 673 839 2,269 5,684 ------- ------- ------- -------- -------- Total cost of revenues.............................. -- 1,401 1,225 2,663 6,242 ------- ------- ------- -------- -------- Gross profit................................................ -- 727 734 5,607 10,917 ------- ------- ------- -------- -------- Operating expenses: Sales and marketing....................................... 111 2,363 2,936 5,896 12,353 Research and development.................................. 425 744 1,793 3,401 6,434 General and administrative................................ 66 515 963 1,815 4,687 Acquired in-process technology(1)......................... -- -- -- -- 5,203 ------- ------- ------- -------- -------- Total operating expenses............................ 602 3,622 5,692 11,112 28,677 ------- ------- ------- -------- -------- Loss from operations........................................ (602) (2,895) (4,958) (5,505) (17,760) Other income (expense), net................................. -- 5 5 (19) (314) ------- ------- ------- -------- -------- Net loss.................................................... $ (602) $(2,890) $(4,953) $ (5,524) $(18,074) ======= ======= ======= ======== ======== Pro forma basic and diluted net loss per share(2)........... $ (1.58) ======== Shares used in calculation of pro forma basic and diluted net loss per share(2)..................................... 11,419 ========
SEPTEMBER 30, -------------------------------------------------------------- PRO FORMA(3) 1994 1995 1996 1997 1998 1998 ----- ------- ------- -------- -------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents................................... $ 277 $ 2,541 $ 5,685 $ 6,695 $ 15,629 $15,629 Working capital (deficit)................................... (175) 1,839 4,073 6,183 8,474 8,474 Total assets................................................ 345 3,058 6,759 12,364 25,031 25,031 Long-term obligations, net of current portion............... 233 125 215 3,687 8,092 8,092 Redeemable convertible preferred stock and warrants......... -- 4,903 12,386 17,345 30,129 -- Total stockholders' equity (deficit)........................ (353) (3,234) (8,186) (13,710) (26,219) 3,910
- --------------- (1) In June 1998, the Company acquired 7Software, resulting in a charge for acquired in-process technology. See Note 3 of Notes to Consolidated Financial Statements. The Financial Statements of 7Software are included elsewhere herein. (2) See Note 13 of Notes to Consolidated Financial Statements for information concerning the calculation of pro forma basic and diluted net loss per share. (3) Pro forma to give effect to (i) the conversion of all outstanding shares of preferred stock into 10,213,553 shares of Common Stock and (ii) the conversion of all outstanding warrants to purchase preferred stock into warrants to purchase 2,329,578 shares of Common Stock. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Concur is a leading provider of Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. The Company's Xpense Management Solution ("XMS") and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment ("T&E") expense reports and front-office procurement requisitions. Concur believes it is the leading provider of T&E expense management solutions, based on a combination of the number of customers it serves and the features its solutions provide. Since the introduction of XMS in 1996, the Company has licensed its products to over 150 enterprise customers for use by over 800,000 end users. Through its June 1998 acquisition of 7Software, Inc., the Company added the CompanyStore front-office procurement application to its product suite. By automating manual, paper-based processes, the Company's products reduce processing costs and enable customers to consolidate purchases with preferred vendors and negotiate vendor discounts. Concur was incorporated in 1993 and commenced operations in fiscal 1994, initially developing QuickXpense, a retail, shrink-wrapped application that automated T&E expense reporting for individuals. Concur first shipped QuickXpense in fiscal 1995 and sold QuickXpense through a combination of retail channels and direct marketing, utilizing a small sales force and no consulting or implementation staff. In response to inquiries from businesses seeking to automate the entire T&E expense reporting process, including back-office processing and integration to financial systems, the Company significantly expanded its product development efforts and released XMS, a client-server based enterprise T&E expense management solution in July 1996. In connection with that transition, the Company also replaced its retail and direct marketing programs with a direct sales force including sales representatives and sales engineers, built consulting services and customer training staffs, and redirected its marketing efforts to focus on enterprise sales. In March 1998, the Company shipped an Intranet-based version of XMS. While the Company continues to sell the client-server version of XMS, since its release the Intranet-based version has accounted for a majority of XMS license revenues and the Company expects to continue to focus its product development efforts on the Intranet-based versions of its products. On June 30, 1998, the Company acquired 7Software, a privately-held software company and the developer of CompanyStore. 7Software was incorporated in May 1997. 7Software was selling the initial version of its product through a single sales representative at the time Concur acquired it. Concur's existing sales force and consulting services group sells and services both XMS and CompanyStore, and the Company's research and development activities will be expanded to develop a common technology platform, the Concur Common Platform, for both XMS and CompanyStore. In connection with the acquisition, the Company issued 708,918 shares of its Common Stock in exchange for all the outstanding shares of 7Software, converted all of 7Software's outstanding options into options to purchase up to 123,921 shares of the Company's Common Stock, paid $130,000 to 7Software, and agreed to pay $500,000 to certain shareholders of 7Software, resulting in a total purchase price valued at $6.2 million, including direct costs of the acquisition. The total purchase price was determined by the Company's management and Board of Directors based on an assessment of the value of 7Software and as a result of negotiations with 7Software. In determining the purchase price, the Company estimated the fair value of the Company's Common Stock and the Company's stock options issued in the transaction. The Company also entered into employment and bonus agreements with certain officers of 7Software. The acquisition was recorded under the purchase method of accounting and the results of operations of 7Software and the fair value of the assets acquired and liabilities assumed were included in Concur's consolidated financial statements beginning on the acquisition date. In connection with 25 27 this acquisition, the Company recorded $5.2 million for in-process technology as an expense in the quarter ended June 30, 1998. In addition, the Company recorded capitalized technology and other intangible assets of $960,000 that will be amortized on a straight-line basis over the three years following the acquisition. See "--Acquisition of 7Software" and Note 3 of Notes to Consolidated Financial Statements. The Company expects that for the foreseeable future the significant majority of its revenues will continue to be derived from its XMS product line and related services. See "Risk Factors--Product Concentration," "--Risks Associated with Expansion into New Market" and "--Risks Associated with Acquisitions Generally." The Company's revenues, which consist of software license revenues and service revenues, totaled $2.0 million, $8.3 million and $17.2 million in fiscal 1996, 1997 and 1998, respectively. Through June 1996, the Company's revenues were derived from licenses of QuickXpense and related services. In July 1996, the Company released XMS. Substantially all of the Company's revenues since the fourth quarter of fiscal 1996 have been derived from licenses of XMS and related services. The Company's product pricing is based on the number of users or employees of the purchasing enterprise. Service revenues consist of consulting, customer support and training. See "Risk Factors--Limited Operating History; Future Operating Results Uncertain; History of Losses" and "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results." Concur markets its software and services primarily through its direct sales organization in the United States, Canada, the United Kingdom and Australia. Revenues from XMS licenses and services to customers outside the United States were insignificant prior to fiscal 1997, and represented approximately $1.3 million and $810,000 in fiscal 1997 and 1998, respectively. Historically, as a result of the relatively small amount of international sales, fluctuations in foreign currency exchange rates have not had a material effect on the Company's business, results of operations and financial condition. See "Risk Factors--International Operations" and Note 15 of Notes to Consolidated Financial Statements. For fiscal 1998 and prior years the Company recognized revenues in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 91-1 ("SOP 91-1"). Software license revenues are recognized when a non-cancelable license agreement has been signed with a customer, the software is shipped, no significant post delivery vendor obligations remain and collection is deemed probable. Maintenance revenues are recognized ratably over the contract term, typically one year. Revenues for consulting services are recognized as such services are performed. Commencing with fiscal 1999, the Company recognizes revenue in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition" and related amendments and interpretations ("SOP 97-2"). Based upon its interpretation of SOP 97-2 and its current business policies and practices, the Company believes there will be no significant impact on revenue recognition as a result of the adoption of SOP 97-2. However, full guidelines for this standard have not yet been issued. Once available, such guidelines could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could materially adversely affect the Company's future revenues and earnings. Since its inception, the Company has incurred substantial research and development costs and has invested heavily in the expansion of its sales, marketing and professional services organizations to build an infrastructure to support its long-term growth strategy. The number of the Company's full-time employees increased from 65 as of September 30, 1996, to 133 as of September 30, 1997 and to 222 as of September 30, 1998, representing increases of 105% and 67%, respectively. As a result of investments in the Company's infrastructure, the Company has incurred net losses in each fiscal quarter since inception and, as of September 30, 1998, had an accumulated deficit of $32.0 million. The Company anticipates that its operating expenses will increase substantially for the foreseeable future as it expands its product development, sales and marketing, and professional services staff. Accordingly, the Company expects to incur net losses for the foreseeable future. The Company has recorded aggregate deferred stock compensation of $861,000. Deferred stock compensation is amortized over the life of the options, generally four years. During fiscal 1998, the Company recorded amortization of deferred stock compensation of $409,000. 26 28 The Company believes that period-to-period comparisons of its operating results are not meaningful and should not be relied upon as indicative of future performance. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. There can be no assurance the Company will be successful in addressing such risks and difficulties. In addition, although Concur has experienced significant revenue growth recently, there can be no assurance that such revenue growth will continue or that the Company will achieve or maintain profitability in the future. See "Risk Factors--Limited Operating History; Future Operating Results Uncertain; History of Losses" and "--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results." RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:
YEAR ENDED SEPTEMBER 30, -------------------------- 1996 1997 1998 ------ ------ ------ Revenues, net: Licenses.................................................. 87.6% 76.7% 68.2% Services.................................................. 12.4 23.3 31.8 ------ ------ ------ Total revenues.................................... 100.0 100.0 100.0 ------ ------ ------ Cost of revenues: Licenses.................................................. 19.7 4.8 3.3 Services.................................................. 42.8 27.4 33.1 ------ ------ ------ Total cost of revenues............................ 62.5 32.2 36.4 ------ ------ ------ Gross margin................................................ 37.5 67.8 63.6 ------ ------ ------ Operating expenses: Sales and marketing....................................... 149.9 71.3 72.0 Research and development.................................. 91.5 41.1 37.5 General and administrative................................ 49.2 21.9 27.3 Acquired in-process technology............................ -- -- 30.3 ------ ------ ------ Total operating expenses.......................... 290.6 134.3 167.1 ------ ------ ------ Loss from operations........................................ (253.1) (66.5) (103.5) Other income (expense), net................................. 0.3 (0.2) (1.9) ------ ------ ------ Net loss.................................................... (252.8)% (66.7)% (105.4)% ====== ====== ======
Revenues The Company's revenues are derived from software licenses and related services. The Company's revenues were $2.0 million, $8.3 million and $17.2 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $6.3 million, or 322%, from fiscal 1996 to fiscal 1997 and $8.9 million, or 107%, from fiscal 1997 to fiscal 1998. The Company had no customer that accounted for more than 10% of its revenues in fiscal 1996, 1997 or 1998. The Company's license revenues were $1.7 million, $6.3 million and $11.7 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $4.6 million, or 271%, from fiscal 1996 to fiscal 1997 and $5.4 million, or 84%, from fiscal 1997 to fiscal 1998. The increase in the Company's license revenues from fiscal 1996 to fiscal 1997 was due to increased market acceptance of the client-server version of XMS and increases in both the size and productivity of the sales force. The increase in license revenues from fiscal 1997 to fiscal 1998 was a result of the continued impact of those same factors, as well as the release of the Intranet version of XMS, and the strategic marketing alliance agreement signed with American Express in December 1997. Virtually none of the increase in revenues was attributable to increased prices. The Company has never changed the list price of XMS. 27 29 The Company's service revenues were $242,000, $1.9 million and $5.5 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $1.7 million from fiscal 1996 to fiscal 1997 and $3.5 million, or 184%, from fiscal 1997 to fiscal 1998. Prior to fiscal 1997, service revenues consisted primarily of customizing electronic versions of expense report forms in connection with sales of QuickXpense. In fiscal 1997 and fiscal 1998, service revenues consisted primarily of consulting service fees, customer support and, to a lesser extent, training services, associated with the increasing license revenues during these periods. Service revenues represented 12.4%, 23.3% and 31.8% of the Company's total revenues in fiscal 1996, 1997 and 1998, respectively. The increase in absolute service revenues from fiscal 1997 to fiscal 1998 reflects increasing licenses of XMS as well as service revenues recognized with respect to licenses entered into in prior periods. The Company believes that the percentage of total revenues represented by service revenues in prior fiscal years is not indicative of levels to be expected in future periods. Due to its limited experience selling CompanyStore, the Company is uncertain how recognition of service revenues associated with such sales will affect its results of operations in the future. In addition, the Company expects that its proportion of service revenues to total revenues will fluctuate in the future, depending in part on the Company's use of third-party consulting and implementation service providers as well as on the market's acceptance of the Company's outsourced ESP solution. Cost of Revenues Cost of License Revenues. Cost of license revenues includes license fees for third-party software, product media, product duplication and manuals. Cost of license revenues was $386,000, $394,000 and $558,000 in fiscal 1996, 1997 and 1998, respectively, representing increases of $8,000, or 2%, from fiscal 1996 to fiscal 1997 and $164,000, or 42%, from fiscal 1997 to fiscal 1998. Cost of license revenues remained relatively constant from fiscal 1996 to fiscal 1997 as a result of a shift in the mix of revenues from QuickXpense and XMS. The increase from fiscal 1997 to fiscal 1998 was a result of increased expenses associated with sub-licensing of third party software due to increased sales of XMS and the costs of production, manuals and other media associated with the release of the Intranet version of XMS in March 1998. Cost of license revenues as a percentage of license revenues was 22.5%, 6.2% and 4.8% for fiscal 1996, 1997 and 1998, respectively. A portion of the capitalized technology and other intangible assets recorded in connection with the acquisition of 7Software will be amortized on a straight-line basis over three years as cost of license revenues. The Company expects that the cost of license revenues as a percentage of total revenues and license revenues may increase significantly upon the introduction of the Company's outsourced enterprise service provider ("ESP") solution and will fluctuate in the future depending in part on the demand for the Company's current products and its outsourced ESP solution. Cost of Service Revenues. Cost of service revenues includes personnel and other costs related to consulting services, technical support, expense report forms development and training. Cost of service revenues was $839,000, $2.3 million and $5.7 million, in fiscal 1996, 1997 and 1998, respectively, representing increases of $1.4 million, or 170%, from fiscal 1996 to fiscal 1997 and $3.4 million, or 151%, from fiscal 1997 to fiscal 1998. The increase from fiscal 1996 to fiscal 1997 was a result of hiring and training a consulting organization to implement XMS and retraining existing personnel, in connection with the shift in the Company's product line from QuickXpense to XMS. The increase from 1997 to 1998 was primarily due to an increase in professional services personnel to support the Company's growing XMS customer base. Cost of service revenues as a percentage of service revenues was 346.7%, 118.0% and 104.1% for fiscal 1996, 1997 and 1998, respectively. The decrease in cost of service revenues as a percentage of service revenues from fiscal 1996 through fiscal 1998 was primarily due to economies of scale realized as a result of higher levels of consulting services activity and increased experience of the professional services personnel. Cost of service revenues as a percentage of service revenues may vary between periods due to the mix of services provided by the Company and the resources used to provide such services. Costs and Expenses Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, lead referral fees, and travel, entertainment and promotional 28 30 expenses. Sales and marketing expenses were $2.9 million, $5.9 million and $12.4 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $3.0 million, or 101%, from fiscal 1996 to fiscal 1997 and $6.5 million, or 110%, from fiscal 1997 to fiscal 1998. The increases from fiscal 1996 through 1998 primarily reflect the Company's investment in its sales and marketing infrastructure, which included significant personnel-related expenses such as salaries, benefits and commissions, recruiting fees, travel and entertainment expenses, and related costs of hiring sales management, sales representatives, sales engineers and marketing personnel. Sales and marketing employees totaled 21, 42 and 66 as of September 30, 1996, 1997 and 1998, respectively, representing increases of 100% and 57%, respectively. The increase in sales and marketing expenses from fiscal 1997 to fiscal 1998 also reflected increased hiring rates to replace and support promoted regional sales managers, public relations and trade show expenses, and sales referral fees made under the Company's agreement with its referral partners, principally American Express. Sales and marketing expenses represented 149.9%, 71.3% and 72.0% of the Company's total revenues for fiscal 1996, 1997 and 1998, respectively. The decreases in sales and marketing expenses as a percentage of total revenues from fiscal 1996 through 1998 primarily reflects the more rapid growth of revenues compared to the growth of sales and marketing expenses in this period due to the increase in service revenues as a percentage of total revenues and a maturing sales force. The Company believes that a significant increase in its sales and marketing efforts is essential for it to maintain its market position and further increase acceptance of its products. Accordingly, the Company anticipates it will continue to invest significantly in sales and marketing for the foreseeable future, and sales and marketing expenses will increase in future periods. Research and Development. Research and development expenses consist primarily of salaries and benefits for software developers, product managers and quality assurance personnel and payments to outside contractors. Research and development expenses were $1.8 million, $3.4 million and $6.4 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $1.6 million, or 90%, from fiscal 1996 to fiscal 1997 and $3.0 million, or 89% from fiscal 1997 to fiscal 1998. The increases from fiscal 1996 through 1998 were primarily related to the increase in the number of software developers and quality assurance personnel and outside contractors to support the Company's product development and testing activities related to the development and release of both the client-server and Intranet versions of XMS. The Company's research and development employees totaled 22, 38 and 64 as of September 30, 1996, 1997 and 1998, respectively, representing increases of 73% and 68%, respectively. Research and development costs represented 91.5%, 41.1% and 37.5% of the Company's total revenues in fiscal 1996, 1997 and 1998, respectively. The Company believes that a significant increase in its research and development investment is essential for it to maintain its market position, to continue to expand its product line and to develop a common technology platform for its suite of products. Accordingly, the Company anticipates that it will continue to invest significantly in product research and development for the foreseeable future, and research and development expenses are likely to increase in future periods. In the development of the Company's new products and enhancements of existing products, the technological feasibility of the software is not established until substantially all product development is complete. Accordingly, software development costs eligible for capitalization were insignificant, and all costs related to internal research and development have been expensed as incurred. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for the Company's executive, finance, administrative and information services personnel. General and administrative expenses were $963,000, $1.8 million and $4.7 million in fiscal 1996, 1997 and 1998, respectively, representing increases of $852,000, or 88%, from fiscal 1996 to 1997 and $2.9 million, or 158%, from fiscal 1997 to 1998. The increases from fiscal 1996 through 1998 were primarily the result of additional finance, executive and administrative personnel to support the growth of the Company's business during these periods. In addition to increased compensation and related expenses, the increase in general and administrative expenses from 1997 to 1998 reflects an increase in the allowance for doubtful accounts related to the Company's increase in revenues, and stock compensation expense, during the period. During 1998, the Company recorded deferred stock compensation for the differences between the exercise prices and the deemed fair values of the Company's Common Stock with respect to certain options, and recorded amortization of deferred stock compensation of $409,000. General and administrative costs represented 49.2%, 21.9% and 27.3% of the Company's total revenues in fiscal 1996, 1997 and 1998, respectively. The Company believes that its general and administrative expenses will continue to increase as a result of the continued 29 31 expansion of the Company's administrative staff and the expenses associated with becoming a public company, including but not limited to annual and other public reporting costs, directors' and officers' liability insurance, investor relations programs and professional services fees. Income Taxes. As of September 30, 1998, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $19.1 million and tax credit carryforwards of $262,000, which expire at various dates from 2009 to 2013. The Code contains provisions that limit the use in any future period of net operating loss and credit carryforwards upon the occurrence of certain events, including a significant change in ownership interests. The Company had deferred tax assets, including its net operating loss carryforwards and tax credits, totaling approximately $8.8 million as of September 30, 1998. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset balance. See Note 8 of Notes to Consolidated Financial Statements. 30 32 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited consolidated statement of operations data for the eight quarters in the 24-month period ended September 30, 1998, as well as such data expressed as a percentage of the Company's total revenues for the respective periods indicated. This data has been derived from unaudited Consolidated Financial Statements that have been prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information when read in conjunction with the Consolidated Financial Statements and Notes thereto. The Company's quarterly results have been in the past and may in the future be subject to significant fluctuations. As a result, the Company believes that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future period. See "Risk Factors--Unpredictable Fluctuations and Seasonal Patterns in Quarterly Results."
QUARTER ENDED ---------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1997 1997 1997 ------------ --------- -------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS Revenues, net: Licenses................... $ 923 $ 1,335 $ 1,829 $ 2,260 Services................... 218 336 564 805 ------- ------- ------- ------- Total revenues........... 1,141 1,671 2,393 3,065 Cost of revenues: Licenses................... 40 80 99 175 Services................... 317 468 585 899 ------- ------- ------- ------- Total cost of revenues... 357 548 684 1,074 ------- ------- ------- ------- Gross profit................. 784 1,123 1,709 1,991 ------- ------- ------- ------- Operating expenses: Sales and marketing........ 1,061 1,378 1,434 2,023 Research and development... 603 787 836 1,175 General and administrative........... 322 450 440 603 Acquired in-process technology............... -- -- -- -- ------- ------- ------- ------- Total operating expenses............... 1,986 2,615 2,710 3,801 ------- ------- ------- ------- Loss from operations......... (1,202) (1,492) (1,001) (1,810) Other income (expense), net........................ 17 11 (14) (33) ------- ------- ------- ------- Net loss..................... $(1,185) $(1,481) $(1,015) $(1,843) ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES Revenues, net: Licenses................... 80.9% 79.9% 76.4% 73.7% Services................... 19.1 20.1 23.6 26.3 ------- ------- ------- ------- Total revenues........... 100.0 100.0 100.0 100.0 Cost of revenues: Licenses................... 3.5 4.8 4.1 5.7 Services................... 27.8 28.0 24.4 29.3 ------- ------- ------- ------- Total cost of revenues... 31.3 32.8 28.5 35.0 ------- ------- ------- ------- Gross margin................. 68.7 67.2 71.5 65.0 ------- ------- ------- ------- Operating expenses: Sales and marketing........ 93.0 82.4 59.9 66.0 Research and development... 52.8 47.1 34.9 38.3 General and administrative........... 28.2 26.9 18.4 19.7 Acquired in-process technology............... -- -- -- -- ------- ------- ------- ------- Total operating expenses............... 174.0 156.4 113.2 124.0 ------- ------- ------- ------- Loss from operations......... (105.3) (89.2) (41.7) (59.0) Other income (expense), net........................ 1.4 0.7 (0.6) (1.1) ------- ------- ------- ------- Net loss..................... (103.9)% (88.5)% (42.3)% (60.1)% ======= ======= ======= ======= QUARTER ENDED ---------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1997 1998 1998 1998 ------------ --------- -------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS Revenues, net: Licenses................... $ 2,036 $ 2,818 $ 3,185 $ 3,657 Services................... 1,079 1,141 1,456 1,787 ------- ------- ------- ------- Total revenues........... 3,115 3,959 4,641 5,444 Cost of revenues: Licenses................... 82 90 146 240 Services................... 1,097 1,115 1,490 1,982 ------- ------- ------- ------- Total cost of revenues... 1,179 1,205 1,636 2,222 ------- ------- ------- ------- Gross profit................. 1,936 2,754 3,005 3,222 ------- ------- ------- ------- Operating expenses: Sales and marketing........ 2,206 2,400 3,280 4,467 Research and development... 1,083 1,195 1,884 2,272 General and administrative........... 837 836 1,552 1,462 Acquired in-process technology............... -- -- 5,203 -- ------- ------- ------- ------- Total operating expenses............... 4,126 4,431 11,919 8,201 ------- ------- ------- ------- Loss from operations......... (2,190) (1,677) (8,914) (4,979) Other income (expense), net........................ (93) (103) (118) -- ------- ------- ------- ------- Net loss..................... $(2,283) $(1,780) $(9,032) $(4,979) ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES Revenues, net: Licenses................... 65.4% 71.2% 68.6% 67.2% Services................... 34.6 28.8 31.4 32.8 ------- ------- ------- ------- Total revenues........... 100.0 100.0 100.0 100.0 Cost of revenues: Licenses................... 2.6 2.3 3.1 4.4 Services................... 35.3 28.2 32.1 36.4 ------- ------- ------- ------- Total cost of revenues... 37.9 30.5 35.2 40.8 ------- ------- ------- ------- Gross margin................. 62.1 69.5 64.8 59.2 ------- ------- ------- ------- Operating expenses: Sales and marketing........ 70.8 60.6 70.6 82.0 Research and development... 34.8 30.2 40.6 41.7 General and administrative........... 26.9 21.1 33.4 26.9 Acquired in-process technology............... -- -- 112.1 -- ------- ------- ------- ------- Total operating expenses............... 132.5 111.9 256.7 150.6 ------- ------- ------- ------- Loss from operations......... (70.4) (42.4) (191.9) (91.4) Other income (expense), net........................ (2.9) (2.6) (2.5) -- ------- ------- ------- ------- Net loss..................... (73.3)% (45.0)% (194.4)% (91.4)% ======= ======= ======= =======
31 33 The trends discussed in the annual comparisons of operating results from fiscal 1996 through 1998 apply generally to the comparison of results of operations for the eight quarters in the 24-month period ended September 30, 1998, adjusted for the seasonality the Company has experienced as referred to below. The Company's operating expenses for the three months ended June 30, 1998 exceeded levels that the Company has historically experienced due in part to acquired in-process technology expense recorded in connection with the acquisition of 7Software. In addition, operating expenses for the three month periods ended June 30, and September 30, 1998 increased significantly as a result of increased (i) T&E expenses associated with higher personnel levels, (ii) use of independent contractors and other outside services for continued development and localization of XMS, (iii) recruiting and related hiring expenses for additional senior management in the professional services, research and development, administrative, marketing and sales organizations, (iv) allowances for doubtful accounts due to the Company's revenue growth in fiscal 1998, and (v) amortization of deferred stock compensation. The Company's quarterly operating results have fluctuated significantly in the past, and will continue to fluctuate in the future, as a result of a number of factors, many of which are outside the Company's control. These factors include: demand for the Company's products and services; size and timing of specific sales; level of product and price competition; timing and market acceptance of new product introductions and product enhancements by Concur and its competitors; changes in pricing policies by Concur or its competitors; Concur's ability to hire, train and retain sales and consulting personnel to meet the demand, if any, for XMS and CompanyStore; the length of sales cycles; Concur's ability to establish and maintain relationships with third-party implementation services providers and strategic partners; delay of customer purchases caused by announcement of new hardware or enterprise resource planning ("ERP") platforms or otherwise; the mix of products and services sold, including an anticipated shift to providing its solutions as an ESP; mix of distribution channels through which products are sold; mix of international and domestic revenues; changes in the Company's sales force incentives; software defects and other product quality problems; personnel changes; changes in the Company's strategy, including the anticipated development of an ESP strategy; general domestic and international economic and political conditions; and budgeting cycles of the Company's customers. The Company has in the past experienced delays in the planned release dates of new software products or upgrades, and has discovered software defects in new products after their introduction. There can be no assurance that new products or upgrades will be released according to schedule, or that when released they will not contain defects. Either of these situations could result in adverse publicity, loss of revenues, delay in market acceptance or claims by customers brought against the Company, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the timing of individual sales has been difficult for the Company to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those anticipated by the Company. There can be no assurance that the loss or deferral of one or more significant sales will not have a material adverse effect on the Company's quarterly operating results. The Company has experienced, and expects to continue to experience, a high degree of seasonality, with a disproportionately greater amount of the Company's license revenues for any fiscal year being recognized in its fourth fiscal quarter. For example, in fiscal 1998, 32% of total revenues, 31% of license revenues and 33% of service revenues were recognized in the fourth fiscal quarter. The Company believes that such seasonality is primarily the result of the efforts of the Company's direct sales force to meet or exceed fiscal year end sales quotas. In addition, the Company's license revenues in its first fiscal quarter have historically been lower than those of the immediately preceding fourth quarter. For example, license revenues in the first quarter of fiscal 1998 decreased 10% from the fourth quarter of fiscal 1997. In future periods, the Company expects these seasonal trends may cause first quarter revenues to be lower than the level achieved in the preceding fourth quarter. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has funded its operations primarily through private sales of equity securities and the use of long-term debt and equipment leases. As of September 30, 1998, the Company had 32 34 raised approximately $29.7 million, net of offering costs from the issuance of preferred stock, and approximately $8.0 million from the issuance of long-term debt, and had financed equipment purchases totaling approximately $3.6 million. The Company's sources of liquidity as of September 30, 1998 consisted principally of cash and cash equivalents of $15.6 million, and approximately $1.5 million of available borrowings under a line of credit. Net cash used in operating activities was $4.1 million, $6.6 million and $8.5 million in fiscal 1996, 1997 and 1998, respectively. For such periods, net cash used by operating activities was primarily a result of funding ongoing operations. Since 1995, the Company's investing activities have consisted of purchases of property and equipment. Capital expenditures, including those under capital leases, totaled $420,000, $1.0 million and $1.6 million in fiscal 1996, 1997 and 1998, respectively. Capital leases are used to finance the acquisition of property and equipment, primarily computer hardware and software, for the Company's increasing employee base, as well as for the Company's management information systems. The Company anticipates that it will experience an increase in its capital expenditures and lease commitments consistent with its anticipated growth in operations, infrastructure and personnel. The Company does not expect to incur significant costs to make its products or internal information systems Year 2000 compliant because it believes such products and information systems are designed to function properly through and beyond the year 2000. See "Risk Factors--Year 2000 Compliance." The Company's financing activities provided $7.7 million, $8.6 million and $17.6 million in fiscal 1996, 1997 and 1998, respectively. In fiscal 1996, cash provided by financing activities was comprised primarily of $7.5 million received in connection with the sale of Series C Redeemable Convertible Preferred Stock and $563,000 in proceeds from long-term debt borrowings, partially offset by principal payments on long-term debt totaling $380,000. In fiscal 1997, cash provided by financing activities was comprised primarily of $4.6 million received in connection with the sale of Series D Redeemable Convertible Preferred Stock, $3.1 million in proceeds from long-term debt, and $1.9 million in proceeds from sales leaseback transactions and capital lease financing offset by principal payments on long-term debt of $925,000. In fiscal 1998, cash provided by financing activities consisted primarily of $12.7 million received in connection with the sale of Series E Redeemable Convertible Preferred Stock and $5.5 million in proceeds from long-term borrowings, offset by $335,000 in principal payments on long-term debt and $500,000 in payments on capital lease obligations. The Company has a line of credit with a bank for $2.0 million, which bears interest at the lending bank's prime rate plus 1.5%. Borrowings are limited to the lesser of 80% of eligible accounts receivable or $2.0 million and are secured by substantially all of the Company's non-leased assets. As of September 30, 1998, the Company had not borrowed under the line of credit, however, there were $465,000 in standby letters of credit outstanding. Total borrowings available under this line were approximately $1.5 million as of September 30, 1998. This credit facility expires in December 1998, and the Company expects to extend or replace such credit facility under substantially similar terms. This credit facility contains the same restrictions and covenants as the Security and Loan Agreement described below. In September 1997, the Company entered into a $1.0 million senior term loan facility with the same bank with which the Company has the line of credit, pursuant to the terms of a Security and Loan Agreement (the "Loan Agreement"). In April 1998, the Loan Agreement was amended to allow for additional borrowings up to a total of $3.0 million. The facility, which bears interest at the lending bank's prime rate less 1.0%, matures on February 15, 2001. Payments are interest only through February 1999, at which time the facility will be repaid in 24 equal monthly principal payments plus interest. The Company's Loan Agreement contains certain financial restrictions and covenants that include a minimum liquidity ratio of 1.5 to 1, minimum quarterly net sales covenants that have increased each quarter from $3.0 million in the quarter ended March 31, 1998 to $5.0 million in the quarter ended September 30, 1998, and restrictions on dividend payments. The Company is currently in compliance with such covenants and restrictions. The Company has granted a perfected senior security interest in all non-leased assets of the Company as security for its obligations under the Loan Agreement. As of September 30, 1998, the outstanding indebtedness under the Loan Agreement was $3.0 million. 33 35 In July 1997, the Company entered into a Subordinated Loan and Security Agreement with an equipment lessor in the principal amount of $1.5 million which bears interest at an annual rate of 8.5% (the "Subordinated Loan Agreement"). In May 1998, the Subordinated Loan Agreement was amended to allow for additional borrowings of $5.0 million bearing interest at an annual rate of 11% on the first $3.5 million and 12.5% on the remaining $1.5 million. Availability of such additional borrowings expires on December 31, 1998. The notes are due in varying monthly installments through April 2002. The Subordinated Loan Agreement contains certain restrictions and covenants, including restrictions on dividend payments, restrictions on extending or settling receivables and on relocating collateral. As of September 30, 1998, the outstanding indebtedness under the Subordinated Loan Agreement was $4.7 million. On August 11, 1998, the Company issued a warrant to purchase an additional 2,400,000 shares of Series E Preferred Stock to TRS, (the "TRS Warrant"). Upon the conversion of all of the shares of Series E Preferred Stock into shares of Common Stock in connection with a registration of the Company's Common Stock under the Securities Act, this warrant will automatically become exercisable for 2,400,000 shares of the Company's Common Stock. The warrant is exercisable in four tranches as follows: 300,000 shares may be acquired at the time of the Offering at a cash purchase price equal to the price to the public in the Offering less 7%; 700,000 shares may be acquired at any time on or before October 15, 1999 at a cash purchase price of $33.75 per share; 700,000 shares may be acquired at any time on or before January 15, 2001 at a cash purchase price of $50.625 per share; and the remaining 700,000 shares may be acquired at any time on or before January 15, 2002 at a cash purchase price of $85.00 per share. As was permitted by the warrant, the Board of Directors determined to cancel 25% of the shares that could have been acquired under the warrant at the time of the Offering or on or before October 15, 1999. Thus, 225,000 shares may be acquired at the time of the Offering and an additional 525,000 shares may be acquired on or before October 15, 1999, at the prices stated above. The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes, including increased domestic and international sales and marketing expenditures, increased research and development expenditures and capital expenditures made in the ordinary course of business, as well as possible acquisitions of businesses, products and technologies that are complementary to those of the Company. The Company intends to use a minimum of $5.0 million from the net proceeds of the Offering to fund increases in its research and development activities and $10.0 million to increase its domestic and international sales and marketing capabilities. The Company has no other specific plan as to the use of the net proceeds of the Offering. Although the Company has not identified any specific businesses, products or technologies that it may acquire, and there are no current agreements or understandings with respect to any such transactions, the Company does from time to time evaluate such opportunities. Pending such uses, the net proceeds of the Offering will be invested in short-term, investment-grade, interest-bearing instruments. See "Risk Factors--Broad Discretion Over Use of Proceeds." The Company currently anticipates that for the foreseeable future it will continue to experience significant growth in its operating expenses related to augmenting its sales and marketing operations, increasing research and development and extending its professional service capabilities, as well as developing new distribution channels, improving its operational and financial systems and entering new markets for the Company's products and services. Such operating expenses will be a material use of the Company's cash resources, including a portion of the net proceeds of the Offering. The Company believes that the net proceeds of the Offering, together with its existing cash and cash equivalents and available bank borrowings, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financing or from other sources. There can be no assurance that such sources will be adequate, will be obtainable on terms favorable to the Company or will not be dilutive. 34 36 YEAR 2000 COMPLIANCE Background of Year 2000 Issues Many currently installed computer systems and software products are unable to distinguish between twentieth century dates and twenty-first century dates because such systems were developed using two digits rather than four to determine the applicable year. For example, computer programs that have date-sensitive software may recognize a date using '00' as the year 1900 rather than the year 2000. This error could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with such 'Year 2000' requirements. State of Readiness The Company's business is dependent on the operation of numerous systems that could potentially be affected by Year 2000-related problems. Those systems include, among others: hardware and software systems used by the Company to deliver products and services to its customers (including the Company's proprietary software systems as well as software supplied by third parties); communications networks such as the Internet and private Intranets; the internal systems of the Company's customers and suppliers; software products sold to customers; the hardware and software systems used internally by the Company in the management of its business; and non-information technology systems and services used by the Company in the management of its business, such as power, telephone systems and building systems. The Company has established a Year 2000 Compliance Task Force (the "Task Force"), composed of high-level representatives of the product, management and information systems and legal departments. The Task Force has been charged with the responsibility of formulating and implementing the Company's Year 2000 readiness and is applying a phased approach to analyzing of the Company's operations and relationships as they relate to the Year 2000 problem. The phases of the Company's Year 2000 program are as follows: (1) establishment of a Year 2000 Task Force; (2) assignment of responsibility for external issues (products licensed by Concur), internal issues (systems, facilities, equipment, software) and legal audit; (3) inventory of all aspects of the Company's operations and relationships subject to the Year 2000 problem; (4) comprehensive analysis (including impact analysis and cost analysis) of the Company's Year 2000 readiness; and (5) remediation and testing. The Company has tested its software products and has determined that the current versions of all of its software products to be Year 2000 compliant, consistent with the Year 2000 compliance specifications established by the British Standards Institute's DISC PD-2001. Concur plans to continue to test its current and future products, applying its Year 2000 compliance criteria and to include any modifications that are incorporated into the compliance process during its implementation. The Company has completed Phases 1 and 2 of its program and is currently actively engaged in Phase 3 and anticipates completing Phase 3 and beginning Phase 4 by the end of November 1998. The Company currently expects to complete Phases 4 and 5 by December 1998 and February 1999, respectively. Risks Related to Year 2000 Issues Based on the Company's assessment to date, the Company believes the current versions of its software products are "Year 2000 compliant." However, the Company's products are generally integrated into enterprise systems involving sophisticated hardware and complex software products which may not be Year 2000 compliant. In addition, in some cases even certain earlier Year 2000 compliant versions of the Company's software, while compatible with earlier, non-Year 2000 compliant versions of other software products with which Concur's software is integrated, are not compatible with certain more recent Year 2000 compliant versions of such other software providers. While the Company does not believe it has any obligation under this circumstance given that these customers using the Company's older versions of its software products would in any case be required to upgrade in order to be compatible with newer versions of other companies products, there can be no assurance that the Company will not be subject to claims or complaints 35 37 by its customers. Success of the Company's Year 2000 compliance efforts may depend on the success of its customers in dealing with their Year 2000 issues. The Company sells its products to companies in a variety of industries, each of which is experiencing different Year 2000 compliance issues. Customer difficulties with Year 2000 issues might require the Company to devote additional resources to resolve underlying problems.Although the Company has not been a party to any litigation or arbitration proceeding to date involving its products or services and related to Year 2000 compliance issues, there can be no assurance that the Company will not in the future be required to defend its products or services in such proceedings, or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000- related disputes, regardless of the merits of such disputes, and any liability of the Company for Year 2000-related damages, including consequential damages, would have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company believes that purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct or upgrade their current software systems for Year 2000 compliance or defer additional software purchases until after 2000. As a result, some customers and potential customers may have more limited budgets available to purchase software products such as those offered by the Company, and others may choose to refrain from changes in their information technology environment until after 2000. To the extent Year 2000 issues cause significant delay in, or cancellation of, decisions to purchase the Company's products or services, the Company's business, results of operations and financial condition would be materially adversely affected. The Company and the Task Force are also reviewing the Company's internal management information and other systems in order to identify any products, services or systems that are not Year 2000 compliant, in order to take corrective action. To date, the Company has not encountered any material Year 2000 problems with its computer systems or any other equipment that might be subject to such problems. The Company's plan for the Year 2000 calls for compliance verification of external vendors supplying software and information systems to the Company and communication with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. As part of its assessment, the Company is evaluating the level of validation it will require of third parties to ensure their Year 2000 Compliance and expects to circulate letters to its suppliers and other business partners requesting their Year 2000 Compliance status. The Company is taking steps with respect to new supplier agreements to ensure that the suppliers' products and internal systems are Year 2000 compliant. In the event that any such third parties' products, services or systems do not meet the Year 2000 requirements on a timely basis, the Company's business, results of operations and financial condition could be materially adversely affected. The Company could also experience material adverse effects on its business, results of operations and financial condition if it fails to identify all Year 2000 dependencies in its systems and in the systems of its suppliers, customers and financial institutions. Therefore, the Company plans to develop contingency plans for continuing operations in the event such problems arise, but does not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. The Company has not completed its Year 2000 investigation, and there can be no assurance that the total cost of Year 2000 compliance will not be material to the Company's business, results of operations and financial condition. There can be no assurance that the Company will identify and remediate all significant Year 2000 problems on a timely basis, that remediation efforts will not involve significant time and expense, or that unremediated problems will not have a material adverse effect on the Company's business, results of operations and financial condition. ACQUISITION OF 7SOFTWARE On June 30, 1998, the Company acquired 7Software, a privately-held software company and the developer of CompanyStore. As of the date of acquisition, the CompanyStore developmental project consisted of ongoing research and development efforts in the following areas: compatibility with additional databases; compatibility with additional enterprise resource planning platforms; multiple catalog support; fundamental redesign of the user interface; and redesign and rewriting of the administrative functionality. Based on the Company's estimates, the remaining research and development efforts relating to the completion of the CompanyStore technology were expected to continue into the first quarter of fiscal 1999, the anticipated 36 38 product release date. Accordingly, the cost to complete the in-process technology was estimated based on the number of man-months required to reach technological feasibility for the CompanyStore technology, the type of professional and engineering staff involved in the completion process and their fully burdened monthly salaries. The Company estimated the direct costs to achieve technological feasibility to be approximately $307,000. Beyond this period, the Company estimated significantly less expense to support and maintain active products identified at the acquisition date to be in-process technology. If the in-process projects contemplated in the Company's forecast are not successfully developed, future revenue and profitability might be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. In connection with the acquisition, the Company determined the fair value of all identifiable assets, including technology assets, for purposes of allocating the purchase price. To determine the value of the acquired in-process research and development, the expected future cash flows of the in-process technology were based on forecasts of future results that the Company believes are likely to occur. The future cash flows were discounted taking into account the state of development of the in-process project, the cost to complete that project, the expected income stream, the life cycle of the product ultimately developed, and the associated risks. Such risks include, but are not limited to, the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future markets. This analysis resulted in amounts assigned to the acquired in-process research and development projects that have not yet reached technological feasibility (as defined and utilized by the Company in assessing software capitalization) and do not have alternative future uses. Revenues and related expenses for the in-process technology were estimated from the acquisition date through the end of Concur's fiscal 2002. The Company's analysis considered the anticipated product release date for the acquired CompanyStore developmental project. The overall life of the in-process technology was estimated to be approximately four years for the CompanyStore technology. The Company's aggregate projections reflect revenue growth in earlier periods resulting from an expanding market for procurement software products. Operating expenses, including general and administrative, marketing and sales, were based on anticipated costs after the 7Software operations were merged into Concur's operating structure. The Company discounted the net cash flows of the in-process technology to their present value using a discount rate of 35%. This was determined to be higher than Concur's weighted average cost of capital ("WACC") due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than WACC, the Company has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. The CompanyStore developmental project, as of the acquisition date, was estimated to be developed during the fourth quarter of 7Software's fiscal 1998 and fiscal 1999 and released during Concur's fiscal 1999. The Company continues to expect to achieve the forecasted revenue attributable to the in-process project, as set forth in the valuation, when it is released. Because the Company believes that it will achieve revenue levels and incur product development costs similar to those originally estimated, it expects only slight variations between assumptions and actual results. Therefore, the Company does not anticipate any material impact on operations or financial position unless the in-process project is not completed. 37 39 BUSINESS The following description contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that may cause such results to differ include but are not limited to those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW Concur is a leading provider of Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. The Company's Xpense Management Solution ("XMS") and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment ("T&E") expense reports and front-office procurement requisitions. Concur believes it is the leading provider of T&E expense management solutions, based on a combination of the number of customers it serves and the features its solutions provide. Since the introduction of XMS in 1996, the Company has licensed its products to over 150 enterprise customers for use by over 800,000 end users. Through its June 1998 acquisition of 7Software, Inc., the Company added the CompanyStore front-office procurement application to its product suite. By automating manual, paper-based processes, the Company's products reduce processing costs and enable customers to consolidate purchases with preferred vendors and negotiate vendor discounts. INDUSTRY BACKGROUND In response to increasingly competitive conditions worldwide, businesses are seeking cost savings and productivity gains through business process automation. Rather than internally developing applications to automate business processes, companies are increasingly turning to independent software vendors for solutions in areas such as finance and accounting, manufacturing, human resources, supply chain management, customer support and sales force automation. These solutions have traditionally targeted discrete functional or department level business processes involving relatively few employees. Businesses are now seeking similar applications to replace manual, paper-based processes involving the vast majority of employees throughout the enterprise. Such "employee-facing" business processes include T&E expense management, front-office procurement, human resources self-service, time and billing, and facilities management. Typically, these processes are characterized by extensive corporate policies, detailed forms, manual data entry, multiple approvals, manual review and audit, manual financial system posting and cumbersome interactions with third-party suppliers and service providers. The emergence of the Internet and corporate Intranets has made it possible to deploy applications that reach all employees in the enterprise and to connect the enterprise to corporate partners, vendors and service providers. In addition, in contrast to traditional client-server applications, Intranet-based applications can be deployed rapidly and cost-effectively throughout the enterprise. The Internet also allows a software vendor to act as an outsourced enterprise service provider ("ESP"), delivering employee-facing applications through the Internet to reduce customers' up-front costs and IT infrastructure commitments. Companies automating employee-facing business processes can realize significant operating cost savings through reduced processing costs, consolidated purchases with preferred vendors and negotiated vendor discounts. For example, according to the 1997 American Express T&E Management Process Study (the "American Express Study") published in 1997 by American Express, a subsidiary of which became a stockholder of the Company in August 1998, corporations on average spend $36 per T&E expense report processed, factoring in costs such as employee time required to complete expense reports, management approvals and administrative processing of expense reports, but can reduce such costs to as little as $8 through best-in-class automation. Savings of this magnitude on a per transaction basis are significant for enterprises with large numbers of similar transactions. Based on the savings suggested by the American Express Study, businesses that process from 1,000 to 5,000 T&E expense reports per month might achieve savings ranging from $300,000 to $1.5 million per year. Similar savings can be achieved by automating front-office procurement. The Company believes that companies typically spend in excess of $75 to process each requisition, which can be reduced to approximately $25 using best-in-class automation. Automation not only 38 40 can lower the cost of processing expense reports and procurement requisitions, but also can provide information that can be used to negotiate discounts from vendors and service providers. Based on the amounts spent on T&E and front-office procurement, even a small percentage reduction in vendor charges can result in significant savings. For example, the American Express Study reported that U.S. businesses spent $156 billion in 1996 on direct T&E expenses such as airfare, hotel stays and car rentals. The Company believes that the substantial potential savings from processing cost reductions and vendor discounts, coupled with the emergence of Intranet technologies, has created a significant demand for employee-facing applications. The Company further believes that the most successful employee-facing applications will improve the efficiency of T&E expense management, front-office procurement and other similar business processes and will be (i) based on Internet technologies, (ii) rapidly deployable and highly scalable, (iii) offered as part of an integrated suite of related applications, (iv) integrated with enterprises' existing IT infrastructures and (v) capable of linking businesses with their corporate partners, vendors and service providers through the Internet. Successful providers of such employee-facing applications will be able to deliver cost savings and other tangible benefits to corporate management, meet the needs of enterprise IT professionals and reduce burdens on employees. THE CONCUR SOLUTION Concur is a leading provider of Intranet-based employee-facing applications that extend automation to employees throughout an enterprise and to partners, vendors and service providers in the extended enterprise. The Company's XMS and CompanyStore products automate the preparation, approval, processing and data analysis of T&E expense reports and front-office procurement requisitions. Concur believes that it is the leading provider of T&E expense management solutions based on a combination of the number of customers it serves and the features its solutions provide. Since the introduction of XMS in 1996, the Company has licensed its products to over 150 enterprise customers for use by over 800,000 end users. By acquiring 7Software in June 1998, the Company added the CompanyStore front-office procurement application to its product suite. The Company's products benefit a number of constituencies within the enterprise, including corporate management, IT professionals and employees, in the following ways. Benefits for Corporate Management Reduced Processing Costs. XMS and CompanyStore can significantly reduce the amount of labor associated with manual, paper-based T&E expense management and front-office procurement systems, by automating the process of preparation, approval, processing and data analysis. Concur believes that companies using its solutions as part of best-in-class processes can achieve significant cost savings. According to the American Express Study, corporations on average spend $36 per T&E expense report processed, but can reduce such costs to as little as $8 through best-in-class automation. Similarly, industry estimates indicate that companies typically spend in excess of $75 to process each requisition for front-office goods and services. The Company believes that this estimate is typical and that enterprises using best-in-class automation for such processes can reduce that cost to approximately $25. Improved Supplier Management. Concur's products enable customers to collect and analyze data on T&E expenses and front-office procurement. Customers can use this data to help consolidate purchases with preferred vendors, negotiate vendor discounts and monitor compliance with pre-negotiated rates. The Company believes that the savings from improved supplier management can be substantial. For example, one XMS customer informed the Company that, after implementing XMS, it was able to reduce its annual spending on air travel by 5% to 10%. Improved Cash Management. Concur's products enable customers to improve their cash management positions and cash forecasting abilities by controlling the timing of payments to T&E and front-office suppliers and vendors. Improved Policy-Making and Monitoring. Concur's products facilitate budgeting, policy-making and trend analysis, and monitoring of compliance with corporate policy. 39 41 Benefits for IT Professionals Rapid Deployment. Concur's Intranet-based products are designed to be deployed rapidly within today's existing corporate IT infrastructures without requiring modifications to customer systems. Concur offers applications configured to customer requirements rather than solutions customized on a customer-by-customer basis. Once installed on a customer's Intranet servers, Concur's products can reach employees enterprise-wide. For example, one Concur customer recently deployed XMS to over 25,000 employees within 90 days after the customer began its rollout, and another customer deployed CompanyStore within five weeks. Enterprise-Wide Scalability. Concur's Intranet-based products are designed to reach employees throughout the enterprise, regardless of the organization's size. The Company has licensed its products to customers seeking to deploy to as few as 100 employees and as many as 80,000 employees, with the largest installation to date being a site with over 50,000 employees. Leverage of Existing IT Infrastructure. Because most businesses operate in a heterogeneous computing environment, XMS is designed to interact and interoperate with a broad range of software platforms and products, including multiple operating systems, browsers, databases, accounting packages and major ERP programs such as SAP, PeopleSoft and Oracle. CompanyStore currently supports SAP R/3 and Microsoft SQL server, and the Company intends to enhance CompanyStore to support other major platforms. Connectivity to Third Parties. The Company's Intranet-based products are designed to enable enterprises to link their systems with those of their corporate partners, vendors and service providers, including corporate charge card providers such as American Express, travel booking applications and suppliers such as BT Office Products International, Inc. Benefits for Employees Faster Reimbursement and Order Fulfillment. Concur's solutions enable businesses to reduce the time required to reimburse employees for their T&E expenses and to fulfill front-office requisitions. Features that expedite the process include automated electronic approval routing, links to automatic deposit systems, links with approved vendors, on-line status updates and automatic posting to ERP and financial programs. The American Express Study reported that the time from submission of an expense report to reimbursement could be reduced from an average of 22 days to as few as three days using best-in-class automation processes. Ease of Use. Concur's products contain easy-to-use features and functions that reduce the time users spend preparing T&E expense reports and front-office requisitions. XMS uses corporate credit card information to "prepopulate" a user's expense report automatically. Both XMS and CompanyStore also prepopulate expense reports and requisition forms based on past experience and preferences. In addition, corporate policies and preferred vendors can be integrated into the applications, and detailed explanations of corporate policies are available on-line. These features reduce errors, save user time and effort, and improve expense reconciliation. STRATEGY Concur's objective is to be the leading provider of Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. Key elements of the Company's strategy include: Extend Leadership Position. Concur intends to extend its leadership position in T&E expense management solutions and to leverage that position to sell CompanyStore, its recently acquired front-office procurement product. In order to accommodate anticipated future demand for its products, the Company intends to increase the size of its direct sales and telesales organizations significantly. Concur believes that expanding its sales and marketing organization will enhance its ability to sell its products to new customers globally. The Company also believes that an expanded sales force will allow it to sell CompanyStore and future applications to its current customers. Expand Product Functionality. Concur plans to continue its innovation and development of advanced features and functionality for its T&E expense management and front-office procurement solutions. The Company plans to add functionality to XMS, including features such as localized versions for additional 40 42 foreign countries and enhanced integration with on-line travel booking applications such as American Express Interactive. Concur also plans to enhance CompanyStore by expanding its features and functionality, adding support for additional databases and ERP platforms, enhancing catalog support and integrating CompanyStore into its product suite through the Concur Common Platform, the common technology platform being built by the Company to standardize all of the software architecture in its application suite. Extend and Integrate Product Suite. The Company plans to extend its employee-facing application suite by acquisition and internal development. Concur expects to target additional employee-facing applications that can offer compelling benefits to the enterprise such as human resources self-service, time and billing, and facilities management applications. To create an integrated suite of applications, the Company is pursuing development of a common user interface and a common technology platform. The common user interface, known as Employee Desktop, is a personalized Web page on the corporate Intranet that provides a centralized location for all employee-facing applications. The technology platform, known as the Concur Common Platform, will standardize the software architecture underlying all applications in the suite. The Company believes that the benefits of an integrated suite include ease of use and reduced IT burden as a result of common technology. Expand International Presence. Concur believes that considerable untapped demand exists for its products outside of the United States. For fiscal 1998 the Company's international revenues accounted for less than five percent of its total revenues. The Company intends to accelerate its investment in international sales and marketing in an effort to increase sales of its employee-facing applications worldwide. It also plans to add new features and functionality to XMS and CompanyStore to accommodate accounting, customs, currency and tax requirements of foreign jurisdictions. Extend Relationships With Strategic Third Parties. Concur intends to expand its relationships with existing strategic referral partners and to develop additional relationships with providers of complementary third-party applications and products. The Company has developed strong lead generation relationships with leading corporate charge card providers such as American Express, Diners Club and Citibank, N.A., and intends to establish similar relationships with purchasing card providers and systems integration and consulting firms. The Company intends to integrate XMS with automated travel booking applications to provide its customers with an end-to-end travel booking solution that encompasses booking, reporting and analysis, and to integrate CompanyStore with leading front-office supply vendors to provide its customers with greater access to those vendors. Offer Enterprise Service Provider Solutions. In addition to licensing its software, Concur plans to offer its solutions as an Internet-based ESP on a per-transaction pricing basis to companies seeking to outsource their employee-facing business applications. The Company expects that this opportunity will be particularly attractive to middle-market customers (100-750 licensed end users), which typically have limited IT staffing and budget. The Company plans to offer its outsourced ESP products starting with XMS in the middle of calendar 1999 and continuing with CompanyStore in fiscal 2000. The Company's strategy involves substantial risk. There can be no assurance that the Company will be successful in implementing its strategy or that it will lead to achievement of the Company's objectives. If the Company is unable to implement its strategy effectively, the Company's business, results of operations and financial condition would be materially adversely affected. PRODUCTS AND TECHNOLOGY The Company's current product line consists of XMS, its market-leading T&E expense management application, and CompanyStore, its newly-acquired front-office procurement application. Substantially all revenues to date have been derived from XMS and related services. The Company shipped an enterprise-wide, client-server based version of XMS in July 1996, and shipped the Intranet-based version of XMS in March 1998. For customers without corporate Intranets or for users not connected to the Internet, the Company provides a disconnected Windows-based version of XMS, which is interoperable with the Intranet version of XMS. Concur has licensed XMS to over 150 companies for use by over 800,000 end users. By acquiring 7Software in June 1998, the Company added CompanyStore to its product suite. The Company generally offers licenses for its software based on the number of users or employees at a given enterprise. The typical 41 43 order size for the Company's products and services ranges from $50,000 to $500,000, with certain transactions that have been greater than $1 million. Xpense Management Solution XMS automates the T&E expense management process, including report preparation, approval, processing and data analysis. Report Preparation. XMS includes a number of features that facilitate report preparation for the end-user. The application uses corporate credit card information to prepopulate a user's expense report with transaction data covering a variety of the information required for the expense report, including transaction date, type of expense, vendor, location, method of payment, currency amount and foreign currency conversion. Using a graphical user interface, the employee supplies additional expense-related information by using pull-down menus. To eliminate the task of sorting receipts, XMS allows the user to enter data in any order. The HotelXpert feature of the program automates the complicated process of itemizing hotel receipts. With each use of XMS, the application retains commonly incurred expense information and uses this information to help complete the next expense report. Other ease-of-use features include simple "checkbook" style input screens, the ability to create "attendees" lists, mileage reimbursement tracking and automatic flagging of non- compliant and incomplete entries. Report Approval. XMS allows each enterprise to determine how expense reports should be processed, whether by submission to a manager for approval before processing or by submission to the accounting department for immediate review and payment. Once the report is submitted, the approver receives an e-mail message containing an Intranet link to XMS, where all reports awaiting approval are listed. XMS can be configured to route the report for approval based on cost center, dollar limit or other criteria. Items that do not comply with corporate policy can be automatically flagged for review, allowing approvers to focus on problematic items. Approvers can reject individual line items, while allowing the rest of the report to continue in the approval process. Once approved, the report is automatically forwarded to the next phase in the process or to the enterprise's accounting department, and the user is notified of the action. Report Processing. XMS streamlines back-office processing of expense reports in a number of ways. Because all expense reports are prepared electronically, the processing department no longer needs to check the arithmetic of each report manually. Moreover, businesses can greatly reduce the time spent auditing reports by choosing to audit only those reports flagged by XMS as not compliant with corporate T&E expense policies. In addition, XMS reduces the number of status inquiries between employees and processing departments by automatically updating the status of reports in the database, and alerting employees via e-mail to the status of their reports. XMS allows significant time savings by automatically posting expense report information to the enterprise's ERP or accounting package, eliminating the manual re-entry of these data. XMS further simplifies processing by producing bar-coded receipt submission cover pages to validate delivery of receipts associated with expense reports. XMS also helps companies claim reimbursement of tax credits by tracking VAT, GST and other international taxes. Data Analysis. XMS utilizes business intelligence software to analyze expense data. This information can be presented graphically in various display formats and allows travel managers to determine total spending according to vendor, location or other user-defined criteria. Informed by this data, managers can analyze trends and determine methods for controlling costs or negotiating more favorable terms with vendors. Managers can also analyze the data to monitor compliance with corporate travel policies and determine if policy modifications are appropriate. 42 44 The following table describes significant features and potential benefits of XMS: - -------------------------------------------------------------------------------------------- REPORT PREPARATION - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Prepopulates report with corporate credit Speeds report preparation time card transactions Reduces input mistakes Retains commonly incurred expense information Reduces queries and dependence on accounting department Simplifies receipt entry Ensures submission of all applicable expenses Itemizes hotel receipts automatically Increases employee use of corporate credit Prevents submission of incomplete reports card Built-in attendee lists, mileage reimbursement tracking, foreign currency translation - -------------------------------------------------------------------------------------------- REPORT APPROVAL - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Automatic routing of reports Speeds approval time Flags non-compliant expenses Increases compliance with corporate policies Line-item approval of reimbursement data Facilitates more efficient use of management resources Approver notification - -------------------------------------------------------------------------------------------- REPORT PROCESSING - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Integrates travel expense data with Facilitates more efficient use of processing back-office systems resources Flags non-compliant expenses Speeds report processing and employee reimbursement Provides automatic status updates Reduces human error Bar-codes receipt submissions Reduces queries and dependence on accounting Tracks VAT, GST and other foreign taxes department Verifies arithmetic Identifies tax credits - -------------------------------------------------------------------------------------------- DATA ANALYSIS - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Presents travel expense data graphically Supplies data needed for vendor rate negotiation Allows customer to sort data by employee, vendor and type of expense Facilitates vendor consolidation Drill-down capability Identifies trends and problem areas Allows monitoring of compliance with vendor commitments and corporate travel policies - --------------------------------------------------------------------------------------------
43 45 CompanyStore CompanyStore automates the front-office procurement process, including order preparation, approval, processing and data analysis. CompanyStore, which was acquired by the Company in its June 1998 acquisition of 7Software, has been licensed to two customers. The Company is currently developing version 2.0 of CompanyStore. See "Risk Factors--Risk Associated with Acquisitions Generally" and "--Risks Associated with Expansion into New Market." Order Preparation. CompanyStore utilizes a customer-specific electronic catalog of preferred vendors and commonly requested goods and services such as office supplies, computers and other equipment. Using a graphical user interface, requisitioners browse the catalog to select and order items and place them in an electronic "shopping basket." Catalog materials can be updated by either the enterprise or the vendor. CompanyStore contains links to vendor Web sites, allowing the requisitioner to obtain detailed product information. To make the ordering process easier, CompanyStore retains information about the user, including name, employee identification, shipping address, accounting information and frequently ordered products. To reduce delays and unnecessary processing iterations, CompanyStore prevents submission of incomplete orders. Order Approval. CompanyStore allows an enterprise to determine how requisitions should be processed, whether by submission to a manager for approval before processing or by submission to the purchasing department for immediate processing. Once the order is submitted, an e-mail notification of the order is automatically sent to the specified approver. The e-mail contains a link to a personalized "approval" Web page, which lists all purchase requisitions that are awaiting approval by the particular approver. Using the Web page, the approver specifies which requisitions to approve in each order. CompanyStore enables the customer to configure approval rules based on cost center, dollar limit, material type or other criteria. CompanyStore enables authorization of orders based on digital signatures and prohibits the release of orders without required approval. Order Processing. CompanyStore streamlines processing of front-office requisitions in a number of ways. The customer's purchasing department selects the items and vendors to be included in the CompanyStore electronic catalog. After approval, orders are sent to the purchasing department to be processed and progress reports are delivered to the requisitioner automatically, reducing the number of status inquiries between the requisitioner and the purchasing department. CompanyStore can be integrated into the customer's accounting package so that the order can be entered into the purchasing system automatically, allowing significant time savings. CompanyStore allows approved requisitions to be sent directly to vendors via fax, e-mail or electronic data interchange. Data Analysis. CompanyStore consolidates purchasing data, allowing managers to determine spending according to cost center, time period, employee and supplier. This data allows managers to determine how best to control costs, negotiate more favorable supplier arrangements and consolidate vendors. Managers can analyze the data to monitor compliance with corporate purchasing policies and vendor commitments. 44 46 The following table describes significant features and potential benefits of CompanyStore: - -------------------------------------------------------------------------------------------- ORDER PREPARATION - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Simple point-and-click ordering Speeds order time Customer-specific electronic catalog stores Directs orders to preferred vendors preferred vendors and commonly requested goods and services Reduces errors Retains user information, including shipping Detailed product descriptions available information, frequently ordered products and purchasing card information Reduces queries and dependence on purchasing department Prevents submission of incomplete orders Internet links to vendor Web sites - -------------------------------------------------------------------------------------------- ORDER APPROVAL - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Automatically e-mails order to designated Speeds approval time approver Reduces errors Digital signatures for order authorization Decreases purchasing in violation of company Automated approval controls based on user procedures signing authority Facilitates more efficient use of management resources Increases compliance with corporate policies - -------------------------------------------------------------------------------------------- ORDER PROCESSING - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Integrates purchasing data with back-office Speeds fulfillment time systems Reduces lost orders Sends approved requisitions directly to vendor or to enterprise's purchasing system Facilitates more efficient use of processing resources Updates requisitioner on order progress Improves consistency of items ordered Purchasing department determines items available in catalog Allows vendor consolidation Prohibits release of orders without required approval - -------------------------------------------------------------------------------------------- DATA ANALYSIS - -------------------------------------------------------------------------------------------- FEATURES BENEFITS Allows customers to track spending by Identifies trends and problem areas multiple factors, including cost center, time period, employee and supplier Supplies data needed for vendor rate negotiation Allows monitoring of compliance with vendor commitments Facilitates vendor consolidation - --------------------------------------------------------------------------------------------
45 47 Product Architecture The following diagram illustrates the key features of the Company's product architecture: PRODARCH CHART - --------------- * The Concur Technology Platform shown is currently in place in XMS. The Company is integrating CompanyStore and intends to integrate future applications into an enhanced version of this platform, which will be known as the Concur Common Platform. The Company's two applications, XMS and CompanyStore, operate on advanced IT platforms and are scalable and configurable. XMS and CompanyStore are built on a multi-tiered architecture. XMS has a separate client, application server and database server built using a COM-based architecture. CompanyStore currently has separate client and server layers and is migrating to the COM model. In addition, a common application server model, the Concur Common Platform, is being built for both applications which will contain all common business logic, including workflow, user management, security, business rules, business intelligence and messaging. See "Risk Factors--Limited Experience with Large Scale Deployment." The XMS application server contains all of the business logic, is COM based and is built using Microsoft Visual C++. The CompanyStore application is being adapted to the Concur Common Platform, which is currently under development. The application server layer can be extended using off-the-shelf tools such as Microsoft Visual Basic. The application server operates on Windows NT 4.0 and, for browser-based clients, supports both the Microsoft Internet Information Server and the Netscape Enterprise Server. The XMS application server supports Oracle, Sybase and Microsoft SQL server databases and integrates with multiple ERP systems, including SAP, PeopleSoft, Oracle and existing legacy systems. The CompanyStore application server supports the Microsoft SQL server database and integrates with SAP R/3, and the Company intends to integrate the CompanyStore application server with other database and ERP systems in the future. Browser-based clients run on versions of Microsoft Internet Explorer 3.02 and above and Netscape Navigator 3.0 and above, utilizing primarily HTML and JavaScript via Microsoft's Active Server Pages technology. Operating systems supported include Microsoft Windows 3.11, Windows 95, Windows 98 and Windows NT 4.0. The Windows-based XMS client is written utilizing Microsoft Visual C++, and is fully functional in a disconnected environment. 46 48 SERVICES The Company's professional services organization was formed in 1996 to offer consulting, customer support and training in connection with licenses of XMS. The Company believes that services are an important part of its success and consequently the Company has expanded its professional services organization to offer similar services in connection with licenses of CompanyStore. See "Risk Factors --Dependence on Service Revenues." Consulting. The Company offers a variety of consulting services in connection with licenses of XMS and CompanyStore. Concur's consulting staff meets with customers prior to product implementation to review the customer's existing business processes and IT infrastructure, and to provide advice on ways to improve these processes using industry best practices. Thereafter, Concur's consultants install, configure and test the application and integrate it with the customer's existing ERP and employee reimbursement systems. Concur's consultants also help customers implement bar-coding processes and develop a strategy for the customers' enterprise-wide deployment of the application. Customer Support. The Company provides product upgrades and customer support through its "CustomerOne" customer support program. Customers generally purchase the first year of the CustomerOne program at the time they license an application; thereafter, support may be renewed on an annual basis. Customer support personnel are available 24 hours a day, seven days a week. The Company also offers Internet-based support that features an on-line knowledge base. Training. The Company offers a variety of training programs for XMS and CompanyStore. These classes are tailored to particular user groups, such as end users, help desk personnel and trainers. Training classes are offered at customer sites and also at the Company's headquarters in Redmond, Washington. The Company plans to begin providing training classes for third-party service providers, such as systems integrators, as it expands its relationships with such parties. 47 49 CUSTOMERS The Company has licensed its applications to over 150 enterprise customers in a wide range of industries. The following table lists certain of the Company's significant customers in fiscal 1996, 1997 and 1998: TECHNOLOGY/TELECOMMUNICATIONS/MEDIA CONSUMER AT&T Corp. Anheuser-Busch Companies Inc. American Management Systems, Inc. Avon Products, Inc. Computer Sciences Corporation Eastman Kodak Company Hewlett-Packard Company The Gap, Inc. Lucent Technologies, Inc. The Gillette Company The New York Times Company J.C. Penney Company, Inc. Quantum Corporation Levi Strauss & Co. Reuters Limited Maytag Corporation Seagate Technology, Inc. FINANCIAL SERVICES Sprint Corporation ABN Amro Holding N.V. Texas Instruments Incorporated Bear Stearns & Co. Inc. The Times Mirror Company Comdisco, Inc. Tivoli Systems, Inc. Dresdner Kleinwort Benson Visio Corporation J & H Marsh & McLennan, Inc. INDUSTRIAL/MANUFACTURING Lehman Brothers Inc. Case Corporation Royal Insurance E.I. du Pont de Nemours and Company OTHER Guardian Industries Corporation American Airlines, Inc. Northrop Grumman Corporation Battelle Memorial Institute Monsanto Company Broken Hill Proprietary Company Limited Solutia, Inc. Exxon Corporation PHARMACEUTICAL/HEALTH CARE Harvard College Columbia/HCA Healthcare Corporation Ontario Ministry of Labour Merck, Sharpe & Dohme Limited J. Walter Thompson Pfizer Inc. Texaco Inc. Pharmacia & Upjohn Co. Tenet Healthcare Corporation
In fiscal 1996, 1997 and 1998, no customer accounted for 10% or more of the Company's total revenues. The following case studies, which are based solely on information supplied by the respective subject companies and which the Company believes to be accurate in all material respects, illustrate how selected companies have used Concur products and services to address their T&E expense management and front- office procurement needs: Guardian Industries Corporation ("Guardian"). A leading manufacturer and fabricator of architectural and automotive glass and plastics, Guardian operates over 40 production facilities around the world and has approximately 1,000 employees travelling at any one time. Historically, Guardian's business travelers filed expense reports manually after each business trip. This paper-based process led to processing delays, significant employee time invested in filling out expense reports, and a lack of visibility into enterprise-wide T&E spending. Guardian implemented Concur's XMS application to address these issues, and realized significant advantages and cost savings as a result. For example, XMS saves employee time by decreasing time spent completing reports and allows management to analyze enterprise-wide T&E spending to formulate more effective travel policies, evaluate the performance of travel vendors and negotiate reduced costs with vendors. In fact, Guardian reduced its annual spending on air travel by 5% to 10% after implementing XMS. Case Corporation ("Case"). A leading designer, manufacturer and distributor of agricultural and construction equipment and provider of a broad array of financial services, Case has over 13,000 employees worldwide with 4,000 business travelers. Before implementing XMS, Case received as many as 5,000 T&E expense reports per month in a variety of formats, from handwritten reports to spreadsheets. This practice resulted in costly delivery methods (such as overnight delivery or facsimile), high processing costs, delays in reimbursement, and reports not in compliance with corporate policies. To address these problems, Case 48 50 automated its T&E expense reporting process with XMS. Within nine months after deploying XMS on an enterprise-wide basis, the vast majority of Case's travelers were using XMS and receiving reimbursements through their regular paychecks. As a result, Case has significantly reduced travel expense reimbursement related costs. In addition, Case now reimburses employees and analyzes spending more effectively. Solutia, Inc. ("Solutia"). Solutia is a global company that applies its expertise in chemistry to the consumer, household, automotive and industrial products industries through 24 manufacturing sites worldwide. Solutia's nearly 9,000 employees include approximately 3,000 who are business travelers. At the time Solutia decided to reengineer its T&E expense management processes, it had 15 processing centers handling approximately 25,000 expense reports per year. Using XMS as the cornerstone of its reengineering effort, Solutia streamlined the preparation, approval and processing of expense reports, consolidated its 15 processing centers into one shared services center, and cut processing costs by over 50%. Visio Corporation ("Visio"). Through a worldwide network of offices, Visio develops, markets and sells drawing and diagramming software for PCs. After implementing SAP R/3, Visio sought an Intranet front-office procurement system to eliminate inefficiencies in its paper-based ordering and manual routing of front-office procurement requisitions. Visio required a system that was easy to use and would seamlessly integrate with SAP. After selecting CompanyStore, Visio implemented the application in only five weeks and immediately realized efficiencies in purchase order processing and product delivery. CompanyStore allows purchasing and procurement personnel to spend less time processing transactions and more time evaluating vendors and pricing strategies. Visio estimates that it will achieve approximately $1 million in savings in the first year of implementation, from such improvements as decreased requisition processing costs, decreased non-compliant spending, decreased time needed to process payables, and decreased time spent by budget managers gathering financial data. SALES The Company sells its software primarily through its domestic direct sales organization, with sales professionals located in the metropolitan areas of Atlanta, Boston, Chicago, Columbus, Dallas, Detroit, Los Angeles, New York, Redmond, St. Louis, San Francisco and Washington, D.C. The Company also has sales professionals in Toronto, London and Sydney. The field sales force is complemented by direct telesales and telemarketing representatives based at the Company's headquarters in Redmond, Washington. Technical sales support is provided by sales engineers located in several of the field offices. The Company currently intends to add a significant number of sales representatives and sales engineers in other domestic and international locations. The Company uses a remarketer in New Zealand and plans to expand its remarketing channel to other international markets. The remarketer receives a referral fee from the Company for marketing the Company's products, and provides post-sale implementation and support of the Company's products. See "Risk Factors--Dependence on Direct Sales Model." The Company's direct sales force sells both XMS and CompanyStore. Since Concur's products affect employees throughout the enterprise, the sales effort involves multiple decision makers and frequently includes the chief financial officer, vice president of finance, controller and vice president of purchasing. While the average sales cycle varies substantially from customer to customer, for initial sales it has generally ranged from six to nine months. See "Risk Factors--Lengthy Sales Cycle." Strategic Marketing and Referral Relationships The Company has developed a number of strategic referral relationships. Under arrangements with American Express, the largest corporate charge card issuer in the United States, and its subsidiary TRS, American Express may, at its sole discretion, refer corporate charge card customers that seek a T&E expense management software solution to Concur. TRS also recently agreed to be a strategic marketer for the ESP version of XMS. Other key referral relationships include Citibank, N.A., Citicorp Diners Club Inc. and Geac Computer Corporation Ltd. 49 51 The Company recently entered into a non-binding letter of intent, and is presently negotiating a definitive agreement, regarding a strategic marketing and referral arrangement with ADP. See "Summary--Recent Development." The Company's existing strategic relationships generally do not, and any future strategic relationships may not, afford the Company any exclusive marketing or distribution rights. Many of the Company's strategic partners have multiple strategic relationships, and there can be no assurance that the Company's strategic partners regard their relationships with the Company as significant for their own businesses or that they will regard it as significant in the future. In addition, there can be no assurance that such parties will not pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with the Company's products or services either on their own or in collaboration with others, including the Company's competitors. Further, the Company's existing strategic relationships may interfere with its ability to enter into other desirable strategic relationships. Any future inability of the Company to maintain its strategic relationships or to enter into additional strategic relationships will have a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Need to Establish and Maintain Strategic Relationships" and "Certain Transactions." MARKETING The Company's marketing efforts are directed at extending the Company's leadership position in T&E expense management applications and increasing its market share for CompanyStore. The Company's marketing programs are targeted at accounting, finance, purchasing and travel executives, and are focused on creating awareness of, and generating interest in, the Company's products. Concur engages in a variety of marketing activities, including developing and executing co-advertising and co-marketing strategies designed to leverage its existing strategic relationships, targeting additional strategic relationships, managing and maintaining the Company's Web site, issuing newsletters and direct mailings, creating and placing advertisements, conducting public relations campaigns, and establishing and maintaining close relationships with recognized industry analysts. The Company is an active participant in technology-related conferences and demonstrates its products at trade shows targeted at accounting, finance, purchasing and travel executives. The Company believes that demand is increasing, and will continue to increase, for employee-facing applications such as those sold by the Company. There can be no assurance that the Company will be able to expand its sales and marketing staff, either domestically or internationally, to take advantage of any increase in demand for employee-facing applications. The failure of the Company to expand its sales and marketing organization or other distribution channels could materially and adversely affect the Company's business, results of operations and financial condition. See "Risk Factors--Management of Growth," "--Dependence on Key Employees" and "--Need to Attract and Retain Qualified Personnel." PRODUCT DEVELOPMENT The Company has been an innovator and leader in the development of employee-facing enterprise applications. The Company believes that it was one of the first to introduce a commercially successful T&E expense reporting application and that it pioneered a number of features that are now common throughout the T&E expense reporting field, such as prepopulation with corporate credit card transactions and automatic itemization of hotel bills. Concur's software development staff is responsible for enhancing the Company's existing products and expanding its product line. The Company believes that a technically skilled, quality oriented and highly productive software development organization will be a key component of the continued success of new product offerings. The Company expects that it will increase its product development expenditures substantially in the future. Concur's current product development activities focus on product enhancements to XMS and CompanyStore, development of the Concur Common Platform technology that will standardize the software architecture underlying all applications in the suite, and development of Employee Desktop, a personalized Web page on the corporate Intranet that will provide a centralized location for all employee-facing 50 52 applications. Concur expects XMS enhancements to include features such as localized versions of XMS for foreign countries, and enhanced integration of XMS with on-line travel booking applications. Concur plans to enhance CompanyStore by expanding its features and functionality, adding support for additional databases and ERP platforms, enhancing catalog support and integrating CompanyStore into its product suite through the Concur Common Platform, which is currently under development. The Company plans to offer its applications through the Internet as an outsourced ESP starting with XMS in the middle of calendar 1999 and to provide CompanyStore as an ESP offering in fiscal 2000. There can be no assurance that these development efforts will be completed within the Company's anticipated schedules or that, if completed, they will have the features necessary to make them successful in the marketplace. Future delays or problems in the development or marketing of product enhancements or new products could result in a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Risks Associated with New Products and New Versions of Existing Products," "--Risks Associated with Unproven Enterprise Service Provider Model" and "--Risks Associated with the Internet." COMPETITION The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's primary source of direct competition comes from independent software vendors of T&E expense management and front-office procurement applications. The Company also faces indirect competition from potential customers' internal development efforts and has to overcome potential customers' reluctance to move away from existing paper-based systems. The Company's major competitors in the T&E expense management field include Captura Software, Inc., Extensity, Inc., International Business Machines Corporation and Necho Systems Corporation. In addition, several major ERP vendors such as SAP AG, Oracle Corporation and PeopleSoft, Inc. have already developed T&E expense management products, and Oracle Corporation has developed a front-office procurement product. These companies have begun to sell these products along with their application suites. The Company's major competitors in the front-office procurement field include Ariba Technologies, Inc., Clarus Corporation, Commerce One, Inc., Harbinger Corporation, Netscape Communications Corporation, Trilogy Development Corporation and TRADE'ex Electronic Commerce Systems, Inc. In addition to its current competitors, the Company expects to face competition from new entrants including those ERP providers that do not already market a T&E expense management product. Most of the major ERP providers have a significant installed customer base and have the opportunity to offer additional products to those customers as additional components of their respective application suites. The Company believes that the principal competitive factors considered in selecting T&E expense management and front-office procurement applications are functionality, interoperability with existing IT infrastructure, price and an installed referenceable base of customers. The Company has learned from its customers that XMS tends to be 20% to 200% more expensive than other competing solutions, depending on the size and the nature of the transaction. Despite the disparity in price, the Company believes that it has a competitive advantage relative to competing solutions. With respect to functionality, the Company believes that it offers a product with more features than other competing products, and that it has often been the first to offer new and innovative features, such as prepopulation of transaction reports based on credit card information. Significantly, the Company believes it was the first provider of an Intranet-based T&E expense management solution. In addition, XMS was designed and built to interoperate with existing IT systems and can often be deployed on an enterprise customer's existing IT infrastructure. Many of the Company's competitors have chosen to develop their Intranet-based applications using Java, which the Company believes is difficult to deploy on a large scale within today's corporate IT infrastructure. With respect to price, the Company positions XMS as the premium product compared to the competition. The Company believes that this positioning does cause the Company to lose some potential transactions to competitors based on price. Finally, the Company believes that it has a larger customer base, spread across a wider variety of industries, 51 53 than the Company's primary competitors. The Company believes that this large installed customer base helps the Company to secure additional customers. Many of the Company's competitors in both the T&E expense management and front-office procurement markets have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than the Company. Moreover, a number of the Company's competitors, particularly major ERP vendors, have well-established relationships with current and potential customers of the Company as well as with systems integrators and other vendors and service providers. In addition, these competitors may 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 can the Company. It is also possible that new competitors or alliances among competitors or other third parties may emerge and rapidly acquire significant market share. The Company expects that competition in its markets will increase as a result of consolidation and the formation of alliances in the industry. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, results of operations and financial condition. See "Risk Factors--Risks Associated with Expansion into New Market," "--Competition" and "--Need to Establish and Maintain Strategic Relationships." INTELLECTUAL PROPERTY RIGHTS The Company's success depends upon its proprietary technology. The Company relies primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect its proprietary information. For example, the Company licenses rather than sells its software to customers and requires licensees to enter into license agreements that impose certain restrictions on licensees' ability to utilize the software. The Company currently holds no patents and does not have any patent applications pending. There can be no assurance that any copyrights or trademarks held by the Company will not be challenged and invalidated. As part of its confidentiality procedures, the Company enters into non-disclosure agreements with certain of its employees, consultants, corporate partners, customers and prospective customers. The Company also enters into license agreements with respect to its technology, documentation and other proprietary information. Such licenses are generally non-transferable and have a perpetual term. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use the Company's products or technology that the Company considers proprietary and third parties may attempt to develop similar technology independently. In particular, the Company provides its licensees with access to object code versions of its software, and to other proprietary information underlying the Company's licensed software. Policing unauthorized use of the Company's products is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted and, while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. The laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the Company's protection of its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that its products, trademarks, copyrights or other proprietary rights infringe the proprietary rights of third parties. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products Further, the Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. From time to time, the Company hires or retains employees or 52 54 consultants (including through acquisition) who have worked for independent software vendors or other companies developing products similar to those offered by the Company. There can be no assurance that such prior employers will not claim that the Company's products are based on their products and that the Company has misappropriated their intellectual property. Any such claims, with or without merit, could cause a significant diversion of management attention, result in costly and protracted litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which would have a material adverse effect upon the Company's business, results of operations and financial condition. See "Risk Factors--Limited Protection from Proprietary Technology; Risks of Infringement." EMPLOYEES As of October 31, 1998, the Company had approximately 231 full-time employees, five of whom were based in the United Kingdom, one in Canada and one in Australia. These included 68 engaged in research and development, 69 in sales and marketing, 64 in consulting, training and technical support and 30 in administration and finance. No employees are known by the Company to be represented by a collective bargaining agreement and the Company has never experienced a strike or similar work stoppage. The Company considers its relations with its employees to be good. The Company's ability to achieve its financial and operational objectives depends in large part upon its continuing ability to attract, integrate, retain and motivate highly qualified sales, technical and managerial personnel. Competition for such qualified personnel in the Company's industry is intense, particularly in the Seattle area in which the Company's headquarters is located and particularly with respect to software development and management personnel. In addition, competitors may attempt to recruit the Company's key employees. There can be no assurance that the Company will be able to attract or retain employees in the future. The Company is a party to employment agreements with certain of its employees. See "Risk Factors--Dependence on Key Employees," "--Need to Attract and Retain Qualified Personnel" and "Management--Employment Agreements." FACILITIES The Company's principal administrative, sales, marketing and research and development facility is located in Redmond, Washington and consists of approximately 43,000 square feet of office space held under a lease that expires in January 2003. As of October 31, 1998, the Company also leased sales offices in Atlanta, Chicago, Dallas, Detroit, Los Angeles, New York, San Francisco, Sydney and London. For a discussion of certain risks associated with the Company's anticipated need for additional office space, see "Risk Factors--Management of Growth." LEGAL PROCEEDINGS There are no material legal proceedings currently pending to which the Company is a party. 53 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company:
NAME AGE POSITION ---- --- -------- S. Steven Singh............... 37 President, Chief Executive Officer and Director Michael W. Hilton............. 34 Chairman of the Board and Chief Technical Officer Jon T. Matsuo................. 39 Executive Vice President of Worldwide Sales Sterling R. Wilson............ 40 Chief Financial Officer and Vice President of Operations Rajeev Singh.................. 30 Vice President of Products Frederick L. Ingham........... 31 Vice President of Business Development John P. Russo, Jr............. 38 Vice President of Internet Application Services Michael Watson................ 51 Vice President of Professional Services John A. Prumatico............. 50 Vice President of Human Resources Jeffrey D. Brody(1)........... 38 Director Norman A. Fogelsong(1)........ 48 Director Michael J. Levinthal(2)....... 43 Director James D. Robinson III(2)...... 62 Director Russell P. Fradin............. 43 Director Nominee Edward P. Gilligan............ 39 Director Nominee
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. S. Steven Singh has served as the Company's President and Chief Executive Officer since February 1996. Mr. Singh served as the Chairman of the Board of Directors from the Company's inception until February 1996. Prior to joining the Company as an officer, Mr. Singh was General Manager of the Contact Management Division at Symantec Corporation ("Symantec") from June 1993 to February 1996. From February 1992 to June 1993, when it was acquired by Symantec, Mr. Singh was Vice President of Development for Contact Software International ("CSI"), a personal computer software publisher. Prior to joining CSI, Mr. Singh co-founded Eshani Corporation ("Eshani"), where he was President and Chief Executive Officer. Mr. Singh holds a B.S. in Electrical Engineering from the University of Michigan. Mr. Singh is the brother of Rajeev Singh, the Company's Vice President of Products. Michael W. Hilton co-founded the Company in August 1993 and has served as the Company's Chief Technical Officer since 1996. Mr. Hilton has served as a member of the Company's Board of Directors since its founding, and as Chairman of the Board since February 1996. Before co-founding the Company, Mr. Hilton served as Senior Development Manager at Symantec during 1993. Prior to his employment at Symantec, Mr. Hilton served as Director of Product Development for CSI's California office. Mr. Hilton also was a co-founder of Eshani, where he was Vice President of Product Development. Mr. Hilton holds a B.A. in Computer and Information Sciences and a B.S. in Mathematics from the University of California at Santa Cruz. Jon T. Matsuo joined the Company in July 1994 and currently serves as the Company's Executive Vice President of Worldwide Sales. Prior to joining the Company, Mr. Matsuo served as General Manager, Consumer Software Division of Delrina Corporation from June 1993 to July 1994. Mr. Matsuo's experience also includes senior marketing positions with CSI and Bluebird Systems, as well as eight years of experience with Deloitte Haskins & Sells in auditing, consulting and product management. Mr. Matsuo holds a B.B.A. in Accounting from the University of San Diego and is a Certified Public Accountant. 54 56 Sterling R. Wilson joined the Company in May 1994 and currently serves as the Company's Chief Financial Officer and Vice President of Operations. Prior to joining the Company, Mr. Wilson served as Vice President of Operations and Chief Financial Officer at IntelliQuest, Inc., a leading provider of market research information, from July 1993 to May 1994. Mr. Wilson also served as Chief Financial Officer at CSI from 1992 to 1993. Mr. Wilson holds a B.B.A. in Accounting from California State University at Bakersfield (formerly California State College at Bakersfield) and is a Certified Public Accountant. Rajeev Singh co-founded the Company in August 1993 and currently serves as the Company's Vice President of Products. Previously, Mr. Singh acted as Director of Product Management of the Company. Prior to co-founding the Company, Mr. Singh served as a Software and Manufacturing Engineer at General Motors Corporation from July 1986 to January 1990 and he served as a Software Project Manager for the development of complex computer simulations at Ford Motor Company from January 1991 to March 1993. Mr. Singh holds a B.S. in Mechanical Engineering from Kettering University (formerly GMI Engineering and Management Institute). Mr. Singh is the brother of S. Steven Singh, the Company's President and Chief Executive Officer. Frederick L. Ingham joined the Company in January 1997 and currently serves as the Company's Vice President of Business Development. Prior to joining the Company, Mr. Ingham was Director of Business Development at Symantec from January 1995 to December 1996. From September 1992 to December 1994, Mr. Ingham worked as a Product Manager and Product Planner at Xerox Corporation. Mr. Ingham holds a B.A. in Economics from Yale University and an M.B.A. from the Wharton School of the University of Pennsylvania. John P. Russo, Jr. joined the Company in April 1996 and currently serves as the Company's Vice President of Internet Application Services. From September 1988 to April 1996, Mr. Russo was employed by Symantec, including as Director of Product Management from September 1994 to April 1996, and assisted with the integration of company acquisitions for Symantec's Productivity Applications Group. Mr. Russo holds a B.S. in Marketing from San Jose State University. Michael Watson joined the Company in August 1998 and currently serves as the Company's Vice President of Professional Services. Prior to joining the Company, Mr. Watson was Vice President of Consulting Services from June 1995 to August 1998 at Hyperion Software, where he also held various roles in the sales organization from October 1990 to June 1995. Mr. Watson also served as the National Director of Price Waterhouse's Applied Technology Center from 1986 to 1990. Mr. Watson holds a B.A. in Business Studies from Lanchester University (U.K.) and an M.B.A. from the Babcock Graduate School of Management at Wake Forest University. John A. Prumatico joined the Company in July 1998 and currently serves as the Company's Vice President of Human Resources. Prior to joining the Company, Mr. Prumatico was managing principal for John Prumatico & Associates, a consulting firm specializing in human resources leadership and organization development, which he founded in 1992. From April 1987 to October 1992, Mr. Prumatico was employed by Microsoft Corporation as the Director of Human Resources Development and Administration. Mr. Prumatico holds a B.S. in Management and Organization Development from the University of West Florida. Jeffrey D. Brody has served as a member of the Company's Board of Directors since October 1994. Since April 1994, Mr. Brody has been employed by Brentwood Venture Capital ("Brentwood"), a venture capital firm, where he has been a General Partner of Brentwood since October 1995. From 1988 to April 1994, Mr. Brody was Senior Vice President of Comdisco Ventures, a venture leasing company. Mr. Brody holds a B.S. in Engineering from the University of California at Berkeley and an M.B.A. from the Graduate School of Business at Stanford University. Mr. Brody is a member of the boards of directors of several private technology companies. Norman A. Fogelsong has served as a member of the Company's Board of Directors since July 1996. Since March 1989, Mr. Fogelsong has been a General Partner of Institutional Venture Partners, a venture capital firm. Between March 1980 and February 1989, Mr. Fogelsong was a General Partner of Mayfield Fund, a venture capital firm. Mr. Fogelsong holds a B.S. in Industrial Engineering from Stanford University, 55 57 an M.B.A. from Harvard Business School and a J.D. from Harvard Law School. Mr. Fogelsong is a member of the boards of directors of Aspect Telecommunications Corporation as well as several private technology companies. Michael J. Levinthal has served as a member of the Company's Board of Directors since April 1998. Since 1984, Mr. Levinthal has been a General Partner or managing director of various entities associated with Mayfield Fund, a venture capital firm. Mr. Levinthal holds a B.S. in Engineering, an M.S. in Industrial Engineering and an M.B.A. from the Graduate School of Business at Stanford University. Mr. Levinthal is a member of the boards of directors of Focal, Inc., InControl, Inc. and Symphonix Devices, Inc. as well as several private technology companies. James D. Robinson III has served as a member of the Company's Board of Directors since July 1998. Since 1994, Mr. Robinson has been the Chairman and Chief Executive Officer of RRE Investors, LLC, a private information technology venture investment firm. From 1977 to 1993, Mr. Robinson served as Chairman and Chief Executive Officer of American Express Company. Mr. Robinson holds a B.S. in Industrial Management from the Georgia Institute of Technology and an M.B.A. from Harvard Business School. Mr. Robinson is a member of the boards of directors of The Coca-Cola Company, Bristol-Myers Squibb Company, Cambridge Technology Partners and First Data Corporation as well as several private companies. Russell P. Fradin is expected to begin serving as a member of the Company's Board of Directors after the completion of the Offering. In 1996, Mr. Fradin joined ADP, where he served first as Senior Vice President before becoming Group President, Employer Services. Prior to joining ADP, Mr. Fradin was a senior partner of McKinsey & Company, and was associated with that firm for 18 years. Mr. Fradin holds a B.S. in Economics from the Wharton School of the University of Pennsylvania and an M.B.A. from the Harvard Business School. Edward P. Gilligan is expected to be appointed as a member of the Company's Board of Directors after the completion of the Offering. Mr. Gilligan has been President, Corporate Services Division, for TRS, since February 1996. From June 1995 to February 1996, Mr. Gilligan served as Executive Vice President of Travel Management Services for TRS. From September 1992 to June 1995, Mr. Gilligan was Senior Vice President and General Manager, Eastern Region, of American Express Travel Management Services. Mr. Gilligan holds a B.S. in Economics and Management from New York University. The Company's Bylaws, which will be in effect upon the completion of the Offering, provide for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Compensation Committee of the Board of Directors consists of Mr. Brody and Mr. Fogelsong. The Compensation Committee makes decisions regarding all forms of salary, bonus and stock compensation provided to executive officers of the Company, the long-term strategy of employee compensation, the types of stock and other compensation plans to be used by the Company and the shares and amounts reserved thereunder, and any other compensation matters as from time to time directed by the Board. The Audit Committee of the Board of Directors consists of Mr. Levinthal and Mr. Robinson. The Audit Committee meets with the Company's independent auditors to review the adequacy of the Company's internal control systems and financial reporting procedures, reviews the general scope of annual audits and the fees charged by the independent accountants, as well as the performance of non-audit services by the Company's auditors, and reviews and makes recommendations to the Board of Directors regarding the fairness of any proposed transaction between the Company and any officer, director or other affiliate of the Company. 56 58 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the Board of Directors was at any time since the formation of the Company an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the Board of Directors of the Company or the Compensation Committee of the Board of Directors. Mr. Brody is the Managing Member of Brentwood VIII Ventures LLC, the General Partner of Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. Between October 1, 1994 and October 31, 1998, Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. purchased in the aggregate 1,529,365 shares of the Company's Series A Preferred Stock at a price of $1.3075 per share, 312,500 shares of the Company's Series B Preferred Stock at a price of $1.60 per share, 237,500 shares of the Company's Series C Preferred Stock at a price of $2.00 per share, 135,378 shares of the Company's Series D Preferred Stock at a price of $3.65 per share and 72,123 shares of the Company's Series E Preferred Stock at a price of $7.75 per share. In addition, The Schuster Revocable Trust dated February 10, 1995, Eric Chiu and James Mongiello, affiliates of Brentwood VIII Ventures LLC, purchased in the aggregate 12,500 shares of the Company's Series C Preferred Stock at a price of $2.00 per share and 2,580 shares of the Company's Series E Preferred Stock at a price of $7.75 per share. Mr. Brody also purchased 3,871 shares of the Company's Series E Preferred Stock at $7.75 per share. Mr. Fogelsong is a General Partner of Institutional Venture Management VII, L.P., the General Partner of Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P. Between October 1, 1994 and October 31, 1997, Institutional Venture Management VII, L.P., Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P. purchased in the aggregate 2,000,000 shares of the Company's Series C Preferred Stock at a price of $2.00 per share, 130,193 shares of the Company's Series D Preferred Stock at a price of $3.65 per share and 72,090 shares of the Company's Series E Preferred stock at a price of $7.75 per share. DIRECTOR COMPENSATION Directors of the Company do not receive any cash compensation for their services as directors but are reimbursed for their reasonable travel expenses in attending meetings of the Board of Directors. The Company's Board of Directors adopted the 1998 Directors Stock Option Plan (the "Directors Plan") in August 1998 (to be effective upon the effective date of the Registration Statement for this Offering (the "Effective Date") and reserved a total of 240,000 shares of the Company's Common Stock for issuance thereunder. The Directors Plan was approved by the Company's stockholders in September 1998. Members of the Board of Directors who are not employees of the Company or any parent, subsidiary or affiliate of the Company are eligible to participate in the Directors Plan. The option grants under the Directors Plan are automatic and the exercise price of the options must be 100% of the fair market value of the Common Stock on the date of grant. Each eligible director who is or becomes a member of the Board of Directors on or after the Effective Date will automatically be granted an option for 20,000 shares of the Company's Common Stock on the later of the Effective Date and the date such director first becomes a member of the Board of Directors (an "Initial Grant"). The Initial Grants made on the Effective Date will have exercise prices equal to the initial public offering price. On the date of each Annual Meeting of Stockholders following the Effective Date, each eligible director who has served continuously as a member of the Board of Directors since the date of such director's Initial Grant will automatically be granted an option for 8,000 shares of the Company's Common Stock (a "Succeeding Grant"). Options granted under the Directors Plan generally will become exercisable as they vest, although the Compensation Committee may provide that options are exercisable immediately subject to repurchase. Initial Grants and Succeeding Grants will vest as to 25% of the shares on the first anniversary of the date of grant and as to an additional 2.0833% of the shares each month thereafter. Options will cease to vest if the individual ceases to provide services to the Company, or any parent or subsidiary of the Company, as a director or a consultant. Once the individual ceases providing such services, he or she will have seven months in which to exercise his or her vested options, or his or her estate will have 12 months if the cessation of services resulted from the individual's death or disability. In the event of a 57 59 merger or consolidation in which the Company is not the surviving corporation, the sale of all or substantially all of the Company's assets, or certain other corporate transactions as set forth in the Directors Plan, the vesting of all options granted under the Directors Plan will accelerate and the options will become exercisable in full upon such terms as the Compensation Committee determines, and must be exercisable within seven months following such event. Any options not exercised within seven months of the corporate transaction will expire. Options may be granted pursuant to the Directors Plan from time to time within a period of ten years from the Effective Date. The Board of Directors may at any time terminate or amend the Directors Plan or any outstanding option, provided that the Board of Directors may not terminate or amend the terms of any outstanding option or without the consent of the optionee amend the Directors Plan so as to adversely affect any then outstanding options or any unexercised portions thereof. The Directors Plan may be administered by the full Board of Directors or by the Compensation Committee. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation awarded to, earned by or paid for services rendered to the Company in all capacities during fiscal 1997 and fiscal 1998 by (i) the Company's Chief Executive Officer and (ii) the Company's four other most highly compensated executive officers who were serving as executive officers as of September 30, 1998 and whose compensation was in excess of $100,000 in fiscal 1998 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------ ------------------ FISCAL SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS --------------------------- ------ -------- -------- ------------------ S. Steven Singh.............................. 1997 $200,000 $ 66,950 -- President and Chief Executive Officer 1998 200,000 140,529 200,000 Sterling R. Wilson........................... 1997 140,874 52,354 10,400 Chief Financial Officer and Vice President 1998 150,000 83,459 52,000 of Operations Jon T. Matsuo................................ 1997 131,566 91,700 10,400 Executive Vice President of Worldwide Sales 1998 150,000 157,989 52,000 Michael W. Hilton............................ 1997 133,000 49,700 -- Chairman of the Board and Chief Technical 1998 132,000 95,330 52,000 Officer Rajeev Singh................................. 1997 92,282 44,169 10,000 Vice President of Products 1998 115,000 108,027 52,000
58 60 OPTION GRANTS IN FISCAL 1997 AND FISCAL 1998 The following table sets forth information regarding stock option grants during fiscal 1997 and fiscal 1998 to each of the Named Executive Officers. The Company has not granted any stock appreciation rights.
INDIVIDUAL GRANTS --------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF ASSUMED ANNUAL RATES OF SECURITIES PERCENTAGE OF STOCK PRICE APPRECIATION FOR UNDERLYING TOTAL OPTIONS OPTION TERM(4) FISCAL OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION ----------------------------- NAME YEAR GRANTED(1) EMPLOYEES(2) PER SHARE(3) DATE 5% 10% ---- ------ ---------- -------------- -------------- ---------- ------------- ------------- S. Steven Singh...... 1997 -- --% $ -- -- $ -- $ -- 1998 200,000 26.8 0.375 10/22/07 1,320,679 3,346,859 Sterling R. Wilson... 1997 10,400 5.3 0.20 10/23/06 68,675 174,037 1998 52,000 7.0 0.375 10/22/07 343,376 870,183 Jon T. Matsuo........ 1997 10,400 5.3 0.20 10/23/06 68,675 174,037 1998 52,000 7.0 0.375 10/22/07 343,376 870,183 Michael W. Hilton.... 1997 -- -- -- -- 1998 52,000 7.0 0.375 10/22/07 343,376 870,183 Rajeev Singh......... 1997 10,000 5.1 0.20 10/23/06 66,034 167,343 1998 52,000 7.0 0.375 10/22/07 343,376 870,183
- --------------- (1) Unless otherwise indicated below, all options granted in fiscal 1997 and fiscal 1998 were granted pursuant to the 1994 Plan and become exercisable with respect to 25% of the shares subject to the option on the first anniversary of the date of grant and with respect to an additional 2.0833% of these shares each month thereafter, subject to acceleration upon certain changes in control of the Company. See "--Employee Benefit Plans." (2) Based on a total of 196,580 options granted to all employees during fiscal 1997 and 746,414 options granted to all employees during fiscal 1998. (3) Options were granted at an exercise price equal to the fair market value of the Company's Common Stock at the time of grant. (4) The potential realizable value is calculated based upon the term of the option at its time of grant and is calculated by assuming that the aggregate exercise price (assuming that the options were granted at an exercise price equal to the midpoint of the price range set forth on the cover page of the Prospectus) appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated price. The 5% and 10% assumed annual compound rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission (the "Commission") and do not represent the Company's estimates or projection of future Common Stock prices. There can be no assurance that the Common Stock will appreciate at any particular rate or at all in future years. 59 61 AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND 1998 AND FISCAL YEAR-END VALUES The following table sets forth information concerning unexercised options held at September 30, 1997 and at September 30, 1998 with respect to each of the Named Executive Officers. No options were exercised by the Named Executive Officers during fiscal 1997.
VALUE REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED AT EXERCISE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(2) FISCAL ON LESS EXERCISE ---------------------------- ---------------------------- NAME YEAR EXERCISE PRICE)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------ -------- --------------- ----------- ------------- ----------- ------------- S. Steven Singh...... 1997 -- $ -- 71,250 108,750 $ 736,725 $1,124,475 1998 -- -- 116,250 263,750 1,202,025 2,684,175 Sterling R. Wilson... 1997 -- -- -- 10,400 -- 107,120 1998 -- -- 4,983 57,417 51,325 582,295 Jon T. Matsuo........ 1997 -- -- 180,000 10,400 1,872,000 107,120 1998 8,000 19,520 176,983 57,417 1,840,125 582,295 Michael W. Hilton.... 1997 -- -- -- -- -- -- 1998 -- -- -- 52,000 -- 526,500 Rajeev Singh......... 1997 -- -- -- 10,000 -- 103,000 1998 -- -- 4,792 57,208 49,358 580,142
- --------------- (1) Mr. Matsuo exercised options to purchase 8,000 shares of the Company's Common Stock at $0.10 per share in June 1998. The fair market value of the Company's Common Stock at the time of such exercise was $6.20, as determined by the Board of Directors. (2) Based on the fair market value of the Company's Common Stock at September 30, 1998 ($10.50 as determined by the Board of Directors based on the midpoint of the price range set forth on the cover page of the Prospectus) less the exercise price. EMPLOYMENT AGREEMENTS The Company and Mr. Wilson are parties to a letter agreement dated April 21, 1994 governing his employment with the Company. Under the agreement, the Company paid to Mr. Wilson an annual initial salary of $90,000, which was to be increased to $105,600 following the Company's initial equity financing, with possible bonuses of up to $36,000 per year. The compensation for Mr. Wilson was subsequently increased. In addition, Mr. Wilson was given benefits that the Company makes available to employees in comparable positions, and was granted an option to purchase 200,000 shares of Common Stock. The Company also agreed to pay Mr. Wilson's reasonable costs to relocate to Seattle. Mr. Wilson's employment is voluntary and may be terminated by the Company or Mr. Wilson at any time with or without cause or notice. The Company and Mr. Matsuo are parties to a letter agreement dated June 20, 1994 governing his employment with the Company. Under the agreement, the Company paid to Mr. Matsuo an initial annual salary of $90,000, which was to be increased to $105,000 following the Company's initial equity financing, with possible bonuses of up to $50,000 per year. The compensation for Mr. Matsuo was subsequently increased. In addition, Mr. Matsuo was given benefits that the Company makes available to employees in comparable positions, and was granted an option to purchase 260,000 shares of Common Stock. Mr. Matsuo's employment is voluntary and may be terminated by the Company or Mr. Matsuo at any time with or without cause or notice. EMPLOYEE BENEFIT PLANS 1994 Stock Option Plan The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board of Directors and approved by the Company's stockholders in April 1994. Initially, 150,000 shares of Common Stock were reserved for issuance under the 1994 Plan. This reserve has been increased several times, and there are currently 2,760,000 shares reserved for issuance under the 1994 Plan. The 1994 Plan provides for the grant of both incentive stock options ("ISOs") that may qualify under Section 422 of the Code and non-qualified 60 62 stock options ("NQSOs") on terms determined by the Board of Directors, subject to certain statutory and other limitations in the 1994 Plan (including limitations on the vesting schedule thereof and the exercise price, which for ISOs to comply with Section 422 of the Code may not be less than 100% of the fair market value of the Company's Common Stock on the date of grant and for NQSOs may not be less than 85% of the fair market value of the Company's Common Stock on the date of grant). The 1994 Plan will terminate upon the Effective Date, when the 1998 Plan will become effective. As a result, no further options may be granted under the 1994 Plan following the Effective Date. However, termination will not affect any options outstanding as of such date, which options will remain effective until exercised or until they terminate or expire in accordance with their terms. As of October 31, 1998, options to purchase 1,429,215 shares of Common Stock were outstanding under the 1994 Plan and 354,768 shares were available for future option grants. 1997 Stock Option Plan of 7Software In connection with the Company's June 1998 acquisition of 7Software, the Company assumed the 1997 Stock Option Plan of 7Software (the "7Software Plan") and all options outstanding under the 7Software Plan at the closing of the Company's acquisition of 7Software, which options will remain effective until exercised for the Company's Common Stock or until they terminate or expire in accordance with their terms. The 7Software Plan provided for the grant of both ISOs that may qualify under Section 422 of the Code and NQSOs on terms determined by the board of directors, subject to certain statutory and other limitations in the 7Software Plan (including limitations on the vesting schedule thereof and the exercise price, which for ISOs to comply with Section 422 of the Code may not be less than 100% of the fair market value of the Company's Common Stock on the date of grant and for NQSOs may not be less than 85% of the fair market value of the company's common stock on the date of grant). No options will be granted in the future under the 7Software Plan. As of October 31, 1998, options to purchase 110,306 shares of Common Stock were outstanding under the 7Software Plan. 1998 Equity Incentive Plan In August 1998, the Board of Directors adopted the 1998 Equity Incentive Plan (the "1998 Plan") and reserved 3,240,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the 1998 Plan in September 1998. The 1998 Plan will become effective on the Effective Date and will serve as the successor to the 1994 Plan. Shares that (a) are subject to issuance upon exercise of an option granted under the 1998 Plan that cease to be subject to such option for any reason other than exercise of such option, (b) have been issued pursuant to the exercise of an option granted under the 1998 Plan that are subsequently forfeited or repurchased by the Company at the original purchase price, (c) are subject to an award granted pursuant to restricted stock purchase agreement under the 1998 Plan that are subsequently forfeited or repurchased by the Company at the original issue price or (d) are subject to stock bonuses granted under the 1998 Plan that otherwise terminate without shares being issued will again be available for grant and issuance under the 1998 Plan. In addition, any authorized shares not issued or subject to outstanding grants under the 1994 Plan on the Effective Date and any shares issued under the 1994 Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options granted pursuant to the 1994 Plan that expire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under the 1998 Plan. The 1998 Plan will terminate in August 2008, unless sooner terminated in accordance with the terms of the 1998 Plan. The 1998 Plan authorizes the award of options, restricted stock awards and stock bonuses (each an "Award"). No person will be eligible to receive more than 960,000 shares in any calendar year pursuant to Awards under the 1998 Plan other than a new employee of the Company, who will be eligible to receive no more than 1,200,000 shares in the calendar year in which such employee commences employment. Over the term of the 1998 Plan, no more than 10,000,000 shares may be issued under the 1998 Plan upon exercise of incentive stock options. The 1998 Plan will be administered by the Compensation Committee, which currently consists of Mr. Brody and Mr. Fogelsong, both of whom are "non-employee directors" under applicable 61 63 federal securities laws and "outside directors" as defined under applicable federal tax laws. The Compensation Committee has the authority to construe and interpret the 1998 Plan and any agreement made thereunder, grant Awards and make all other determinations necessary or advisable for the administration of the 1998 Plan. The 1998 Plan provides for the grant of both ISOs that qualify under Section 422 of the Code and NQSOs. ISOs may be granted only to employees of the Company or of a parent or subsidiary of the Company. NQSOs (and all other Awards other than ISOs) may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any parent or subsidiary of the Company, provided such consultants, independent contractors and advisors render to the Company bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of ISOs must be at least equal to the fair market value of the Company's Common Stock on the date of grant. The exercise price of ISOs granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of NQSOs must be at least equal to 85% of the fair market value of the Common Stock on the date of grant. The maximum term of options granted under the 1998 Plan is ten years. In addition to, or in tandem with, awards of stock options, the Compensation Committee may grant participants restricted stock awards to purchase the Company's Common Stock at terms to be determined by the Compensation Committee. The Compensation Committee may also grant stock bonus awards of the Company's Common Stock either in addition to, or in tandem with, other awards under the 1998 Plan under such terms, conditions and restrictions as the Compensation Committee may determine. Under the 1998 Plan, stock bonuses may be awarded for the satisfaction of performance goals established in advance. The Compensation Committee may, with the consent of the respective Award recipient, issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Compensation Committee may also buy from an Award recipient an award previously granted based on such terms and conditions as the Committee and recipient may agree. At the discretion of the Compensation Committee, payment for Awards may be made: in cash; by cancellation of indebtedness of the Company to the participant; by surrender of shares that either have been owned by the participant for more than six months and have been paid for within the meaning of Rule 144 or were obtained by the participant in the public market; by tender of a full recourse promissory note; by waiver of compensation due or accrued to the participant for services rendered; or, with respect only to purchases upon exercise of an option, through a "same day sale" or a "margin" commitment. Awards granted under the 1998 Plan may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee (unless otherwise determined by the Compensation Committee and set forth in the Award agreement with respect to Awards that are not ISOs). Options granted under the 1998 Plan generally expire three months after the termination of the optionee's service to the Company or a parent or subsidiary of the Company, except in the case of death or disability, in which case the options generally may be exercised up to 12 months following the date of death or termination of service. Options will generally terminate ten days after termination for cause. In the event of the Company's dissolution or liquidation or a "change in control" transaction, outstanding Awards may be assumed or substituted by the successor corporation. In the discretion of the Compensation Committee, the vesting of such Awards may accelerate upon such transaction. 1998 Employee Stock Purchase Plan In August 1998, the Board adopted the 1998 Employee Stock Purchase Plan (the "Purchase Plan") and reserved a total of 320,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the Purchase Plan in September 1998. On each January 1, the aggregate number of shares reserved for issuance under the Purchase Plan will increase automatically by a number of shares equal to 1% of the total outstanding shares of the Company as of the immediately preceding December 31. Such annual increase may not exceed 320,000 shares per year. The Purchase Plan will be administered by the Compensation Committee. The Compensation Committee will have the authority to construe and interpret the Purchase Plan and its decision in such capacity will be final and binding. The Purchase Plan will become effective on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. Employees generally will be eligible to participate in the Purchase Plan if they are customarily employed by the Company (or its parent or any subsidiaries that the Company 62 64 designates) for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted an option under the Purchase Plan) 5% stockholders of the Company (or its designated parent or subsidiaries). Under the Purchase Plan, eligible employees will be permitted to acquire shares of the Company's Common Stock through payroll deductions. Eligible employees may select a rate of payroll deduction between 2% and 15% of their W-2 cash compensation and are subject to certain maximum purchase limitations described in the Purchase Plan. A participant may change the rate of payroll deductions or withdraw from an Offering Period by notifying the Company in writing. Participation in the Purchase Plan will end automatically upon termination of employment for any reason. Except for the First Offering Period, each Offering Period under the Purchase Plan will be for two years and consist of four six-month Purchase Periods. The first Offering Period is expected to begin on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. The First Offering Period shall consist of no more than five and no fewer than three Purchase Periods, any of which may be greater or less than six months as determined by the Compensation Committee. Offering Periods and Purchase Periods thereafter will begin on May 1 and November 1. The purchase price for the Company's Common Stock purchased under the Purchase Plan is 85% of the lesser of the fair market value of the Company's Common Stock on the first day of the applicable Offering Period or the last day of each Purchase Period. The Compensation Committee will have the power to change the duration of Offering Periods without stockholder approval, if such change is announced at least 15 days prior to the beginning of the Offering Period to be affected. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. Rights granted under the Purchase Plan will not be transferable by a participant other than by will or the laws of descent and distribution. The Purchase Plan provides that in the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the proposed action, unless otherwise provided by the Compensation Committee. The Compensation Committee may, in the exercise of its sole discretion in such instances, declare that the Purchase Plan will terminate as of a date fixed by the Compensation Committee and give each participant the right to purchase shares prior to such termination. In the event of a "change in control" transaction, the Purchase Plan will continue for the duration of each Offering Period that commenced prior to the closing of such proposed transaction and stock will be purchased on the purchase dates based on the fair market value of the surviving corporation's stock; unless otherwise provided by the Compensation Committee consistent with pooling of interests accounting treatment. The Purchase Plan will terminate in August 2008 unless earlier terminated pursuant to its terms. The Board of Directors will have the authority to amend, terminate or extend the term of the Purchase Plan, except that no such action may adversely affect any outstanding options previously granted under the Purchase Plan and stockholder approval is required to increase the number of shares that may be issued or to change the terms of eligibility under the Purchase Plan. Notwithstanding the foregoing, the Board of Directors may make such amendments to the Purchase Plan as the Board of Directors determines to be advisable if the financial accounting treatment for the Purchase Plan is different than the financial accounting treatment in effect on the date the Purchase Plan was adopted by the Board of Directors. 401(k) Plan The Company maintains the Concur Technologies, Inc. 401(k) Profit Sharing and Trust Plan (the "401(k) Plan"), a defined contribution plan intended to qualify under Section 401 of the Code. All employees are eligible to participate in the 401(k) Plan. An eligible employee of the Company may begin to participate in the 401(k) Plan on the first day of January, April, July or October of the plan year following the date on which such employee meets the eligibility requirements. A participating employee may make pre-tax contributions of a percentage of his or her eligible compensation, subject to limitations under the federal tax laws. Employee contributions and the investment earnings thereon are fully vested at all times. The Company does not make matching or profit-sharing contributions. 63 65 INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY As permitted by Section 145 of the Delaware General Corporation Law (the "DGCL"), the Bylaws of the Company provide that the Company is required to indemnify its directors and executive officers to the fullest extent permitted by the DGCL, the Company may indemnify its other officers, employees and agents as set forth in the DGCL. The Bylaws also provide that to the fullest extent permitted by the DGCL, the Company is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding (subject to certain exceptions), the rights conferred in the Bylaws are not exclusive, and the Company is authorized to enter into indemnification agreements with its directors, officers, employees and agents. The Company intends to enter into Indemnity Agreements with each of its current directors and executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Company's Bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. As permitted by the DGCL, the Company's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, under Section 174 of the DGCL or for any transaction from which the director derived an improper personal benefit. As authorized by the Company's Bylaws, the Company, with approval of the Board of Directors, has applied for, and expects to obtain, directors and officers liability insurance with a per claim and annual aggregate coverage limit of $10 million to $15 million. 64 66 CERTAIN TRANSACTIONS Since October 1, 1994, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company or any of its subsidiaries was or is to be a party in which the amount involved exceeded or will exceed $60,000 and in which any director, executive officer, holder of more than 5% of the Common Stock of the Company or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest other than compensation agreements and other arrangements, which are described where required in "Management" and the transactions described below. Loan Repayment. On September 21, 1994, the Company entered into a Repayment Agreement with S. Steven Singh, the Company's President, Chief Executive Officer and a director, and Michael W. Hilton, the Company's Chairman of the Board and Chief Technical Officer. Pursuant to the Repayment Agreement, the Company agreed to repay loans previously made to the Company by Mr. Singh and Mr. Hilton in the amounts of $111,500 and $121,500, respectively. Under the terms of the Repayment Agreement, the Company agreed to repay the loans on the date two years following the Commencement Date (as defined in the Repayment Agreement) together with interest at the rate of 7% per annum. In December 1996, the Company agreed to issue 64,530 shares of its Series C Preferred Stock to Mr. Singh and 70,390 shares of its Series C Preferred Stock to Mr. Hilton in consideration for the cancellation of indebtedness under the Repayment Agreement at a purchase price of $2.00 per share. Preferred Stock Financings. From October 1, 1994 through August 15, 1998, the Company sold 1,529,636 shares of its Series A Preferred Stock at a price of $1.3075 per share, 1,874,999 shares of its Series B Preferred Stock at a price of $1.60 per share, 3,884,920 shares of its Series C Preferred Stock at a price of $2.00 per share (which includes the 134,920 shares of Series C Preferred Stock issued to Mr. Singh and Mr. Hilton in consideration for the cancellation of indebtedness under the Repayment Agreement), 1,275,338 shares of its Series D Preferred Stock at a price of $3.65 per share, and 1,648,660 shares of its Series E Preferred Stock at a price of $7.75 per share, in a series of private financings. The Company sold these securities pursuant to preferred stock purchase agreements and an investors' rights agreement on substantially similar terms (except for terms relating to date and price), under which the Company made standard representations, warranties and covenants, and which provided the purchasers thereunder with registration rights, information rights, and rights of first refusal, among other provisions, standard in venture capital financings. Each share of preferred stock will convert into one share of Common Stock upon the completion of the Offering. The purchasers of the preferred stock included, among others, the following holders of 5% or more of the Company's Common Stock, directors and entities associated with directors:
SHARES OF PREFERRED STOCK PURCHASED -------------------------------------------------------- INVESTOR SERIES A SERIES B SERIES C SERIES D SERIES E -------- --------- --------- --------- --------- -------- American Express Travel Related Services Company, Inc............................. -- -- -- -- 645,161 Brentwood Associates VI, L.P. and affiliates(1)............................ 1,529,636 312,500 250,000 135,378 74,703 Institutional Venture Partners VII, L.P. and affiliates(2)........................ -- -- 2,000,000 130,193 72,090 Mayfield VIII and affiliates(3)............ -- -- 1,250,000 807,308 69,872 RRE Investors, L.P. and affiliates(4)...... -- -- -- -- 645,161 US Venture Partners IV L.P. and affiliates(5)............................ -- 1,562,499 250,000 159,993 -- Michael W. Hilton(6)....................... -- -- 70,390 -- 3,871 S. Steven Singh(7)......................... -- -- 64,530 -- 3,871
- --------------- (1) Jeffrey D. Brody, a director of the Company, is the Managing Member of Brentwood VIII Ventures, LLC, the General Partner of Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. (2) Norman A. Fogelsong, a director of the Company, is a General Partner of Institutional Venture Management VII, L.P., the General Partner of Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P. 65 67 (3) Michael J. Levinthal, a director of the Company, is the Managing Member of Mayfield VIII Management, L.L.C., the General Partner of Mayfield VIII and Mayfield Associates Fund III. (4) James D. Robinson III, a director of the Company, is a member of RRE Investors II, LLC, which indirectly exercises exclusive control over RRE Investors, L.P. and RRE Investors Fund, L.P. (5) US Venture Partners IV L.P.'s affiliates that are holders of the Company's Preferred Stock are USVP Entrepreneur Partners II, L.P. and Second Ventures II, L.P. (6) Michael W. Hilton is Chairman of the Board and Chief Technical Officer of the Company. (7) S. Steven Singh is the President, Chief Executive Officer and a director of the Company. Transactions with American Express. In August 1998, the Company sold an aggregate of 645,161 shares of its Series E Preferred Stock, at a cash purchase price of $7.75 per share, and issued the TRS Warrant exercisable for an aggregate of 2,400,000 shares of the Company's Series E Preferred Stock, to TRS, a subsidiary of American Express. If all of the shares of the Company's Series E Preferred Stock are converted into shares of Common Stock in connection with a registration of the Company's Common Stock under the Securities Act, then the TRS Warrant will automatically become exercisable for 2,400,000 shares of Common Stock instead of Series E Preferred Stock (such shares underlying the TRS Warrant are referred to as the "Warrant Shares"). 300,000 of the Warrant Shares may be acquired at the time of the Offering at a cash purchase price per share equal to the per share price to the public in the Offering less 7%; 700,000 of the Warrant Shares may be acquired at any time on or before October 15, 1999 at a cash purchase price of $33.75 per share; 700,000 of the Warrant Shares may be acquired at any time on or before January 15, 2001 at a cash purchase price of $50.625 per share; and the remaining 700,000 of the Warrant Shares may be acquired at any time on or before January 15, 2002 at a cash purchase price of $85.00 per share. As was permitted by the warrant, the Board of Directors determined, within 60 days of the date of the warrant, to cancel 25% of the shares that could have been acquired under the warrant at the time of the Offering or on or before October 15, 1999. Thus, 225,000 of the Warrant Shares may be acquired at the time of the Offering, and only 525,000 additional Warrant Shares may be acquired on or before October 15, 1999. In connection with the purchase of Series E Preferred Stock by TRS, the Company and the other holders of its Series E Preferred Stock entered into an amended Voting Agreement, pursuant to which TRS was given the right to designate Edward Gilligan, or some other person reasonably acceptable to the Company's Board of Directors, as a member of the Company's Board of Directors. The Company intends to appoint Mr. Gilligan to the Board of Directors after completion of the Offering, and Mr. Gilligan has indicated his willingness to serve in such capacity. The Voting Agreement, as amended, will terminate upon the completion of the Offering. Under a standstill agreement with the Company, TRS has agreed not to acquire beneficial ownership of additional shares of the Company's capital stock prior to February 10, 2000 if such purchase would result in TRS owning more than 17% of the Company's capital stock (including Warrant Shares issuable upon exercise of the TRS Warrant) or to solicit proxies to vote any voting stock of the Company if at the time the Company is publicly traded and subject to the proxy rules. In December 1997, the Company entered into a Strategic Marketing Alliance Agreement (the "Marketing Agreement") with American Express, providing for the marketing of XMS to corporate card clients of American Express. Under the Marketing Agreement, the Company agreed to pay American Express a fee for referrals of American Express corporate card clients that became XMS customers. The amount of the referral fee depends primarily on the aggregate licensing revenue realized by the Company from the referred customers. The Company also agreed to provide XMS and related services to American Express customers then using the American Express Expense Manager Suite at a special license fee, as a replacement for the Expense Manager Suite; the special license fee reflects a quantity discount comparable to discounts the Company grants for other orders of similar size. The Company also agreed to license XMS to American Express for its internal use at the Company's generally prevailing rates. The Company and American Express also agreed to develop certain product features enabling a higher level of integration between XMS and certain American Express services and products. The Marketing Agreement includes cross-indemnification, proprietary information and confidentiality provisions, has a three year term and automatically renews for successive two-year terms unless terminated by either party. The Marketing Agreement may be terminated by either 66 68 party upon an acquisition of the Company by any competitor of American Express, and by American Express upon the acquisition of 20% or more of the Company's securities by any competitor of American Express. At September 30, 1998, under the Marketing Agreement, American Express owed the Company $152,000 in license fees and the Company owed American Express $83,000 in referral fees. In August 1998, the Company entered into a Co-Branded Service Marketing Agreement (the "Co-Branding Agreement") with TRS, under which TRS will market to its clients a co-branded ESP version of XMS (the "Co-Branded Service"). The agreement provides that the Company will develop the Co-Branded Service and that both TRS and the Company will develop certain special features for integration into the Co-Branded Service (the "Special Features"); for a certain period following the release of a Co-Branded Service containing a Special Feature, the Company will not include such Special Feature in any product or service offered by or on behalf of the Company or any of its licensees. TRS may market the Co-Branded Service initially in the United States and Canada, and eventually in other geographical areas as the Company completes its localization efforts in those areas. The Company has agreed to offer service contracts for the Co- Branded Service to TRS clients at terms not materially less favorable than those offered to the Company's own customers and is responsible for providing warranty and customer support services to these TRS clients. The Co-Branding Agreement provides that TRS will receive a fee based on the amount of revenue received by the Company from licenses of the Co-Branded Service to TRS clients and related consulting services. The Company is also obligated to provide TRS with certain "most favored pricing" rights. The Company also agreed, for the term of the Co-Branding Agreement and for one year thereafter, not to solicit any TRS client that is a Co-Branded Service customer to become a customer of a corporate card product or a travel and booking product offered by a TRS competitor. TRS also agreed not to solicit any of its clients who are Co-Branded Service customers to become a customer of a business and expense management service offered by a competitor of the Company. The Co-Branding Agreement also includes cross-indemnification, intellectual property rights and confidentiality provisions. TRS has the right to terminate the agreement if the Co-Branded Service is not available for general commercial distribution to TRS clients by August 1, 1999. Otherwise, the Co-Branding Agreement has a term of 18 months from the launch date of the Co-Branded Service, and automatically renews for successive two-year terms unless terminated by either party. The Co-Branding Agreement may be terminated at any time by TRS if a TRS competitor acquires a controlling interest in the Company or if an officer, director or other designee of a TRS competitor is appointed to the Company's Board of Directors. No payments were made under the Co-Branding Agreement in fiscal 1998. The Company believes that the terms of the agreements with American Express and TRS, taken as a whole, are no less favorable to the Company than the Company could have obtained from unaffiliated third parties. Employment Agreements. The Company has entered into employment agreements with Messrs. Wilson and Matsuo. See "Management--Employment Agreements." 67 69 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of October 31, 1998, and as adjusted to reflect the sale of the shares offered hereby, by each stockholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, each director of the Company, each of the Named Executive Officers, each Selling Stockholder, and all current executive officers and directors as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING NUMBER OF AFTER OFFERING -------------------------- SHARES BEING ------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2) - --------------------------------------- ----------- ----------- ------------ ----------- ----------- Edward P. Gilligan American Express Travel Related Services Company, Inc.(3)........... 2,795,161 18.1% -- 2,795,161 15.2% Jeffrey D. Brody Brentwood Associates VI, L.P. and affiliates(4)....................... 2,302,217 17.3 -- 2,302,217 14.2 Norman A. Fogelsong Institutional Venture Partners VII, L.P. and affiliates(5).............. 2,202,283 16.5 -- 2,202,283 13.6 Michael J. Levinthal Mayfield VIII and affiliates(6)..... 2,127,180 16.0 -- 2,127,180 13.1 US Venture Partners IV, L.P. and affiliates(7)....................... 1,972,492 14.8 -- 1,972,492 12.1 S. Steven Singh(8).................... 1,054,234 7.8 56,900 997,334 6.1 Michael W. Hilton(9).................. 989,428 7.4 40,000 949,428 5.8 James D. Robinson III RRE Investors, L.P. and affiliates(10)...................... 645,161 4.9 -- 645,161 4.0 Jon T. Matsuo(11)..................... 283,380 2.1 26,400 256,980 1.6 Sterling R. Wilson(12)................ 243,408 1.8 22,400 221,008 1.4 Rajeev Singh(13)...................... 203,164 1.5 18,400 184,764 1.1 Imperial Bank(14)..................... 55,312 * 31,900 13,187 * Timothy Y. Fitzgerald(15)............. 50,542 * 4,000 46,542 * Russell P. Fradin ADP, Inc.(16)....................... -- * -- -- * All current executive officers and directors as a group(17)............ 14,858,679 93.2% 164,100 14,694,579 77.9%
- --------------- * Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) Unless otherwise indicated, the address for each listed stockholder is c/o Concur Technologies, Inc., 6222 185th Avenue NE, Redmond, Washington 98052. (2) Percentage ownership is based on 13,313,512 shares outstanding as of October 31, 1998 and 16,245,412 shares outstanding after the Offering. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options or warrants that are currently exercisable or exercisable within 60 days of October 31, 1998 are deemed to be outstanding and to be beneficially owned by the person holding such options or warrants for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (3) Represents 645,161 shares held of record by TRS and 2,150,000 shares subject to a warrant held by TRS that is exercisable within 60 days of September 30, 1998, expiring in four tranches through January 2002, at cash purchase prices equal to the initial public offering price per share less 7%, $33.75, $50.625 and $85.00, respectively. Edward P. Gilligan, who is expected to become a director of the Company after completion of the Offering, is President of the Corporate Services Division for TRS. 68 70 Mr. Gilligan disclaims beneficial ownership of the shares held by TRS. See "Certain Transactions." The address for American Express and TRS is American Express Tower, World Financial Center, New York, New York 10285. See "Certain Transactions." (4) Represents (i) 2,215,014 shares held of record by Brentwood Associates VI, L.P., (ii) 68,252 shares held of record by Brentwood Affiliates Fund II, L.P., (iii) 3,871 shares held of record by Jeffrey D. Brody, (iv) 12,500 shares held of record by The Schuster Revocable Trust dated February 10, 1995, (v) 1,290 shares held of record by Eric Chiu and (vi) 1,290 shares held of record by James Mongiello. Mr. Brody, a director of the Company, is the Managing Member of Brentwood VIII Ventures, LLC, the General Partner of Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. Mr. Brody disclaims beneficial ownership of the shares held by Brentwood Associates VI, L.P. and Brentwood Affiliates Fund II, L.P. The address for Mr. Brody, Brentwood Associates VI, L.P., Brentwood Affiliates Fund II, L.P., The Schuster Revocable Trust dated February 10, 1995, Mr. Chiu and Mr. Mongiello is c/o Brentwood Venture Capital, 3000 Sand Hill Road, Building 1, Suite 260, Menlo Park, California 94025. (5) Represents 2,092,961 shares held of record by Institutional Venture Partners VII, L.P., 75,276 shares held of record by IVP Founders Fund I, L.P., and 34,046 shares held of record by Institutional Venture Management VII, L.P. Norman A. Fogelsong, a director of the Company, is the General Partner of Institutional Venture Management VII, L.P., the General Partner of Institutional Venture Partners VII, L.P. and IVP Founders Fund I, L.P. Mr. Fogelsong disclaims beneficial ownership of the shares held by Institutional Venture Partners VII, L.P., IVP Founders Fund I, L.P. and Institutional Venture Management VII, L.P. The address for Mr. Fogelsong, Institutional Venture Partners VII, L.P., IVP Founders Fund I, L.P. and Institutional Venture Management VII, L.P. is c/o Institutional Venture Management VII, L.P., 3000 Sand Hill Road, Building 2, Suite 290, Menlo Park, California 94025. (6) Represents 2,020,822 shares held of record by Mayfield VIII and 106,358 shares held of record by Mayfield Associates Fund III. Michael J. Levinthal, a director of the Company, is the Managing Member of Mayfield VIII Management, L.L.C., the General Partner of Mayfield VIII and Mayfield Associates Fund III. Mr. Levinthal disclaims beneficial ownership of the shares held by Mayfield VIII and Mayfield Associates Fund III. The address for Mr. Levinthal, Mayfield VIII and Mayfield Associates Fund III is c/o Mayfield Fund, 2800 Sand Hill Road, Suite 250, Menlo Park, California 94025. (7) Represents 1,706,206 shares held of record by U.S. Venture Partners IV, L.P., 59,175 shares held of record by USVP Entrepreneur Partners II, L.P., and 207,111 shares held of record by Second Ventures II, L.P. William K. Bowes, Jr., Irwin Federman, Steven Krausz, Lucio Lanza and Philip Young are the General Partners of Presidio Management Group IV, L.P., the General Partner of each of U.S. Venture Partners IV, L.P. USVP Entrepreneur Partners II, L.P. and Second Ventures II, L.P. Messrs. Bowes, Federman, Krausz, Lanza and Young disclaim beneficial ownership of the shares held by U.S. Venture Partners IV, L.P., USVP Entrepreneur Partners II, L.P. and Second Ventures II, L.P. The address for U.S. Venture Partners IV, L.P., USVP Entrepreneur Partners II, L.P. and Second Ventures II, L.P. is c/o Presidio Management Group IV, L.P., 2180 Sand Hill Road, Suite 300, Menlo Park, California 94025. (8) Represents 868,401 shares held of record by S. Steven Singh and 185,833 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Singh. Mr. Singh is the President, Chief Executive Officer and a director of the Company. (9) Represents 974,261 shares held of record by Michael W. Hilton and 15,167 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Hilton. Mr. Hilton is the Chairman of the Board and Chief Technical Officer of the Company. (10) Represents 416,087 shares held of record by RRE Investors, L.P. and 229,074 shares held of record by RRE Investors Fund, L.P. James D. Robinson III, a director of the Company, is a member of RRE Investors II, LLC, which indirectly exercises exclusive control over RRE Investors, L.P. and RRE Investors Fund, L.P. Mr. Robinson disclaims beneficial ownership of the shares held by RRE Investors, L.P. and RRE Investors Fund, L.P. The address for Mr. Robinson, RRE Investors, L.P. and RRE Investors Fund, L.P. is 126 East 56th Street, 22nd Floor, New York, New York 10022. 69 71 (11) Represents 90,580 shares held of record by Jon T. Matsuo and 192,800 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Matsuo. Mr. Matsuo is the Executive Vice President of Worldwide Sales of the Company. (12) Represents 222,608 shares held of record by Sterling R. Wilson and 20,800 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Wilson. Mr. Wilson is the Chief Financial Officer and Vice President of Operations of the Company. (13) Represents 182,580 shares held of record by Rajeev Singh and 20,584 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Singh. Mr. Singh is the Vice President of Products of the Company. (14) Represents 55,312 shares subject to three warrants exercisable within 60 days of October 31, 1998 held by Imperial Bank. Imperial Bank has notified the Company that it will exercise two of such warrants on a net exercise basis and acquire 31,900 shares at an assumed exercise price of $10.50 per share, all of which will be offered in the Offering. The address for Imperial Bank is Emerging Growth Industries Group, 2460 Sand Hill Road, #102, Menlo Park, California 94025. (15) Represents 16,000 shares held of record by Timothy Y. Fitzgerald and 34,542 shares subject to options exercisable within 60 days of October 31, 1998 held by Mr. Fitzgerald. Mr. Fitzgerald is the Vice President of U.S. Large Account Sales of the Company. (16) Russell P. Fradin, who is expected to become a director of the Company after completion of the Offering, is Group President, Employer Services, of ADP. See "Summary--Recent Developments." (17) Represents 12,235,504 shares held of record by current executive officers and directors as a group and 2,623,175 shares subject to options or warrants exercisable within 60 days of October 31, 1998 held by current executive officers and directors as a group. 70 72 DESCRIPTION OF CAPITAL STOCK Upon the closing of the Offering, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. COMMON STOCK As of October 31, 1998, assuming the conversion of all outstanding shares of preferred stock into Common Stock, there were 13,313,512 shares of Common Stock outstanding, held of record by 78 stockholders. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. See "Dividend Policy." Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the Company's Certificate of Incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to stockholders would be distributable ratably among the holders of the Common Stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of the Offering, there will be no shares of preferred stock outstanding. The Board of Directors is authorized, subject to any limitations prescribed by Delaware law, to issue the preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and to designate any qualifications, limitations or restrictions thereon, and to decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the stockholders. The Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of preferred stock. WARRANTS As of October 31, 1998, the Company had outstanding warrants to purchase an aggregate of 28,125 shares of Series C Preferred Stock, 81,815 shares of Series D Preferred Stock, and 2,219,638 shares of Series E Preferred Stock. Imperial Bank, the holder of outstanding warrants to purchase 55,312 shares of preferred stock, has indicated that immediately prior to the Offering it will net exercise two of such warrants to purchase 31,900 shares at an assumed initial public offering price of $10.50 per share. Any warrants to purchase shares of Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock that are not exercised prior to the closing of the Offering will automatically be converted into warrants to purchase a like number of shares of Common Stock. The TRS Warrant Initial Tranche will expire unless exercised in connection with the Offering. Warrants to purchase 2,062,453 shares of Common Stock are expected to be outstanding following the closing of the Offering. ANTI-TAKEOVER PROVISIONS Section 203 ("Section 203") of the DGCL is applicable to corporate takeovers of Delaware corporations. Subject to certain exceptions set forth therein, Section 203 provides that a corporation may not engage in any business combination with any "interested stockholder" for a three-year period following the date that such 71 73 stockholder becomes an interested stockholder unless: (a) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder's becoming an interested stockholder; (b) upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (i) persons who are directors and also officers and (ii) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (c) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, and by the affirmative votes of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Except as specified in Section 203, an interested stockholder is generally defined to include any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation any time within three years immediately prior to the relevant date, and the affiliates and associates of such person. Under certain circumstances, Section 203 makes it more difficult for an interested stockholder to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption. The Company's Certificate of Incorporation and Bylaws do not exclude the Company from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors of the Company since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which resulted in the stockholder's becoming an interested stockholder. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of the Company, which could depress the market price of the Common Stock and which could deprive the stockholders of opportunities to realize a premium on shares of the Common Stock held by them. Certain other provisions of the Company's Certification of Incorporation and Bylaws, including provisions that divide the Board of Directors into three classes to serve staggered three-year terms, prohibit the stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings, may also make it more difficult for a third party to acquire a majority of the Company's voting stock or effect a change in control of the Company. The Company's Bylaws, which will be in effect upon the completion of the Offering, provide for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. See "Risk Factors--Anti-Takeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." REGISTRATION RIGHTS Beginning one year after the date of the Offering, the holders of 12,501,006 shares of Common Stock (assuming the net exercise of warrants to purchase 31,900 shares of Common Stock held by holders of registration rights and the sales by certain of the Selling Stockholders of 200,000 shares of Common Stock in the Offering) (the "Registrable Securities") will have certain rights with respect to the registration of such shares under the Securities Act. If requested by holders of 40% or more of the Registrable Securities, the Company must file a registration statement under the Securities Act on a form other than Form S-3 covering all Registrable Securities requested to be included by all holders of such Registrable Securities, provided that at least 25% of the then outstanding Registrable Securities (or any lesser percent if the reasonably anticipated aggregate proceeds of such offering exceeds $10,000,000) will be offered in such offering. In addition, if requested by a holder or holders of outstanding Registrable Securities, the Company must file a registration statement under the Securities Act on Form S-3 covering such Registrable Securities, provided that the reasonably anticipated aggregate proceeds of such offering, net of underwriting discounts and commissions, 72 74 exceeds $2,000,000. The Company may be required to effect two such registrations. In addition to the foregoing, if the Company proposes to register any of its Common Stock, the holders of the Registrable Securities may include all or a portion of their shares in such registration, subject to certain rights of the underwriter's representatives in an underwritten offering to limit the number of shares in any such offering. All expenses incurred in connection with such registrations (including underwriting discounts and commissions) will be borne by the Company. Such registration rights terminate following the expiration of five years following the closing of the Offering or in the event that the Registrable Securities held by the rights holder is less than 1% of the outstanding Registrable Securities. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Norwest Bank Minnesota, National Association. 73 75 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 16,245,412 shares of Common Stock outstanding (16,710,412 shares if the underwriter's over-allotment option is exercised in full), assuming no exercise of options after October 31, 1998 and no exercise of the TRS Warrant Initial Tranche. Of this amount, the 3,100,000 shares offered hereby will be available for immediate sale in the public market as of the date of this Prospectus. An additional 199,013 shares are not subject to an 180-day lockup and will be available for sale in the public market 90 days following the date of this Prospectus pursuant to Rule 701. Approximately 10,588,821 additional shares will be available for sale in the public market following the expiration of 180-day lockup agreements with the Representatives of the Underwriters or the Company, subject in some cases to compliance with the volume and other limitations of Rule 144.
DAYS AFTER THE DATE OF APPROXIMATE SHARES THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT ---------------------- ------------------------ ----------------------------------- Upon Effectiveness................. 3,100,000 Freely tradable shares sold in Offering and shares salable under Rule 144(k) that are not subject to 180-day lockup 90 days............................ 199,013(1) Shares salable under Rule 144, 144(k) or 701 that are not subject to 180-day lockup. 180 days........................... 10,588,821 Lockup released; shares salable under Rule 144, 144(k) or 701 Over 180 days...................... 2,357,578 Restricted securities held for one year or less
- --------------- (1) If the Underwriters waive the 180-day lockup agreements within the first 90 days after the date of the Prospectus, an additional 10,588,821 shares will be available for sale in the public market, subject in some cases to compliance with the volume and other limitations of Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year is entitled to sell within any three-month period commencing 90 days after the date of this Prospectus a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 162,454 shares immediately after the Offering) or (ii) the average weekly trading volume during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied. The Company is unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for the Common Stock of the Company, the personal circumstances of the sellers and other factors. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that a significant public market for the Common Stock will develop or be sustained after the Offering. Any future sale of substantial amounts of the Common Stock in the open market may adversely affect the market price of the Common Stock offered hereby. The Company, its directors, executive officers, stockholders with registration rights and certain other stockholders and optionholders have agreed pursuant to the Underwriting Agreement and other agreements that they will not sell any Common Stock without the prior written consent of BancBoston Robertson Stephens Inc. for a period of 180 days from the date of this Prospectus (the "180-day Lockup Period") except that the Company may, without such consent, grant options and sell shares pursuant to the Company's stock plans. Any employee or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits 74 76 nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. As of October 31, 1998, the holders of options to purchase approximately 1,543,021 shares of Common Stock will be eligible to sell their shares upon the expiration of the 180-day Lockup Period, subject in certain cases to vesting of such options. The Company intends to file a registration statement on Form S-8 under the Securities Act within 180 days after the completion of the Offering to register 5,692,874 shares of Common Stock subject to outstanding stock options or reserved for issuance under the 1998 Plan, the Directors Plan and the Purchase Plan, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. In addition, beginning one year after the date of the Offering, the holders of 12,501,006 shares of Common Stock (assuming the net exercise of warrants to purchase 39,100 shares of Common Stock held by holders of registration rights, and the sales by certain of the Selling Stockholders of 200,000 shares of Common Stock in the Offering) (the "Registrable Securities") will have certain rights with respect to the registration of such shares under the Securities Act. If requested by holders of 40% or more of the Registrable Securities, the Company must file a registration statement under the Securities Act on a form other than Form S-3 covering all Registrable Securities requested to be included by all holders of such Registrable Securities, provided that at least 25% of the then outstanding Registrable Securities (or any lesser percent if the reasonably anticipated aggregate proceeds of such offering exceeds $10,000,000) will be offered in such offering. In addition, if requested by a holder or holders of outstanding Registrable Securities, the Company must file a registration statement under the Securities Act on Form S-3 covering such Registrable Securities, provided that the reasonably anticipated aggregate proceeds of such offering, net of underwriting discounts and commissions, exceeds $2,000,000. The Company may be required to effect two such registrations. In addition to the foregoing, if the Company proposes to register any of its Common Stock, the holders of the Registrable Securities may include all or a portion of their shares in such registration, subject to certain rights of the underwriters' representatives in an underwritten offering to limit the number of shares in any such offering. All expenses incurred in connection with such registrations (including underwriting discounts and commissions) will be borne by the Company. Such registration rights terminate following the expiration of five years following the closing of the Offering or in the event that the Registrable Securities held by the rights holders is less than 1% of the outstanding Registrable Securities. Registration of the Registrable Securities under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act. 75 77 UNDERWRITING The Underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and Piper Jaffray Inc. (the "Representatives"), have severally agreed with the Company and the Selling Stockholders, subject to the terms and conditions of the Underwriting Agreement, to purchase the number of shares of Common Stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER UNDERWRITER OF SHARES ----------- --------- BancBoston Robertson Stephens Inc........................... Hambrecht & Quist LLC....................................... Piper Jaffray Inc........................................... --------- Total............................................. 3,100,000 =========
The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the Offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company and the Selling Stockholders as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus for the Offering, to purchase up to 465,000 additional shares of Common Stock at the same price per share as the Company and the Selling Stockholders will receive for the 3,100,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 3,100,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 3,100,000 shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representation and warranties contained in the Underwriting Agreement. Each officer and director and certain security holders of the Company have agreed with the Representatives for a period of 180 days after the effective date of this Prospectus that they will not, subject to certain exceptions, directly or indirectly offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to, any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, now owned or hereafter acquired directly by such holders or with respect to which they have the power of disposition, without the prior written consent of BancBoston Robertson Stephens Inc., which may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, the Company has agreed that during the 180 days following the effective date of this Prospectus, the Company will not, without the prior written consent of BancBoston Robertson Stephens Inc., subject to certain exceptions, offer, issue, sell, contract to sell, or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than (i) the Company's sales of shares in the Offering, (ii) the issuance of Common Stock upon the exercise of outstanding options or warrants or (iii) the Company's issuance of options or shares under the 1998 Plan, the Directors Plan and the Purchase Plan. See "Shares Eligible for Future Sale." The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. 76 78 Prior to the Offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations among the Company and the Representatives. Among the factors to be considered in such negotiations were prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development and other factors deemed relevant. Certain persons and entities affiliated with Hambrecht & Quist LLC own an aggregate of 25,225 shares of the Company's Series E Preferred Stock. Such affiliates are subject to the 180-day lock-up that applies to other stockholders as described above. Hambrecht & Quist LLC and its affiliates (other than such holders described above) will be permitted to engage in stabilization, brokerage and ordinary course of business transactions. See "Shares Eligible for Future Sale." The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids that may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The Representatives have advised the Company that such transitions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Underwriters have reserved for sale, at the initial public offering price, up to 5% of the Common Stock offered hereby for certain individuals designated by the Company who have expressed an interest in purchasing such shares of Common Stock in the Offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Matthew P. Quilter, a member of Fenwick & West LLP, owns an aggregate of 1,290 shares of Series E Preferred Stock of the Company and is the Secretary of the Company. EXPERTS The consolidated financial statements and the related financial statement schedule of Concur as of September 30, 1997 and 1998 and for each of the three years in the period ended September 30, 1998 and the financial statements of 7Software as of December 31, 1997 and for the period then ended appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports, 77 79 given upon the authority of such firm as experts in accounting and auditing. The 1997 American Express T&E Management Process Study referred to in this Prospectus has been prepared by American Express. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedule thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedule thereto. Statements contained in this Prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified by such reference. A copy of the Registration Statement and the exhibits and schedule thereto may be inspected without charge at the public reference facilities maintained by the Commission located at Room 1024, 450 Fifth Street, Washington, D.C. 20549 and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. 78 80 INDEX TO FINANCIAL STATEMENTS CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets as of September 30, 1997 and 1998, .................................................... F-3 Consolidated Statements of Operations for the Years Ended September 30, 1996, 1997, and 1998........................ F-4 Consolidated Statements of Stockholders' Deficit for the Years Ended September 30, 1996, 1997, and 1998 ........... F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998......................... F-6 Notes to Consolidated Financial Statements.................. F-7 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) Report of Ernst & Young LLP, Independent Auditors........... F-23 Balance Sheet as of December 31, 1997 and June 30, 1998..... F-24 Statement of Operations for the Period May 30, 1997 (Date of Incorporation) to December 31, 1997 and the Six Month Unaudited Period Ended June 30, 1998...................... F-25 Statement of Shareholders' Equity for the Period May 30, 1997 (Date of Incorporation) to December 31, 1997 and the Six Month Unaudited Period Ended June 30, 1998............ F-26 Statement of Cash Flows for the Period May 30, 1997 (Date of Incorporation) to December 31, 1997 and the Six Month Unaudited Period Ended June 30, 1998...................... F-27 Notes to Financial Statements............................... F-28 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Consolidated Financial Statements (Unaudited)..... F-31 Pro Forma Consolidated Statements of Operations for the Year Ended September 30, 1998 (Unaudited)...................... F-32 Notes to Pro Forma Consolidated Financial Statements (Unaudited)............................................... F-33
F-1 81 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Concur Technologies, Inc. (Formerly Portable Software Corporation) We have audited the accompanying consolidated balance sheets of Concur Technologies, Inc. (the Company) as of September 30, 1997 and 1998 and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concur Technologies, Inc. at September 30, 1997 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Seattle, Washington October 27, 1998, except as to Note 19, as to which the date is November , 1998 The foregoing report is in the form that will be signed upon shareholder approval of the reverse stock split described in Note 19 to the consolidated financial statements. ERNST & YOUNG LLP Seattle, Washington November 18, 1998 F-2 82 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
PRO FORMA STOCKHOLDERS' SEPTEMBER 30, EQUITY -------------------- SEPTEMBER 30, 1997 1998 1998 -------- -------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 6,695 $ 15,629 Accounts receivable, net of allowance for doubtful accounts of $170 and $547 in 1997, and 1998, respectively............................................ 4,365 4,988 Prepaid expenses and other current assets................. 165 536 Note receivable from stockholders......................... 167 -------- -------- Total current assets............................... 11,225 21,320 Equipment and furniture, net................................ 1,088 2,162 Deposits and other assets................................... 51 336 Note receivable from stockholders, net of current portion... -- 333 Capitalized technology and other intangible assets.......... -- 880 -------- -------- Total assets....................................... $ 12,364 $ 25,031 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 1,082 $ 1,838 Accrued liabilities....................................... 1,294 3,850 Accrued commissions....................................... 509 902 Current portion of accrued payment to stockholders........ -- 167 Current portion of long-term debt......................... 329 2,033 Current portion of capital lease obligations.............. 351 1,004 Deferred revenues......................................... 1,477 3,052 -------- -------- Total current liabilities.......................... 5,042 12,846 Accrued payment to stockholders, net of current portion..... -- 333 Long-term debt, net of current portion...................... 2,171 5,632 Capital lease obligations, net of current portion........... 1,516 2,127 Deferred rental expense..................................... -- 183 Redeemable convertible preferred stock: Issued and outstanding shares -- 8,564,893, and 10,213,553 in 1997, and 1998, respectively, liquidation value of $30,202 (Note 11).................................................. 17,264 29,685 Redeemable convertible preferred stock warrants............. 81 444 Commitments Stockholders' equity (deficit): Preferred stock, no par value: Authorized shares -- 53,000,000, of which 10,457,714 have been designated redeemable convertible shares... -- -- -- Common stock, no par value: Authorized shares -- 60,000,000 Issued and outstanding shares -- 2,289,493 and 3,098,543 in 1997 and 1998, respectively; 13,312,096 shares pro forma................................................ 259 6,276 $ 36,405 Deferred stock compensation............................... -- (452) (452) Accumulated deficit....................................... (13,969) (32,043) (32,043) -------- -------- -------- Total stockholders' equity (deficit)............... (13,710) (26,219) $ 3,910 -------- -------- ======== Total liabilities and stockholders' equity (deficit)........................................ $ 12,364 $ 25,031 ======== ========
See accompanying notes. F-3 83 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ------------------------------ 1996 1997 1998 ------- ------- -------- Revenues, net: Licenses.................................................. $ 1,717 $ 6,347 $ 11,696 Services.................................................. 242 1,923 5,463 ------- ------- -------- 1,959 8,270 17,159 Cost of revenues: Licenses.................................................. 386 394 558 Services.................................................. 839 2,269 5,684 ------- ------- -------- 1,225 2,663 6,242 ------- ------- -------- Gross profit................................................ 734 5,607 10,917 Operating expenses: Sales and marketing....................................... 2,936 5,896 12,353 Research and development.................................. 1,793 3,401 6,434 General and administrative................................ 963 1,815 4,687 Acquired in-process technology (Note 3)................... -- -- 5,203 ------- ------- -------- Total operating expenses.......................... 5,692 11,112 28,677 ------- ------- -------- Loss from operations........................................ (4,958) (5,505) (17,760) Interest income............................................. 92 130 331 Interest expense............................................ (43) (88) (467) Other expense, net.......................................... (44) (61) (178) ------- ------- -------- Net loss.................................................... $(4,953) $(5,524) $(18,074) ======= ======= ======== Pro forma basic and diluted net loss per share (unaudited)............................................... $ (1.58) ======== Shares used in calculation of pro forma basic and diluted net loss per share (unaudited)............................ 11,419 ======== Historical basic and diluted net loss per share............. $ (2.17) $ (2.41) $ (7.45) ======= ======= ======== Shares used in calculation of historical basic and diluted net loss per share........................................ 2,282 2,288 2,425 ======= ======= ========
See accompanying notes. F-4 84 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK DEFERRED TOTAL -------------------- STOCK ACCUMULATED STOCKHOLDERS' SHARES AMOUNT COMPENSATION DEFICIT DEFICIT ---------- ------- ------------- ----------- ------------- Balance at October 1, 1995......... 2,280,028 $ 258 $ -- $ (3,492) $ (3,234) Issuance of common stock from exercise of stock options..... 8,217 1 -- -- 1 Net loss......................... -- -- -- (4,953) (4,953) ---------- ------- ----- -------- -------- Balance at September 30, 1996...... 2,288,245 259 -- (8,445) (8,186) Issuance of common stock from exercise of stock options..... 1,248 -- -- -- -- Net loss......................... -- -- -- (5,524) (5,524) ---------- ------- ----- -------- -------- Balance at September 30, 1997...... 2,289,493 259 -- (13,969) (13,710) Issuance of common stock from exercise of stock options..... 100,132 13 -- -- 13 Deferred stock compensation...... -- 861 (861) -- -- Amortization of deferred stock compensation.................. -- -- 409 -- 409 Issuance of common stock in connection with acquisition (Note 3)...................... 708,918 4,378 -- -- 4,378 Assumption of stock options in connection with acquisition (Note 3)...................... -- 765 -- -- 765 Net loss......................... -- -- -- (18,074) (18,074) ---------- ------- ----- -------- -------- Balance at September 30, 1998...... 3,098,543 $ 6,276 $(452) $(32,043) $(26,219) ========== ======= ===== ======== ========
See accompanying notes. F-5 85 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------ 1996 1997 1998 ------- ------- -------- OPERATING ACTIVITIES Net loss.................................................... $(4,953) $(5,524) $(18,074) Adjustments to reconcile net loss to net cash used in operating activities: Acquired in-process technology.......................... -- -- 5,203 Amortization of deferred stock compensation............. -- -- 409 Warrant expense......................................... 5 53 23 Depreciation and amortization........................... 144 393 629 Provisions for bad debts................................ 91 45 453 Other................................................... 17 -- 183 Changes in operating assets and liabilities: Accounts receivable................................... (451) (3,901) (1,040) Notes receivable from stockholders.................... -- -- (500) Prepaid expenses and other current assets............. 63 (84) (616) Accounts payable...................................... (24) 454 756 Accrued liabilities................................... 597 927 2,535 Deferred revenues..................................... 412 1,026 1,575 ------- ------- -------- Net cash used in operating activities....................... (4,099) (6,611) (8,464) ------- ------- -------- INVESTING ACTIVITIES Purchases of equipment and furniture........................ (420) (1,020) (40) Payment in connection with acquisition of 7Software......... -- -- (130) ------- ------- -------- Net cash used in investing activities....................... (420) (1,020) (170) ------- ------- -------- FINANCING ACTIVITIES Proceeds from sales leaseback transaction................... -- 1,800 192 Proceeds from capital lease financing....................... -- 67 -- Proceeds from borrowings.................................... 563 3,087 5,500 Payments on borrowings...................................... (380) (925) (335) Payment on capital leases................................... -- -- (500) Issuance of common stock.................................... 1 -- 13 Issuance of redeemable convertible preferred stock and warrants.................................................. 7,479 4,612 12,698 ------- ------- -------- Net cash provided by financing activities................... 7,663 8,641 17,568 ------- ------- -------- Net increase (decrease) in cash and cash equivalents........ 3,144 1,010 8,934 Cash and cash equivalents at beginning of year.............. 2,541 5,685 6,695 ------- ------- -------- Cash and cash equivalents at end of year.................... $ 5,685 $ 6,695 $ 15,629 ======= ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 27 $ 76 $ 398 Issuance of redeemable convertible preferred stock in exchange for cancellation of notes payable................ -- 267 -- Issuance of warrants in connection with financing activity.................................................. -- 30 75 Equipment and furniture obtained through capital leases..... -- -- 1,572 Assets and liabilities recorded in connection with acquisition of 7Software: Operating assets........................................ -- -- 85 Accounts payable and accrued expenses................... -- -- (15) Intangible assets....................................... -- -- 960
See accompanying notes. F-6 86 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company Concur Technologies, Inc. (the "Company," formerly Portable Software Corporation) is a leading provider of Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. The Company's Xpense Management Solution ("XMS") and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment ("T&E") expense reports and front-office procurement requisitions. The Company was originally incorporated in the State of Washington on August 19, 1993. Operations commenced during 1994. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Concur Technologies (UK) Ltd., Concur Technologies Pty. Limited, and 7Software, Inc. ("7Software"). All significant intercompany accounts and transactions are eliminated in consolidation. Revenue Recognition Policy The Company generates revenues from licensing the rights to use its software products directly to end users. The Company also generates revenues from sales of customer support contracts and integration services performed for customers who license the software. The Company recognizes revenue in accordance with Statement of Position No. 97-2, "Software Revenue Recognition." Software license revenues are recognized when a non-cancelable license agreement has been signed with a customer, the software is shipped, no significant post-delivery vendor obligations remain, and collection is deemed probable. Customer support revenues are recognized ratably over the term of the customer support contract, typically one year. Revenues for consulting services and other post-sales revenues are recognized when the services are performed. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). The Company adopted SOP 97-2 beginning in fiscal 1999. SOP 97-2 generally requires revenues earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, postcontract customer support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. Evidence of the fair value of each element is based on the price charged when the element is sold separately or, if the element is not being sold separately, the price for each element established by management having relevant authority. The revenues allocated to software products, including specified upgrades or enhancements, generally are recognized upon delivery of the products. The revenues allocated to unspecified upgrades, updates and other postcontract customer support generally are recognized ratably over the term of the contract. If evidence of the fair value for all elements of the arrangement does not exist, all revenues from the arrangement are deferred until such evidence exists or until all elements are delivered. Based upon its interpretation of SOP 97-2 and its current business policies and practices, the Company believes there will be no significant impact on revenue recognition as a result of the adoption of 97-2. However, full guidelines for this standard have not yet been issued. Once available, such guidelines could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could materially adversely affect the Company's future revenues and earnings. F-7 87 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents All highly liquid financial instruments purchased with an original maturity of three months or less are reported as cash equivalents. Fair Values of Financial Instruments At September 30, 1998, the Company has the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, accrued commissions, long-term debt and capital lease obligations, bank line of credit ("LOC"), and standby letters of credit. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and accrued commissions approximates fair value based on the liquidity of these financial instruments or based on their short-term nature. The carrying value of long-term debt, LOC, standby letters of credit, and capital lease obligations approximates carrying value based on the market interest rates available to the Company for debt of similar risk and maturities. Research and Development Research and development costs are expensed as incurred and consist primarily of software development costs. Financial accounting standards require the capitalization of certain software development costs after technological feasibility of the software is established. In the development of the Company's new products and enhancements to existing products, the technological feasibility of the software is not established until substantially all product development is complete, including the development of a working model. Internal software development costs that were eligible for capitalization were insignificant and were charged to research and development expense in the accompanying statements of operations. Advertising and Marketing Costs Costs of marketing materials and advertising expenditures are charged to operations when the materials are used or the advertising is first released. Advertising costs were $711,000, $569,000 and $1,762,000 in 1996, 1997 and 1998 respectively. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which utilizes the liability method of accounting for income taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Stock-Based Compensation In fiscal 1997, the Company implemented the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's common stock at the date of grant over the stock option exercise price. F-8 88 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Equipment and Furniture Equipment and furniture are carried at cost. The Company provides for depreciation and amortization using the straight-line method for financial reporting purposes over estimated useful lives ranging from two to five years. Depreciation expense includes amounts amortized for assets recorded under capital leases. Net Loss per Share Basic and diluted net loss per share is calculated using the average number of shares of common stock outstanding. Other common stock equivalents, including stock options and warrants, are excluded from the computation as their effect is antidilutive. See Note 13. Upon the completion of the Company's proposed initial public offering, all redeemable convertible preferred stock will either automatically convert into common stock or it is assumed that the preferred stockholders will voluntarily convert into common stock. Accordingly, pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding and the weighted average redeemable convertible preferred stock outstanding as if such shares were converted to common stock at the time of issuance. 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. Concentrations of Credit Risk The Company's customer base is dispersed across many different geographic areas throughout the world in a variety of industries. No single customer accounted for more than 10% of the Company's sales in any of the periods presented. The Company does not require collateral or other security to support credit sales, but provides an allowance for bad debts based on historical experience and specific identification. The Company is subject to concentrations of credit risk from its cash and cash equivalents. Under terms of certain of its debt agreements, the Company is required to maintain its cash and cash equivalents primarily at one financial institution. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Recently Issued Accounting Standards In 1997, the following accounting standards were issued: SFAS No. 129, "Disclosure of Information About Capital Structure," requiring supplemental disclosure of capital structure SFAS No. 130, "Reporting Comprehensive Income" (this statement establishes standards for reporting and disclosure of comprehensive income and its components, including revenues, expenses, gains, and losses, in a full set of general-purpose financial statements) SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information;" and SOP 97-2, "Software Revenue Recognition." Each of these standards will become effective for the Company on October 1, 1998. The adoption of these standards is not expected to have a significant impact upon the Company's financial statements or disclosures. Also, in June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued and is required to be adopted by the Company in F-9 89 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) fiscal 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 2. EQUIPMENT AND FURNITURE Equipment and furniture consisted of the following:
SEPTEMBER 30, ---------------- 1997 1998 ------ ------ (IN THOUSANDS) Computer hardware and software............................. $ 319 $ 48 Furniture and equipment.................................... 33 38 Leased equipment........................................... 789 2,607 ------ ------ 1,141 2,693 Less accumulated depreciation and amortization............. (53) (531) ------ ------ $1,088 $2,162 ====== ======
In July 1997, the Company entered into a Master Lease Agreement with Comdisco, Inc. ("Comdisco"), a preferred stockholder, under which Comdisco agreed to provide the Company lease financing, up to an aggregate purchase price of $2.5 million. In connection with this master lease agreement the Company entered into several sale leaseback transactions in September and October of 1997 under which the Company sold assets with a total net book value of $970,000. No gain or loss was recognized in connection with these sale leaseback transactions because the fair value of the equipment sold approximated net book value. Leases executed pursuant to this loan agreement aggregated to approximately $2 million and provide for equal monthly payments over a four-year term with an imputed interest rate of 8.2%. In February 1998, the Company entered into a second Master Lease Agreement, whereby the total financing commitment extended by Comdisco was increased by an additional $1.0 million, to a total of $3.5 million. In July 1998, the Company entered into a third Master Lease Agreement with Comdisco, whereby the total financing commitment was increased by an additional $1.5 million for a total of $5.0 million. As of September 30, 1998, approximately $1,369,000 was available under this agreement. The Company accounts for its obligations under these Master Lease Agreements as capital leases. 3. ACQUISITION On June 30, 1998, the Company acquired 7Software, a privately-held software company and the developer of CompanyStore. The Company issued 708,918 shares of its common stock in exchange for all outstanding shares of 7Software and also assumed all outstanding 7Software options, which were converted to options to purchase approximately 123,921 shares of the Company's common stock. The total 7Software purchase price of $6,233,000 includes the estimated fair value of the common stock ($4,378,000), the estimated fair value of converted options issued ($765,000), $500,000 payable to certain former 7Software shareholders, cash payments of $130,000 and other direct acquisition costs of $460,000. The amount due to former 7Software shareholders is payable in the amount of $167,000 per year for three years. The acquisition was accounted for as a purchase. Therefore, the results of operations of 7Software and the fair value of the assets acquired and liabilities assumed were included in the Company's financial statements beginning on the acquisition date. F-10 90 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITION (CONTINUED) In connection with the purchase of 7Software, the Company assumed 7Software's 1997 stock option plan. All outstanding options to purchase the stock of 7Software on the acquisition date were converted into options to purchase 123,921 shares of common stock of the Company. The outstanding options can be exercised at a price of approximately $0.025 per share, vest over four years, and are exercisable for a period not to exceed ten years. The allocation of the purchase price resulted in intangible assets (primarily developed software and the value of an acquired workforce) of $960,000, which has been capitalized and is being amortized on a straight line basis over three years. Amortization expense for the year ended September 30, 1998 was $80,000. Acquired in-process technology has been valued using the income approach, resulting in a charge of $5,203,000. Values assigned to acquired in-process research and development, developed technology, and trademarks were determined using a discounted cash flow analysis. The value assigned to the acquired workforce was based on replacement cost. To determine the value of the in-process research and development, the Company considered, among other factors, the state of development of each project, the time and cost needed to complete each project, expected income, and associated risks, which included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis resulted in amounts assigned to in-process research and development projects that had not yet reached technological feasibility or do not have alternative future uses. To determine the value of the developed technology, the expected future cash flows of the existing technology product were discounted taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the life cycle stage of each product. Based on this analysis, the existing technology that had reached technological feasibility was capitalized. As of the date of acquisition, the CompanyStore development project consisted of ongoing research and development efforts in the following areas: (i) compatibility with additional databases, (ii) compatibility with additional enterprise resource planning platforms, (iii) multiple catalog support, (iv) fundamental redesign of the user interface, and (v) redesign and rewriting of the administrative functionality. Based on management's estimates, the remaining research and development efforts relating to the completion of the CompanyStore technology were expected to continue into the first quarter of fiscal 1999, the anticipated product release date. Accordingly, the cost to complete the in-process technology was estimated based on the number of man-months required to reach technological feasibility for the CompanyStore technology, the type of professional and engineering staff involved in the completion process and their fully burdened monthly salaries. Management estimated the direct costs to achieve technological feasibility to be approximately $307,000. Beyond this period, management estimated significantly less expense in supporting and maintaining active products identified at the acquisition date to be in-process technology. If the in-process projects contemplated in management's forecast are not successfully developed, future revenue and profitability might be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. F-11 91 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITION (CONTINUED) The unaudited pro forma combined historical results, as if 7Software had been acquired on October 1, 1997, excluding the non-recurring one-time charge for acquired in-process technology, are as follows:
YEAR ENDED SEPTEMBER 30, 1998 --------------------- ACTUAL PRO FORMA -------- --------- (IN THOUSANDS) (UNAUDITED) Total revenues, net.................................... $ 17,159 $ 17,356 Net loss............................................... (18,074) (13,350) Pro forma net loss per share........................... (1.58) (1.14)
The pro forma information does not purport to be indicative of the results that would have been attained had these events occurred at the beginning of the period presented and is not necessarily indicative of future results. In connection with the purchase of 7Software, the Company also entered into separate employment agreements with certain former 7Software officers and shareholders. Under the terms of these arrangements, the Company loaned $500,000 to these officers and shareholders in the form of a note receivable. This receivable is payable in aggregate annual installments of $167,000 plus interest at variable rates. The note is secured by second mortgages on real property. Approximately 124,000 shares of the Company's common stock issued in connection with the purchase of 7Software will be held in escrow until June 30, 1999 subject to resolution of any unresolved claims by the Company. The value of these shares was included in the 7Software purchase price, as no such unresolved claims are known. In addition, as of September 30, 1998, 340,452 shares of Common Stock issued to the founders in connection with the acquisition included restrictions entitling the Company to repurchase such shares in the event of termination. These shares were issued in exchange for 7Software shares that included the same restrictions. These restrictions lapse at various rates through June 2000. The estimated fair value of these shares has been included in the purchase price referred to above. 4. LINE OF CREDIT The Company has a $2.0 million line of credit for operating needs that expires in November 1998. Borrowings under the credit line bear interest at the lending bank's prime interest rate plus 1.5%, which can be reduced to the bank's prime rate plus 1.0% following the achievement and maintenance of after-tax operating profitability for two consecutive quarters. The line is limited to $500,000 for the issuance of standby and commercial letters of credit. The borrowing base for the line is to be monitored on a monthly basis and is to consist of the sum of up to 80% of eligible domestic accounts receivable and any letter of credit backed or insured by foreign accounts receivable; and up to 80% of approved eligible foreign accounts receivable with a limit of the aggregate funds advanced against such accounts, not to exceed $300,000. Interest is due monthly and principal is due upon maturity. There were no outstanding borrowings under this line at September 30, 1998. The bank had issued standby letters of credit on behalf of the Company at September 30, 1998 in the amount of $465,000, and the amount available under the line of credit on that date was $1,535,000. The line is secured by all non-leased assets of the Company, including intellectual property. The line of credit agreement requires the Company to meet certain financial covenants, including limitations on the Company's ability to pay dividends. See Note 11 for a discussion of warrants issued in conjunction with the line of credit and other debt. F-12 92 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT Long-term debt at September 30, 1998 consisted of: (i) a $3.0 million senior term loan facility; (ii) a $1.5 million subordinated promissory note; and (iii) a $3.5 million subordinated promissory note. The subordinated promissory notes are held by Comdisco. The proceeds from these obligations may be used for equipment purchases and general corporate purposes. The senior term loan facility bears interest at the lending bank's prime rate less 1.0% (7.5% at September 30, 1998) and matures on February 15, 2001. Payments are interest only through February 15, 1999. At February 15, 1999, the outstanding balance under the facility will be paid in 24 equal monthly principal payments, plus applicable interest. The loan is secured by a perfected senior security interest in all non-leased assets of the Company with specific filings for intellectual property (both the line of credit and senior term loan were issued by the same lender and include the same financial covenants and restrictions discussed above). The subordinated promissory notes (which are subordinated to both the line of credit and senior term loan) are secured by the Company's receivables, equipment, general intangibles, inventory, and all other goods and personal property of the Company. The $1.5 million note bears interest at 8.5%, has principal and interest payments of approximately $38,000 due monthly, and matures in August 2001. The $3.5 million note bears interest at 11.0%, has monthly principal and interest payments of approximately $101,000 beginning in November 1998, and matures in April 2002. The underlying debt agreement allows the Company to obtain additional long-term borrowings of up to $1.5 million, at an interest rate of 12.5%. This commitment by the lending institution will expire on December 31, 1998. Maturities of long-term debt are as follows:
(IN THOUSANDS) -------------- Fiscal year ending September 30: 1999......................................... $2,033 2000......................................... 2,857 2001......................................... 2,094 2002......................................... 681 ------ $7,665 ======
6. NOTES PAYABLE TO STOCKHOLDERS In December 1996, the Company agreed to exchange two notes payable to stockholders totaling $233,000, plus accrued interest, for 134,920 shares of Series C Preferred Stock. At the time of the conversion to Series C Preferred Stock, the outstanding balance of the notes plus accrued interest was $267,000. 7. COMMITMENTS The Company leases office space and equipment under noncancelable operating leases and capital leases. In October 1997, the Company signed a five-year lease for a new corporate headquarters in Redmond, Washington, which commenced February 1998. The Company has the option to extend the lease for one additional five-year term. The Company is required to provide a $450,000 letter of credit as security for the lease. The letter of credit may be reduced by specified amounts in the lease agreement after 36 months or upon the Company's achieving certain economic goals. In January and February 1998, the Company signed two-year subleases for its former corporate headquarters. F-13 93 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS (CONTINUED) Future minimum rental payments under noncancelable leases, net of the future minimum rentals of $274,000 to be received under the subleases, are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Fiscal year ending September 30: 1999.................................................. 1,234 883 2000.................................................. 1,244 727 2001.................................................. 1,036 754 2002.................................................. 27 754 2003.................................................. -- 276 ------- ------ 3,541 $3,394 ====== Less amount representing interest....................... (410) ------- Present value of net minimum capital lease obligations........................................... 3,131 Less current portion.................................... (1,004) ------- Capital lease obligations, less current portion......... $ 2,127 =======
Total rent expense for the years ended September 30, 1996, 1997 and 1998 was $162,000, $254,000 and $1,055,000 respectively. 8. INCOME TAXES The Company did not provide an income tax benefit for any period presented because it has experienced operating losses since inception. At September 30, 1998, the Company has net operating loss carryforwards of $19,142,000 and tax credit carryforwards of $262,000, all of which expire between 2009 and 2013. As a result of prior equity financings, the Company has incurred and will incur "ownership changes" pursuant to applicable regulations in effect under the Internal Revenue Code of 1986, as amended. Accordingly, the Company's use of net operating loss carryforwards incurred through the date of these ownership changes will be limited during the carryforward period. To the extent that any single year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. Significant components of the Company's deferred tax assets are as follows:
SEPTEMBER 30, ------------------ 1997 1998 ------- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $ 3,410 6,508 Tax credit carryforwards.................................. 152 262 Deferred revenues......................................... 502 1,038 Expenses not currently deductible and other............... 630 947 ------- ------- Total deferred tax assets......................... 4,694 8,755 Valuation allowance......................................... (4,694) (8,755) ------- ------- $ -- $ -- ======= =======
F-14 94 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) Since the Company's utilization of these deferred tax assets is dependent on future profits, which are not assured, a valuation allowance equal to the net deferred tax assets has been provided. The valuation allowance for deferred tax assets increased approximately $2,635,000 and $4,061,000 during the years ended September 30, 1997 and 1998. 9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the issuance of options to acquire 2,760,000 shares of common stock. The 1994 Plan provides for the granting of incentive stock options to employees and nonqualified stock options to employees, directors and other eligible participants. Options granted under the 1994 Plan vest at variable rates, typically four years, determined by the Board of Directors, and remain exercisable for a period not to exceed ten years. At September 30, 1998, 354,768 shares were available for future grant. Benefit Plans On August 21, 1998, the Board adopted the 1998 Equity Incentive Plan, the Director Stock Option Plan and the Employee Stock Purchase Plan. The Equity Incentive Plan authorizes issuance of 3,240,000 shares of common stock upon the exercise of stock options or otherwise pursuant to the plan. The Director Stock Option Plan authorizes the issuance of 240,000 shares of common stock upon the exercise of stock options that may be granted pursuant to the plan. The Employee Stock Purchase Plan authorizes the issuance of 320,000 shares of Common Stock. There were no options granted under these plans as of September 30, 1998. A summary of the Company's stock option activity under the 1994 Plan and the options issued in exchange for options of 7Software and related weighted average exercise prices is as follows:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Balance at beginning of period.............. 324,100 $ 0.11 622,879 $ 0.15 794,777 $0.16 Granted................................... 360,400 0.18 196,580 0.22 746,414 1.82 Issued in exchange for options of 7Software............................... -- -- -- -- 123,921 0.03 Exercised................................. (8,218) 0.13 (1,248) 0.18 (100,132) 0.13 Canceled.................................. (53,403) 0.14 (23,434) 0.37 (25,459) 0.37 ---------- ---------- ---------- Balance at end of year...................... 622,879 0.15 794,777 0.15 1,539,521 0.95 ========== ========== ========== Exercisable at end of period................ 199,157 0.10 391,815 0.16 498,378 0.13 ========== ========== ========== Weighted average fair value of options granted during the period Granted at fair value................... $0.18 $0.22 $10.73 Granted at below fair value............. -- -- 2.58
F-15 95 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED) Information regarding the weighted average remaining contractual life and weighted average exercise price of options outstanding and options exercisable at September 30, 1998 for selected exercise price ranges is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------- -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RANGE OF CONTRACTUAL EXERCISE EXERCISE PRICES LIFE (IN YEARS) SHARES SHARES PRICE --------------- --------------- --------- --------- -------- $ .03 - 0.20 7.22 776,882 493,180 $ 0.13 0.37 9.07 585,619 5,123 0.37 1.88 - 11.63 9.75 177,020 75 3.13 ------------- ---- --------- --------- ------ $ 0.3 - 11.63 8.22 1,539,521 498,378 $ 0.13 ========= =========
The Company uses the intrinsic value-based method to account for all its employee stock-based compensation arrangements. Accordingly, no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements because the fair value of the underlying common stock equals or exceeds the exercise price of the stock options at the date of grant, except with respect to certain options granted during the year ended September 30, 1998. The Company has recorded deferred stock compensation expense of $861,000 relating to options granted during the year ended September 30, 1998. This amount represents the difference between the exercise price and the deemed fair value for financial reporting purposes of the Company's common stock during the periods in which such options were granted. Amortization of deferred stock compensation of $409,000 was recognized during the year ended September 30, 1998. The following pro forma information regarding stock-based compensation has been determined as if the Company had accounted for its employee stock options under the fair market value method of SFAS 123. The fair value of these options was estimated at the date of grant using a minimum value option pricing model with the following weighted average assumptions: risk-free interest rates range from 5.5% to 6.5% in 1996, 1997, and 1998; a dividend yield rate of 0% for all periods; and the options will be exercised one year after they vest. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information is as follows:
YEAR ENDED SEPTEMBER 30, ---------------------------------------- 1996 1997 1998 --------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss as reported..................................... $(4,953) $(5,524) $(18,074) Incremental pro forma compensation expense under SFAS 123.................................................... (2) (7) (37) ------- ------- -------- Pro forma net loss....................................... $(4,955) $(5,531) $(18,111) ======= ======= ======== Pro forma loss per share................................. $ (2.17) $ (2.42) $ (7.47) ======= ======= ========
Under SFAS 123, compensation expense representing the fair value of the option grant is recognized over the vesting period. The initial impact on pro forma net loss may not be representative of compensation expense in future years, when the effect of amortization of multiple awards would be reflected in pro forma earnings. 10. STOCKHOLDER NOTES RECEIVABLE In October 1994, certain stockholders exercised options to purchase shares of common stock. In connection with the issuance, the Company accepted promissory notes totaling $80,000. These notes are due F-16 96 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDER NOTES RECEIVABLE (CONTINUED) in October 1999 and bear interest at 5%, payable annually. These notes are full recourse and are secured by the common stock purchased with the proceeds thereof. 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS Redeemable Convertible Preferred Stock In October 1994, the Company designated and issued 1,529,636 shares of Series A redeemable convertible preferred stock ("Series A Preferred Stock") through a private offering. Net proceeds from the financing amounted to $1,963,000. In July 1995, the Company designated and issued 1,874,999 shares of Series B redeemable convertible preferred stock ("Series B Preferred Stock") through a private offering. Net proceeds from the financing amounted to $2,939,000. In July 1996, the Company designated 3,909,920 shares and issued 3,750,000 shares of Series C redeemable convertible preferred stock ("Series C Preferred Stock") through a private offering. Net proceeds from the financing amounted to $7,479,000. In December 1996, the Company agreed to issue an additional 134,920 shares of Series C Preferred Stock in exchange for the cancellation of notes payable totaling $267,000. In July 1997, the Company designated 1,343,159 shares and issued 1,275,338 shares of Series D redeemable convertible preferred stock ("Series D Preferred Stock") through a private offering. Net proceeds from the financing amounted to $4,612,000. In June 1998, the Company designated 1,800,000 shares and issued 1,003,509 shares of Series E redeemable convertible preferred stock ("Series E Preferred Stock") through a private offering. In August 1998, the Series E Preferred Stock Purchase Agreement (the "Purchase Agreement") was amended for the sale of an additional 645,161 shares of the Company's Series E Preferred Stock and Series E Preferred Stock Warrants to purchase an additional 2,400,000 shares of Series E Preferred Stock for $4,999,999 to American Express Travel Related Services Company, Inc. ("TRS"). The total number of shares of Series E Preferred Stock issued was 1,648,660. Total net proceeds from the Series E Preferred Stock financing amounted to $12,698,000. Redeemable convertible preferred stock is convertible into common stock, at the option of the holder, currently at the rate of one-to-one, subject to antidilution provisions. An equivalent number of unissued shares of common stock are reserved for issuance in the event of full conversion of all redeemable convertible preferred stock. Each share of redeemable convertible preferred stock has voting rights equivalent to the number of shares of common stock issuable if converted. Stockholders of certain series of preferred stock have the right to elect one member to the Board of Directors while common stockholders may elect two members to the Board of Directors. Subject to certain conditions, the redeemable convertible preferred stock has mandatory conversion requirements in the event of a qualified initial public offering of the Company's common stock, or if 80% of the preferred stockholders, voting as a single class, elects to convert to common stock. Each series of redeemable convertible preferred stock has dividend rights payable at various rates per share when and if declared. In the event of any distribution of assets upon liquidation of the Company, the order of preference to those assets will be holders of Series E, Series D, Series C, Series B, and Series A Preferred Stock at the original offering price per share, plus any declared but unpaid dividends. Any remaining assets will be distributed ratably to all stockholders up to various maximum rates for the preferred stockholders. F-17 97 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED) The redeemable convertible preferred stock will be redeemed in four equal annual installments beginning in October 2001 unless waived in writing by more than 60% of the holders of such stock. Redemption amounts are based on the original offering price of the stock plus any declared but unpaid dividends. The order of preference in any such redemption effected is as follows: Series E, Series D, Series C, Series B and Series A Preferred Stock. Following is a summary of terms and conditions for each series of redeemable convertible preferred stock as of September 30, 1998:
ANNUAL AGGREGATE DIVIDEND SHARES STATED LIQUIDATION RATE -- OUTSTANDING VALUE VALUE NONCUMULATIVE ----------- ------ ----------- ------------- Issues and outstanding: Series A.......................... 1,529,636 $1.30 $ 2,000,000 $0.0915 Series B.......................... 1,874,999 1.60 3,000,000 0.1120 Series C.......................... 3,884,920 2.00 7,770,000 0.1400 Series D.......................... 1,275,338 3.65 4,655,000 0.2550 Series E.......................... 1,648,660 7.75 12,777,000 0.5425 ---------- ----------- 10,213,553 $30,202,000 ========== ===========
Warrants to Purchase Preferred Stock In May 1996, the Company issued warrants to purchase 28,125 shares of Series C Preferred Stock in conjunction with a renewal and increase in the bank line of credit (see Note 4). The warrants are immediately exercisable at a price of $2.00 per share, expiring May 2001. The estimated fair value of these warrants of $5,000 has been recorded as debt issuance costs. In July 1997, the Company issued warrants to Comdisco to purchase 44,827 and 22,988 shares of Series D Preferred Stock in conjunction with the Company's receipt of financing commitments relating to the promissory note and lease agreement, respectively (see Note 2). Each has a purchase price of $3.65 per share. The warrants become immediately exercisable on the effective date of the agreements and remain exercisable for a period of five years; or two years from the effective date of the Company's initial public offering, whichever is longer, provided the offering is less than $15.0 million. Should the offering exceed $15.0 million, the warrant will expire, if not previously exercised, immediately upon the closing of the issuance and sale of shares of common stock of the Company. The estimated fair values of these warrants of $30,000 and $16,000, respectively, has been recorded as debt issuance costs. In September 1997, the Company issued warrants to purchase 14,000 shares of Series D Preferred Stock in conjunction with a new loan facility and an increase/renewal in the bank line of credit (see Note 4). The warrants have an initial exercise price of $3.65 per share, a five-year maturity inclusive of certain provisions to include, but not limited by, a net exercise provision, antidilution protection and a $30,000 put option. The right to exercise the put option expires two years from the issue date of the warrants. The estimated fair value of these warrants of $30,000 has been recorded as debt issuance costs. In April 1998, the Company issued warrants to purchase 13,187 shares of Series E Preferred Stock in conjunction with the increase to the senior loan facility (see Note 4). The warrants have an initial exercise price of $7.75 per share. The warrants became immediately exercisable on the effective date of the agreements and are exercisable for a period of five years. Additionally, the agreement provides for a $75,000 put option, F-18 98 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED) which expires in April 2000. The estimated fair value of these warrants of $75,000 has been recorded as debt issuance costs. In May 1998, the Company issued warrants to Comdisco to purchase 56,451 shares of Series E Preferred Stock in conjunction with the new subordinated promissory note (see Note 2). The warrants are immediately exercisable at a price of $7.75 per share and are exercisable for a period of five years; or two years from effective date of the Company's initial public offering, whichever is longer, provided the offering is less than $15.0 million. Should the offering exceed $15.0 million, the right to purchase preferred stock as granted shall expire, if not previously exercised, immediately upon the closing of the issuance and sale of shares of common stock of the Company. The estimated fair value of these warrants of $11,000 has been recorded as debt issuance costs. Under the terms of this subordinated debt agreement, the Company has an outstanding commitment to issue additional warrants to purchase as many as 27,096 shares of Series E Preferred Stock at an exercise price of $7.75 per share if it utilizes the $1.5 million additional financing available under the agreement. In connection with the sale of an additional 645,161 shares of Series E Preferred Stock, the Company issued a warrant to TRS and its assignees to purchase an additional 2,400,000 shares of Series E Preferred Stock. If all of the shares of Series E Preferred Stock are converted into shares of common stock in connection with a registration of the Company's common stock under the Securities Act, this warrant will automatically become exercisable for 2,400,000 shares of the Company's common stock. The warrant is exercisable in four tranches as follows: 300,000 shares may be acquired at the time of the Company's initial public offering at a cash purchase price per share equal to the initial public offering price per share less 7%; 700,000 shares may be acquired at any time on or before October 15, 1999 at a cash purchase price of $33.75 per share; 700,000 shares may be acquired at any time on or before January 15, 2001 at a cash purchase price of $50.63 per share; and the remaining 700,000 shares may be acquired at any time on or before January 15, 2002 at a cash purchase price of $85.00 per share. As was permitted by the warrant, the Company exercised its option to cancel 25% of the shares that could have been acquired under the warrant at the time of the Offering or on or before October 15, 1999. Thus, 225,000 shares may be acquired at the time of the Offering, and 525,000 shares may be acquired on or before October 15, 1999. The estimated fair value of this warrant, determined based on a Black Scholes fair value model, is approximately $278,000, which has been recorded as redeemable convertible preferred stock warrants. All preferred stock warrants automatically convert to common stock warrants upon the closing of a qualified initial public offering of the Company's common stock. F-19 99 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCKHOLDERS' EQUITY The Company has reserved shares of common stock for future issuance as follows:
SEPTEMBER 30, 1998 ------------- Outstanding stock options................................... 1,539,521 Stock Options available for grant........................... 354,768 1998 Equity Incentive Plan.................................. 3,240,000 Director Stock Option Plan.................................. 240,000 Employee Stock Purchase Plan................................ 320,000 Conversion of redeemable convertible preferred stock: Series A............................................... 1,529,636 Series B............................................... 1,875,000 Series C............................................... 3,909,920 Series D............................................... 1,343,158 Series E............................................... 1,800,000 Warrants to purchase Series C Preferred Stock that are convertible to common stock............................... 28,125 Warrants to purchase Series D Preferred Stock that are convertible to common stock............................... 81,815 Warrants to purchase Series E Preferred Stock that are convertible to common stock............................... 2,219,638 ---------- Total............................................. 18,481,581 ==========
13. NET LOSS PER SHARE Basic and diluted net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding. Pro forma net loss per share is computed using the weighted average number of shares used for basic and diluted per share amounts and the weighted average convertible redeemable preferred stock outstanding as if such shares were converted to common stock at the time of issuance.
YEAR ENDED SEPTEMBER 30, -------------------------------------- 1996 1997 1998 ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Net loss................................................. $ (4,953) $ (5,524) $ (18,074) ========== =========== =========== Basic and diluted net loss per common share.............. $ (2.17) $ (2.41) (7.45) ========== =========== =========== Weighted average number of common shares used for basic and diluted per share amounts.......................... 2,282,382 2,288,379 2,425,254 ========== =========== =========== Weighted average common shares issuable upon pro forma conversion of preferred stock.......................... 8,994,088 =========== Weighted average number of shares used for pro forma per share amounts.......................................... 11,419,342 =========== Pro forma basic and diluted net loss per share (unaudited)............................................ $ (1.58) ===========
Options to purchase 1,539,521 shares of common stock with exercise prices of $0.03 to $11.63 per share and warrants to purchase 2,329,578 shares of preferred stock at a range of $2.00 to $85.00 per share were F-20 100 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. NET LOSS PER SHARE (CONTINUED) outstanding at September 30, 1998. These options and warrants were excluded from the computation of diluted earnings per share because their effect was anti-dilutive. 14. RETIREMENT 401(k) PLAN The Company sponsors a 401(k) Profit Sharing and Trust Plan that is available to substantially all employees. Each employee may elect to contribute up to 20% of his or her pre-tax gross earnings, subject to annual limits. The Company reserves the right to amend the Plan at any time. Employee contributions to the Plan are subject to statutory limitations regarding maximum contributions. There are no Company matching contributions. 15. INTERNATIONAL REVENUES The Company licenses and markets its products primarily in the United States, and operates in a single industry segment. Information regarding revenues in different geographic regions is as follows:
REVENUES --------------------------- COUNTRY 1996 1997 1998 ------- ------ ------ ------- (IN THOUSANDS) United States........................................... $1,959 $6,981 $16,349 Europe.................................................. -- 612 364 Canada.................................................. -- 677 31 Australia............................................... -- -- 398 Asia.................................................... -- -- 17 ------ ------ ------- Total......................................... $1,959 $8,270 $17,159 ====== ====== =======
From the inception of the Company to September 30, 1996, there were no significant export sales or operations in countries outside of the United States. 16. SIGNIFICANT AGREEMENTS Strategic Marketing Alliance Agreement with American Express In December 1997, the Company entered into a strategic alliance agreement with American Express Company ("American Express"), a related party, under which American Express refers to the Company its corporate charge card customers that seek a T&E expense management software solution. Under the terms of the agreement, American Express receives a fee for referring to the Company clients of American Express who become XMS customers. The fee varies based upon licensing revenue realized from referred customers. Except for the referral, the Company is responsible for the entire sales effort and also for customer support and warranty service. Under the agreement, the Company and American Express have also agreed to develop certain product features enabling a higher level of integration between XMS and certain American Express services and products. Co-Branded XMS Service Marketing Agreement In August 1998, the Company entered into a Co-Branded XMS Service Marketing Agreement with American Express' affiliate TRS. Under the terms of the agreement, TRS will receive a fee for marketing to TRS's clients a co-branded enterprise service provider ("ESP") version of XMS containing special features. The marketing fee is based on the amount of revenue received. The Company is responsible for providing warranty and customer support services to these customers. In addition, under the terms of the agreement, the F-21 101 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SIGNIFICANT AGREEMENTS (CONTINUED) Company and TRS have agreed to jointly develop certain product features for integration into the co-branded ESP version of XMS. License and Other Agreements The Company has entered into various agreements that allow the Company to incorporate licensed technology into its products or that allow the Company the right to sell separately the licensed technology. The Company incurs royalty fees under these agreements that are based on a predetermined fee per license sold. Royalty costs incurred under these agreements are recognized as products are licensed and are included in cost of product sales. These amounts totaled $203,000 and $348,000 for the years ended September 30, 1997 and 1998, respectively. Amounts recognized in 1996 were insignificant. 17. RELATED PARTY TRANSACTION During 1998 the Company paid fees of $121,000 to a stockholder under a sales referral agreement. Certain of the proceeds received under the sales referral agreement in the amount of $192,000 were received directly from the stockholder. Additionally, the Company recorded $134,000 in revenue for the sale of a license agreement to another stockholder in 1998. No sales were made to stockholders or under the sales referral agreement prior to 1998. At September 30, 1998 accounts receivable from stockholders were $152,000 and accounts payable to stockholders were $83,000. 18. INITIAL PUBLIC OFFERING On August 21, 1998, the Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to offer its common stock to the public. If the offering is consummated under terms presently anticipated each outstanding share of redeemable convertible preferred stock will convert into one share of common stock. Unaudited pro forma stockholders' equity reflects the assumed conversion of the redeemable convertible preferred stock outstanding at September 30, 1998 into common stock and the assumed conversion of redeemable convertible preferred stock warrants outstanding at September 30, 1998 into common stock warrants as of September 30, 1998. 19. SUBSEQUENT EVENT -- REVERSE STOCK SPLIT On August 21, 1998 the Board of Directors authorized a reverse stock split of the Company's common stock. The split ratio of 1-to-2.5 was determined on November 16, 1998, subject to shareholder approval. The related common share, preferred share and per share data in the accompanying financial statements has been retroactively restated to reflect the reverse stock split, including preferred share data on an as-converted to common stock basis. F-22 102 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors 7Software, Inc. We have audited the accompanying balance sheet of 7Software, Inc. (a development stage company) as of December 31, 1997 and the related statements of operations, shareholders' equity, and cash flows for the period May 30, 1997 (date of incorporation) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 7Software, Inc. at December 31, 1997 and the results of its operations and its cash flows for the period May 30, 1997 (date of incorporation) to December 31, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Seattle, Washington August 14, 1998 F-23 103 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $25 $ 39 Accounts receivable....................................... 12 36 --- ----- Total current assets.............................. 37 75 Furniture and equipment, net................................ 21 28 --- ----- Total assets...................................... $58 $ 103 === ===== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 6 $ 4 Accrued payroll liabilities............................... 4 4 --- ----- Total current liabilities......................... 10 8 Convertible note payable.................................... 25 130 Commitments Shareholders' equity: Preferred stock, no par value: Authorized shares: 5,000,000 No shares issued and outstanding....................... -- -- Common stock, no par value: Authorized shares: 10,000,000 2,000,000 and 2,082,294 shares issued and outstanding at December 31, 1997 and June 30, 1998, respectively.......................................... 20 212 Deferred stock compensation............................... -- (8) Retained earnings (deficit)............................... 3 (239) --- ----- Total shareholders' equity (deficit).............. 23 (35) --- ----- Total liabilities and shareholders' equity (deficit)....................................... $58 $ 103 === =====
See accompanying notes. F-24 104 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE PERIOD MAY 30, 1997 SIX MONTHS (DATE OF INCORPORATION) ENDED TO DECEMBER 31, 1997 JUNE 30, 1998 ----------------------- ------------- (UNAUDITED) Revenues.................................................... $66 $ 131 Cost of revenues............................................ 5 25 --- ----- Gross profit................................................ 61 106 Operating expenses: Research and development.................................. 30 213 Selling, general, and administration...................... 27 135 --- ----- Total operating expenses.......................... 57 348 --- ----- Income (loss) before taxes.................................. 4 (242) Provision for taxes......................................... 1 -- --- ----- Net income (loss)................................. $ 3 $(242) === =====
See accompanying notes. F-25 105 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997 AND FOR THE 6 MONTH UNAUDITED PERIOD ENDED JUNE 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
TOTAL COMMON STOCK DEFERRED RETAINED STOCKHOLDERS' ------------------- STOCK EARNINGS EQUITY SHARES AMOUNT COMPENSATION (DEFICIT) (DEFICIT) --------- ------ ------------ --------- ------------- Sale of common stock at $0.01 per share for cash on June 6, 1997... 630,000 $ 6 $ -- $ 6 Issuance of common stock at $0.01 per share for furniture and equipment at cost on June 6, 1997.......................... 630,000 6 -- 6 Issuance of common stock at $0.01 per share for employee services on June 6, 1997...... 740,000 8 -- 8 Net income....................... -- -- 3 3 --------- ---- ---- ----- ----- Balance at December 31, 1997....... 2,000,000 $ 20 $ 3 $ 23 Issuance of common stock (unaudited)................... 12,632 1 -- 1 Issuance of common stock on conversion of notes payable (unaudited)................... 69,662 100 -- 100 Net loss (unaudited)............. -- (242) (242) Deferred stock compensation (unaudited)................... -- 91 (91) -- Amortization of deferred stock compensation (unaudited)...... -- -- 83 83 --------- ---- ---- ----- ----- Balance at June 30, 1998 (unaudited)...................... 2,082,294 $212 (8) $(239) $ (35) ========= ==== ==== ===== =====
See accompanying notes. F-26 106 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) SIX MONTHS ENDED TO DECEMBER 31, 1997 JUNE 30, 1998 -------------------- ---------------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)........................................... $ 3 $(242) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation.............................................. 1 2 Stock compensation........................................ 8 83 Changes in assets and liabilities: Accounts receivable.................................... (12) (24) Accounts payable and accrued payroll liabilities....... 10 (2) ---- ----- Net cash provided by (used in) operating activities......... 10 (183) ---- ----- INVESTING ACTIVITIES Purchases of furniture and equipment........................ (16) (9) ---- ----- FINANCING ACTIVITIES Proceeds from issuance of common stock...................... 6 1 Proceeds from convertible note payable...................... 25 75 Proceeds from convertible note payable to Concur............ 130 ---- ----- Net cash provided by financing activities................... 31 206 ---- ----- Net increase in cash and cash equivalents................... 25 14 Cash and cash equivalents at beginning of period............ -- 25 ---- ----- Cash and cash equivalents at end of period.................. $ 25 $ 39 ==== ===== NONCASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES Furniture and equipment contributed for common stock........ $ 6 -- ==== ===== Issuance of common stock in consideration for conversion of note payable.............................................. -- $ 100 ==== =====
See accompanying notes. F-27 107 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998 (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF ACTIVITIES 7Software, Inc. (the "Company") was incorporated in California on May 30, 1997. The Company performs consulting services for product development and developed a product called CompanyStore that automates the purchasing of nonproduction goods. CompanyStore runs on corporate intranets, providing access to company-specific information and making that information available on employee desktops throughout the enterprise. The Company is in the development stage. On June 30, 1998, the Company merged with Concur Technologies, Inc. ("Concur"). The merger resulted in all shares of the Company's outstanding capital stock and all stock options being converted into Concur common stock and stock options, respectively. UNAUDITED INTERIM FINANCIAL INFORMATION The financial information for the six months ended June 30, 1998 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such date and its operating results and cash flows for that period. Operating results for the six months ended June 30, 1998 are not necessarily indicative of results that may be expected for an entire year. REVENUE RECOGNITION The Company generates revenues from performing computer programming consulting. Revenue is recognized by the Company based upon hours of consulting performed and billable, in accordance with the related consulting agreement. CASH EQUIVALENTS All short-term investments with maturities of three months or less at date of purchase are considered to be cash equivalents. DEVELOPMENT COSTS All software development costs are expensed until technological feasibility has been established. No software development costs were capitalized during the period ended December 31, 1997 or June 30, 1998. ADVERTISING AND MARKETING COSTS Costs of marketing materials and advertising expenditures are charged to operations when the materials are used or the advertising is first released. Advertising costs were $5,000 for the period ended December 31, 1997 and $17,000 for the six months ended June 30, 1998. FEDERAL INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement No. 109, deferred tax assets and liabilities are recorded using the liability method, which recognizes the effect of temporary differences between the reporting of revenues and expenses for financial statement and income tax return purposes. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. F-28 108 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998 (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recorded when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." 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 recorded in the financial statements and accompanying notes. Actual results could materially differ from these estimates. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and is depreciated on the straight-line method over the estimated useful lives of the assets, ranging from two to four years. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following: (in thousands)
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Computer equipment.......................... $20 $20 Furniture, fixtures, and equipment.......... 2 12 --- --- 22 32 Accumulated depreciation.................... (1) (4) --- --- $21 $28 === ===
3. CONVERTIBLE NOTES On November 30, 1997, the Company entered into an agreement to receive $75,000 in consideration of a non-interest bearing convertible note. The terms of this agreement were such that the entire balance of the note was convertible into securities sold in the Company's first stock financing with outside investors after the date thereof. Additionally, the agreement provided that the note holder would receive warrants to purchase common stock if and when the Company received additional equity financing. The Company received $25,000 of the $75,000 note in December 1997 and the remaining balance during the first quarter of 1998. On January 1, 1998, the Company entered into another agreement and received $25,000 in consideration of a non-interest bearing convertible note with similar terms to those as described above. On June 9, 1998, the note holders and the Company agreed to convert the notes in exchange for the issuance of 69,662 shares of common stock. As a result of this transaction, the note holders' rights to the warrants were cancelled. F-29 109 7SOFTWARE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD MAY 30, 1997 (DATE OF INCORPORATION) TO JUNE 30, 1998 (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) 4. SHAREHOLDERS' EQUITY On June 6, 1997, the Company issued 2,000,000 shares of common stock to the founders of the Company. The shares were issued for $20,000 of consideration, which included cash, furniture and equipment, and services rendered since the incorporation of the Company. On June 9, 1998, the Company issued 69,662 shares of common stock to certain note holders in exchange for the cancellation of the convertible notes and the obligations of issuing warrants as discussed in Note 3. Between January 1, 1998 and June 10, 1998, the Company issued 12,632 shares of common stock. The shares were issued for approximately $1,000 in cash and services rendered during this period. 5. STOCK OPTION PLAN The Company's 1997 Stock Option Plan authorizes the grant of options to employees, directors, and eligible participants for up to 500,000 shares of the Company's common stock. The term of options granted to certain significant stockholders cannot exceed five years while the term of all other options cannot exceed ten years. The options vest over periods defined in each option agreement as determined at the discretion of the Company's Board of Directors. Stock options that qualify as incentive stock options are exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Board of Directors, which may not be less than 85% of the fair market value of the stock at the date of grant. No options had been granted under the plan as of December 31, 1997. For the period May 30, 1997 to June 30, 1998, the Company issued 364,000 options to purchase common stock at $0.01 per share resulting in deferred stock compensation of approximately $91,000 which is being amortized over the vesting period of the options of generally four years. Stock compensation expense was $83,000 for the six months ended June 30, 1998. 6. INCOME TAXES Temporary differences between the book and tax basis of assets and liabilities to December 31, 1997 were insignificant; therefore no deferred taxes were provided. Significant components of the Company's deferred tax assets were as follows:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Deferred tax asset relating to net operating loss $ -- $ 52 credit carry-forward................................ Valuation allowance................................... -- (52) ---- ---- $ -- $ -- ==== ====
Since the Company was acquired by Concur on June 30, 1998 it will not utilize its deferred tax assets; therefore, a valuation allowance for the full amount of all deferred tax assets has been provided. 7. COMMITMENTS The Company leased its facility under an operating lease that expired on June 30, 1998. Total rental expense for the period ended December 31, 1997 and June 30, 1998 were $4,000 and $24,000, respectively. 8. SALES TO MAJOR CUSTOMERS All revenues recognized by the Company for the period ended December 31, 1997 were received from SAP Technology for computer programming consulting. For the six months ended June 30, 1998, all revenues were received for sales and services provided to two customers. F-30 110 CONCUR TECHNOLOGIES, INC. (FORMERLY PORTABLE SOFTWARE CORPORATION) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following financial statements present the Concur Technologies, Inc. ("Concur," formerly Portable Software Corporation) Pro Forma Consolidated Statements of Operations for the year ended September 30, 1998. The Company's acquisition of 7Software, Inc. ("7Software") has been accounted for under the "purchase" method of accounting, which requires the purchase price to be allocated to the acquired assets and liabilities of 7Software on the basis of their estimated fair values as of the date of acquisition. The following pro forma consolidated statements of operations for the year ended September 30, 1998 give effect to the acquisition of 7Software as if it occurred on October 1, 1997, and include adjustments directly attributable to the acquisition of 7Software and expected to have a continuing impact on the combined company (collectively, the "Pro Forma Financial Statements"). As the Pro Forma Financial Statements have been prepared based on estimated fair values, amounts actually recorded may change upon determination of the total purchase price (which may change based on future performance) and additional analysis of individual assets and liabilities assumed. The pro forma information is based on historical financial statements. The pro forma results of operations for the year ended September 30, 1998 includes the results of operations of 7Software from May 30, 1997 (Date of Incorporation) to June 30, 1998. The assumptions give effect to the business combination with 7Software under the purchase method of accounting. The information has been prepared in accordance with the rules and regulations of the Commission and is provided for comparative purposes only. The pro forma information does not purport to be indicative of the results that actually would have occurred had the combination been effected at the beginning of the periods presented. F-31 111 CONCUR TECHNOLOGIES, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PURCHASE PRO FORMA CONCUR 7SOFTWARE ADJUSTMENTS CONSOLIDATED ----------- ---------- ----------- ------------ Total revenues, net..................... $ 17,159 $ 197 $ -- $ 17,356 Cost of revenues........................ 6,242 30 174 6,446 ----------- ---------- ------- ----------- Gross profit............................ 10,917 167 (174) 10,910 Sales and marketing..................... 12,353 162 33 12,548 Research and development................ 6,434 243 33 6,710 General and administrative.............. 4,687 -- -- 4,687 Acquired in-process technology.......... 5,203 -- (5,203) -- ----------- ---------- ------- ----------- Total operating expense....... 28,677 405 (5,137) 23,945 ----------- ---------- ------- ----------- Loss from operations.................... (17,760) (238) 4,963 (13,035) Other expense........................... (314) (1) -- (315) ----------- ---------- ------- ----------- Net loss...................... $ (18,074) $ (239) $ 4,963 $ (13,350) =========== ========== ======= =========== Pro forma net loss per share............ (1.58) $ (1.14) =========== =========== Weighted average shares used in computation of basic and diluted net loss per share........................ 11,419 11,675 =========== ===========
See accompanying notes. F-32 112 CONCUR TECHNOLOGIES, INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION On June 30, 1998, the Company acquired 7Software, Inc. ("7Software"). 7Software was incorporated in May 1997 and focused on the development and licensing of Internet-based procurement solutions that bring purchasing to the desktops of employees of large corporations. Concurrent with this transaction, 7Software was merged into the Company. The unaudited pro forma information presented is not necessarily indicative of future consolidated results of operations of Concur or the consolidated results of operations that would have resulted had the acquisition taken place on October 1, 1997. The unaudited pro forma consolidated statements of operations for the years ended September 30, 1997 and 1998 reflect the effects of the acquisition, assuming the related events occurred as of October 1, 1997 for the purposes of the unaudited pro forma consolidated statements of operations. 2. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS The unaudited pro forma consolidated financial statements reflect the conversion of all the outstanding shares of 7Software common stock into 708,918 shares and stock options to purchase 123,921 shares of Concur common stock pursuant to the acquisition. This consideration resulted in a total purchase price of $6.2 million (including acquisition expenses). The allocation of the purchase price resulted in intangible assets, primarily capitalized technology and the value of an acquired workforce, of $960,000 which are being amortized on a straight line basis over three years. In-process research and development acquired and valued using the income approach in the amount of $5,203,000 was charged to expense. In-process research and development charges have not been reflected in the pro forma consolidated financial statements of operations for the year ended September 30, 1998 as they are considered a nonrecurring charge. 3. UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE The net loss per share and shares used in computing the net loss per share for the year ended September 30, 1998 is based upon the historical weighted average common shares outstanding adjusted to reflect the issuance, as of October 1, 1997 of approximately 708,918 shares and stock options to purchase 123,921 shares of Concur common stock as described in Note 2 to these Notes to Unaudited Pro Forma Consolidated Financial Statements. Options to purchase approximately 364,000 shares of 7Software common stock were assumed by Concur pursuant to the acquisition and converted into options to purchase approximately 123,921 shares of Concur common stock. The Concur common stock issuable upon the exercise of the stock options have been excluded as the effect would be antidilutive. In addition to the shares used in computing the net income (loss) per share above, pro forma basic and diluted net loss per share is calculated using the weighted average convertible and redeemable preferred stock outstanding as if such shares were converted to common stock at the time of issuance. On August 21, 1998, Concur's Board of Directors authorized a reverse stock split. The split ratio of 1-to-2.5 was determined on November 16, 1998. Share and per share data included in these pro forma statements have been retroactively restated to reflect the reverse stock split. 4. PURCHASE ADJUSTMENTS Pro forma adjustments have been prepared to reflect the elimination of the non-recurring one-time charge for acquired in-process technology and to reflect the amortization of capitalized technology and other intangible assets. F-33 113 DESCRIPTION OF GRAPHICS INSIDE FRONT COVER Graphic: Concur logo. A large Concur logo without the words "Concur-TM TECHNOLOGIES" and without the box in the center of the circle, which is replaced by the text below. Text: Concur Technologies is a leading provider of Web-based employee-facing applications. Envision a workplace where manual, paper-based processes are not only automated throughout the enterprise, but also extend to partners, vendors and service providers. Concur Technologies provides travel and entertainment expense management and front-office procurement solutions that enable organizations to work more efficiently and increase employee productivity. The Company leverages Intranet technology to deploy such applications quickly and on an enterprise-wide basis, and plans to leverage the public Internet infrastructure to offer its solutions to a broad range of businesses as an Enterprise Service Provider. Concur Technologies' mission is to be the leading Web-based integrated solution provider of employee-facing business applications throughout the extended enterprise. GATEFOLD Graphic: Box divided into 5 vertical sections. The top of the first is the Concur logo. The next four are headed by "Preparation," "Approval," "Processing" and "Data Analysis and Reporting," respectively. There are pictures of eight screen shots showing various stages of the software. The top four screen shots deal with XMS and the bottom four deal with CompanyStore. Text: Under Concur logo: Concur products automate the preparation, approval, processing and data analysis of travel and entertainment (T & E) expense reports and front-office procurement requisitions. By automating manual paper-based processes, costs are reduced and customers are enabled to collect and analyze data to consolidate purchases with preferred vendors and to negotiate vendor discounts. Under "Preparation": [XMS logo] Expense Reports are easily prepared using a checkbook-style user interface and are prepopulated with corporate charge card data. [CompanyStore logo] Using CompanyStore's simple user interface, orders are placed on-line through a customized electronic catalog. Under "Approval": XMS allows the enterprise to determine the approval process and automatically flags those reports that are not in compliance. CompanyStore allows the enterprise to determine how the requisitions should be processed. Under "Processing": XMS integrates with existing IT infrastructure and ERP applications and has features such as electronic flagging of non-compliant expenses that greatly reduce the time and cost of processing expense reports. CompanyStore saves time by integrating with the enterprise's ERP system, allowing orders to be entered into the purchasing system automatically and then forwarded electronically to the vendor. Under "Data Analysis and Reporting": Provides access to expense trends and data, allowing consolidation of vendors and negotiation of vendor discounts. Better data allows managers to determine how best to control costs, negotiate more favorable supplier arrangements and consolidate vendors. 114 PAGE 45 This graphic depicts the interconnection of various systems. A box with three divisions, captioned "Concur Applications," is on the top. The three divisions are the XMS logo, the CompanyStore logo and "Future Applications" in text. A box with eight divisions, captioned "Concur Technology Platform," is below the "Concur Applications" box. The eight divisions are "Prepopulation," "Workflow/Routing," "Business Intelligence," "Security," "Messaging," "Business Rules," "User Management," and "Database," as text. A box with five divisions, captioned "ERP Platforms," is below the "Concur Technology Platform" box. The five divisions are "SAP," "Oracle," "PeopleSoft," "Others" and "Legacy Systems" as text. A box with four divisions, captioned "E-Commerce," is to the right of the other three boxes. The three divisions are "Travel Services," "Corporate Charge Card Suppliers," "Vendors & Suppliers" and "Financial Institutions" as text. "Concur Technology Platform" and "Concur Applications" have three double-ended arrows pointing to each other. "Concur Technology Platform" and "E-Commerce" have a double-ended arrow pointing to each other. "Concur Technology Platform" and "ERP Platforms" have five double-ended arrows pointing to each other. INSIDE BACK COVER Graphic: Two screen shots, one of a CompanyStore page, and the other of an XMS page with the CompanyStore and XMS logos. A large Concur logo without the words "Concur-TM TECHNOLOGIES" and without the box in the center of the circle. Text: CompanyStore-TM is an Intranet application designed to support procurement of front-office goods and services. The Xpense Management Solution-TM is a proven travel expense automation product that has been licensed to more than 150 companies for use by over 800,000 employees around the world. BACK COVER Graphic: Concur logo with shadow. Dark background. 115 LOGO 116 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses to be paid by the Company in connection with the sale of shares of Common Stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee......... $ 12,027 NASD filing fee............................................. 4,200 Nasdaq National Market filing fee........................... 90,000 Accounting fees and expenses................................ 200,000 Legal fees and expenses..................................... 400,000 Printing and engraving expenses............................. 150,000 Road show expenses.......................................... 30,000 Transfer agent and registrar fees and expenses.............. 3,000 Custodian fees.............................................. 3,600 Miscellaneous............................................... 7,173 -------- Total............................................. $900,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by Section 145 of the Delaware General Corporation Law ("DGCL"), the Company's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. In addition, as permitted by Section 145 of the DGCL, the Bylaws of the Company provide that: (i) the Company is required to indemnify its directors and executive officers to the fullest extent permitted by the DGCL (except if such person is seeking indemnity in connection with a proceeding (or part thereof) initiated by such person and not authorized by the Board of Directors); (ii) the Company may, in its discretion, indemnify other officers, employees and agents as set forth in the DGCL; (iii) upon receipt of an undertaking to repay such advances if indemnification is determined to be unavailable, the Company is required to advance expenses, as incurred, to its directors and executive officers to the fullest extent permitted by the DGCL in connection with a proceeding (except if the expenses incurred by such person are incurred because the Company is directly bringing a claim, in a proceeding, against such person, alleging that such person has breached his or her duty of loyalty to the Company, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction); (iv) the rights conferred in the Bylaws are not exclusive and the Company is authorized to enter into indemnity agreements with its directors, officers, employees and agents and (v) the Company may not retroactively amend the Bylaw provisions relating to indemnity. The Company's policy is to enter into Indemnity Agreements with each of its directors and executive officers. The Indemnity Agreements provide that directors and executive officers will be indemnified and held harmless to the fullest possible extent permitted by law including against all expenses (including attorneys' fees), judgments, fines and settlement amounts paid or reasonably incurred by them in any action, suit or proceeding, including any derivative action by or in the right of the Company, on account of their services as directors, officers, employees or agents of the Company or as directors, officers, employees or agents of any other company or enterprise when they are serving in such capacities at the request of the Company. The Company will not be obligated pursuant to the agreements to indemnify or advance expenses to an indemnified party with respect to proceedings or claims (i) initiated by the indemnified party and not by way II-1 117 of defense, except with respect to a proceeding authorized by the Board of Directors and successful proceedings brought to enforce a right to indemnification under the indemnity agreements; (ii) for any amounts paid in settlement of a proceeding unless the Company consents to such settlement; (iii) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the Company pursuant to the provisions of sec. 16(b) of the Securities Exchange Act of 1934 and related laws; (iv) on account of conduct by an indemnified party that is finally adjudged to have been in bad faith or conduct that the indemnified party did not reasonably believe to be in, or not opposed to, the best interests of the Company; (v) on account of any criminal action or proceeding arising out of conduct that the indemnified party had reasonable cause to believe was unlawful; or (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The Indemnity Agreement requires a director or executive officer to reimburse the Company for expenses advanced only to the extent it is ultimately determined that the director or executive officer is not entitled, under Delaware law, the Bylaws, his or her indemnity agreement or otherwise to be indemnified for such expenses. The Indemnity Agreement provides that it is not exclusive of any rights a director or executive officer may have under the Certificate of Incorporation, Bylaws, other agreements, any majority-in-interest vote of the stockholders or vote of disinterested directors, Delaware law or otherwise. The indemnification provision in the Bylaws, and the indemnity agreements entered into between the Company and its directors and executive officers, may be sufficiently broad to permit indemnification of the Company's directors and executive officers for liabilities arising under the Securities Act. As authorized by the Company's Bylaws, the Company, with approval by the Company's Board of Directors, has applied for, and expects to obtain, directors and officers liability insurance with a per claim and annual aggregate coverage limit of $5 million. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
DOCUMENT EXHIBIT NUMBER -------- -------------- Underwriting Agreement...................................... 1.01 Company's Certificate of Incorporation...................... 3.01 Company's Bylaws............................................ 3.04 Form of Indemnity Agreement................................. 10.06
II-2 118 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following table sets forth information regarding all securities of the Company sold by the Company from September 30, 1995 to October 31, 1998. The Company anticipates that it will effect a 1-for-2.5 reverse split of its Common Stock prior to the Offering; the numbers included in the following table reflect such reverse split. References to warrants below assume the full exercise of all warrants.
NUMBER AGGREGATE FORM OF CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SECURITIES PURCHASE PRICE CONSIDERATION - -------------------- ----------------- ----------------------- ------------- -------------- ------------- 1 investor May 15, 1996 Warrants to purchase -- $ -- --(1) 28,125 shares of Series C Preferred Stock 10 investors July 10, 1996 Series C Preferred 3,750,000 7,500,000 Cash Stock 2 investors December 31, 1996 Series C Preferred 134,920 269,697 --(2) Stock 1 investor July 22, 1997 Warrants to purchase -- -- --(3) 67,815 shares of Series D Preferred Stock 10 investors July 23, 1997 Series D Preferred 1,275,338 4,655,001 Cash Stock 1 investor September 3, 1997 Warrants to purchase -- -- --(4) 14,000 shares of Series D Preferred Stock 1 investor April 28, 1998 Warrants to purchase -- -- --(5) 13,187 shares of Series E Preferred Stock 1 investor May 8, 1998 Warrants to purchase -- -- --(6) 56,451 shares of Series E Preferred Stock 8 shareholders June 30, 1998 Common Stock 708,918 -- Exchange for(7) Common Stock of 7Software Corporation 25 investors June 30, 1998 and Series E Preferred 1,648,660 12,777,196 Cash August 11, 1998 Stock 1 investor August 11, 1998 Warrant to purchase -- -- --(8) 2,400,000 shares of Series E Preferred Stock Officers, directors, September 30, Exercise of Options to 111,023 $ 14,455 Cash(9) employees and other 1995 to October purchase Common Stock eligible 31, 1998 participants
- --------------- * As part of the reincorporation of the Company into Delaware, the Company will exchange 3,099,959 shares of its Common Stock, 10,213,553 shares of its redeemable convertible preferred stock and warrants to purchase 2,329,578 shares of its redeemable convertible preferred stock for 3,099,959 shares of Common Stock, 10,213,553 shares of redeemable convertible preferred stock and warrants to purchase 2,329,578 shares of redeemable convertible preferred stock, respectively. (1) Issued to Imperial Bank as additional consideration for a bank line of credit. (2) In connection with the cancellation of previous indebtedness, 70,390 shares of Series C Preferred Stock were issued to Michael W. Hilton and 64,530 shares of Series C Preferred Stock were issued to S. Steven Singh. (3) Issued to Comdisco, Inc. as additional consideration for a promissory note and an equipment lease. (4) Issued to Imperial Bank as additional consideration for a bank line of credit and other financing. (5) Issued to Imperial Bank as additional consideration for additional financing. (6) Issued to Comdisco, Inc. as additional consideration for a promissory note. (7) In connection with the Company's acquisition of 7Software, the Company exchanged 708,918 shares of Common Stock for 7Software's Common Stock. II-3 119 (8) Issued to TRS in connection with TRS's purchase of Series E Preferred Stock. See "Certain Transactions." (9) With respect to the grant of stock options, exemption from registration under the Securities Act was unnecessary in that none of such transactions involved a "sale" of securities as such term is used in Section 2(3) of the Securities Act. All sales of Common Stock made pursuant to the exercise of stock options granted under the stock option plans of the Company or its predecessors were made pursuant to the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated under the Securities Act. All other sales were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investment and who represented to the issuer that the shares were being acquired for investment. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01 -- Form of Underwriting Agreement. 2.01 -- Form of Agreement and Plan of Merger between Company and Concur Technologies, Inc., a Washington corporation.* 2.02 -- Agreement and Plan of Reorganization between Company, PSC Merger Corp., 7Software, Inc., Andrew Dent and Melissa Widner dated June 30, 1998.* 3.01 -- Company's Certificate of Incorporation.* 3.02 -- Company's Certificate of Designation.* 3.03 -- Form of Company's Amended and Restated Certificate of Incorporation to be filed with the Delaware Secretary of State immediately following the Offering.* 3.04 -- Company's Bylaws.* 4.01 -- Specimen Certificate for Company's Common Stock.* 4.02 -- Second Amended and Restated Information and Registration Rights Agreement dated May 29, 1998.* 5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being issued.** 10.01 -- Company's Amended and Restated 1994 Stock Option Plan and related documents.* 10.02 -- Company's 1998 Equity Incentive Plan and related documents.* 10.03 -- Company's 1998 Employee Stock Purchase Plan and related documents.* 10.04 -- Company's 1998 Directors Stock Option Plan and related documents.* 10.05 -- Company's 401(k) Profit Sharing and Trust Plan.* 10.06 -- Form of Indemnity Agreement entered into by Company with each of its directors and executive officers.* 10.07 -- Series D Preferred Stock Purchase Agreement dated July 22, 1997.* 10.08 -- Series E Preferred Stock Purchase Agreement dated May 29, 1998.* 10.09 -- Strategic Marketing Alliance Agreement between Company and American Express Company dated December 17, 1997.*/*** 10.10 -- Co-Branded XMS Service Marketing Agreement between Company and American Express Travel Related Services Company, Inc. ("TRS") dated August 11, 1998.*/*** 10.11 -- Warrant to purchase shares of Company's Series E Preferred Stock issued by Company to TRS dated August 11, 1998.*
II-4 120
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 10.12 -- Voting Agreement among Company and stockholders of Company identified therein dated May 29, 1998.* 10.13 -- Amendment Agreement among Company and stockholders of Company identified therein dated July 30, 1998.* 10.14 -- Facility Lease between Company and CarrAmerica Realty Corporation dated October 31, 1997, as amended on April 10, 1998.* 10.15 -- Letter Agreement between Company and Sterling R. Wilson dated April 21, 1994.* 10.16 -- Letter Agreement between Company and Jon T. Matsuo dated June 20, 1994.* 10.17 -- Letter Agreement between Company and Frederick L. Ingham dated December 5, 1996.* 10.18 -- Letter Agreement between Company and John P. Russo, Jr. dated April 1, 1996.* 10.19 -- Standstill Agreement between Company and TRS dated August 10, 1998.* 10.20 -- Security and Loan Agreement between Company and Imperial Bank dated September 3, 1997. 10.21 -- Addendum to Security and Loan Agreement between Company and Imperial Bank dated September 3, 1997. 10.22 -- Second Amendment to Loan Documents between Company and Imperial Bank dated April 28, 1998. 10.23 -- Bonus Agreement between Company and Melissa Widner and Andrew Dent dated June 30, 1998. 21.01 -- List of Company's subsidiaries. 23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).** 23.02 -- Consent of Ernst & Young LLP, Independent Auditors. 23.03 -- Consent of American Express Company. 23.04 -- Consent of Edward P. Gilligan. 23.05 -- Consent of Russ Fradin. 24.01 -- Power of Attorney* 27.01 -- Financial Data Schedule.*
- --------------- * Previously filed. ** To be filed by amendment. *** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Commission. (b) The following financial statement schedule is filed herewith: Report of Ernst & Young, LLP, Independent Auditors, on Financial Statement Schedule. Schedule II -- Valuation and Qualifying Accounts - --------------- ITEM 17. UNDERTAKINGS. The undersigned Company hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described under Item 14 above, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for II-5 121 indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 122 SIGNATURES Pursuant to the requirements of the Securities Act, the Company has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Redmond, State of Washington, on the 18th day of November, 1998. CONCUR TECHNOLOGIES, INC. By: /s/ S. STEVEN SINGH ------------------------------------ S. Steven Singh President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ S. STEVEN SINGH President, Chief Executive November 18, 1998 - ----------------------------------------------------- Officer and Director S. Steven Singh (principal executive officer) /s/ STERLING R. WILSON Chief Financial Officer and November 18, 1998 - ----------------------------------------------------- Vice President of Operations Sterling R. Wilson (principal financial officer and principal accounting officer) /s/ MICHAEL W. HILTON Chairman of the Board of November 18, 1998 - ----------------------------------------------------- Directors and Chief Michael W. Hilton Technical Officer JEFFREY D. BRODY* Director November 18, 1998 - ----------------------------------------------------- Jeffrey D. Brody NORMAN A. FOGELSONG* Director November 18, 1998 - ----------------------------------------------------- Norman A. Fogelsong MICHAEL J. LEVINTHAL* Director November 18, 1998 - ----------------------------------------------------- Michael J. Levinthal JAMES D. ROBINSON III* Director November 18, 1998 - ----------------------------------------------------- James D. Robinson III
*By /s/ STERLING R. WILSON -------------------------------- Sterling R. Wilson Attorney-in-fact II-7 123 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE We have audited the consolidated balance sheets of Concur Technologies, Inc. as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 1998, and have issued our report thereon dated October 27, 1998 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Seattle, Washington October 27, 1998 S-1 124 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS CONCUR TECHNOLOGIES, INC. SEPTEMBER 30, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS ------------------------ CHARGED TO BALANCE OF CHARGED TO OTHER BEGINNING OF COSTS AND ACCOUNTS -- DEDUCTION -- BALANCE AT END DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ----------- ------------ ---------- ----------- ------------ -------------- Year ended September 30, 1998: Deducted from asset accounts: Allowance for doubtful accounts....... $170,000 $493,304 $ -- $116,703 $546,601 Year ended September 30, 1997: Deducted from asset accounts: Allowance for doubtful accounts....... 125,000 87,000 -- 42,000 170,000 Year ended September 30, 1996: Deducted from asset accounts: Allowance for doubtful accounts....... 18,000 108,197 -- 1,197 125,000 Year ended September 30, 1995: Deducted from asset accounts: Allowance for doubtful accounts....... $ -- $ 25,000 $ -- $ 7,000 $ 18,000 ======== ======== ======== ======== ========
- --------------- (1) Uncollectible accounts written off, net of recoveries. S-2 125 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01 -- Form of Underwriting Agreement. 10.20 -- Security and Loan Agreement between Company and Imperial Bank dated September 3, 1997. 10.21 -- Addendum to Security and Loan Agreement between Company and Imperial Bank dated September 3, 1997. 10.22 -- Second Amendment to Loan Documents between Company and Imperial Bank dated April 28, 1998. 10.23 -- Bonus Agreement between Company and Melissa Widner and Andrew Dent dated June 30, 1998. 21.01 -- List of Company's subsidiaries. 23.02 -- Consent of Ernst & Young LLP, Independent Auditors. 23.03 -- Consent of American Express Company. 23.04 -- Consent of Edward P. Gilligan. 23.05 -- Consent of Russ Fradin.
EX-1.01 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.01 3,100,000 SHARES (1) CONCUR TECHNOLOGIES, INC. COMMON STOCK UNDERWRITING AGREEMENT _____________, 1998 BANCBOSTON ROBERTSON STEPHENS HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. As Representatives of the several Underwriters c/o BancBoston Robertson Stephens 555 California Street Suite 2600 San Francisco, California 94104 Ladies/Gentlemen: Concur Technologies, Inc., a Delaware corporation (the "Company"), and certain stockholders of the Company named in Schedule B hereto (hereinafter called the "Selling Stockholders") address you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (hereinafter collectively called the "Underwriters") and hereby confirm their respective agreements with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 2,900,000 shares of its authorized and unissued Common Stock, $0.001 par value per share, to the several Underwriters. The Selling Stockholders, acting severally and not jointly, propose to sell an aggregate of 200,000 shares of the Company's authorized and outstanding Common Stock to the several Underwriters. The 2,900,000 shares of Common Stock of the Company to be sold by the Company are hereinafter called the "Company Shares" and the 200,000 shares of Common Stock to be sold by the Selling Stockholders are hereinafter called the "Selling Stockholder Shares." The Company Shares and the Selling Stockholder Shares are hereinafter collectively referred to as the "Firm Shares." The Company also proposes to grant to the Underwriters an option to purchase up to 465,000 additional shares of the Company's Common Stock (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. I. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-62299) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and - ----------- (1) Plus an option to purchase up to 465,000 additional shares from the Company to cover over-allotments. 2 Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses") and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if BancBoston Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if BancBoston Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, however, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of BancBoston Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of BancBoston Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto 2 3 up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter or Selling Stockholder furnished to the Company by such Underwriter or Selling Stockholder specifically for use in the preparation thereof. (c) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of its subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and its subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor any of its subsidiaries is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound; and neither the Company nor any of its subsidiaries is in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than Concur Technologies (UK) Ltd., Concur Technologies Pty. Limited and 7Software, Inc. (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification and contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound, (ii) the charter or bylaws of the Company or any of its subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its 3 4 subsidiaries or over their respective properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company or any of its subsidiaries of the transactions herein contemplated, except such as may be required under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), state or other securities or blue sky laws or the bylaws, rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"), all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, any of its subsidiaries or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise or might materially and adversely affect their properties, assets or rights, (ii) might prevent consummation of the transactions provided herein, or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or any of its subsidiaries of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and (as of the date set forth therein) the outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company in all material respects); the Firm Shares and the Option Shares to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares to be purchased from the Company hereunder or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon or will not apply to the consummation of the transactions contemplated on the Closing Date (as defined in Section 3 hereof). No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act state or other securities or blue sky laws or the bylaws, rules and regulations of the NASD. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any of its subsidiaries has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. 4 5 (g) Ernst & Young LLP, which has examined the consolidated financial statements of the Company, together with the related schedules and notes, as of September 30, 1996 and 1997 and for each of the years in the three (3) years ended September 30, 1997 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company and its subsidiaries at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information (other than the selected and summary financial and statistical data included in the Registration Statement), filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or (other than through the exercise of options or warrants disclosed in the Prospectus) outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (vi) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and its subsidiaries has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) the agreements to which the Company or any of its subsidiaries is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and its subsidiaries (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and its subsidiaries has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (j) The Company and its subsidiaries have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or 5 6 any of its subsidiaries that might have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. (k) The Company and its subsidiaries maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (l) To the best of the Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, value added resellers, subcontractors, authorized dealers or international distributors that might be expected to result in a material adverse change in the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; except to the extent described in the Registration Statement and the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and except to the extent described in the Registration Statement and the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (n) The Common Stock has been approved for quotation on The Nasdaq Stock Market's National Market, subject to official notice of issuance. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) 6 7 completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) Neither the Company nor any of its subsidiaries has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer and director of the Company, each Selling Stockholder and, each beneficial owner of 1% or more of the outstanding shares of Common Stock and each beneficial owner of shares of Common Stock issuable upon conversion of the Company's Preferred Stock have agreed in writing that each such person will not, for a period of 180 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancBoston Robertson Stephens. The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions, including the Investor Rights Agreement of the Company (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of BancBoston Robertson Stephens. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws, and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. 7 8 (u) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (w) The minute books of the Company provided to the Underwriters' counsel contain a complete summary of all meetings, consents and actions of the Board of Directors and shareholders of the Company since the time of its incorporation, accurately reflecting all transactions referred to in such minutes in all material respects. II. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Stockholder now has and on the Closing Date will have valid marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing S. Steven Singh and Sterling Wilson as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with ______________________________, as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(h) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Selling Stockholder Shares under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Selling Stockholder Shares under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws and the bylaws, rules and regulations of the NASD) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has 8 9 been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Such Selling Stockholder will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such Selling Stockholder or with respect to which such Selling Stockholder has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such Selling Stockholder, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancBoston Robertson Stephens. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the Selling Stockholder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such Selling Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the securities held by such Selling Stockholder except in compliance with this restriction. (e) Certificates in negotiable form for all Shares and securities which are convertible into Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (f) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a default under any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder, or any Selling Stockholder Shares hereunder, may be bound or, to the best of such Selling Stockholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or over the properties of such Selling Stockholder, or, if such Selling Stockholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Stockholder. (g) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (h) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (i) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder and the Selling Stockholder Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Power of Attorney or set forth in the 9 10 Registration Statement or the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date, was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (j) Such Selling Stockholder (other than Imperial Bank) will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date and will advise one of its Attorneys and BancBoston Robertson Stephens prior to the Closing Date if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(h) would be inaccurate if made as of the Closing Date. (k) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (l) Such Selling Stockholder (other than Imperial Bank) is not aware (without having conducted any investigation or inquiry) that any of the representations and warranties of the Company set forth in Section 2.I. above is untrue or inaccurate in any material respect. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, respectively, at a purchase price of $_____ per share, the respective number of Firm Shares as hereinafter set forth and Selling Stockholder Shares set forth opposite the names of the Company and the Selling Stockholders in Schedule B hereto. The obligation of each Underwriter to the Company and to each Selling Stockholder shall be to purchase from the Company or such Selling Stockholder that number of Firm Shares or Selling Stockholder Shares, as the case may be, which (as nearly as practicable, as determined by you) is in the same proportion to the number of Company Shares or Selling Stockholder Shares, as the case may be, set forth opposite the name of the Company or such Selling Stockholder in Schedule B hereto as the number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10) is to the total number of Firm Shares to be purchased by all the Underwriters under this Agreement. The certificates in negotiable form for the Selling Stockholder Shares (or certificates representing securities convertible into such Shares) have been placed in custody (for delivery under this Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the certificates for the Selling Stockholder Shares of such Selling Stockholder so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for such custody, including the Power of Attorney is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Selling Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if 10 11 such death, incapacity or other event had not occurred, regardless of whether the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters drawn in same-day funds, payable to the order of the Company with regard to the Shares being purchased from the Company, and to the order of the Custodian for the respective accounts of the Selling Stockholders with regard to the Shares being purchased from such Selling Stockholders at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California (or at such other place as may be agreed upon among the Representatives and the Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company and the Attorneys may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $_____ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under all the paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company and the Selling Stockholders that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. THE COMPANY AGREES WITH THE SEVERAL UNDERWRITERS THAT: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereto, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; 11 12 the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; as promptly as practicable upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the reasonable opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare as promptly as practicable upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with 12 13 Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if BancBoston Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. (e) Unless the requirement has otherwise been satisfied in full, the Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of three (3) years after the date hereof, the Company will furnish (or, in the case of unaudited quarterly reports, make available) to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD, (v) every material press release and every material news item or article in respect of the Company or its affairs which was prepared by the Company or any of its subsidiaries and generally released to stockholders; and (vi) any additional information of a public nature concerning the Company or its subsidiaries, or its business which you may reasonably request. During such three (3) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company or any Selling Stockholder to perform any agreement on their respective parts to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b), the Company will reimburse the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith consult with you concerning the timing and substance of a press release or other public 13 14 statement, if any, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of BancBoston Robertson Stephens, effect the Disposition of, directly or indirectly, any Securities other than (i) the sale of the Firm Shares and the Option Shares to be sold by the Company hereunder, (ii) the issuance of shares pursuant to the exercise of outstanding options or warrants, (iii) the issuance of options or shares under the Company's presently authorized 1998 Equity Incentive Plan, 1998 Employee Stock Purchase Plan and 1998 Directors Stock Option Plan (collectively, the "Stock Plans") or (iv) the issuance of shares of Common Stock as consideration for the acquisition of one or more corporations or entities provided that (1) such shares in the aggregate represent less than 5% (or, following 90 days after the date of the Prospectus, 7.5%) of the total number of shares of the Company's Common Stock outstanding immediately after giving effect to the sales of Common Stock pursuant to this Agreement and (2) subject to applicable pooling of interests rules, the Company has taken reasonable steps to ensure that such shares may not be resold during the 180 days after the date of the Prospectus (provided that during the Lock-Up Period, the Company will in any event consult with BancBoston Robertson Stephens concerning any such acquisition a reasonable time in advance thereof). (l) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under any employee benefit plan other than the Stock Plans. 5. EXPENSES. (a) The Company and the Selling Stockholders agree with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Blue Sky Survey and, as applicable, the Agreement Among Underwriters, the Selected Dealer Agreement, any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and blue sky qualifications); and all other expenses directly incurred by the Company and the Selling Stockholders in connection with the performance of their obligations hereunder. Any additional expenses incurred as a result of the sale of the Shares by the Selling Stockholders will be borne collectively by the Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. (ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to 14 15 time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (iii) In addition to their other obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof relating to such Selling Stockholder, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholders, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(c) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c) hereof, they will reimburse the Company and each Selling Stockholder on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such Selling Stockholder for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such Selling Stockholder shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and each such Selling Stockholder within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii), and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b), and 8(c) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(e) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Stockholders herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: 15 16 (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Stockholder or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of counsel for the Company and the Selling Stockholders, dated the Closing Date or such later date on which Option Shares are to be purchased, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company has the corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations or business of the Company and its subsidiaries considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than Concur Technologies (UK) Ltd., Concur Technologies Pty. Limited and 7Software, Inc.; (iv) The authorized and, to such counsel's knowledge, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued, are fully paid and nonassessable and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal, or other similar right; (v) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and, to such counsel's knowledge, will not have been 16 17 issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (vi) The Company has the corporate power and corporate authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (viii) Based solely upon oral advice of the Commission Staff, the Registration Statement has become effective under the Act and, to such counsel's knowledge, (a) no stop order suspending the effectiveness of the Registration Statement has been issued and (b) no proceedings for that purpose have been instituted or are pending or threatened under the Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (in each case other than the financial statements (including notes and supporting schedules) and financial and statistical data included therein, as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (x) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and accurately summarizes such matters and conclusions in all material respects; and the form of certificate evidencing the Common Stock and filed as an exhibit to the Registration Statement complies with Delaware law; (xi) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (xii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (xiii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification and contribution obligations hereunder, concerning which no opinion need be expressed) does not as of the Closing Date (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a breach or violation of any of the terms and provisions of, or constitute a default under, any agreement, instrument or document filed as an exhibit to the Registration Statement or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any United States, Delaware, California, or Washington court, government or governmental agency or governmental body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xiv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of 17 18 its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or blue sky laws or the bylaws, rules or regulations of the NASD in connection with the purchase and the distribution of the Shares by the Underwriters; (xv) To such counsel's knowledge, there are no legal or governmental proceedings pending or overtly threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (xvi) To such counsel's knowledge, neither the Company nor any of its subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xvii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights; (xviii) Each Selling Stockholder which is not a natural person has full right, power and authority to enter into and to perform its obligations under the Power of Attorney and Custody Agreement to be executed and delivered by it in connection with the transactions contemplated herein; the Power of Attorney and Custody Agreement of each Selling Stockholder that is not a natural person has been duly authorized by such Selling Stockholder; the Power of Attorney and Custody Agreement of each Selling Stockholder has been duly executed and delivered by or on behalf of such Selling Stockholder; and the Power of Attorney and Custody Agreement of each Selling Stockholder constitutes the valid and binding agreements of such Selling Stockholder, enforceable in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; (xix) Each of the Selling Stockholders has full right, power and authority to enter into and to perform its obligations under this Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder hereunder; (xx) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of each Selling Stockholder; and (xxi) Upon the delivery of and payment for the Shares to be sold by the Selling Stockholders as provided in this Agreement, and upon registration of such Shares in the stock records of the Company in the names of the Underwriters or their nominees and the issuance by the Company of stock certificates therefor, each of the Underwriters will receive valid title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest (other than any right, title or interest in or to the Shares granted by the Underwriters to any person or entity in connection with the sale of such Shares to the public), provided that (a) the Underwriters are purchasing such Shares in good faith, and (b) the 18 19 Underwriters, together with their nominees (if any), hold such Shares without notice of any adverse claim. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which causes them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and (in the case of an Option Closing) on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including notes and supporting schedules and the other financial and statistical information therein, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or (in the case of an Option Closing) any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. In rendering their opinions, such counsel may rely solely and state that they are relying solely upon the representations and warranties of such Selling Stockholders in this Agreement and the Power of Attorney and Custody Agreement referred to in paragraph (xviii), insofar as any of the same relate to factual matters, above, provided such counsel shall state that they believe that both you and they are justified in relying upon such representations and warranties. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have reasonably requested for the purpose of enabling them to pass upon such matters. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent 19 20 financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and shall be in substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of September 30, 1997 and related consolidated statements of operations, stockholders' equity, and cash flows for the twelve (12) months ended September 30, 1997, (iii) state that Ernst & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 on the financial statements for each of the quarters in the ____-quarter period ended ________________, 1998 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and (v) address other matters agreed upon by Ernst & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of September 30, 1997, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct in all material respects, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement did not, and any amendment or supplement thereto, does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus did not, and any amendment or supplement thereto, does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the 20 21 condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock (other than exercises of options and warrants) or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), results of operations, earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (h) You shall be satisfied that, and you shall have received a certificate, dated the Closing Date, from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date, they have not been informed that: (i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date; or (ii) Such Selling Stockholder has not complied, in any material respect, with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the Closing Date. (i) The Company shall have obtained and delivered to you an agreement from each officer and director of the Company, each Selling Stockholder, the beneficial owners of 1% or more shares of Common Stock and the beneficial owners of any shares of Common Stock issuable upon conversion of the Company's Preferred Stock in writing prior to the date hereof that each such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancBoston Robertson Stephens. The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (j) The Company and the Selling Stockholders shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person)) as to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein, as to the performance by the Company and the Selling Stockholders of its their respective obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. 21 22 All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 465,000 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters drawn in same-day funds, payable to the order of the Company. In the event of any breach of the foregoing, the Company shall reimburse the Underwriters for the interest lost and any other expenses borne by them by reason of such breach. Such delivery and payment shall take place at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306 or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 5(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all 22 23 proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be reasonably satisfactory in form and substance to you and to Underwriters' counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter or Selling Stockholder furnished to the Company by such Underwriter or Selling Stockholder, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E or the Bylaws of the NASD) under the Act, or otherwise, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances 23 24 under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished about such stockholder to the Company or such Underwriter by such Selling Stockholder, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement provided in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which such Selling Stockholder may otherwise have. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company or such Selling Stockholder may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company and each such Selling Stockholder for any legal or other expenses reasonably incurred by the Company and each such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, each Selling Stockholder and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the 24 25 defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that, except as set forth in Section 8(f) hereof, the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company and the Selling Stockholders are responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise required to pay, and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (f) The aggregate liability of each Selling Stockholder under the representations, warranties and agreements contained herein and under the indemnity, contribution and reimbursement agreements contained in the provisions of Section 5 and this Section 8 shall be limited to an amount equal to the lesser of (i) the initial public offering price of the Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters minus the amount of the underwriting discount paid thereon to the Underwriters by such Selling Stockholder (the "Selling Stockholder Proceeds"), less (if and only if clause (ii) immediately below is applicable) the amount of any income taxes described in clause (y) immediately below, and (ii) solely in the case of an indemnity, contribution or reimbursement claim arising out of or based upon any breach of the representation and warranty contained in Section 2.II(l) hereof, the result obtained by (x) multiplying the aggregate liability of all indemnifying parties by the proportion which such Selling Stockholder's Selling Stockholder Proceeds bear to the total of all Selling Stockholder Proceeds of all Selling Stockholders and (y) subtracting therefrom any applicable United States federal and state income taxes incurred by such Selling Stockholder as a result of the sale of such Selling Stockholder's Selling Stockholder Shares pursuant to this Agreement. The Company and such Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the 25 26 parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS to Survive Delivery. All representations, warranties, covenants and agreements of the Company, the Selling Stockholders and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or any of their officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company nor any Selling Stockholder shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, the Selling Stockholders and the other Underwriters for damages, if any, resulting from such default) be liable to the Company or any Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof). 26 27 The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company or any Selling Stockholder shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy, telegram or electronic mail transmission, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy, telegram or electronic mail transmission, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o BancBoston Robertson Stephens, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to Concur Technologies, Inc., 14715 Northeast 95th Street, Redmond, Washington 98052, telecopier number (425) 702-8808, Attention: S. Steven Singh, President and Chief Executive Officer; if sent to 27 28 one or more of the Selling Stockholders, such notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to S. Steven Singh and Sterling Wilson, as Attorneys-in-Fact for the Selling Stockholders, at Concur Technologies, Inc., 14715 Northeast 95th Street, Redmond, Washington 98052, telecopier number (425) 702-8808. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and the Selling Stockholders and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by BancBoston Robertson Stephens on behalf of you. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. 28 29 If the foregoing correctly sets forth the understanding among the Company the Selling Stockholders and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, CONCUR TECHNOLOGIES, INC. By ___________________________________ S. Steven Singh President and Chief Executive Officer SELLING STOCKHOLDERS By ___________________________________ S. Steven Singh By ___________________________________ Sterling Wilson Attorneys-in-Fact for the Selling Stockholders named in Schedule B hereto Accepted as of the date first above written: BANCBOSTON ROBERTSON STEPHENS HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By BANCBOSTON ROBERTSON STEPHENS By ___________________________________ Authorized Signatory 30 SCHEDULE A
NUMBER OF FIRM SHARES UNDERWRITERS TO BE PURCHASED BancBoston Robertson Stephens............................ Hambrecht & Quist LLC.................................... Piper Jaffray Inc........................................ [NAMES OF OTHER UNDERWRITERS]............................ ---------------- Total........................................... 2,900,000 ================
1 31 SCHEDULE B
NUMBER OF COMPANY SHARES COMPANY TO BE SOLD Concur Technologies, Inc............................. Total....................................... 2,900,000 ================
NUMBER OF SELLING STOCKHOLDER NAME OF SELLING STOCKHOLDERS SHARES TO BE SOLD - ---------------------------- ----------------- Michael W. Hilton.................................... 40,000 S. Steven Singh...................................... 56,900 Jon T. Matsuo........................................ 26,400 Rajeev Singh......................................... 18,400 Sterling R. Wilson................................... 22,400 Imperial Bank........................................ 31,900 Timothy Y. Fitzgerald................................ 4,000 ----------------- Total....................................... 200,000 =================
1 EX-10.20 3 SECURITY AND LOAN AGREEMENT 1 EXHIBIT 10.20 IMPERIAL BANK Member FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE) This Agreement is entered into between PORTABLE SOFTWARE CORPORATION, a Washington Corporation (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: 80% of Eligible Accounts and in no event more than $2,000,000.00. Amounts repaid may be reborrowed. 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledgers account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account at maturity, unless accelerated according to the terms herein and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of One & 500/1000ths percent (1.500%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest corporation purposes be considered one year. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. C. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account to the extent of the amount subject to such defense, offset, counterclaim, or other right to avoid or reduce the liability, and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor, and hereby grants to Bank a continuing security interest in all moneys in the Collateral Account referred to in Section 6 hereof as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts. Any collection of Accounts by Borrower, whether in the form of cash, checks, notes, or other instruments for payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank. In the event of default, the proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. Page 1 of 3 2 7. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. 8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is bound or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bond fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Permit representatives of Bank to inspect Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (ii) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (iii) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (iv) Notify Bank of each location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (v) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds or from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time after and during the continuance of an Event of Default without prior notice to Borrower, collect the Accounts and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittance for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commended by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking except for gross negligence or willful misconduct (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may at its option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. Page 2 of 3 3 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower in excess of $50,000, or if any recording or filing of a lien for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. 16. Additional Provisions: Subject to the attached Addendum to Security and Loan Agreement dated September 3, 1997. Executed this 3rd day of September, 1997 PORTABLE SOFTWARE CORPORATION ----------------------------------- (Name of Borrower) IMPERIAL BANK By: [SIG] -------------------------------- (Authorized Signature and Title) By: [SIG] By: [SIG] ---------------------------------- -------------------------------- (Title) (Authorized Signature and Title) Page 3 of 3 EX-10.21 4 ADDENDUM TO SECURITY AND LOAN AGREEMENT 1 EXHIBIT 10.21 ADDENDUM TO SECURITY AND LOAN AGREEMENT ("SECURITY AND LOAN AGREEMENT") BETWEEN PORTABLE SOFTWARE CORPORATION AND IMPERIAL BANK DATED: SEPTEMBER 3, 1997 This Addendum is made and entered into September 3, 1997, between Portable Software Corporation ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on September 2, 1998, subject to Bank's right to renew said commitment in its sole discretion. Any such renewal of the commitment shall not be binding upon Bank unless it is in writing and signed by an officer of the Bank. 2. Within the commitment pursuant to the terms of the Security and Loan Agreement, there shall be a sub-limit of $500,000.00 for the issuance by Bank of Standby and Commercial Letters of Credit for the benefit of Borrower. Borrower agrees that should, for any reason, the Line of Credit not be renewed by Bank, any Letter of Credit outstanding with a maturity date beyond September 2, 1998, will be secured by a Certificate of Deposit with Bank in an amount equal to the face value of the Letter of Credit. 3. In addition to the commitments set forth in the Security and Loan Agreement, Bank commits to advance up to $1,000,000.00 as a three (3) year non-revolving term loan (the "Senior Term Loan"). Borrower may make draws under the Senior Term Loan until February 15, 1999, at which time the outstanding balance will be converted to a two (2) year fully amortizing term loan. Interest on the Senior Term Loan shall be payable monthly and calculated on a 360 day-year basis at one percent (1%) below the Bank's announced Prime Rate (floating), as it may vary from time to time. Principal on the Senior Term Loan will be payable in twenty-four (24) equal monthly payments beginning on March 15, 1999, with final payment due on February 15, 2001. 4. As a condition precedent to Bank's obligation to make any advances to Borrower, Borrower shall, among other things, provide to Bank a subordination agreement covering all existing and any subsequent loan to Borrower by Comdisco Ventures, Inc. in the minimum amount of one million dollars ($1,000,000.00), in form and substance satisfactory to Bank. Payments of interest will be permitted so long as Borrower is in compliance with this Agreement. 1 2 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 5. As a condition precedent to Bank's obligation to make any advances to Borrower, Borrower shall, among other things, (i) provide to Bank a perfected security interest in all it owned patents and trademarks in form and substance satisfactory to Bank and (ii) cause any material copyright registerable works including software to be promptly registered in the U.S. Copyright Office and execute and deliver a mortgage of copyrights and amendments appropriate and acceptable to Bank to perfect Bank's security interest in all proceeds of such works. 6. Bank agrees to amend the interest rate on the Loan Account as follows: Interest on the Loan Account shall be payable monthly and calculated on a 360 day-year basis at one percent (1%) above the Bank's announced Prime Rate (floating), as it may vary from time to time upon Bank's receipt of satisfactory written evidence of Borrower's achievement and maintenance of operating and after-tax profitability for two consecutive quarters. 7. Eligible Accounts shall not include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. b. Accounts due from a customer if more than twenty-five percent (25%) or more of the aggregate amount of accounts of such customer have at that time remained unpaid for more than ninety (90) days from the invoice. c. Accounts with respect to international transactions unless insured or covered by a letter of credit in a manner and form acceptable to the Bank or unless approved by Bank in writing or included in Table I below. Advances against such accounts to be subject to all other restrictions of Eligible Accounts. Approved accounts receivable listed in Table I will not exceed $300,000 at any one time.
Table I - ------- Morgan Stanley (UK) Pfizer (Belgium) Dresdner Kleinwort Benson (UK) Sotheby's (UK) Unysis (UK) Case (France) Citicorp (UK) Paraexel (UK) Tektronix (UK) Merck, Sharpe and Dome (UK)
2 3 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 d. Salesman's accounts for promotional purposes. e. The amount by which any one account exceeds twenty percent (20%) of the total accounts receivable balance. f. Accounts where the account debtor is a seller to borrower, to the extent that a potential offset exists. 8. Borrower represents and warrants that: a. There is no litigation or other proceeding pending or threatened against or affecting Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. The balance sheet of Borrower dated as of June 30, 1997, and the related profit and loss statement for the nine months then ended, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with its request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrower as of the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. c. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. d. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights, patents and license rights of others. 3 4 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 9. Borrower agrees that so long as it is indebted to Bank, it will not, without prior written consent of Bank, which consent will not be unreasonably withheld: a. Make any substantial change in the character of its business; or make any change in its executive management. b. Create, incur, assume or permit to exist any indebtedness for borrowed monies other than loans from Bank except obligations now existing as shown in financial statement dated June 30, 1997, and except those to third party equipment lessors and the debt due to Comdisco Ventures, Inc. ("Permitted Indebtedness"). The debt due to Comdisco Ventures, Inc. to be evidenced by a sale-leaseback agreement, subordination agreement, or equipment leasing facility and may not to exceed $5.0 million in the aggregate, without prior written consent of Bank (such consent will not be unreasonably be withheld) excluding those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any monies due or to become due. c. Create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by it, other than liens for taxes not delinquent, liens directly related to Permitted Indebtedness, and liens in Bank's favor. d. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. e. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or except in the ordinary and normal course of its business, sell (including without limitation the selling of any property or other asset accompanied by the leasing back of the same) any assets including any fixed assets, any property, or other assets necessary for the continuance of its business as now conducted. 4 5 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 f. Declare or pay any dividend, other than in capital stock, or make any other distribution on any of its capital stock now outstanding or hereafter issued or purchase, redeem or retire any of such stock, other than redeeming employees, officers, or directors stock, when they leave Borrower, provided that such payments do not exceed $100,000 in any fiscal year. 10. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a monthly basis. 11. Borrower affirmatively covenants that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, it will: a. At all times maintain a minimum tangible net worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities, less subordinated debt) of not less than $2,000,000.00 presently and hereafter. b. At all times maintain a maximum ratio of total debt to tangible net worth not to exceed 2.50 to 1.00. Total debt to be defined as all the Borrower's liabilities less deferred revenues, warranty allowance, and indebtedness full subordinated to the debt due Bank. c. At all times maintain a quick ratio (defined as the sum of cash plus accounts receivable divided by current liabilities less debt fully subordinated to the debt due to Bank) of at least 1.25:1.00 presently and hereafter. d. Maximum quarterly losses (losses; are not to exceed) $1,450,000 for the quarter ending September 30, 1997; $1,450,000 for the quarter ending December 31, 1997; $1,300,000 for the quarter ending March 31, 1998, and $800,000 for the quarter ending June 30, 1998. e. As soon as it is available, but not later than 10 days after and as of the end of each month, deliver to Bank an accounts receivable aging, accounts payable aging, and borrowing base certificate in form of Exhibit A (attached), and certified by an officer of Borrower. 5 6 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 f. As soon as it is available, but not later than 25 days after and as of the end of each month, deliver to Bank a financial statement consisting of a balance sheet and profit and loss statement in form satisfactory to Bank. g. As soon as it is available, but not later than 25 days after and as of the end of each fiscal quarter, deliver to Bank a Compliance Certificate in the form of Exhibit B (attached) certified by an officer of Borrower. h. As soon as it is available, but not later than 120 days after the end of Borrower's fiscal year, deliver to Bank a report of audit of Borrower's financial statements together with changes in financial position certified without negative qualification by an independent certified public accountant selected by Borrower but acceptable to Bank. i. On a quarterly basis, provide Bank with an alphabetized list of customers including addresses. j. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. k. Maintain public liability, property damage and workers compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to Bank, and certificates naming Bank Loss Payee. l. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and any of its other liabilities at any time existing, except to the extent and so long as: (i) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse affect upon its financial condition or the loss of any right of redemption from any sale thereunder; and 6 7 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 (ii) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. m. Maintain a standard and modem system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. 12. In addition to any other amounts due, or to become due, Borrower agrees to pay Bank: (i) A loan fee in the amount of fifteen thousand dollars ($15,000.00) upon signing of this Agreement. (ii) The reimbursement of all reasonable out of pocket and reasonable legal expenses incurred by Bank for filing, search and similar fees in connection with the Loan or the Loan Documents. 13. Bank to receive a warrant to purchase 35,000 shares of Borrower's Series D Preferred Stock at an initial exercise price of $1.46 per share. The warrant to be on the Bank's form, with a five year maturity inclusive of certain provisions to include, but not limited by, a net exercise provision, anti-dilution protection, piggy-back registration rights and a $30,000 put option (the right to exercise the put option. "Put Right" shall expire two years from the issue date of the warrant.) 14. Borrower will maintain its primary operating and deposit accounts with Bank. Local depository account(s) may be maintained for Borrower's convenience. 15. Default Interest. The default rate applicable to the Loan Account and the Senior Term Debt upon notice shall be five (5) percent per year in excess of the rate otherwise applicable. 7 8 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 16. Late Charges. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent ten (10) or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. 17. Reference Provisions a. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Note ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the real property securing this Agreement, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim 8 9 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. b. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the reference, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. c. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto 9 10 Addendum to Security and Loan Agreement Portable Software Corporation dated September 3, 1997 expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. d. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding." 18. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or delay on the part of Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof. All rights and remedies existing under this agreement or any not issued in connection with a loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. PORTABLE SOFTWARE CORPORATION IMPERIAL BANK "BORROWER" "BANK" BY /s/ [SIG] BY ----------------------------------- ------------------------------ TITLE CFO/VP of Professional Services TITLE -------------------------------- --------------------------- 10 EX-10.22 5 SECOND AMENDMENT TO LOAN DOCUMENTS 1 EXHIBIT 10.22 Second Amendment to Loan Documents This Second Amendment to the Loan Documents listed below (the "Amendment") is entered into as of April 28, 1998, between Imperial Bank ("Bank") and Portable Software Corporation ("Borrower"). RECITALS A. Borrower executed that certain Note in the principal amount of $1,000,000 dated September 3, 1997, in favor of Bank (the "Note"). B. Borrower executed that certain Security and Loan Agreement ("Security and Loan Agreement") and Addendum to Security and Loan Agreement ("Addendum") both dated September 3, 1997, in favor of Bank as amended by that Letter Agreement dated January 15, 1998 (the Security and Loan Agreement and the Addendum herein referred to as "Agreement" and together with the Note the "Loan Documents"). C. Bank and Borrower desire to amend the Note and the Agreement. AGREEMENT 1. The amount of the Note is hereby increased to $3,000,000. 2. The amount of the Senior Term Loan referenced in Paragraph 3 of the Agreement is increased to $3,000,000. 3. A one-time advance under the Note for up to an additional $2,000,000 may be requested by Borrower through May 28, 1998. After May 28, 1998, no further advances under the Note shall be allowed. 4. The amount in Paragraph 4 of the Agreement shall be increased to five million dollars ($5,000,000,00). 5. The amount of "Permitted Indebtedness" due Comdisco Ventures, Inc. as defined in Paragraph 9.b. of the Agreement, shall be increased to $8.5 million. 6. The definition of Liquidity Ratio shall be: the sum of cash plus 80% of Eligible Accounts Receivable (less any outstanding balance under the Line of Credit) divided by the total debt due Bank. 7. The Minimum Sales covenant shall also include $5,750,000 for the fiscal quarter ending December 31, 1998. 2 8. In consideration for the amendments made herewith, Borrower agrees to sign an additional five-year warrant (the "Warrant") for 27,400 shares of Borrower's Series D Preferred Stock at an initial exercise price of $3.73 per share. The Warrant to also include a $75,000 put option (such option to expire two years after the date of the Warrant). 9. Except as provided above, the Loan Documents remain unchanged. 10. This Amendment is effective as of April 28, 1998, and the parties hereby confirm that the Loan Documents as amended are, or shall be, in full force and effect as of said date. PORTABLE SOFTWARE CORPORATION "Borrower" By: [SIG] ------------------------------- Its: CFO/VP of Professional Services ------------------------------- IMPERIAL BANK "Bank" By: [SIG] ------------------------------ Its: AVP ----------------------------- 3 [IMPERIAL BANK LETTERHEAD] November 4, 1998 Mr. Sterling Wilson Vice President of Professional Services & Chief Financial Officer Concur Technologies, Inc. (fka Portable Software Corporation) 6222 185th Avenue NE Redmond, WA 98052 Re: Loan #00700002340/4 $2,000,000 Line of Credit Dear Sterling: Imperial Bank has approved an extension of your credit facility shown above as evidenced by that certain Security and Loan Agreement dated September 3, 1997, from its current maturity of November 2, 1998 to December 2, 1998. Except as modified and extended hereby, the existing documentation as amended concerning your obligations remains in full force and effect. Sincerely, /s/ JAMES M. PETROFF James M. Petroff Assistant Vice President Emerging Growth Industries Accepted and Agreed: CONCUR TECHNOLOGIES, INC. By: [SIG] --------------------------- Title: CFO/VP of Operations ----------------------- Date: 11/4/98 ------------------------- EX-10.23 6 BONUS AGREEMENT 1 EXHIBIT 10.23 BONUS AGREEMENT This BONUS AGREEMENT (this "Agreement") is made and entered into effective as of June 30, 1998 (the "Effective Date") by and between Portable Software Corporation, a Washington corporation ("Portable"), and Melissa Widner and Andrew Dent (each an "Employee"). R E C I T A L S A. Employees will be employed by Portable under the terms and conditions set forth in those certain Employment and Non-Competition Agreements by and between Portable and each Employee dated of even date herewith (the "Employment Agreements"), pursuant to which Employees will be subject to certain non-competition provisions described in Section 4 therein. B. In connection with their employment by Portable, Employees will each sign Portable's Confidential Information Agreement (as defined in Section 6 of the Employment Agreements) (the "Confidential Information Agreements"). C. In consideration of Employees' continued full compliance with their respective obligations set forth in Section 4 of the Employment Agreements and set forth in their respective Confidential Information Agreements, the Company desires to pay to Employees a bonus and provide certain benefits upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing facts and the mutual agreements of the parties contained herein, Portable and Employees hereby agree as follows: 1. Employment. Simultaneously with the execution of this Agreement, Employees are executing and delivering the Employment Agreements. Nothing in this Agreement shall confer on Employees any right to continue in the employ of Portable or any of its subsidiaries, or limit in any way the right of Portable or any of its subsidiaries to terminate Employees' employment at any time, with or without cause. 2. Bonus. Subject to both Employees' continued full compliance with their respective obligations set forth in Section 4 of their respective Employment Agreements and set forth in their respective Confidential Information Agreements (the "Obligations"), Portable agrees to pay each Employee a sum sufficient to provide such Employee with $83,333.33 plus $_____________ (which amount shall be equal to the product of $83,333.33 by the minimum rate established pursuant to Section 1274(d) of the Internal Revenue code of 1986, as amended, for a medium term loan as of July 31, 1998) on an after-tax basis on the first, second and third anniversaries of the Effective Date (the "Bonus"). If either Employee fails to fully comply with the Obligations, Portable will have no obligation to pay the Bonus to that Employee or the other Employee. Notwithstanding anything to the contrary set forth herein, it is expressly understood that in the event Portable fails to pay any installment of the Bonus when due and such nonpayment is not cured by Portable within five (5) business days following Portable's receipt of written notice from Employee, Employee shall have the right to apply all or any part of such 2 delinquent Bonus to satisfy any outstanding indebtedness or other financial obligation of Employee to Portable. Employees shall not be permitted to sell, assign or otherwise transfer their right to receive the Bonus or any interest therein. 3. Miscellaneous. 3.1 Governing Law. The internal laws of the State of Washington (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 3.2 Assignment. This Agreement and all rights hereunder are personal to Employee and may not be transferred or assigned by Employee at any time. Portable may assign its rights, together with its obligations hereunder in connection with any sale, transfer or other disposition of all or substantially all the business and assets of Portable or any of their respective subsidiaries or affiliates, whether by sale of stock, sale of assets, merger, consolidation or otherwise; provided that any such assignee assumes Portable's obligations hereunder. This Agreement shall be binding upon, and inure to the benefit of, the persons or entities who are permitted, by the terms of this Agreement, to be successors, assigns and personal representatives of the respective parties hereto. 3.3 Severability. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 3.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of both parties reflected hereon as signatories. 3.5 Other Remedies. Portable and Employee acknowledge that the services to be provided by Employee are of a special, unique, unusual, extraordinary and intellectual character, which gives them peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, Employee hereby consents and agrees that for any material breach or violation by Employee of any of the provisions of this Agreement, a restraining order and/or injunction may be issued against Employee, in addition to any other rights and remedies Portable may have, at law or equity, including without limitation the recovery of money damages. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 2 3 3.6 Amendment and Waivers. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. 3.7 Attorneys Fees. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorneys' fees to be fixed by the court (including without limitation, costs, expenses and fees on any appeal). The prevailing party will be entitled to recover its costs of suit, regardless of whether such suit proceeds to final judgment. 3.8 Notices. Any notice or other communication required or permitted to be given under this Agreement will be in writing. Notices will be deemed given (i) when personally received, (ii) on the first business day after having been sent by commercial overnight courier with written verification of receipt, or (iii) on the third business day after having been sent by registered or certified mail, return receipt requested, postage prepaid, to the following addresses or at any new address, notice of which will have been given in accordance with this Section 3.8: (i) If to Portable: Portable Software Corporation 6222-185th Street, N.E. Redmond, WA 98122 Attention: Fred Ingham with a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attention: Matthew P. Quilter, Esq. (ii) If to Employee: 7 Software, Inc. 25 Loyola Avenue Menlo Park, CA 94025 with a copy to: Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, CA 94301 Attention: Peter M. Astiz, Esq. 3 4 or to such other address as a party may have furnished to the other parties in writing pursuant to this Section 3.8. 3.8 Construction of Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof will not be construed for or against either party. A reference to a Section or an exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. 3.9 Further Assurances. Each party agrees to cooperate fully with the other party and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by the other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 3.10 Entire Agreement. This Agreement (and the exhibit hereto) constitutes the entire and only agreement and understanding between the parties relating to employment of Employee with Portable and this Agreement supersedes and cancels any and all previous contracts, arrangements or understandings with respect to the specific subject matter hereof; except that the Employment Agreements and each Employee's Confidential Information Agreement shall remain as an independent contract and shall remain in full force and effect according to their terms. [Remainder of this page intentionally left blank] 4 5 IN WITNESS WHEREOF, the undersigned parties have executed this Agreement as of the date first above written. PORTABLE SOFTWARE CORPORATION EMPLOYEES By: ------------------------------- -------------------------------- Sterling Wilson Melissa Widner Chief Financial Officer Andrew Dent [Signature Page to Bonus Agreement] EX-21.01 7 LIST OF COMPANY'S SUBSIDIARIES 1 Exhibit 21.01 List of Subsidiaries of Concur Technologies, Inc. 1. Concur Technologies Pty. Limited, a corporation organized under the laws of Australia. 2. Concur Technologies (UK) Ltd., a corporation organized under the laws of the United Kingdom. 3. 7Software, Inc., a California corporation. EX-23.02 8 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.02 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated October 27, 1998 (except Note 19, as to which the date is November __, 1998) relative to the consolidated financial statements of Concur Technologies, Inc. (the Company) and to the use of our report dated August 14, 1998 relative to the financial statements of 7Software in the Registration Statement (Form S-1 No. 333-62299) and the related Prospectus of the Company. Ernst & Young LLP Seattle, Washington November __, 1998 The foregoing Consent is in the form that will be signed upon shareholder approval of the reverse stock split described in Note 19 to the consolidated financial statements of the Company. Ernst & Young LLP Seattle, Washington November 18, 1998 EX-23.03 9 CONSENT OF AMERICAN EXPRESS COMPANY 1 EXHIBIT 23.03 CONSENT OF AMERICAN EXPRESS COMPANY We consent to the reference to our company under the captions "Summary," "Business--Industry Background" and "Experts" and to the use of our 1997 American Express T&E Management Process Study in the Registration Statement (Form S-1 no. 333-62299) and the related Prospectus of Concur Technologies, Inc. /s/ -------------------------- AMERICAN EXPRESS COMPANY New York, New York November __, 1998 EX-23.04 10 CONSENT OF EDWARD P. GILLIGAN 1 EXHIBIT 23.04 CONSENT OF EDWARD GILLIGAN I hereby consent to my identification as a director nominee of Concur Technologies, Inc. (the "Company") in the Company's Registration Statement on Form S-1 (Reg. No. 333-62299) and the related Prospectus included therein. /s/ EDWARD GILLIGAN -------------------------------- Edward Gilligan New York, New York November 18, 1998 EX-23.05 11 CONSENT OF RUSS FRADIN 1 EXHIBIT 23.05 CONSENT OF RUSS FRADIN I hereby consent to my identification as a director nominee of Concur Technologies, Inc. (the "Company") in the Company's Registration Statement on Form S-1 (Reg. No. 333-62299) and the related Prospectus included therein. /s/ RUSS FRADIN -------------------------------- Russ Fradin Date: November 18, 1998 -----END PRIVACY-ENHANCED MESSAGE-----