-----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, Gz4MmO9JcwPKaaczc1zg6kmFXxj+TxjpDjK6tSmrdNRhgZaAM3X2QrW0XSKvvJP9 JsO4fPN6GuWzEo5UyWtdQw== 0000891618-99-001177.txt : 19990330 0000891618-99-001177.hdr.sgml : 19990330 ACCESSION NUMBER: 0000891618-99-001177 CONFORMED SUBMISSION TYPE: 424A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990329 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: 424A SEC ACT: SEC FILE NUMBER: 333-74685 FILM NUMBER: 99575329 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 424A 1 424(A) FILING 1 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 26, 1999 LOGO 2,900,000 SHARES COMMON STOCK Concur Technologies, Inc. is offering 1,818,620 shares of its common stock and the selling stockholders are selling an additional 1,081,380 shares. Concur's common stock is traded on the Nasdaq National Market under the symbol "CNQR." The last reported sale price of the common stock on the Nasdaq National Market on March 25, 1999 was $36.00 per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------------
PER SHARE TOTAL --------- --------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Concur Technologies............................. $ $ Proceeds to the selling stockholders........................ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Concur has granted the underwriters a 30-day option to purchase up to an additional 435,000 shares of common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on April , 1999. ------------------------------ BANCBOSTON ROBERTSON STEPHENS HAMBRECHT & QUIST U.S. BANCORP PIPER JAFFRAY VOLPE BROWN WHELAN & COMPANY FAC/EQUITIES THE DATE OF THIS PROSPECTUS IS , 1999 2 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE THESE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO "CONCUR," "WE," "OUR" AND "US" REFER TO CONCUR TECHNOLOGIES, INC., TOGETHER WITH ITS SUBSIDIARIES. ------------------------------ TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 4 Special Notice Regarding Forward-Looking Statements......... 14 Use of Proceeds............................................. 15 Price Range of Common Stock................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Selected Consolidated Financial Data........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 37 Management.................................................. 56 Certain Transactions........................................ 67 Principal and Selling Stockholders.......................... 70 Description of Capital Stock................................ 73 Shares Eligible for Future Sale............................. 75 Underwriting................................................ 76 Legal Matters............................................... 78 Experts..................................................... 78 Where You Can Find More Information......................... 78 Index to Consolidated Financial Statements.................. F-1
------------------------- We own or have rights to the product names, trade names and trademarks that we use in conjunction with the sale of our products, including Concur(TM), Concur Technologies(TM), Xpense Management Solution(TM), XMS(TM), CompanyStore(TM), Employee Desktop(TM), and QuickXpense(R). This prospectus also contains product names, trade names and trademarks that belong to other organizations. ------------------------- The 1997 American Express Travel and Entertainment Process Study cited in this prospectus was not prepared with a view to, or in connection with, us or our products or this offering. That study was prepared based on various assumptions, facts and circumstances that may not apply to us or our products. Accordingly, American Express and Concur cannot assure you that the conclusions in that report are applicable to us or our products. American Express and Concur expressly disclaim any duty to update that study, which you should note was issued in 1997. i 3 SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the consolidated financial statements and notes, before deciding to invest in shares of our common stock. Unless we indicate otherwise, all information in this prospectus assumes the underwriters will not exercise their over-allotment option. CONCUR TECHNOLOGIES, INC. We are a leading provider of Intranet-based employee-facing software applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. Our Xpense Management Solution, or XMS, and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment expense reports and front-office procurement requisitions. We recently introduced our Employee Desktop product, which integrates XMS and CompanyStore through a common user interface and provides a business portal through which corporate customers and third parties can deliver other information and services to employees. We believe we are the leading provider of travel and entertainment expense management solutions, based on a combination of the number of customers we serve and the features our solutions provide. Since 1996, we have licensed products to over 175 enterprise customers for use by over 900,000 end users. By automating manual, paper-based processes, our 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. These applications have traditionally targeted discrete functional or department level business processes involving relatively few employees. However, businesses are now seeking similar applications for employee-facing business processes including travel and entertainment expense management, front-office procurement, human resources self-service, time and attendance, 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 on a cost-effective basis. Customers using our 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 Travel and Entertainment Management Process Study, businesses using best-in-class automation that process 1,000 to 5,000 travel and entertainment expense reports per month can achieve savings from $300,000 to $1.5 million per year in processing costs alone. American Express concluded that corporations on average spend $36 per travel and entertainment expense report processed, but can reduce such costs to as little as $8 through best-in-class automation. We believe our customers can achieve these cost savings rapidly because our products are designed to minimize burdens on IT professionals and to maximize employees' ease of use. Because our 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 1 4 customer deployed XMS to over 25,000 employees in less than 90 days, and has since deployed XMS to over 50,000 employees. Employees readily adopt our solutions because they are easy to use, reduce time spent preparing expense reports and supply requisitions, and shorten reimbursement and fulfillment process cycles. Our objective is to be the leading provider of Internet-based employee-facing applications. Our strategy is: - to extend our leadership in travel and entertainment expense management; - to leverage that leadership in marketing our Employee Desktop and front-office procurement applications; - to expand the functionality of our products; - to add new employee-facing applications to our product suite; - to leverage Employee Desktop to sell multiple products; - to increase our international presence; - to develop new relationships with strategic third-parties; and - to offer our solutions as an outsourced enterprise service provider. We sell our products primarily through our direct sales organization. We also have a number of strategic referral relationships. For example, American Express has referred corporate charge card customers seeking a travel and entertainment expense management solution to us. American Express owns a minority equity stake in us and is an affiliate. Automatic Data Processing, or ADP, jointly markets our XMS product and refers potential customers to us as well. Given the broad applicability of our products, we have licensed applications to numerous customers in a wide range of industries. Our customers include: AT&T Gillette Northrop Grumman Allied Signal Guardian Industries Pfizer American Airlines Hearst Corporation Pharmacia & Upjohn Anheuser-Busch J.C. Penney Seagate Technology Case Corporation Lehman Brothers Solutia Computer Sciences Corporation Levi Strauss Sprint Dell Computer Lucent Technologies Texaco DuPont Monsanto Texas Instruments Eastman Kodak Motorola Visio Exxon The New York Times
OUR ADDRESS Our principal executive officers are located at 6222 185th Avenue NE, Redmond, Washington 98052 and our telephone number is (425) 702-8808. Information in our Web site is not part of this prospectus. 2 5 THE OFFERING COMMON STOCK OFFERED BY CONCUR................... 1,818,620 shares COMMON STOCK OFFERED BY SELLING STOCKHOLDERS..... 1,081,380 shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING................. 18,920,261 shares. This is based on the actual number of shares outstanding on February 28, 1999. The number excludes 5,710,233 shares subject to outstanding options or reserved for issuance under our stock and option plans and 2,224,267 shares subject to outstanding warrants. USE OF PROCEEDS............ For working capital and other general corporate purposes, including capital expenditures. See "Use of Proceeds." NASDAQ NATIONAL MARKET SYMBOL................... CNQR SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Our consolidated financial data reflects our acquisition of 7Software, Inc. in June 1998 which resulted in a charge for acquired in-process technology. See Note 3 to Notes to our Consolidated Financial Statements and see the separate financial statements of 7Software included in this prospectus. See Note 13 to Notes to our Consolidated Financial Statements for an explanation of the number of shares used in computing pro forma net loss per share. The balance sheet data at December 31, 1998, as adjusted, gives effect to our sale of 1,818,620 shares at an assumed public offering price of $36.00 per share, and application of the net proceeds to us. See "Use of Proceeds" and "Capitalization."
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1997 1998 ----- ------- ------- ------- -------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues, net......................... $ -- $ 2,128 $ 1,959 $ 8,270 $ 17,159 $ 3,115 $ 6,005 Loss from operations.................. (602) (2,895) (4,958) (5,505) (17,760) (2,190) (5,608) Net loss.............................. (602) (2,890) (4,953) (5,524) (18,074) (2,283) (5,642) Pro forma basic and diluted net loss per share.......................... $ (1.58) $ (0.21) $ (0.40) Shares used in calculation of pro forma basic and diluted net loss per share.......................... 11,419 10,863 13,968
DECEMBER 31, 1998 --------------------- ACTUAL AS ADJUSTED ------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $53,277 $114,446 Working capital............................................. 39,915 101,084 Total assets................................................ 62,877 124,046 Long-term obligations, net of current portion............... 7,351 7,351 Total stockholders' equity.................................. 38,329 99,498
3 6 RISK FACTORS You should carefully consider the risks described below before making any investment decision. The risks described below are not the only ones we face. Additional risks that we are unaware of or that we currently believe are immaterial may become important factors that affect our business. If any of the following risks actually occur, our business, results of operations and financial condition would be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or a part of your investment. OUR SHORT OPERATING HISTORY AND SIGNIFICANT LOSSES MAKE OUR BUSINESS DIFFICULT TO EVALUATE. We are still in the early stages of our development, so evaluating our business operations and our prospects is difficult. We incorporated in 1993 and have incurred net losses in each quarter since then. We shipped our first product in fiscal 1995, and since fiscal 1997 have derived substantially all of our revenues from licenses of our XMS product and related services. To compete effectively, we expect to devote substantial cash, financial and other resources to expanding our sales and marketing, research and development, and professional services organizations. These investments may never produce a profit. We incurred net losses of $5.0 million for fiscal 1996, $5.5 million for fiscal 1997, $18.1 million for fiscal 1998 and $5.6 million for the three months ended December 31, 1998. As of December 31, 1998, we had an accumulated deficit of $37.7 million. We expect to continue to incur net losses for the foreseeable future. Despite substantial net operating loss carryforwards as of December 31, 1998, tax laws may limit their use in the future upon the occurrence of certain events, including a significant change in ownership interests. See "--Our operating results fluctuate widely and are difficult to predict," "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR OPERATING RESULTS FLUCTUATE WIDELY AND ARE DIFFICULT TO PREDICT. In the past our quarterly operating results have fluctuated significantly, and we expect them to continue to fluctuate in the future. Many of the factors causing the fluctuations are listed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." Our products are typically shipped when orders are received, so license backlog at the beginning of any quarter in the past represented only a small portion of that quarter's expected license revenues. This makes license revenues in any quarter difficult to forecast because they are dependent on orders booked and shipped in that quarter. Moreover, we typically recognize a substantial percentage of revenues in the last month of the quarter, frequently in the last week or even the last days of the quarter. Since our expenses are relatively fixed in the near term, any shortfall from anticipated revenues or any delay in the recognition of revenues could result in significant variations in operating results from quarter to quarter. We find it difficult to forecast quarterly license revenues because our sales cycle, from initial evaluation to delivery of software, is lengthy and varies substantially from customer to customer. If revenues fall below our expectations in a particular quarter, our business could be harmed. See "--Our lengthy sales cycle could adversely affect our revenue growth." YEAR 2000 CONSIDERATIONS AMONG OUR CUSTOMERS AND POTENTIAL CUSTOMERS MAY REDUCE OUR SALES. We may experience reduced sales of products as customers and potential customers put a priority on correcting Year 2000 problems and therefore defer purchases of our 4 7 products until later in 2000. Accordingly, demand for our products may be particularly volatile and unpredictable for the remainder of 1999 and early 2000. THE MARKET FOR OUR PRODUCTS IS NEWLY EMERGING AND CUSTOMERS MAY NOT ACCEPT OUR PRODUCTS. The market for employee-facing applications is newly emerging. Enterprises have historically performed the processes addressed by employee-facing applications themselves. Accordingly, our future success will depend on companies adopting third-party employee-facing applications, particularly travel and entertainment expense management and front-office procurement solutions. In addition, companies that have already invested substantial resources in other methods of implementing enterprise processes may be reluctant to adopt a new strategy. Even if companies implement employee-facing applications, they may still choose to design, develop or manage all or part of their process automation internally. Thus, the use of employee-facing applications may not increase significantly in the future, and our products or services may not achieve commercial success. See "Business--Industry Background." WE RELY HEAVILY ON SALES OF ONE PRODUCT. Since 1997, we have generated substantially all of our revenues from licenses and services related to our XMS product. We believe that XMS revenues will continue to account for a large portion of our revenues for the foreseeable future. Our future financial performance will depend upon the successful development, introduction and customer acceptance of new and enhanced versions of XMS and our business could be harmed if we fail to deliver the enhancements to XMS that customers want. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR EXPANSION INTO THE FRONT-OFFICE PROCUREMENT APPLICATION MARKET IS RISKY. We also recently added the CompanyStore front-office procurement application to our product line. To date, we have licensed CompanyStore to only five customers. Our future revenue growth depends on our ability to license CompanyStore to new customers and our existing base of XMS customers. Potential and existing customers may not purchase CompanyStore for a number of reasons, including: - an absence of desired functionality; - the costs of and time required for implementation; - possible software defects; and - a customer's lack of the necessary hardware, software or Intranet infrastructure. Further, we must overcome certain significant obstacles to expand into the front-office procurement automation market, including: - competitors that have more experience and better name recognition; - the experience of our sales and consulting personnel in the front-office procurement automation market is limited; and - our reference accounts in the front-office procurement automation market are limited. 5 8 Our business could be harmed if we fail to deliver the enhancements to CompanyStore that customers want. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE FACE SIGNIFICANT COMPETITION. The market for our products is intensely competitive and rapidly changing. Direct competition comes from independent software vendors of travel and entertainment expense management and front-office procurement applications, and from providers of enterprise resource planning, or ERP, software applications that have or may be developing travel and entertainment expense management and front-office procurement products. Many of our competitors in both the travel and entertainment 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 we do. Moreover, a number of our competitors, particularly major ERP vendors, have well-established relationships with our current and potential customers as well as with systems integrators and other vendors and service providers. These competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than we can. We also face indirect competition from potential customers' internal development efforts and have to overcome their reluctance to move away from existing paper-based systems. See "Business-- Competition." WE HAVE LIMITED EXPERIENCE SELLING OUR PRODUCTS AS A SUITE AND OUR EMPLOYEE DESKTOP MODEL MAY FAIL. We recently introduced Employee Desktop, which integrates XMS and CompanyStore as a suite of applications. Until recently we have not sold our products as a suite, and we do not know whether customers will prefer to buy our products this way. In an effort to increase overall revenues, we expect to offer our integrated suite of applications at prices that will be lower than would be the case for the applications sold separately. This may have the effect of reducing per-user revenues. We also expect that selling our products as a suite will lengthen our sales cycle because the sale is more complex and is more likely to involve information technology specialists at the prospective customer. Because we are inexperienced selling our products this way, we cannot predict whether it will hurt our business. See "--Our lengthy sales cycle could adversely affect our revenue growth." WE MAY EXPERIENCE DIFFICULTIES IN INTRODUCING NEW PRODUCTS AND UPGRADES. We expect to add new employee-facing applications to our product suite by acquisition or internal development, and to develop enhancements to our existing applications. We have experienced delays in the planned release dates of our software products and upgrades, and we have discovered software defects in new products after their introduction. New products or upgrades may not be released according to schedule, or may contain defects when released. Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business. If we do not develop, license or acquire new software products, or deliver enhancements to existing products on a timely and cost-effective basis, our business will be harmed. 6 9 OUR PLAN TO SELL PRODUCTS AS AN INTERNET-BASED ENTERPRISE SERVICE PROVIDER MAY FAIL. In addition to licensing our software applications, we plan to offer them as an Internet-based enterprise service provider, or ESP. We would price solutions on a per-transaction basis or on a subscription basis to companies seeking to outsource their employee-facing business applications. This business model is unproven and represents a significant departure from the strategies traditionally employed by us and other enterprise software vendors. We have no experience selling products or services as an ESP, and our efforts to develop this ESP business may significantly divert our revenues and management time and attention. In connection with our planned ESP business model, we will engage third-party service providers to perform many of the necessary services as independent contractors, and we will be responsible for monitoring their performance. We have limited experience outsourcing services or other important business functions in the past, and independent contractors may not perform those services adequately. If any service provider delivers inadequate support or service to our customers, our reputation could be harmed. In addition, we plan to use resellers to market ESP products. We have no experience utilizing resellers and we may not be successful in this effort. If customers determine that our 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 our products for use on the Internet or on a per-transaction or subscription basis, our business will be harmed. As an outsourced ESP provider, we may regularly receive large amounts of confidential information, including credit card, travel booking and other financial and accounting data through the Internet or extranets, and there can be no assurance that this information will not be subject to computer break-ins, theft and other improper activity that could jeopardize the security of information for which we are responsible. Even if our strategy of offering products to customers over the Internet is successful, some of those Internet customers may be ones that otherwise might have bought our software and services through our traditional licensing arrangements. Any such shift in potential license revenues to the ESP model, which is unproven and potentially less profitable, could harm our business. WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE DEPLOYMENT, WHICH IS IMPORTANT TO OUR FUTURE SUCCESS. To date only a limited number of customers have deployed XMS on a large scale, and no customer has deployed CompanyStore on a large scale. We think that the ability of large customers to roll out our products across large numbers of users is critical to our success. If our customers cannot successfully implement large-scale deployments, or they determine that our products cannot accommodate large-scale deployments, our business would be harmed. IT IS IMPORTANT FOR US TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS. To offer products and services to a larger customer base than we can reach through direct sales, telesales and internal marketing efforts, we depend on strategic referral relationships. If we were unable to maintain our existing strategic referral relationships or enter into additional strategic referral relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our products and services. We would also lose anticipated customer introductions and co-marketing benefits. Our success depends in part on the ultimate success of our strategic referral partners and their ability to market our 7 10 products and services successfully. A significant number of our new XMS sales have come through referrals from American Express, but American Express is not obligated to refer any potential customers to us, and it may enter into strategic relationships with other providers of expense reporting and front office procurement applications. Many of our strategic partners have multiple strategic relationships, and they may not regard us as significant for their businesses. In addition, our strategic partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products or services. Further, our existing strategic relationships may interfere with our ability to enter into other desirable strategic relationships. See "Business--Strategy," "--Sales," "--Marketing" and "--Competition." FUTURE ACQUISITIONS MIGHT HARM OUR BUSINESS. As part of our business strategy, we might seek to acquire or invest in businesses, products or technologies that we feel could complement or expand our business. If we identify an appropriate acquisition opportunity, we might not be able to negotiate the terms of that acquisition successfully, finance it, or integrate it into our existing business and operations. We have completed only one acquisition to date, 7Software, Inc. We may not be able to select, manage or absorb any future acquisitions successfully, particularly acquisitions of companies larger than 7Software. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available cash, including proceeds of this offering, to consummate an acquisition. On the other hand, if we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business. See "--We have broad discretion over use of proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR LENGTHY SALES CYCLE COULD ADVERSELY AFFECT OUR REVENUE GROWTH. Because of the high costs involved, customers for enterprise software products typically commit significant resources to an evaluation of available software applications and require us to expend substantial time, effort and money educating them about the value of our products and services. The time between initial contact with a potential customer and the ultimate sale, our sales cycle, typically ranges between six and nine months. As a result of our lengthy sales cycle, we have only a limited ability to forecast the timing and size of specific sales. Any delay in completing, or failure to complete, sales in a particular quarter or fiscal year could harm our business and could cause our operating results to vary significantly. See "--Our operating results fluctuate widely and are difficult to predict," and "--Year 2000 considerations among our customers and potential customers may reduce our sales." WE DEPEND ON OUR KEY EMPLOYEES. Our success depends on the performance of our senior management, particularly S. Steven Singh, our President and Chief Executive Officer, who is not bound by an employment agreement. Although we maintain key person life insurance on Mr. Singh in the amount of $1 million, the loss of his services would harm our business. If one or more members of our senior management or any of our key employees were to resign, particularly to join or form a competitor, the loss of that personnel and any resulting loss 8 11 of existing or potential customers to that competitor would harm our business. See "Business--Competition," "--Employees" and "Management." WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL, PARTICULARLY SERVICE PERSONNEL. Our success depends on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, sales and consulting personnel in the market segments in which we compete. Many of our competitors for experienced personnel have greater financial and other resources. In particular, we compete for personnel with Microsoft Corporation, which is located in the same geographic area as our headquarters. We also compete for personnel with other software vendors, including ERP vendors, and with consulting and professional services companies. In addition, our customers generally purchase consulting and implementation services. While we have recently established relationships with some third-party providers, we continue to be the primary provider of these consulting and implementation services. It is difficult and expensive to recruit, train and retain qualified personnel to perform these services, and we may from time to time have inadequate levels of staffing to perform these services. As a result, our growth could be limited due to our lack of capacity to provide such services, or we could experience deterioration in service levels or decreased customer satisfaction, any of which would harm our business. See "--We depend on service revenues to increase our overall revenues" and "Business--Employees." WE DEPEND ON OUR DIRECT SALES MODEL. We sell our products primarily through our direct sales force. We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. Our inability to hire competent sales personnel, or our failure to retain them, would harm our business. See "--We depend on our key employees" and "--We must attract and retain qualified personnel, particularly service personnel." In addition, by relying primarily on a direct sales model, we may miss sales opportunities that might be available through other sales channels, such as domestic and international resellers. In the future, we intend to develop indirect distribution channels through third-party distribution arrangements, but we may not be successful in establishing those arrangements, or they may not increase revenues. Furthermore, we plan to use resellers to market our ESP products in particular. We have no experience utilizing resellers to date. The failure to develop indirect channels may place us at a significant competitive disadvantage. See "Business--Competition" and "--Sales." WE DEPEND ON SERVICE REVENUES TO INCREASE OUR OVERALL REVENUES. Our service revenues have increased each year as a percentage of total revenues. Service revenues represented 12.4% of total revenues for fiscal 1996, 23.3% of total revenues for fiscal 1997, 31.8% of total revenues for fiscal 1998 and 32.6% of total revenues for the three months ended December 31, 1998. We anticipate that service revenues will continue to represent a significant percentage of total revenues. To a large extent, the level of service revenues depends upon the ongoing renewals of customer support contracts by our growing installed customer base. Customer support contracts might not be renewed. And, if third-party organizations such as systems integrators become proficient in installing or servicing our products, consulting revenues could decline. Our ability to increase service revenues will depend in large part on our ability to increase the scale of our services organization, including our ability to successfully recruit and train a sufficient number of qualified services personnel. See "--We depend on our key employees," "--We must 9 12 attract and retain qualified personnel, particularly service personnel" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." THERE ARE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Our international operations are subject to a number of risks, including: - costs of customizing products for foreign countries; - laws and business practices favoring local competition; - dependence on local vendors; - compliance with multiple, conflicting and changing governmental laws and regulations; - longer sales cycles; - greater difficulty in collecting accounts receivable; - import and export restrictions and tariffs; - difficulties staffing and managing foreign operations; - multiple conflicting tax laws and regulations; and - political and economic instability. Our international operations also face foreign currency-related risks. To date, most of our revenues have been denominated in U.S. Dollars, but we believe that an increasing portion of our revenues will be denominated in foreign currencies. In particular, we expect that an increasing portion of our international sales may be Euro-denominated. The Euro is an untested currency and may be subject to economic risks that are not currently contemplated. We currently do not engage in foreign exchange hedging activities, and therefore our international revenues and expenses are currently subject to the risks of foreign currency fluctuations. See "--Our operating results fluctuate widely and are difficult to predict" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Revenues from 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 in fiscal 1997, $810,000 in fiscal 1998 and $548,000 in the three months ended December 31, 1998. A key component to our business strategy is to expand our sales and support operations internationally. We employ sales professionals in London and Sydney and intend to establish additional international sales offices, expand our international management, sales and support organizations, and enter into relationships with additional international remarketers. We are in the early stages of developing our indirect distribution channels in markets outside the United States. We may not be able to attract remarketers that will be able to market our products effectively. We must also customize our products for local markets. For example, our ability to expand into the European market will depend on our ability to develop a travel and entertainment expense management solution that incorporates the tax laws and accounting practices followed in Germany and other European countries, and to develop employee-facing applications that support the Euro. Further, if we establish significant operations overseas, we may incur costs that would be difficult to reduce quickly because of employee practices in those countries. 10 13 OUR PRODUCTS MIGHT NOT BE COMPATIBLE WITH ALL MAJOR PLATFORMS, WHICH COULD INHIBIT SALES. We must continually modify and enhance our products to keep pace with changes in hardware and software platforms 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, back-office applications, and browsers and other Internet-related applications could hurt our business. In addition, our products are not currently based upon the Java programming language, an increasingly widely-used language for developing Internet applications. We have made a strategic decision not to develop a fully Java-based product at this time. Accordingly, certain features available to products written in Java may not be available in our products, and this could result in reduced customer demand. See "Business--Products and Technology." WE RELY ON THIRD-PARTY SOFTWARE THAT IS DIFFICULT TO REPLACE. Some of the software we license from third parties would be difficult to replace. This software may not continue to be available on commercially reasonable terms, if at all. The loss or inability to maintain any of these technology licenses could result in delays in the sale of our products and services until equivalent technology, if available, is identified, licensed and integrated, which could harm our business. SOFTWARE DEFECTS OR SECURITY BREACHES COULD DIMINISH DEMAND FOR OUR PRODUCTS. Complex products like ours frequently contain defects or errors that may be detected only when the product is in use. Further, we often render implementation, consulting and other technical services, the performance of which typically involves working with sophisticated software, computing and networking systems, and we could fail to meet project milestones in a timely manner or to meet customer expectations for services as a result of any such defects or services. Our software products may be vulnerable to break-ins, theft or other improper activity that could jeopardize the security of information for which we are responsible. 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 our reputation, increased insurance costs or increased service and warranty costs. To address these problems, we may need to expend significant capital and resources that may not have been budgeted. PRODUCT LIABILITY RISKS. Because customers rely on our products for business-critical processes, any significant defects or errors in our products or services might depress future sales or result in tort or warranty claims. It is possible that the limitation of liability provisions in our contracts may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. We have not experienced any such product liability claims to date, but we could in the future. Further, although we maintain errors and omissions insurance, such insurance coverage may not be adequate to cover us. A successful product liability claim could harm our business. Just defending a suit like this, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel. 11 14 WE HAVE ONLY LIMITED PROTECTION FOR OUR PROPRIETARY TECHNOLOGY AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS. Someone might gain access to our proprietary technology and make unauthorized use of it. We depend upon our proprietary technology, and rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect it. We have also restricted customer access to our source code and required all employees to enter into confidentiality and invention assignment agreements. However, a few of our former technical personnel did not execute such agreements, and we only recently began requiring contractors and temporary employees to execute these agreements. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase our international presence. In addition, third parties may claim that our products infringe theirs. See "Business--Intellectual Property Rights." OUR REVENUE RECOGNITION POLICY MAY CHANGE WHEN DEFINITIVE GUIDANCE IS AVAILABLE. We recognize revenues from sales of software licenses when we sign a non-cancelable license agreement with a customer, the software is shipped, no significant post-delivery vendor obligations remain and collection is deemed probable. We recognize customer support revenues ratably over the contract term (which is typically one year) and recognize revenues for consulting services as such services are performed. We believe our current revenue recognition policies and practices are consistent with applicable accounting standards. However, full guidelines for recently introduced software revenue recognition standards have not yet been issued. Once available, such guidance could lead to unanticipated changes in our current revenue accounting practices, and such changes could significantly reduce our future revenues and earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Results of Operations." YEAR 2000 COMPLIANCE COSTS ARE DIFFICULT TO ASSESS. Based on our assessment to date, we believe the current versions of our software products are capable of adequately distinguishing 21st century dates from 20th century dates. However, our products are generally integrated into enterprise systems involving sophisticated hardware and complex software products, which may not be Year 2000 compliant. We may in the future be subject to claims based on Year 2000 problems in others' products, Year 2000 problems alleged to be found in our products, Year 2000-related issues arising from the integration of multiple products within an overall system, or other Year 2000-related claims. In addition, earlier versions of our products were not Year 2000 compliant, and we do not intend to make them Year 2000 compliant. We also need to ensure Year 2000 compliance of our own internal computer and other systems, to continue testing our software products, to audit the Year 2000 compliance status of our suppliers and business partners, and to conduct a legal audit. We have not completed our Year 2000 investigation and overall compliance initiative, and the total cost of Year 2000 compliance may be material and may harm our business. See "--Year 2000 considerations among our customers may reduce our sales" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." 12 15 WE HAVE BROAD DISCRETION OVER USE OF PROCEEDS. Our management can spend most of the proceeds from this offering in ways with which the stockholders may not agree. We cannot predict that the proceeds will be invested to yield a favorable return. See "Use of Proceeds." WE HAVE BEEN PUBLIC FOR ONLY A SHORT TIME AND OUR STOCK PRICE HAS BEEN VOLATILE. We completed our initial public offering in December 1998. Prior to this there was no trading market for our stock. The market price of our common stock has been highly volatile and is subject to wide fluctuations. We expect our stock price to continue to fluctuate: - in response to quarterly variations in operating results; - in reaction to announcements of technological innovations or new products by us or our competitors; - because of market conditions in the enterprise software industry; and - in reaction to changes in financial estimates by securities analysts, and our failure to meet or exceed the expectations of analysts or investors. OUR EXISTING STOCKHOLDERS CONTROL A MAJORITY OF OUR STOCK. Immediately after the closing of this offering, 55.3% of the outstanding common stock will be owned by our directors and executive officers. As a result, these stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders, including the election of all directors and approval of significant corporate transactions. In addition, TRS holds a warrant to purchase up to 2,100,000 shares of common stock at prices ranging from $33.75 to $85.00 that expires in three tranches through January 2002. See "Principal and Selling Stockholders" and "Certain Transactions." OUR CORPORATE GOVERNANCE STRUCTURE MAY DELAY OR PREVENT OUR ACQUISITION BY ANOTHER COMPANY. Our staggered Board of Directors makes a takeover less likely. Our certificate of incorporation and bylaws 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. These provisions may make it more difficult for a third party to acquire a majority of our voting stock or effect a change in control of us. Agreements with American Express also contain provisions making it more difficult for third parties to acquire a substantial amount of our voting stock or effect a change in control of us. In addition, our board of directors is authorized to issue 5,000,000 shares of preferred stock, without further stockholder approval, that could have preference over the common stock with respect to the payment of dividends and upon our liquidation, dissolution or winding-up. See "Management--Executive Officers and Directors," "Description of Capital Stock" and "Certain Transactions." FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE. If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, in the public after this offering, the market price of our common stock could fall. These sales could also impair 13 16 our ability to raise capital through the sale of equity securities in the future at a price we deem appropriate. Upon completion of this offering, we will have outstanding approximately 18,920,261 shares of common stock, based on shares outstanding on February 28, 1999, and assuming no exercise of the underwriters' over-allotment option. Of these shares, approximately 6,761,102 are currently eligible for sale in the public market. Approximately 11,184,835 shares of common stock are subject to lock-up agreements between the holders of those shares and the representatives of the underwriters, pursuant to which the holders have agreed not to offer, sell, contract to sell or grant any option to purchase or otherwise dispose of common stock until 90 days after the effective date of the registration statement filed in connection with this offering. Following the expiration of this 90-day period, substantially all of the shares subject to the lock-up agreements will become available for immediate resale in the public market, subject to the volume and other limitations of Rule 144. The underwriters have informed us that they reserve the right without announcement to release shares from the lock-up agreements prior to expiration of their terms. See "Shares Eligible for Future Sale." SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss our expectations about our future performance, contain projections of our future operating results of our future financial condition, or state other "forward- looking" information. We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. The risk factors listed in this prospectus, as well as any other cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in these risks factors and elsewhere in this prospectus could have a material and adverse effect on our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline and you could lose all or part of your investment. 14 17 USE OF PROCEEDS We estimate that our net proceeds from the sale of the 1,818,620 shares we are selling in this offering will be approximately $61.2 million, at an assumed public offering price of $36.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be $76.0 million. We will not receive any proceeds from the sale of shares by the selling stockholders. The primary purpose of this offering is to obtain additional working capital. We intend to use the net proceeds of this offering for working capital and other general corporate purposes, including capital expenditures. These include increased domestic and international sales and marketing expenditures, increased research and development expenditures and capital expenditures made in the ordinary course of business. We may use a portion of the net proceeds for the acquisition of or investments in businesses, products and technologies or the establishment of joint ventures that are complementary to our current and future business. We have no present plans, commitments or agreements with respect to any such transactions. However, we do from time to time evaluate such opportunities. Pending such uses, we will invest the net proceeds of this offering in investment-grade, interest-bearing securities. See "Risk Factors--We have broad discretion over use of proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 15 18 PRICE RANGE OF COMMON STOCK Our common stock is traded on the Nasdaq National Market under the symbol "CNQR." The following table sets forth the range of the high and low closing sale prices by quarter as reported on the Nasdaq National Market since December 16, 1998, the date our common stock commenced public trading.
HIGH LOW FISCAL YEAR ENDING SEPTEMBER 30, 1999: ---- ----- First quarter (since December 16, 1998)................ $30 1/2 $19 1/2 Second quarter (through March 25, 1999)................ $41 $25
On March 25, 1999, the last reported sale price for our common stock on the Nasdaq National Market was $36.00 per share. As of February 28, 1999, there were approximately 77 record holders of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not expect to do so in the foreseeable future. We anticipate that any future earnings will be retained by us to develop and expand our business. Any future determination with respect to the payment of dividends will be at the discretion of our board of directors and will depend upon, among other things, operating results, financial condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as our board of directors deems relevant. In addition, we have credit facilities in place that 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." 16 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998 on an actual basis and as adjusted to reflect the receipt of the estimated net proceeds from selling 1,818,620 shares in this offering at an assumed public offering price of $36.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of common stock by the selling stockholders in this offering.
DECEMBER 31, 1998 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term obligations, net of current portion... $ 7,351 $ 7,351 -------- --------- Stockholders' equity: Preferred stock, par value $0.001 per share, 5,000,000 shares authorized, no shares issued or outstanding............................. -- -- Common stock, par value $0.001 per share, 60,000,000 shares authorized, 17,029,732 shares issued and outstanding, actual; 18,848,352 shares issued and outstanding, as adjusted................................ 76,398 137,567 Deferred stock compensation..................... (384) (384) Accumulated deficit............................. (37,685) (37,685) -------- --------- Total stockholders' equity................. 38,329 99,498 -------- --------- Total capitalization..................... $ 45,680 $ 106,849 ======== =========
The outstanding share information set forth above excludes: - 2,161,268 shares issuable upon the exercise of stock options outstanding under our stock option plans, at a weighted average exercise price of $5.20 per share; - 3,371,897 shares reserved for issuance under our 1994 Stock Option Plan, 1998 Equity Incentive Plan, 1998 Directors Stock Option Plan and 1998 Employee Stock Purchase Plan; - 67,025 shares issuable upon exercise of outstanding options assumed by us in connection with the acquisition of 7Software, at a weighted average exercise price of $0.03 per share; - 137,454 shares issuable upon exercise of outstanding warrants with a weighted average exercise price of $5.51 per share; and - 2,100,000 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. See "Management--Director Compensation," "--Employee Benefit Plans," "Certain Transactions" and Notes 3, 9, 11 and 17 of Notes to Consolidated Financial Statements. 17 20 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our 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 our consolidated financial statements 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 our 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 our unaudited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the three months ended December 31, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1998 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements reflect all normal recurring adjustments that, in the opinion of our management, are necessary for a fair presentation of our financial position at December 31, 1998 and for the three month periods ended December 31, 1997 and 1998. The results of operations for the three month period ended December 31, 1998 are not necessarily indicative of future results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations." Our consolidated financial data reflects our acquisition of 7Software in June 1998 which resulted in a charge for acquired in-process technology. See Note 3 of Notes to Consolidated Financial Statements and see the separate financial statements of 7Software included in this prospectus. See Note 13 of Notes to Consolidated Financial Statement for an explanation of the number of shares used in computing pro forma net loss per share. 18 21
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1997 1998 ----- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues, net: Licenses..................... $ -- $ 2,104 $ 1,717 $ 6,347 $ 11,696 $ 2,036 $ 4,045 Services..................... -- 24 242 1,923 5,463 1,079 1,960 ----- ------- ------- ------- -------- ------- ------- Total revenues......... -- 2,128 1,959 8,270 17,159 3,115 6,005 ----- ------- ------- ------- -------- ------- ------- Cost of revenues: Licenses..................... -- 728 386 394 558 82 224 Services..................... -- 673 839 2,269 5,684 1,097 2,453 ----- ------- ------- ------- -------- ------- ------- Total cost of revenues............. -- 1,401 1,225 2,663 6,242 1,179 2,677 ----- ------- ------- ------- -------- ------- ------- Gross profit................... -- 727 734 5,607 10,917 1,936 3,328 ----- ------- ------- ------- -------- ------- ------- Operating expenses: Sales and marketing.......... 111 2,363 2,936 5,896 12,353 2,206 4,687 Research and development..... 425 744 1,793 3,401 6,434 1,083 2,612 General and administrative... 66 515 963 1,815 4,687 837 1,637 Acquired in-process technology................. -- -- -- -- 5,203 -- -- ----- ------- ------- ------- -------- ------- ------- Total operating expenses............. 602 3,622 5,692 11,112 28,677 4,126 8,936 ----- ------- ------- ------- -------- ------- ------- Loss from operations........... (602) (2,895) (4,958) (5,505) (17,760) (2,190) (5,608) Other income (expense), net.... -- 5 5 (19) (314) (93) (34) ----- ------- ------- ------- -------- ------- ------- Net loss....................... $(602) $(2,890) $(4,953) $(5,524) $(18,074) $(2,283) $(5,642) ===== ======= ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share (unaudited)... $ (1.58) $ (0.21) $ (0.40) ======== ======= ======= Shares used in calculation of pro forma basic and diluted net loss per share (unaudited).................. 11,419 10,863 13,968 ======== ======= =======
SEPTEMBER 30, DECEMBER 31, 1998 ----------------------------------------------- -------------------------- 1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED ----- ------- ------- -------- -------- ------------ ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents......... $ 277 $ 2,541 $ 5,685 $ 6,695 $ 15,629 $53,277 $114,446 Working capital (deficit)......... (175) 1,839 4,073 6,183 8,474 39,915 101,084 Total assets...................... 345 3,058 6,759 12,364 25,031 62,877 124,046 Long-term obligations, net of current portion................. 233 125 215 3,687 8,092 7,351 7,351 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) 38,329 99,498
19 22 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. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We are a leading provider of Intranet-based employee-facing software applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. Our Xpense Management Solution, or XMS, and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment expense reports and front-office procurement requisitions. We recently introduced our Employee Desktop product, which integrates XMS and CompanyStore through a common user interface and provides a business portal through which corporate customers and third parties can deliver other information and services to employees. We believe we are the leading provider of travel and entertainment expense management solutions, based on a combination of the number of customers we serve and the features our solutions provide. Since 1996, we have licensed products to over 175 enterprise customers for use by over 900,000 end users. By automating manual, paper-based processes, our products reduce processing costs and enable customers to consolidate purchases with preferred vendors and negotiate vendor discounts. We were incorporated in 1993 and commenced operations in fiscal 1994, initially developing QuickXpense, a retail, shrink-wrapped application that automated travel and entertainment expense reporting for individuals. We first shipped QuickXpense in fiscal 1995 and sold QuickXpense through a combination of retail channels and direct marketing, utilizing a small sales force and no consulting or implementation staff. In response to inquiries from businesses seeking to automate the entire travel and entertainment expense reporting process, including back-office processing and integration to financial systems, we significantly expanded our product development efforts and released XMS, a client-server based enterprise travel and entertainment expense management solution in July 1996. In March 1998, we shipped an Intranet-based version of XMS. While we continue to sell the client-server version of XMS, since its release the Intranet-based version has accounted for a majority of XMS license revenues. We expect to continue to focus product development efforts on the Intranet-based versions of our products. On June 30, 1998, we 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 we acquired it. In connection with the acquisition, we issued 708,918 shares of our common stock in exchange for all the outstanding shares of 7Software. We also converted all of 7Software's outstanding options into options to purchase up to 123,921 shares of our common stock, paid $130,000 to 7Software, and agreed to pay $500,000 to certain shareholders of 7Software. Our total purchase price was valued at $6.2 million, including direct costs of the acquisition. The total purchase price was determined by our 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, we estimated the fair value of our common stock and our stock options issued in the transaction. We 20 23 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 our consolidated financial statements beginning on the acquisition date. In connection with this acquisition, we recorded $5.2 million for in-process technology as an expense in the quarter ended June 30, 1998. In addition, we 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. In January 1999 we introduced Employee Desktop, which provides a common user interface and a common technology platform to integrate our current products and future applications. We plan to offer our products as an Internet-based enterprise service provider on a per-transaction or subscription basis to companies seeking to outsource their employee-facing business applications. We expect that for the foreseeable future the significant majority of our revenues will continue to be derived from our XMS product line and related services. Our 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, and $6.0 million in the three months ended December 31, 1998. Through June 1996, our revenues were derived from licenses of QuickXpense and related services. In July 1996, we released XMS. Substantially all of our revenues since the fourth quarter of fiscal 1996 have been derived from licenses of XMS and related services. Our 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--Our short operating history and significant losses make our business difficult to evaluate," "--Our operating results fluctuate widely and are difficult to predict" and "--We rely heavily on sales of one product." We market our software and services primarily through our 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, and $548,000 in the three months ended December 31, 1998. Historically, as a result of the relatively small amount of international sales, fluctuations in foreign currency exchange rates have not had a material effect on our business. See "Risk Factors--There are risks associated with international operations" and Note 15 of Notes to Consolidated Financial Statements. For fiscal 1998 and prior years, we recognized revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 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, we recognize revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition," or SOP 97-2. SOP 97-2 has been subject to certain modifications and interpretations since its release in October 1997. Most recently in December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, 21 24 With Respect to Certain Transactions" which has been adopted by us without any significant effect on revenue recognition. Further implementation guidelines relating to SOP 97-2 and related modifications may result in unanticipated changes in our revenue recognition practices and such changes could affect our future revenues and earnings. Since inception, we have incurred substantial research and development costs and have invested heavily in the expansion of our sales, marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. The number of our full-time employees increased from 135 as of December 31, 1997, to 251 as of December 31, 1998, representing an increase of 86%. As a result of investments in our infrastructure, we have incurred net losses in each fiscal quarter since inception and, as of December 31, 1998, had an accumulated deficit of $37.7 million. We anticipate that our operating expenses will increase substantially for the foreseeable future as we expand our product development, sales and marketing and professional services staff. In addition, we expect to incur substantial expenses associated with sales personnel, referral fees and marketing programs in future periods as a result of our joint marketing agreements with TRS and ADP. Accordingly, we expect to incur net losses for the foreseeable future. We have 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, we recorded amortization of deferred stock compensation of $409,000 and during the first quarter of fiscal 1999, we recorded amortization of deferred stock compensation of $68,000. We believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicative of future performance. Our 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 we will be successful in addressing such risks and difficulties. In addition, although we have experienced significant revenue growth recently, this trend may not continue. In addition, we may not achieve or maintain profitability in the future. See "Risk Factors--Our short operating history and significant losses make our business difficult to evaluate" and "--Our operating results fluctuate widely and are difficult to predict." 22 25 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------------- -------------- 1996 1997 1998 1997 1998 ------ ----- ------ ----- ----- Revenues, net: Licenses.......................... 87.6% 76.7% 68.2% 65.4% 67.4% Services.......................... 12.4 23.3 31.8 34.6 32.6 ------ ----- ------ ----- ----- Total revenues............ 100.0 100.0 100.0 100.0 100.0 ------ ----- ------ ----- ----- Cost of revenues: Licenses.......................... 19.7 4.8 3.3 2.6 3.7 Services.......................... 42.8 27.4 33.1 35.3 40.9 ------ ----- ------ ----- ----- Total cost of revenues.... 62.5 32.2 36.4 37.9 44.6 ------ ----- ------ ----- ----- Gross margin........................ 37.5 67.8 63.6 62.1 55.4 ------ ----- ------ ----- ----- Operating expenses: Sales and marketing............... 149.9 71.3 72.0 70.8 78.0 Research and development.......... 91.5 41.1 37.5 34.8 43.5 General and administrative........ 49.2 21.9 27.3 26.9 27.3 Acquired in-process technology.... -- -- 30.3 -- -- ------ ----- ------ ----- ----- Total operating expenses............... 290.6 134.3 167.1 132.5 148.8 Loss from operations................ (253.1) (66.5) (103.5) (70.4) (93.4) Other income (expense), net......... 0.3 (0.2) (1.9) (2.9) (0.6) ------ ----- ------ ----- ----- Net loss............................ (252.8)% (66.7)% (105.4)% (73.3)% (94.0)% ====== ===== ====== ===== =====
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 Revenues Our revenues are derived from software licenses and related services. Our revenues were $3.1 million and $6.0 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $2.9 million, or 93%. International revenues were $126,000 and $548,000 for the three months ended December 31, 1997 and 1998, respectively. Our license revenues were $2.0 million and $4.0 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $2.0 million, or 99%. License revenues represented 65.4% and 67.4% of total revenues for the three months ended December 31, 1997 and 1998, respectively. This increase consisted of increased sales of XMS, reflecting the increased market acceptance of XMS, an increase in the size and productivity of the sales force, and the sales related to referrals attributable to our December 1997 strategic marketing alliance agreement with American Express. Our service revenues were $1.1 million and $2.0 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $881,000, or 82%. Service revenues consist primarily of consulting and implementation service fees, maintenance and, to a lesser extent, training services, associated with the increase in licenses of XMS during these periods. Service revenues represented 34.6% and 32.6% of total revenues for the three months ended December 31, 1997 and 1998, respectively. The 23 26 increase in service revenues for the three months ended December 31, 1998 over the three months ended December 31, 1997 reflected increased licenses of XMS in fiscal 1999 as well as revenues recognized with respect to licenses entered into in prior periods. We believe that the percentage of total revenues represented by service revenues in prior fiscal periods is not indicative of levels to be expected in future periods. Due to our limited experience selling CompanyStore, we are uncertain how recognition of service revenues associated with such sales will affect our results of operations in the future. In addition, we expect that the proportion of our service revenues to total revenues will fluctuate in the future, depending in part on our use of third-party consulting and implementation service providers as well as market acceptance of our outsourced enterprise service provider, or ESP, solution. Cost of Revenues Cost of License Revenues. Cost of license revenues includes license fees for sub-licensing third-party software, product media, product duplication, manuals and amortization of capitalized technology and other intangible assets. Our cost of license revenues was $82,000 and $224,000 for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $142,000, or 173%. This increase was principally a result of the amortization of capitalized technology and other intangible assets recorded in connection with the June 1998 acquisition of 7Software, 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 November 1998 release of XMS 4.0. Cost of license revenues represented 4.0% and 5.5% of license revenues for the three months ended December 31, 1997 and 1998, respectively. We expect that the cost of license revenues may increase significantly as a percentage of total revenues and as a percentage of license revenues upon the introduction of our outsourced ESP solution and will fluctuate in the future depending in part on the demand for our current products and our outsourced ESP solution. Cost of Service Revenues. Cost of service revenues includes personnel and other costs related to consulting services, technical support, training and warranty reserves. Our cost of service revenues was $1.1 million and $2.5 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $1.4 million, or 124%. This increase was primarily due to an increase in professional service support personnel to manage and support our growing customer base. Consulting services personnel increased from 21 as of December 31, 1997 to 47 as of December 31, 1998, representing an increase of 26, or 124%. Cost of service revenues was 102% and 125% of service revenues for the three months ended December 31, 1997 and 1998, respectively. Cost of service revenues as a percentage of service revenues may vary between periods due to the mix of services provided by us 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, travel and entertainment and promotional expenses. Our sales and marketing expenses were $2.2 million and $4.7 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $2.5 million, or 113%. This increase primarily reflects our investment in our sales and marketing infrastructure, which included significant personnel-related costs to recruit and hire sales management, sales representatives and sales engineers, trade show expenses, and sales referral fees under our agreements 24 27 with our referral partners, principally American Express. Sales and marketing employees increased from 43 as of December 31, 1997 to 79 as of December 31, 1998, representing an increase of 36, or 84%. Sales and marketing expenses represented 70.8% and 78.1% of total revenues for the three months ended December 31, 1997 and 1998, respectively. We believe that a significant increase in our sales and marketing efforts is essential for us to maintain our market position and further increase acceptance of our products. Accordingly, we anticipate we 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. Our research and development expenses were $1.1 million and $2.6 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $1.5 million, or 141%. This increase was primarily related to the increase in software developers, program management and documentation personnel and outside contractors to support our product development of XMS, CompanyStore, and Employee Desktop. Our research and development employees increased from 40 as of December 31, 1997 to 69 as of December 31, 1998, representing an increase of 29, or 73%. Research and development costs represented 34.8% and 43.5% of total revenues for the three months ended December 31, 1997 and 1998, respectively. We believe that a significant increase in our research and development investment is essential for us to maintain our market position, to continue to expand our product line and to enhance the common technology platform for our suite of products. Accordingly, we anticipate that we 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 our new products and enhancements of existing products, the technological feasibility of the software is not established until substantially all product development is complete. Historically, software development costs eligible for capitalization have been insignificant, and all costs related to internal research and development have been expensed as incurred. General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related costs for our executive, finance, administrative, business development and information services personnel. Our general and administrative expenses were $837,000 and $1.6 million for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $800,000, or 96%. This increase was primarily the result of additional finance, executive, information services and human resources personnel to support the growth of our business, an increase of outside contractors expense associated with increased recruiting efforts and expanded human resources programs, and an increase in the allowance for doubtful accounts related to our increase in revenues. General and administrative costs represented 26.9% and 27.3% of our total revenues for the three months ended December 31, 1997 and 1998, respectively. We believe that our general and administrative expenses will continue to increase as a result of the continued expansion of our administrative staff and expenses associated with being a public company, including annual and other public reporting costs, directors' and officers' liability insurance, investor relations programs and professional services fees. Interest Income and Interest Expense. Interest income was $54,000 and $225,000 for the three months ended December 31, 1997 and 1998, respectively, representing an increase of $171,000, or 317%. This increase reflects the higher cash and short-term investment base as a result of proceeds we received in December 1998 from our initial public offering of our common stock. Interest expense was $135,000 and $222,000 for the 25 28 three months ended December 31, 1997 and 1998, respectively, representing an increase of $87,000, or 64%. This increase was due to additional bank borrowings and higher capital lease obligations during the three months ended December 31, 1998. Provision for Income Taxes. No provision for federal and state income taxes has been recorded because we have experienced net losses since inception which has resulted in deferred tax assets. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset balance. YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 Revenues Our 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. We had no customer that accounted for more than 10% of our revenues in fiscal 1996, 1997 or 1998. Our 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 our 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. Our 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 our 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. Cost of Revenues Cost of License Revenues. 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 26 29 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. Cost of Service Revenues. 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 our product line from QuickXpense to XMS. The increase from 1997 to 1998 was primarily due to an increase in professional services personnel to support our 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. Costs and Expenses Sales and Marketing. 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 fiscal 1998 primarily reflect our investment in our 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 our agreement with our referral partners, principally American Express. Sales and marketing expenses represented 149.9%, 71.3% and 72.0% of our 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. Research and Development. 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 fiscal 1998 were primarily related to the increase in the number of software developers and quality assurance personnel and outside contractors to support our product development and testing activities related to the development and release of both the client-server and Intranet versions of XMS. Our 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 our total revenues in fiscal 1996, 1997 and 1998, respectively. 27 30 General and Administrative. 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 our business during these periods. In addition to increased compensation and related expenses, the increase in general and administrative expenses from fiscal 1997 to fiscal 1998 reflects an increase in the allowance for doubtful accounts related to our increase in revenues, and stock compensation expense, during the period. During fiscal 1998, we recorded deferred stock compensation for the differences between the exercise prices and the deemed fair values of our 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 our total revenues in fiscal 1996, 1997 and 1998, respectively. Income Taxes. As of September 30, 1998, we 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 U.S. tax laws contain 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. We had deferred tax assets, including our 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. 28 31 QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated statement of operations data for the nine quarters in the 27-month period ended December 31, 1998, as well as such data expressed as a percentage of our total revenues for the periods indicated. This data has been derived from our unaudited Consolidated Financial Statements that have been prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of our 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. Our quarterly results have been in the past and may in the future be subject to significant fluctuations. As a result, we believe 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--Our operating results fluctuate widely and are difficult to predict."
QUARTER ENDED --------------------------------------------------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1996 1997 1997 1997 1997 1998 ------------- ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS Revenues, net: Licenses........................ $ 923 $ 1,335 $ 1,829 $ 2,260 $ 2,036 $ 2,818 Services........................ 218 336 564 805 1,079 1,141 ------- ------- ------- ------- ------- ------- Total revenues................ 1,141 1,671 2,393 3,065 3,115 3,959 Cost of revenues: Licenses........................ 40 80 99 175 82 90 Services........................ 317 468 585 899 1,097 1,115 ------- ------- ------- ------- ------- ------- Total cost of revenues........ 357 548 684 1,074 1,179 1,205 ------- ------- ------- ------- ------- ------- Gross profit..................... 784 1,123 1,709 1,991 1,936 2,754 ------- ------- ------- ------- ------- ------- Operating expenses: Sales and marketing............. 1,061 1,378 1,434 2,023 2,206 2,400 Research and development........ 603 787 836 1,175 1,083 1,195 General and administrative...... 322 450 440 603 837 836 Acquired in-process technology.................... -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- Total operating expenses...... 1,986 2,615 2,710 3,801 4,126 4,431 ------- ------- ------- ------- ------- ------- Loss from operations............. (1,202) (1,492) (1,001) (1,810) (2,190) (1,677) Other income (expense), net...... 17 11 (14) (33) (93) (103) ------- ------- ------- ------- ------- ------- Net loss......................... $(1,185) $(1,481) $(1,015) $(1,843) $(2,283) $(1,780) ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES Revenues, net: Licenses........................ 80.9% 79.9% 76.4% 73.7% 65.4% 71.2% Services........................ 19.1 20.1 23.6 26.3 34.6 28.8 ------- ------- ------- ------- ------- ------- Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues: Licenses........................ 3.5 4.8 4.1 5.7 2.6 2.3 Services........................ 27.8 28.0 24.4 29.3 35.3 28.2 ------- ------- ------- ------- ------- ------- Total cost of revenues........ 31.3 32.8 28.5 35.0 37.9 30.5 ------- ------- ------- ------- ------- ------- Gross margin..................... 68.7 67.2 71.5 65.0 62.1 69.5 ------- ------- ------- ------- ------- ------- Operating expenses: Sales and marketing............. 93.0 82.4 59.9 66.0 70.8 60.6 Research and development........ 52.8 47.1 34.9 38.3 34.8 30.2 General and administrative...... 28.2 26.9 18.4 19.7 26.9 21.1 Acquired in-process technology.................... -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- Total operating expenses...... 174.0 156.4 113.2 124.0 132.5 111.9 ------- ------- ------- ------- ------- ------- Loss from operations............. (105.3) (89.2) (41.7) (59.0) (70.4) (42.4) Other income (expense), net...... 1.4 0.7 (0.6) (1.1) (2.9) (2.6) ------- ------- ------- ------- ------- ------- Net loss......................... (103.9)% (88.5)% (42.3)% (60.1)% (73.3)% (45.0)% ======= ======= ======= ======= ======= ======= QUARTER ENDED --------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS Revenues, net: Licenses........................ $ 3,185 $ 3,657 $ 4,045 Services........................ 1,456 1,787 1,960 ------- ------- ------- Total revenues................ 4,641 5,444 6,005 Cost of revenues: Licenses........................ 146 240 224 Services........................ 1,490 1,982 2,453 ------- ------- ------- Total cost of revenues........ 1,636 2,222 2,677 ------- ------- ------- Gross profit..................... 3,005 3,222 3,328 ------- ------- ------- Operating expenses: Sales and marketing............. 3,280 4,467 4,687 Research and development........ 1,884 2,272 2,612 General and administrative...... 1,552 1,462 1,637 Acquired in-process technology.................... 5,203 -- -- ------- ------- ------- Total operating expenses...... 11,919 8,201 8,936 ------- ------- ------- Loss from operations............. (8,914) (4,979) (5,608) Other income (expense), net...... (118) -- (34) ------- ------- ------- Net loss......................... $(9,032) $(4,979) $(5,642) ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES Revenues, net: Licenses........................ 68.6% 67.2% 67.4% Services........................ 31.4 32.8 32.6 ------- ------- ------- Total revenues................ 100.0 100.0 100.0 Cost of revenues: Licenses........................ 3.1 4.4 3.7 Services........................ 32.1 36.4 40.9 ------- ------- ------- Total cost of revenues........ 35.2 40.8 44.6 ------- ------- ------- Gross margin..................... 64.8 59.2 55.4 ------- ------- ------- Operating expenses: Sales and marketing............. 70.6 82.0 78.0 Research and development........ 40.6 41.7 43.5 General and administrative...... 33.4 26.9 27.3 Acquired in-process technology.................... 112.1 -- -- ------- ------- ------- Total operating expenses...... 256.7 150.6 148.8 ------- ------- ------- Loss from operations............. (191.9) (91.4) (93.4) Other income (expense), net...... (2.5) -- (0.6) ------- ------- ------- Net loss......................... (194.4)% (91.4)% (94.0)% ======= ======= =======
29 32 The trends discussed in the annual comparisons of operating results from fiscal 1996 through the first quarter of fiscal 1999 apply generally to the comparison of results of operations for the nine quarters ended December 31, 1998. Our operating expenses for the three month period ended June 30, 1998 exceeded levels that we experienced historically, 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, September 30 and December 31, 1998 increased significantly as a result of: - higher personnel costs; - higher travel and entertainment expenses; - increased use of independent contractors and other outside services for continued product development activities; - higher recruiting and related hiring expenses for additional senior management; and - amortization of deferred stock compensation. Our 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 our control. These factors include: - demand for our products and services; - size and timing of specific sales; - delays in customer orders due to customers' Year 2000 priorities; - level of product and price competition; - timing and market acceptance of new product introductions and product enhancements by us and our competitors; - delays in our new product introductions and enhancements; - changes in pricing policies by us or our competitors; - our ability to hire, train and retain sales and consulting personnel; - the length of our sales cycle; - our ability to establish and maintain relationships with third-party implementation services providers and strategic partners; - the mix of products and services sold, including an anticipated shift to providing our solutions as an ESP; - mix of distribution channels through which products are sold; - changes in our sales force incentives; - software defects and other product quality problems; - personnel changes; - changes in our strategy, including the anticipated development of an ESP strategy; and - budgeting cycles of our customers. We have in the past experienced delays in the planned release dates of our new software products or upgrades, and have discovered software defects in our new products 30 33 after their introduction. Our new products or upgrades may not be released according to schedule, or when released may contain defects. Either of these situations could result in adverse publicity, loss of revenues, delay in market acceptance or claims by customers brought against us, any of which could harm our business. In addition, the timing of individual sales has been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those anticipated by us. The loss or deferral of one or more significant sales may harm our quarterly operating results. Our license revenues in the first quarter of fiscal 1998 were lower than those of the fourth quarter of fiscal 1997. Although first quarter 1999 license revenues were higher than those for the fourth quarter of 1998, in future periods, we expect that 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, we have funded our operations primarily through sales of equity securities and to a lesser degree the use of long-term debt and equipment leases. In December 1998, we completed our initial public offering of common stock and received approximately $37.4 million in cash, net of underwriting discounts, commissions and other offering costs. Prior to our initial public offering, we had 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. Our sources of liquidity as of December 31, 1998 consisted principally of cash and cash equivalents of $53.3 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, and $1.9 million in the three months ended December 31, 1998. For such periods, net cash used by operating activities was primarily a result of funding ongoing operations. Since 1995, our 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, and $378,000 in the three months ended December 31, 1998. We finance the acquisition of property and equipment, primarily computer hardware and software for our increasing employee base as well as for our management information systems, primarily through capital leases. We anticipate that we will experience an increase in our capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. We do not expect to incur significant costs to make our products or internal information systems Year 2000 compliant because we believe such products and information systems are designed to function properly through and beyond the year 2000. See "Risk Factors--Year 2000 considerations among our customers and potential customers may reduce our sales" and "--Year 2000 compliance costs are difficult to assess." Our financing activities provided $7.7 million, $8.6 million and $17.6 million in fiscal 1996, 1997 and 1998, respectively, and $39.6 million in the three months ended December 31, 1998. In fiscal 1996, cash provided by financing activities consisted 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 consisted primarily of $4.6 million received in connection with the 31 34 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 in part 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. In the three months ended December 31, 1998, cash provided by financing activities consisted primarily of $37.4 million from our initial public offering of common stock and $2.6 million from the exercise of warrants offset in part by principal payments on long-term debt of $155,000 and payments on capital lease obligations of $237,000. As of December 31, 1998, we had a line of credit with a bank for $2.0 million, which bearing interest at the lending bank's prime rate plus 1.5%. Borrowings were limited to the lesser of 80% of eligible accounts receivable or $2.0 million and were secured by substantially all of our non-leased assets. As of December 31, 1998, we had not borrowed under the line of credit; however, there were approximately $500,000 in standby letters of credit outstanding. We could borrow approximately $1.5 million under this line as of December 31, 1998. This credit facility was amended in March 1999 to increase the borrowing amount to $4.0 million and to extend the expiration date to March 2000, and is otherwise on substantially the same terms. In September 1997, we entered into a $1.0 million senior term loan facility with the same bank with which we have the line of credit, pursuant to the terms of a security and 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 were interest only through February 15, 1999, at which time we started to pay off the facility in 24 equal monthly principal payments plus interest. The loan agreement contains certain financial restrictions and covenants, with which we are currently in compliance. As of December 31, 1998, the outstanding indebtedness under the loan agreement was $3.0 million. In July 1997, we 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%. 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, which expired on December 31, 1998. The notes are due in varying monthly installments through April 2002, and contain certain restrictions and covenants, with which we are currently in compliance. As of December 31, 1998, the outstanding indebtedness under the subordinated loan agreement was $4.5 million. On August 11, 1998, we issued a warrant to TRS to purchase shares of our Series E preferred stock which, in connection with our initial public offering in December 1998, converted into a warrant to purchase 2,325,000 shares of our common stock. In December 1998, TRS partially exercised the warrant to purchase 225,000 shares at $11.625 per share. Additionally, under the warrant, TRS may acquire 700,000 shares at any time on or before October 15, 1999 at a cash purchase price of $33.75 per share, 700,000 additional shares at any time on or before January 15, 2001 at a cash purchase price of $50.625 per share, and 700,000 shares at any time on or before January 15, 2002 at a cash purchase price of $85.00 per share. 32 35 We currently anticipate that for the foreseeable future we will continue to experience significant growth in our operating expenses related to augmenting our sales and marketing operations, increasing research and development and extending our professional service capabilities. We also anticipate developing new distribution channels, improving our operational and financial systems, entering new markets for our products and services and possibly acquiring or investing in complementary businesses, products or technologies or investing in joint ventures. Such expenditures will be a material use of our cash resources, including a portion of the net proceeds of this offering. We believe that the net proceeds of this offering, together with our existing cash and cash equivalents and available bank borrowings, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through private or public sales of securities, strategic relationships, bank debt, financing under leasing arrangements, or otherwise. If additional funds are raised through the issuance of equity securities, stockholders may experience additional dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition and operating results. Qualitative and Quantitative Disclosures about Market Risk Concur's operating results are sensitive to changes in the general level of U.S. interest rates, particularly since the majority of its cash equivalents are invested in short-term debt instruments while certain portions of its outstanding long-term debt bear interest at variable rates. An increase or decrease in the U.S. interest rate of 1% would result in a change of approximately $425,000 in operating results. 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 Our 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 us to deliver products and services to customers, including our proprietary software systems as well as software supplied by third parties; 33 36 - communications networks such as the Internet and private Intranets; - the internal systems of our customers and suppliers; - software products sold to customers; - the hardware and software systems used internally by us in the management of our business; and - non-information technology systems and services, such as power, telephone systems and building systems. We have established a Year 2000 Compliance 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 our Year 2000 readiness and is applying a phased approach to analyzing our operations and relationships as they relate to the Year 2000 problem. The phases of our Year 2000 program are as follows: (1) establishment of a Year 2000 Task Force; (2) assignment of responsibility for external issues, such as products licensed by us, internal issues, such as systems, facilities, equipment, software and legal audit; (3) inventory of all aspects of our operations and relationships subject to the Year 2000 problem; (4) comprehensive analysis, including impact analysis and cost analysis, of our Year 2000 readiness; and (5) remediation and testing. We have tested our software products and have determined that the currently shipping versions of all of our software products are Year 2000 compliant, consistent with the Year 2000 compliance specifications established by the British Standards Institute's DISC PD-2001. We are evaluating the Year 2000 compliance of our products currently under development. We plan to continue to test our current and future products by applying our Year 2000 compliance criteria and to include any necessary modifications the compliance process reveals. We have completed Phases 1, 2 and 3 of our program. We anticipate completing Phase 4 by May 1999, and Phase 5 by August 1999. Risks Related to Year 2000 Issues Based on our assessment to date, we believe the current versions of our software products are "Year 2000 compliant." However, our 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 our 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 we do not believe we have any obligation under this circumstance given that these customers using our older versions of our 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 we will not be subject to claims or complaints by our customers. Success of our Year 2000 compliance efforts may depend on the success of our customers in dealing with their Year 2000 issues. We sell our 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 us to devote additional resources to resolve underlying problems. 34 37 Although we have not been a party to any litigation or arbitration proceeding to date involving our products or services and related to Year 2000 compliance issues, there can be no assurance that we will not in the future be required to defend our 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 for Year 2000-related damages, including consequential damages, would have a material adverse effect on our business, results of operations and financial condition. In addition, we believe 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 us, 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 our products or services, our business would be materially adversely affected. We are also reviewing our 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 assist us in this initiative, we have retained the services of a Year 2000 consulting firm. To date, we have not encountered any material Year 2000 problems with our computer systems or any other equipment that might be subject to such problems. Our plan for the Year 2000 calls for compliance verification of external vendors supplying software and information systems to us and communication with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. As part of our assessment, we are evaluating the level of validation we will require of third parties to ensure their Year 2000 compliance and expect to circulate letters to our suppliers and other business partners requesting their Year 2000 compliance status. We are 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, our business could be materially adversely affected. We could also experience material adverse effects on our business if we fail to identify all Year 2000 dependencies in our systems and in the systems of our suppliers, customers and financial institutions. Therefore, we plan to develop contingency plans for continuing operations in the event such problems arise, but do not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. We have not completed our Year 2000 investigation, and there can be no assurance that the total cost of Year 2000 compliance will not be material to our business. We may not identify and remediate all significant Year 2000 problems on a timely basis, remediation efforts may involve significant time and expense, and unremediated problems may have a material adverse effect on our business. See "Risk Factors--Year 2000 considerations among our customers and potential customers may reduce our sales" and "--Year 2000 compliance costs are difficult to assess." ACQUISITION OF 7SOFTWARE On June 30, 1998, we 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. 35 38 Based on our initial 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. We estimated the direct costs to achieve technological feasibility to be approximately $307,000. Beyond this period, we 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 our 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, we 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 we believe 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 us in assessing software capitalization, and do not have alternative future uses. We estimated revenues and related expenses for the in-process technology from the acquisition date through the end of our fiscal 2002. Our 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. Our 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 our operating structure. We 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 our weighted average cost of capital, or 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, we have 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 our fiscal 1999. We continue to expect to achieve the forecasted revenue attributable to the in-process project, as set forth in the valuation, when it is released. Because we believe that we will achieve revenue levels and incur product development costs similar to those originally estimated, we expect only slight variations between assumptions and actual results. Therefore, we do not anticipate any material impact on operations or financial position unless the in-process project is not completed. 36 39 BUSINESS The following description contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that may cause such results to differ include those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW We are a leading provider of Intranet-based employee-facing software applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers in the extended enterprise. Our Xpense Management Solution, or XMS, and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment expense reports and front-office procurement requisitions. We recently introduced our Employee Desktop product, which integrates XMS and CompanyStore through a common user interface and provides a business portal through which corporate customers and third parties can deliver other information and services to employees. We believe we are the leading provider of travel and entertainment expense management solutions, based on a combination of the number of customers we serve and the features our solutions provide. Since 1996, we have licensed our products to over 175 enterprise customers for use by over 900,000 end users. By automating manual, paper-based processes, our 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 travel and entertainment expense management, front-office procurement, human resources self-service, time and attendance, 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, or ESP, delivering employee-facing applications through the Internet to reduce customers' up-front costs and IT infrastructure commitments. 37 40 Customers using our products 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 Travel and Entertainment Management Process Study published in 1997 by American Express, a subsidiary of which became one of our stockholders in August 1998, corporations on average spend $36 per travel and entertainment 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. Per transaction savings of this magnitude 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 travel and entertainment 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. We believe 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 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 travel and entertainment 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 travel and entertainment expenses such as airfare, hotel stays and car rentals. We believe that the substantial potential savings from processing cost reductions and vendor discounts, coupled with the emergence of Intranet and Internet technologies, has created a significant demand for employee-facing applications. We further believe that the most successful employee-facing applications will improve the efficiency of travel and entertainment expense management, front-office procurement and other similar business processes and will be: - based on Internet technologies; - rapidly deployable and highly scalable; - offered as part of an integrated suite of related applications; - integrated with enterprises' existing IT infrastructures; and - 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 We are 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. Our XMS and CompanyStore products automate the preparation, approval, processing and data analysis of travel and entertainment expense reports and front-office procurement requisitions. We recently introduced Employee Desktop, which integrates XMS and CompanyStore through a common user interface and provides a business portal through which corporate customers and third parties can deliver other information and services to employees. We believe that we are the leading provider 38 41 of travel and entertainment expense management solutions based on a combination of the number of customers we serve and the features our solutions provide. Since 1996, we have licensed our products to over 175 enterprise customers for use by over 900,000 end users. Our 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. Our products can significantly reduce the amount of labor associated with manual, paper-based travel and entertainment expense management and front-office procurement systems, by automating the process of preparation, approval, processing and data analysis. We believe that companies using our 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 travel and entertainment 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. We believe 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. Our products enable customers to collect and analyze data on travel and entertainment 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. We believe that the savings from improved supplier management can be substantial. For example, one XMS customer informed us that, after implementing XMS, it was able to reduce its annual spending on air travel by 5% to 10%. Improved Cash Management. Our products enable customers to improve their cash management positions and cash forecasting abilities by controlling the timing of payments to travel and entertainment and front-office suppliers and vendors. Improved Policy-Making and Monitoring. Our products facilitate budgeting, policy-making and trend analysis, and monitoring of compliance with corporate policy. Benefits for IT Professionals Rapid Deployment. Our Intranet-based products are designed to be deployed rapidly within today's existing corporate IT infrastructures without requiring modifications to customer systems. We offer applications configured to customer requirements rather than solutions customized on a customer-by-customer basis. Once installed on a customer's Intranet servers, our products can reach employees enterprise-wide. For example, one of our customers deployed XMS to over 25,000 employees within 90 days after the customer began its rollout, and another customer deployed CompanyStore within five weeks. In addition, customers with Employee Desktop can leverage the installation of XMS or CompanyStore to deploy additional applications. Enterprise-Wide Scalability. Our Intranet-based products are designed to reach employees throughout the enterprise, regardless of the organization's size. We have licensed our products to customers seeking to deploy to as few as 100 employees and as many as 135,000 employees, with the largest deployment to date being to over 50,000 employees. 39 42 Leverage of Existing IT Infrastructure. Because most businesses operate in a heterogeneous computing environment, our products are 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. Connectivity to Third Parties. Our 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. Common Technology Platform. Our Employee Desktop product provides a common user interface and a common technology platform to integrate XMS, CompanyStore and future applications. This enables IT personnel to administer employee-facing applications more easily because the data is captured in a central database, and to deploy software applications in the suite, and updates to those applications, from a central location. Benefits for Employees Faster Reimbursement and Order Fulfillment. Our solutions enable businesses to reduce the time required to reimburse employees for their travel and entertainment 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. Our products contain easy-to-use features and functions that reduce the time users spend preparing travel and entertainment expense reports and front-office requisitions. XMS uses corporate credit card information to "prepopulate" a user's expense report automatically. XMS prepopulates expense reports based on past experience and preferences. CompanyStore allows reconciliation of purchasing card transactions. 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. In addition, we believe Employee Desktop makes it easier for employees to learn and utilize XMS and CompanyStore by integrating them through a common user interface. STRATEGY Our objective is to be the leading provider of Internet-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 our strategy include: Extend Leadership Position. We intend to extend our leadership position in travel and entertainment expense management solutions and to leverage that position to sell CompanyStore, our front-office procurement product. In order to accommodate anticipated future demand for our products, we intend to increase the size of our direct sales and telesales organizations significantly. We believe that expanding our sales and marketing organization will enhance our ability to sell our products to new customers globally. We also believe that an expanded sales force will allow us to sell CompanyStore and future applications to our current customers. 40 43 Expand Product Functionality. We plan to continue our innovation and development of advanced features and functionality for Employee Desktop, XMS and CompanyStore. Extend Product Suite. We plan to extend our employee-facing application suite by acquisition and internal development. We expect to target additional employee-facing applications that can offer compelling benefits to the enterprise such as human resources self-service, time and attendance, and facilities management applications. Leverage Employee Desktop to Sell Multiple Applications. We believe that Employee Desktop will improve our ability to sell multiple applications provided by us or by third parties to existing and new customers. Expand International Presence. We believe that considerable untapped demand exists for our products outside of the United States. For fiscal 1998, our international revenues accounted for less than five percent of our total revenues. We intend to accelerate our investment in international sales and marketing in an effort to increase sales of our employee-facing applications worldwide. We also plan to localize our applications for new countries, and add new features and functionality to Employee Desktop, XMS and CompanyStore to accommodate accounting, customs, currency and tax requirements of foreign jurisdictions. Extend Relationships With Strategic Third Parties. We intend to expand our relationships with existing strategic partners and to develop additional relationships with providers of complementary third-party applications and products. We have developed strong relationships with leading corporate charge card providers, payroll processors and systems integration and consulting firms, and intend to establish similar relationships with purchasing card providers, information technology outsourcing companies and telecommunications providers. We intend to integrate CompanyStore with leading front-office supply vendors to provide our customers with greater access to those vendors. Offer Enterprise Service Provider Solutions. In addition to licensing our software, we plan to offer our solutions as an Internet-based ESP on a per-transaction or subscription pricing basis to companies seeking to outsource their employee-facing business applications. We expect that this opportunity will be particularly attractive to middle-market customers with 100-750 licensed end users, which typically have limited IT staffing and budget. We plan to offer our outsourced ESP products starting with XMS in the second half of calendar 1999 and continuing with CompanyStore and Employee Desktop in fiscal 2000. Our strategy involves substantial risk. There can be no assurance that we will be successful in implementing our strategy or that it will lead to achievement of our objectives. If we are unable to implement our strategy effectively, our business would be materially adversely affected. PRODUCTS AND TECHNOLOGY Our current product line consists of: - Employee Desktop, which provides a common user interface to integrate our current products; - XMS, our market-leading travel and entertainment expense management application; and - CompanyStore, our easy-to-use front-office procurement application. 41 44 Substantially all revenues to date have been derived from XMS and related services. We 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, we provide a disconnected Windows-based version of XMS, which is interoperable with the Intranet version of XMS. Since 1996, we have licensed our products to over 175 companies for use by over 900,000 end users. We generally offer licenses for our software based on the number of users or employees at a given enterprise. The typical order size for our products and services ranges from $50,000 to $500,000, with certain transactions that have been greater than $1 million. Employee Desktop Employee Desktop provides a common user interface to integrate XMS and CompanyStore, and provides a business portal through which corporate customers and third parties can deliver other information and services to employees. Employee Desktop improves employee productivity by integrating XMS and CompanyStore with common features, such as the user interface, applications icons, approval reminders, status updates and passwords. Features include frequently asked questions and helpful tips about the applications. It enables IT personnel to easily administer employee-facing applications that are integrated into Employee Desktop, because all the data is captured in a central database, eliminating the need to support, maintain and manage multiple servers and software programs. In addition, IT personnel can deploy the applications in our suite, and deliver updates to those applications from a central location. Concur plans to offer application programming interfaces to allow third party vendors and customers to integrate other employee-facing applications into the Employee Desktop framework. Xpense Management Solution XMS automates the travel and entertainment expense management process, including report preparation, approval, processing and data analysis. Version 5.0 of XMS enables integration with Employee Desktop. Report Preparation. XMS includes a number of features that facilitate report preparation for the end-user. The application uses corporate charge or 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 42 45 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 travel and entertainment 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. 43 46 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 Retains commonly incurred expense Reduces input mistakes information Simplifies receipt entry Reduces queries and dependence on Itemizes hotel receipts automatically accounting department Prevents submission of incomplete reports Built-in attendee lists, mileage Ensures submission of all applicable reimbursement tracking, foreign currency expenses translation Integrates with American Express online Increases employee use of corporate credit travel booking application card - ------------------------------------------------------------------------------------------ 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 Approver notification management resources - ------------------------------------------------------------------------------------------ REPORT PROCESSING - ------------------------------------------------------------------------------------------ FEATURES BENEFITS Integrates travel expense data with Facilitates more efficient use of back-office systems processing 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 Tracks VAT, GST and other foreign taxes accounting 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 - ------------------------------------------------------------------------------------------
44 47 CompanyStore CompanyStore automates the front-office procurement process, including order preparation, approval, processing and data analysis. CompanyStore has been licensed to five customers. Version 5.0 of CompanyStore enables integration with Employee Desktop and adds new features and functionality. See "Risk Factors--Future acquisitions might harm our business" and "--Our expansion into the front-office procurement application market is risky." 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 an "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 enterprise resource planning application 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. 45 48 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 Directs orders to preferred vendors stores preferred vendors and commonly requested goods and services Reduces errors Retains user information, including Detailed product descriptions available shipping 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 Automated approval controls based on user company procedures signing authority Facilitates more efficient use of management resources Increases compliance with corporate policies - ---------------------------------------------------------------------------------------- ORDER PROCESSING - ------------------------------------------- FEATURES BENEFITS Integrates purchasing data with Speeds fulfillment time back-office systems Reduces lost orders Sends approved requisitions directly to vendor or to enterprise's purchasing Facilitates more efficient use of system processing resources Updates requisitioner on order progress Improves consistency of items ordered Purchasing department determines items Allows vendor consolidation available in catalog 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 - -------------------------------------------
46 49 Product Architecture The following diagram illustrates the key features of our product architecture: LOGO Employee Desktop, XMS and CompanyStore, operate on advanced IT platforms and are scalable and configurable. XMS and CompanyStore are built on a multi-tiered architecture and have a separate client, application server and database server built using a COM-based architecture. In addition, a common application server model, the Concur common technology platform, contains all common business logic, including workflow, user management, security, business rules, business intelligence and messaging. The Concur common technology platform contains all of the business logic, is COM-based and is built using Microsoft Visual C++. 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 Oracle databases and integrates with SAP R/3 and Oracle Financials 11.0. We intend 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. SERVICES Our professional services organization was formed in 1996 to offer consulting, customer support and training in connection with licenses of XMS. We believe that 47 50 services are an important part of our success and consequently we have expanded our professional services organization to offer similar services in connection with licenses of Employee Desktop and CompanyStore. See "Risk Factors--We depend on service revenues to increase our overall revenues." Consulting. We offer a variety of consulting services in connection with licenses of our products. Our 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, our consultants install, configure and test the application and integrate it with the customer's existing ERP and employee reimbursement systems. Our consultants also help customers implement bar-coding processes and develop a strategy for the customers' enterprise-wide deployment of the application. Customer Support. We provide product upgrades and customer support through our "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. We also offer Internet-based support that features an on-line knowledge base. Training. We offer a variety of training programs for our products. 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 our headquarters in Redmond, Washington. We also provide training classes for third-party service providers, such as systems integrators. 48 51 CUSTOMERS We have licensed our applications to over 175 enterprise customers in a wide range of industries. The following table lists a selection of our significant customers since fiscal 1996: Technology/Telecommunications/Media AT&T Corp. American Management Systems, Inc. Cambridge Technology Partners Computer Sciences Corporation Dell Computer Corporation The Hearst Corporation Lucent Technologies, Inc. Motorola, Inc. The New York Times Company Quantum Corporation Reuters Limited Seagate Technology, Inc. Sprint Corporation Texas Instruments Incorporated The Times Mirror Company Tivoli Systems, Inc. Visio Corporation Industrial/Manufacturing Allied Signal Inc. Case Corporation E.I. du Pont de Nemours and Company Guardian Industries Corporation Monsanto Company Northrop Grumman Corporation PPG Industries, Inc. Solutia, Inc. Pharmaceutical/Health Care Baxter Heathcare Corporation Columbia/HCA Healthcare Corporation Merck, Sharpe & Dohme Limited Pfizer Inc. Pharmacia & Upjohn Co. Tenet Healthcare Corporation Consumer Anheuser-Busch Companies Inc. Avon Products, Inc. Eastman Kodak Company The Gap, Inc. The Gillette Company J.C. Penney Company, Inc. Levi Strauss & Co. Maytag Corporation Financial Services ABN Amro Holding N.V. Bear Stearns & Co. Inc. Comdisco, Inc. Dresdner Kleinwort Benson J & H Marsh & McLennan, Inc. Lehman Brothers Inc. Royal Insurance Energy and Natural Resources Amerada Hess Corporation Broken Hill Proprietary Company Limited Exxon Corporation Occidental Petroleum Corporation Texaco Inc. Other American Airlines, Inc. Battelle Memorial Institute Harvard College J. Walter Thompson Ontario Ministry of Labour No customer accounted for 10% or more of our total revenues in fiscal 1996, 1997 and 1998. The following case studies, which are based solely on information supplied by the respective subject companies and which we believe to be accurate in all material respects, illustrate how selected companies have used our products and services to address their travel and entertainment expense management and front-office procurement needs: Guardian Industries Corporation. 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 49 52 invested in filling out expense reports, and a lack of visibility into enterprise-wide travel and entertainment spending. Guardian implemented our 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 travel and entertainment 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. 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 travel and entertainment 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 automated its travel and entertainment 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 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 travel and entertainment 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. 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. Visio recently licensed Employee Desktop and XMS. SALES We sell our software primarily through our domestic direct sales organization, with sales professionals located in the metropolitan areas of Atlanta, Boston, Chicago, Columbus, Dallas, Denver, Los Angeles, New York, Redmond, St. Louis, San Francisco 50 53 and Washington, D.C. We also have sales professionals in Toronto, London and Sydney. The field sales force is complemented by direct telesales and telemarketing representatives based at our headquarters in Redmond, Washington. Technical sales support is provided by sales engineers located in several of the field offices. We currently intend to add a significant number of sales representatives and sales engineers in other domestic and international locations. We use a remarketer in New Zealand and plan to expand our remarketing channel to other international markets. The remarketer receives a referral fee from us for marketing our products, and provides post-sale implementation and support of the Company's products. See "Risk Factors--We depend on our direct sales model." Since our products affect employees throughout the enterprise, our 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--Our lengthy sales cycle could adversely affect our revenue growth." Strategic Marketing and Referral Relationships We have 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 travel and entertainment expense management software solution to us. TRS has agreed to be a strategic marketer for the ESP version of XMS. ADP, Inc., a subsidiary of Automatic Data Processing, Inc., has agreed to refer potential customers for travel and entertainment expense management software products and services exclusively to us. We and ADP also agreed to jointly market our travel and entertainment expense report processing products and services to ADP customers. Our existing strategic relationships generally do not, and any future strategic relationships may not, afford us any exclusive marketing or distribution rights. Many of our strategic partners have multiple strategic relationships, and we may not be regarded as significant for their own businesses. In addition, our strategic partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products or services. Further, our existing strategic relationships may interfere with our ability to enter into other desirable strategic relationships. Any inability to maintain our strategic relationships or to enter into additional strategic relationships may have a material adverse effect on our business. See "Risk Factors--It is important for us to establish and maintain strategic relationships" and "Certain Transactions." MARKETING Our marketing efforts are directed at promoting our integrated suite of applications under Employee Desktop, extending our leadership position in travel and entertainment expense management applications and increasing our market share for CompanyStore. Our marketing programs are targeted at accounting, finance, purchasing and travel executives, and are focused on creating awareness of, and generating interest in, our products. We engage in a variety of marketing activities, including developing and executing co-advertising and co-marketing strategies designed to leverage our existing strategic relationships, targeting additional strategic relationships, managing and maintaining our Web site, issuing newsletters and direct mailings, creating and placing advertisements, 51 54 conducting public relations campaigns, and establishing and maintaining close relationships with recognized industry analysts. We are an active participant in technology-related conferences and demonstrate our products at trade shows targeted at accounting, finance, purchasing and travel executives. We believe that demand is increasing, and will continue to increase, for employee-facing applications such as those sold by us. We may not be able to expand our sales and marketing staff, either domestically or internationally, to take advantage of any increase in demand for employee-facing applications. Our failure to expand our sales and marketing organization or other distribution channels could materially adversely affect our business. See "Risk Factors--We depend on our key employees" and "--We must attract and retain qualified personnel, particularly service personnel." PRODUCT DEVELOPMENT We have been an innovator and leader in the development of employee-facing enterprise applications. We believe that we were one of the first to introduce an integrated suite of employee-facing applications, and one of the first to introduce a commercially successful travel and entertainment expense reporting application. We also believe that we pioneered a number of features that are now common throughout the travel and entertainment expense reporting field, such as prepopulation with corporate credit card transactions and automatic itemization of hotel bills. Our software development staff is responsible for enhancing our existing products and expanding our product line. We believe 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. We expect that we will increase our product development expenditures substantially in the future. Our current product development activities focus on product enhancements to Employee Desktop, XMS, CompanyStore and the Concur common technology platform that standardizes the software architecture underlying all applications in the suite. We plan to offer our applications through the Internet as an outsourced ESP starting with XMS in the second half of calendar 1999 and to provide CompanyStore and Employee Desktop as an ESP offering in fiscal 2000. These development efforts may not be completed within our anticipated schedules, and if completed, they may not 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 our business. See "Risk Factors--We may experience difficulties in introducing new products and upgrades" and "--Our plan to sell products as an Internet-based enterprise service provider may fail." COMPETITION The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our primary source of direct competition comes from independent software vendors of travel and entertainment expense management and front-office procurement applications, and from providers of enterprise resource planning, or ERP, software applications that have or may be developing travel and expense management and front-office procurement products. We also face indirect competition from potential customers' 52 55 internal development efforts and have to overcome their reluctance to move away from existing paper-based systems. Our major competitors in the travel and entertainment 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 travel and entertainment expense management products, and Oracle Corporation has developed a front-office procurement product. These companies have begun to sell these products along with their ERP application suites. Our major competitors in the front-office procurement field include Ariba Technologies, Inc., Clarus Corporation, Commerce One, Inc., Harbinger Corporation, Intelisys Electronic Commerce, LLC, Netscape Communications Corporation, Trilogy Development Corporation and TRADE'ex Electronic Commerce Systems, Inc. We also expect to face competition from new entrants including those ERP providers that do not already market a travel and entertainment 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 ERP application suites. We believe that the principal competitive factors considered in selecting travel and entertainment expense management and front-office procurement applications are functionality, interoperability with existing IT infrastructure, price and an installed referenceable base of customers. We learned from our 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, we believe that we have a competitive advantage relative to competing solutions. With respect to functionality, we believe that we offer a product with more features than other competing products, and that we have often been the first to offer new and innovative features, such as prepopulation of transaction reports based on credit card information. Significantly, we believe we were one of the first providers of a suite of employee-facing applications, and we were the first provider of an Intranet-based travel and entertainment 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 our competitors have chosen to develop their Intranet-based applications using Java, which we believe is difficult to deploy on a large scale within today's corporate IT infrastructure. With respect to price, we position XMS as the premium product compared to the competition. We believe that this positioning does cause us to lose some potential transactions to competitors based on price. Finally, we believe that we have a larger customer base, spread across a wider variety of industries, than our primary competitors. We believe that this large installed customer base helps us to secure additional customers. Many of our competitors in both the travel and entertainment 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. Moreover, a number of our competitors, particularly major ERP vendors, have well-established relationships with our current and potential customers as well as with systems integrators and other vendors and service providers. 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 we can. 53 56 It is also possible that new competitors or alliances among competitors or other third parties may emerge and rapidly acquire significant market share. We expect that competition in our 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 our business. We may not be able to compete successfully against current or future competitors and the competitive pressures we face may materially adversely affect our business. See "Risk Factors--Our expansion into the front-office procurement application market is risky," "--We face significant competition" and "--It is important for us to establish and maintain strategic relationships." INTELLECTUAL PROPERTY RIGHTS Our success depends upon our proprietary technology. We rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information. For example, we license rather than sell our software to customers and require licensees to enter into license agreements that impose certain restrictions on licensees' ability to utilize the software. We currently hold no patents and do not have any patent applications pending. There can be no assurance that any of our copyrights or trademarks will not be challenged and invalidated. As part of our confidentiality procedures, we enter into non-disclosure agreements with certain of our employees, consultants, corporate partners, customers and prospective customers. We also enter into license agreements with respect to our technology, documentation and other proprietary information. Such licenses are generally non-transferable and have a perpetual term. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology that we consider proprietary and third parties may attempt to develop similar technology independently. In particular, we provide our licensees with access to object code versions of our software, and to other proprietary information underlying our licensed software. Policing unauthorized use of our 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. While we are unable to determine the extent to which piracy of our 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 our proprietary rights to the same extent as do the laws of the United States. Overall, the protection of our proprietary rights may not be adequate and our competitors may independently develop similar technology. We are not aware that our products, trademarks, copyrights or other proprietary rights infringe the proprietary rights of third parties. Third parties may assert infringement claims against us in the future with respect to current or future products. Further, we expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. From time to time, we hire or retain employees or consultants, including through acquisition, who have worked for independent software vendors or other companies developing products similar to those offered by us. Such prior employers may claim that our products are based on their products and that we have misappropriated their intellectual property. Any such claims, with or without merit, could cause a significant diversion of management attention, result in costly and protracted 54 57 litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which would have a material adverse effect upon our business. See "Risk Factors--We have only limited protection for our proprietary technology and we may be subject to claims of infringement." EMPLOYEES As of February 28, 1999, we had approximately 271 full-time employees, of whom seven were based in the United Kingdom, one in Canada and one in Australia. These employees included 69 engaged in research and development, 88 in sales and marketing, 84 in consulting, training and technical support and 30 in administration and finance. No employees are known by us to be represented by a collective bargaining agreement and we have never experienced a strike or similar work stoppage. We consider our relations with our employees to be good. Our ability to achieve our financial and operational objectives depends in large part upon our continuing ability to attract, integrate, retain and motivate highly qualified sales, technical and managerial personnel. Competition for such qualified personnel in our industry is intense, particularly in the Seattle area in which our headquarters is located and particularly with respect to software development, marketing and management personnel. In addition, competitors may attempt to recruit our key employees. There can be no assurance that we will be able to attract or retain employees in the future. We are a party to employment agreements with certain of our employees. See "Risk Factors--We depend on our key employees," "--We must attract and retain qualified personnel, particularly service personnel" and "Management--Employment Agreements." FACILITIES Our principal administrative, sales, marketing and research and development facility is located in Redmond, Washington and consists of approximately 80,000 square feet of office space held under a lease that expires in May 2005. As of February 28, 1999, we also leased sales offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, New York, St. Louis, San Francisco, Sydney and London. For a discussion of certain risks associated with our anticipated need for additional office space. LEGAL PROCEEDINGS We are not a party to any currently pending material legal proceedings. 55 58 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors:
NAME AGE POSITION ---- --- -------- S. Steven Singh..................... 37 President, Chief Executive Officer and Director Michael W. Hilton................... 35 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 Executive Vice President of Operations Rajeev Singh........................ 30 Executive Vice President of Products Michael Watson...................... 51 Executive Vice President of Professional Services Bruce A. Chatterley................. 36 Executive Vice President and General Manager, eService Jeffrey D. Brody(1)................. 39 Director Norman A. Fogelsong(1).............. 47 Director Michael J. Levinthal(2)............. 44 Director James D. Robinson III(2)............ 63 Director Russell P. Fradin................... 43 Director Edward P. Gilligan.................. 39 Director
- ------------------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. S. Steven Singh has served as our President and Chief Executive Officer since February 1996. Mr. Singh served as our Chairman of the board of directors from our inception until February 1996. Prior to joining us as an officer, Mr. Singh was General Manager of the Contact Management Division at Symantec Corporation 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, or CSI, a personal computer software publisher. Prior to joining CSI, Mr. Singh co-founded Eshani Corporation, 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, our Executive Vice President of Products. Michael W. Hilton co-founded Concur in August 1993 and has served as our Chief Technical Officer since 1996. Mr. Hilton has served as a member of our board of directors since our founding, and as Chairman of the board since February 1996. Before co-founding Concur, 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. 56 59 Jon T. Matsuo joined us in July 1994 and currently serves as our Executive Vice President of Worldwide Sales. Prior to joining us, 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. Sterling R. Wilson joined us in May 1994 and currently serves as our Chief Financial Officer and Executive Vice President of Operations. Prior to joining us, 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 Concur in August 1993 and currently serves as our Executive Vice President of Products. Previously, Mr. Singh acted as our Director of Product Management. Prior to co-founding Concur, 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, our President and Chief Executive Officer. Michael Watson joined us in August 1998 and currently serves as our Executive Vice President of Professional Services. Prior to joining us, 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. Bruce A. Chatterley is expected to join us in April 1999 to serve as our Executive Vice President and General Manager of eService. Prior to joining us, Mr. Chatterley served in various positions, most recently Vice President of Product Management, at Ameritech Corporation, a telecommunications company, from July 1994 to March 1999. Mr. Chatterley also served as Director of New Opportunity Development, Small Business Group, at US West, a telecommunications company, from February 1989 to June 1994. Mr. Chatterley holds a B.S.S.A. in Business Public Affairs from Central Michigan University and an M.B.A. from The American University, Kogod College of Business Administration. Jeffrey D. Brody has served as a member of our board of directors since October 1994. Since April 1994, Mr. Brody has been employed by Brentwood Venture Capital, 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. 57 60 Norman A. Fogelsong has served as a member of our 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, 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 and several private technology companies. Michael J. Levinthal has served as a member of our 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., Symphonix Devices, Inc., and several private technology companies. James D. Robinson III has served as a member of our 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, First Data Corporation, and several private companies. Russell P. Fradin has served as a member of our board of directors since March 1999. In 1996, Mr. Fradin joined ADP, where he served first as Senior Vice President before becoming President, Employer Services North America. 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 has served as a member of our board of directors since February 1999. 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. Our bylaws 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 our executive officers, the long-term strategy of employee compensation, the types of stock and other compensation plans to be 58 61 used by us 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 our independent auditors to review the adequacy of our 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 our auditors, and reviews and makes recommendations to the board of directors regarding the fairness of any proposed transaction between us and any officer, director or other affiliate. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the board of directors was at any time since our formation an officer or employee of Concur. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or the Compensation Committee of our board of directors. Mr. Brody is a Managing Member of Brentwood VIII Ventures, LLC, the General Partner of Brentwood Affiliates Fund II, L.P. Several of Mr. Brody's Co-Managing Members of Brentwood VIII Ventures, LLC are also General Partners of Brentwood VI Ventures, L.P., the General Partner of Brentwood Associates VI, 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 our Series A preferred stock at a price of $1.30 per share, 312,500 shares of our Series B preferred stock at a price of $1.60 per share, 237,500 shares of our Series C preferred stock at a price of $2.00 per share, 135,378 shares of our Series D preferred stock at a price of $3.65 per share and 72,123 shares of our Series E preferred stock at a price of $7.75 per share. Mr. Brody also purchased 3,871 shares of our 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, 1998 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 our Series C preferred stock at a price of $2.00 per share, 130,193 shares of our Series D preferred stock at a price of $3.65 per share and 72,090 shares of our Series E preferred stock at a price of $7.75 per share. All of our outstanding preferred stock converted into our common stock upon our initial public offering in December 1998. DIRECTOR COMPENSATION Our directors 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. Our board of directors adopted the 1998 Directors Stock Option Plan in August 1998 and reserved a total of 240,000 shares of our common stock for issuance thereunder. Our stockholders approved this Directors Plan in September 1998. Members of our board of directors who are not our employees are eligible to participate in the Directors Plan. Option grants under the Directors Plan are automatic and the exercise price of the options must equal the fair market value of our common stock on the date of grant. 59 62 Each eligible director is automatically granted an option for 20,000 shares of our common stock on the date he or she becomes a member of the board of directors. Eligible directors who were members of our board of directors prior to our initial public offering each received an option for 20,000 shares on the effective date of the initial public offering. To date, Messrs. Brody, Fogelsong, Levinthal, Robinson and Fradin have each received options for 20,000 shares of our common stock. Mr. Gilligan is not permitted to accept such stock option grants under policies of his employer, TRS. On the date of each annual meeting of stockholders, each eligible director who has served continuously as a member of our board of directors since the date of his or her original option grant is automatically granted an option for 8,000 shares of our common stock. All options granted under the Directors Plan 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 us either as a director or a consultant. In the event of a merger or consolidation in which we are not the surviving corporation, the sale of all or substantially all of our assets, or certain other corporate transactions as set forth in the Directors Plan, the vesting of all options granted under the Directors Plan accelerates and the options become exercisable in full. If a director does not exercise his or her options within seven months after the corporate transaction, the options will expire. Options may be granted pursuant to the Directors Plan until December 2008. The board of directors may terminate or amend the Directors Plan at any time. The Directors Plan may be administered by the full board of directors or by the board's Compensation Committee. 60 63 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation awarded to, earned by or paid for services rendered to us in all capacities during fiscal 1997 and fiscal 1998 by our Chief Executive Officer and our 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 1998 200,000 140,529 200,000 Officer Sterling R. Wilson............. 1997 140,874 52,354 10,400 Chief Financial Officer and 1998 150,000 83,459 52,000 Executive Vice President of Operations Jon T. Matsuo.................. 1997 131,566 91,700 10,400 Executive Vice President of 1998 150,000 157,989 52,000 Worldwide Sales Michael W. Hilton.............. 1997 133,000 49,700 -- Chairman of the Board and 1998 132,000 95,330 52,000 Chief Technical Officer Rajeev Singh................... 1997 92,282 44,169 10,000 Executive Vice President of 1998 115,000 108,027 52,000 Products
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. We have not granted any stock appreciation rights. 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 Concur. See "--Employee Benefit Plans." All options were granted at an exercise price equal to the fair market value of our common stock at the time of grant. We granted a total of 196,580 options to all employees during fiscal 1997 and 746,414 options to all employees during fiscal 1998. The potential realizable values were computed by (a) multiplying the number of shares of common stock subject to a given option by our initial public offering price of $12.50 per share in December 1998, (b) assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the remainder of the ten-year term of the option and (c) subtracting from that result the 61 64 aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------------- VALUE AT ASSUMED ANNUAL NUMBER OF PERCENTAGE OF RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM FISCAL OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------- NAME YEAR GRANTED FISCAL YEAR PER SHARE DATE 5% 10% ---- ------ ---------- ------------- -------------- ---------- ---------- ---------- S. Steven Singh...... 1997 -- --% $ -- -- $ -- $ -- 1998 200,000 26.8 0.375 10/22/07 3,803,321 5,819,869 Sterling R. Wilson... 1997 10,400 5.3 0.20 10/23/06 189,989 276,587 1998 52,000 7.0 0.375 10/22/07 988,863 1,513,166 Jon T. Matsuo........ 1997 10,400 5.3 0.20 10/23/06 189,989 276,587 1998 52,000 7.0 0.375 10/22/07 988,863 1,513,166 Michael W. Hilton.... 1997 -- -- -- -- -- -- 1998 52,000 7.0 0.375 10/22/07 988,863 1,513,166 Rajeev Singh......... 1997 10,000 5.1 0.20 10/23/06 182,682 265,949 1998 52,000 7.0 0.375 10/22/07 988,863 1,513,166
On December 14, 1998, we granted options to purchase 100,000 shares of our common stock at an exercise price of $12.50 per share, to each of Messrs. S. Singh, Wilson, Matsuo, Hilton and R. Singh. 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. Mr. Matsuo exercised options to purchase 8,000 shares of our common stock at $0.10 per share in June 1998. The fair market value of our common stock at the time of such exercise was $6.20, as determined by the board of directors. The value of unexercised in-the-money options are based on an assumed fair market value of our common stock at September 30, 1998 of $12.50 per share less the exercise price.
VALUE REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED AT EXERCISE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($) FISCAL ON LESS EXERCISE --------------------------- --------------------------- NAME YEAR EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------ -------- -------------- ----------- ------------- ----------- ------------- S. Steven Singh...... 1997 -- $ -- 71,250 108,750 $ 879,225 $1,341,975 1998 -- -- 116,250 263,750 1,434,525 3,211,675 Sterling R. Wilson... 1997 -- -- -- 10,400 -- 127,920 1998 -- -- 4,983 57,417 61,291 697,129 Jon T. Matsuo........ 1997 -- -- 180,000 10,400 2,232,000 127,920 1998 8,000 48,800 176,983 57,417 2,194,091 697,129 Michael W. Hilton.... 1997 -- -- -- -- -- -- 1998 -- -- -- 52,000 -- 630,500 Rajeev Singh......... 1997 -- -- -- 10,000 -- 123,000 1998 -- -- 4,792 57,208 58,942 694,558
62 65 EMPLOYMENT AGREEMENTS We and Mr. Matsuo are parties to a letter agreement dated June 20, 1994 governing his employment with us. Under the agreement, we paid to Mr. Matsuo an initial annual salary of $90,000, which was to be increased to $105,000 following our 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 we make available to employees in comparable positions, and was granted an option to purchase 104,000 shares of common stock. Mr. Matsuo's employment is voluntary and may be terminated by us or Mr. Matsuo at any time with or without cause or notice. We and Mr. Wilson are parties to a letter agreement dated April 21, 1994 governing his employment with us. Under the agreement, we paid to Mr. Wilson an annual initial salary of $90,000, which was to be increased to $105,600 following our 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 we make available to employees in comparable positions, and was granted an option to purchase 80,000 shares of common stock. We also paid Mr. Wilson's costs to relocate to Seattle. Mr. Wilson's employment is voluntary and may be terminated by us or Mr. Wilson at any time with or without cause or notice. We and Mr. Watson are parties to a letter agreement dated June 24, 1998 governing his employment with us. Under the agreement, we agreed to pay Mr. Watson an annual salary of $160,000, with possible bonuses of up to $80,000 per year. In Mr. Watson's first year of employment by us, $10,000 per quarter of the possible bonus will be guaranteed provided that Mr. Watson is an employee of Concur on the bonus payment dates. In addition, Mr. Watson was granted an option to purchase 80,000 shares of common stock. We also agreed to pay a one-time relocation allowance of $20,000. We and Mr. Chatterley are parties to a letter agreement dated March 2, 1999 governing his employment with us. Under the agreement, we agreed to pay Mr. Chatterley an annual salary of $200,000, with a target bonus of $100,000 per year. In addition, we agreed to grant Mr. Chatterley an option to purchase up to 225,000 shares of our common stock at an exercise price equal to market value on his first day of employment with us which is expected to be in April 1999. The option will become exercisable as to 80,000 shares on the first day of his employment with us, and the remainder will become exercisable as to 25% after one year and as to the balance in equal monthly increments over the next three years. We also agreed to reimburse Mr. Chatterley for relocation expenses and up to $20,000 in real estate closing costs associated with acquiring a home in the Seattle area. EMPLOYEE BENEFIT PLANS 1994 Stock Option Plan Our board of directors and stockholders approved the 1994 Stock Option Plan in April 1994. Just prior to our December 1998 initial public offering, there were 2,760,000 shares of our common stock reserved for issuance under this plan. The 1994 Option Plan provides for grants of both incentive stock options and non-qualified stock options. The 1994 Option Plan terminated in December 1998, when the 1998 Equity Incentive Plan became effective. As a result, no further options have been granted or will be granted under the 1994 Option Plan. However, termination of the 1994 Option Plan did not affect outstanding options, and as of February 28, 1999, options to purchase 1,373,430 shares of our common stock were outstanding under the 1994 Option Plan. 63 66 1997 Stock Option Plan of 7Software In connection with our acquisition of 7Software, we assumed the 1997 Stock Option Plan of 7Software and all options outstanding under that plan at the closing of the acquisition. No options will be granted in the future under the 7Software Plan. As of February 28, 1999, options to purchase 35,216 shares of our common stock were outstanding under the 7Software plan. 1998 Equity Incentive Plan Our board of directors adopted the 1998 Equity Incentive Plan in August 1998, and our stockholders approved it in September 1998. The 1998 Equity Incentive Plan became effective in December 1998. Our board of directors reserved 3,240,000 shares of our common stock for issuance under the 1998 Equity Incentive Plan, and the following additional shares will become available for issuance under the 1998 Equity Incentive Plan: - any shares that are subject to options granted under the 1994 Option Plan or the 1998 Equity Incentive Plan that expire or terminate for any reason without being exercised; - any shares that are issued pursuant to an option under the 1994 Option Plan or the 1998 Equity Incentive Plan that we repurchase upon termination of the optionholder's employment; - any shares that are issued under a restricted stock award under the 1998 Equity Incentive Plan that we repurchase or that are forfeited upon the termination of the awardholder's employment; - any shares that are subject to a stock bonus award under the 1998 Equity Incentive Plan that terminates without shares being issued. In addition, all of the shares of our common stock which remained available for issuance under the 1994 Option Plan when the 1998 Equity Incentive Plan became effective, became available for issuance under the 1998 Equity Incentive Plan. The 1998 Equity Incentive Plan will terminate in August 2008, unless it is terminated sooner in accordance with the terms of the 1998 Equity Incentive Plan. The 1998 Equity Incentive Plan authorizes the award of incentive stock options, non-qualified stock options, restricted stock awards and stock bonuses. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. All other awards may be granted to our employees, officers, directors, consultants, independent contractors and advisors, subject to applicable federal securities laws. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of non-qualified stock options must be equal to at least 85% of the fair market value of the common stock on the date of grant. The maximum term of options granted under the 1998 Equity Incentive Plan is ten years. The 1998 Equity Incentive Plan is administered by the Compensation Committee, which currently consists of Mr. Brody and Mr. Fogelsong, both of whom are "non-employee directors" under applicable 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 Equity Incentive Plan and any agreement made thereunder, to grant awards and to make all other determinations necessary or advisable for the administration of the 1998 Equity Incentive Plan. The Compensation Committee may, 64 67 with the consent of optionees, issue new options in exchange for the surrender and cancellation of any outstanding options. The Compensation Committee in its discretion may permit payment for stock options or restricted stock: - in cash; - by cancellation of our indebtedness to the participant; - by surrender of shares that meet specific criteria set forth in the 1998 Equity Incentive Plan; - by tender of a full recourse promissory note; - by waiver of compensation due or accrued to the participant for services rendered; - or, with respect to purchases upon exercise of an option only, through a "same day sale" or a "margin" commitment. The Compensation Committee may also guarantee third-party loans in order to help recipients of stock option grants or restricted stock awards pay the exercise price or purchase price of those options or awards. Awards granted under the 1998 Equity Incentive Plan generally may not be transferred other than by will or by the laws of descent and distribution. In the event of our dissolution or liquidation or a "change in control" transaction, outstanding awards may be assumed by the successor corporation. If the successor corporation does not assume outstanding awards, they will expire. In the discretion of the Compensation Committee, the vesting of such awards may accelerate upon such transaction. As of February 28, 1999, options to purchase 704,915 shares of our common stock were outstanding under the 1998 Equity Incentive Plan. 1998 Employee Stock Purchase Plan Our board of directors adopted the 1998 Employee Stock Purchase Plan in August 1998, and reserved a total of 320,000 shares of our common stock for issuance under this plan at that time. Our stockholders approved the Purchase Plan in September 1998. The Purchase Plan became effective in December 1998. On each January 1, the aggregate number of shares reserved for issuance under the Purchase Plan increases automatically by a number of shares equal to 1% of our total outstanding shares as of the immediately preceding December 31. Such annual increase may not exceed 320,000 shares per year. On January 1, 1999, the number of shares of our common stock reserved for issuance under the Purchase Plan was automatically increased by 170,297 shares, to 490,297. The Purchase Plan is administered by the Compensation Committee, which has the authority to construe and interpret the Purchase Plan. Our employees generally will be eligible to participate in the Purchase Plan if they are: - customarily employed by us for more than 20 hours per week and more than five months in a calendar year, and - are not and would not as a result of their participation in the Purchase Plan become 5% stockholders of us. The Purchase Plan provides for offering periods of 24 months. After the first offering period, which will be shorter, each offering period comprises of four 6-month purchase periods. Eligible employees may acquire shares of our common stock at the end of each 6-month purchase period through payroll deductions in an amount between 2% and 15% of their cash compensation, subject to purchase limitations as described in the Purchase Plan. 65 68 The first offering period under the Purchase Plan began in December 1998. The first purchase period of the first offering period will be shorter than six months and will end on April 30, 1999. Offering periods and purchase periods thereafter will begin on each May 1 and November 1. The purchase price for our common stock under the Purchase Plan is 85% of the lesser of: - the fair market value of our common stock on the first day of the applicable offering period, or - the fair market value of our common stock on the last day of each purchase period. 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. The Purchase Plan will terminate in August 2008 unless earlier terminated pursuant to its terms. The board of directors may amend, terminate or extend the term of the Purchase Plan, except that the board of directors may not adversely affect any rights previously granted under the Purchase Plan. If the financial accounting treatment for the Purchase Plan changes in any way, the board of directors may make any amendments to the Purchase Plan as it determines to be necessary or advisable, even if the amendments affect rights which were previously granted. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Our Bylaws provide that we are required to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. We may also indemnify our other officers, employees and agents. Our bylaws also required us to advance expenses to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law. We have also entered into indemnity agreements with each of our current directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification set forth in our bylaws and to provide additional procedural protections. In addition, our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Consistent with Delaware law, we have eliminated the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors except for liability for: - any breach of the director's duty of loyalty to us or our stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; or - any transaction from which the director derived an improper personal benefit. We also maintain directors' and officers' liability insurance. 66 69 CERTAIN TRANSACTIONS Loan Repayment. On September 21, 1994, we entered into a repayment agreement with S. Steven Singh, our President, Chief Executive Officer and a director, and Michael W. Hilton, our Chairman of the Board and Chief Technical Officer. Pursuant to the repayment agreement, we agreed to repay loans previously made to us by Mr. Singh for $111,500 and Mr. Hilton for $121,500. Under the terms of the repayment agreement, we 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, we agreed to issue 64,530 shares of our Series C preferred stock to Mr. Singh and 70,390 shares of our 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, we sold: - 1,529,636 shares of our Series A preferred stock at a price of $1.30 per share; - 1,874,999 shares of our Series B preferred stock at a price of $1.60 per share; - 3,884,920 shares of our 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 our Series D preferred stock at a price of $3.65 per share; and - 1,648,660 shares of our Series E preferred stock at a price of $7.75 per share. Each share of preferred stock converted into one share of common stock upon the completion of our initial public offering. The purchasers of the preferred stock included the following holders of 5% or more of our 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............... 1,529,636 312,500 250,000 135,378 74,703 Institutional Venture Partners VII, L.P. and affiliates..... -- -- 2,000,000 130,193 72,090 Mayfield VIII and affiliates... -- -- 1,250,000 807,308 69,872 RRE Investors, L.P. and affiliates................... -- -- -- -- 645,161 US Venture Partners IV L.P. and affiliates................... -- 1,562,499 250,000 159,993 -- Michael W. Hilton.............. -- -- 70,390 -- 3,871 S. Steven Singh................ -- -- 64,530 -- 3,871
Transactions with American Express. In August 1998, we sold an aggregate of 645,161 shares of our Series E preferred stock, at a cash purchase price of $7.75 per share, and issued a warrant exercisable for an aggregate of 2,400,000 shares of Series E preferred stock, to TRS, a subsidiary of American Express. Upon our initial public offering, the warrant issued to TRS automatically became exercisable for 2,325,000 shares of common stock. In December 1998, TRS partially exercised the warrant to purchase 225,000 shares at $11.625 per share. Additionally, under the warrant, TRS may acquire 700,000 shares at 67 70 any time on or before October 15, 1999 at a cash purchase price of $33.75 per share, 700,000 additional shares at any time on or before January 15, 2001 at a cash purchase price of $50.625 per share, and 700,000 shares 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, our board of directors originally determined to cancel 25% of the shares that could have been acquired under the warrant at the time of our initial public offering or on or before October 15, 1999. In connection with an amendment to the standstill agreement described below, the board of directors subsequently rescinded its 25% reduction. Under a voting agreement entered into by holders of our Series E preferred stock, TRS designated Edward Gilligan to be a member of our board of directors. We appointed Mr. Gilligan to the board in February 1999. The voting agreement terminated upon the completion of our initial public offering. Under a standstill agreement, TRS has agreed not to acquire beneficial ownership of additional shares of our capital stock prior to April 10, 2000 if such purchase would result in TRS owning more than 16% of our capital stock, including shares issuable upon exercise of their warrant. TRS has also agreed not to solicit proxies to vote any of our voting stock if at the time we are publicly traded and subject to the proxy rules. In December 1997, we entered into a strategic marketing alliance agreement with American Express, providing for the marketing of XMS to corporate card clients of American Express. Under the agreement, we agreed to pay American Express a fee for referrals of American Express corporate card clients that become XMS customers within 12 months after the referral. The referral fee ranges from 10% to 22.5% of license revenue realized by us from these clients. The percentage referral fee applicable to a particular customer is higher than the 10% base rate if the referral is converted into a customer relationship in a particularly short amount of time, or if annual license revenues realized by us from all American Express referrals have exceeded certain levels. In fiscal 1998, we paid or owed to American Express an aggregate of approximately $204,000 under the agreement. In three months ended December 31, 1998, we paid or owed to American Express an aggregate of approximately $235,000 under this agreement. In connection with the strategic marketing alliance agreement, American Express terminated certain customer licenses of its own travel and entertainment expense management product, and we agreed to offer to license XMS to those former American Express customers on our standard terms. We also agreed to provide a special license rate to American Express for a specified number of end users. That special license rate reflected a quantity discount comparable to discounts we make available to orders of similar size to non-affiliated customers. We negotiated license arrangements with the former American Express customers, and where American Express chose to do so it agreed to pay some or all of the cost of the former customer's XMS license at the special license rate. American Express may also choose to pay the costs of maintenance for a specified number of end users on behalf of its former customers. In fiscal 1998, American Express paid or owed to us an aggregate of $193,000 under the marketing agreement. In the three months ended December 31, 1998, American Express did not pay or owe us fees under the marketing agreement. As of December 31, 1998, the maximum amount of XMS license fees that American Express may choose to pay at the special license rate on behalf of such former American Express customers was approximately $3.1 million. Under the strategic marketing alliance agreement, we also granted American Express an option to license XMS for its internal use at our generally prevailing rates. The option expired in June 1998 without being exercised. We and American Express also agreed to 68 71 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 party upon an acquisition of us by any competitor of American Express and by American Express upon the acquisition of 20% or more of our securities by any competitor of American Express. In August 1998, we entered into a co-branded service marketing agreement with TRS, under which TRS will market to its clients a co-branded ESP version of XMS. The agreement provides that we will develop this co-branded service and that both Concur and TRS will develop certain special features for integration into the co-branded service. For 12 months following the release of a co-branded service containing a special feature, we have agreed not to include such special feature in any product or service offered by or on behalf of us or any of our licensees. TRS determines the prices at which the co-branded service will be offered, and may market the co-branded service initially in the United States and Canada, and eventually in other geographical areas as we complete our localization efforts in those areas. We have agreed to offer service contracts for the co-branded service to TRS clients at terms not materially less favorable than those offered to our own customers, and we have responsible for providing warranty and customer support services to these TRS clients. Revenue other than consulting revenue, direct costs and taxes associated with the co-branded service will be shared 55% to us and 45% to TRS, provided that we are entitled to payment of no less than 55% of certain minimum base prices, some or all of which may be paid by TRS on behalf of the customer, and no more than 55% of certain higher suggested prices. We are also entitled to 55% of consulting revenue associated with the co-branded service, after deduction of our direct and indirect costs, expenses and taxes associated with providing consulting services. We are also obligated to provide TRS with certain "most favored pricing" rights. We also agreed, for the term of the co-branded 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 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 one of our competitors. The co-branded 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-branded 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-branded agreement may be terminated at any time by TRS if a TRS competitor acquires a controlling interest in us or if any officer, director or other designee of a TRS competitor is appointed to our board of directors. No payments were made under the co-branded agreement in fiscal 1998 or in the three months ended December 31, 1998. We believe that the terms of the agreements with American Express and TRS, taken as a whole, are no less favorable to us than we could have obtained from unaffiliated third parties. 69 72 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of February 28, 1999 by the following individuals or groups: - each person or entity who is known by us to own beneficially more than 5% of our common stock; - each of our directors; - each of the Named Executive Officers; - each selling stockholder; and - all current executive officers and directors as a group. Unless otherwise indicated, the address for each listed stockholder is c/o Concur Technologies, Inc., 6222 185th Avenue NE, Redmond, Washington 98052.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING NUMBER OF AFTER OFFERING NAME AND ADDRESS -------------------------- SHARES BEING -------------------------- OF BENEFICIAL OWNER NUMBER PERCENT+ OFFERED NUMBER PERCENT+ ------------------- ------------ ---------- ------------ ------------ ---------- Edward P. Gilligan............. 2,970,161 15.5% -- 2,970,161 14.1% American Express Travel Related Services Company, Inc.(1) Jeffrey D. Brody............... 2,287,137 13.4 500,000 1,787,132 9.4 Brentwood Associates VI, L.P. and affiliates(2) Norman A. Fogelsong............ 2,202,283 12.9 -- 2,202,283 11.6 Institutional Venture Partners VII, L.P. and affiliates(3) Michael J. Levinthal........... 2,127,180 12.4 -- 2,127,180 11.2 Mayfield VIII and affiliates(4) US Venture Partners IV, L.P.... 1,972,492 11.5 -- 1,972,492 10.4 and affiliates(5) S. Steven Singh(6)............. 1,030,638 6.0 55,000 975,638 5.1 Michael W. Hilton(7)........... 953,761 5.6 60,000 893,761 4.7 James D. Robinson III.......... 645,161 3.8 322,580 322,581 1.7 RRE Investors, L.P. and affiliates(8) Andrew Dent(9)................. 340,452 2.0 22,500 317,952 1.7 Melissa Widner(10)............. 340,452 2.0 22,500 317,952 1.7 Jon T. Matsuo(11).............. 262,180 1.5 26,200 235,980 1.2 Sterling R. Wilson(12)......... 226,208 1.3 22,600 203,608 1.1 Comdisco, Inc.(13)............. 198,991 1.2 35,000 163,991 * Rajeev Singh(14)............... 189,930 1.1 15,000 174,930 * Russell P. Fradin.............. -- * -- -- * ADP, Inc.(15) All current executive officers and directors as a group (12 persons)(16)................. 12,894,639 65.5% 1,046,380 11,893,255 55.3%
70 73 - ------------ * Less than 1%. + Percentage ownership is based on 17,101,641 shares outstanding as of February 28, 1999 and 18,920,261 shares outstanding after this 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 February 28, 1999 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. (1) Represents 870,161 shares held of record by TRS and 2,100,000 shares subject to a warrant held by TRS that is exercisable within 60 days of February 28, 1999, expiring in three tranches through January 2002, at cash purchase prices of $33.75, $50.625 and $85.00, respectively. 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. Edward P. Gilligan, who is a director of Concur, is President of the Corporate Services Division for TRS. Mr. Gilligan disclaims beneficial ownership of the shares held by TRS. The address for American Express and TRS is American Express Tower, World Financial Center, New York, New York 10285. See "Certain Transactions." (2) 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. and (iii) 3,871 shares held of record by Jeffrey D. Brody. Mr. Brody, a director of Concur, is a Managing Member of Brentwood VIII Ventures, LLC, the General Partner of and Brentwood Affiliates Fund II, L.P. Several of Mr. Brody's Co-Managing Members of Brentwood VIII Ventures, LLC are also General Partners of Brentwood VI Ventures, L.P., the General Partner of Brentwood Associates VI, 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. and Brentwood Affiliates Fund II, L.P. is c/o Brentwood Venture Capital, 3000 Sand Hill Road, Building 1, Suite 260, Menlo Park, California 94025. (3) 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 Concur, is the General Partner of Institutional Venture Management VII, L.P. (which is the General Partner of Institutional Venture Partners VII, L.P.) and Institutional Venture Management VI, L.P. (which is the General Partner of 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. (4) 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 Concur, 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. (5) 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. (6) Represents 813,138 shares held of record by S. Steven Singh and 217,500 shares subject to options exercisable within 60 days of February 28, 1999 held by Mr. Singh. Mr. Singh is the President, Chief Executive Officer and a director of Concur. (7) Represents 934,261 shares held of record by Michael W. Hilton and 19,500 shares subject to options exercisable within 60 days of February 28, 1999 held by Mr. Hilton. Mr. Hilton is the Chairman of the Board and Chief Technical Officer of Concur. 71 74 (8) 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 Concur, 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. 208,043 of the shares are being offered by RRE Investors, L.P. and 114,537 of the shares are being offered by 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. (9) Represents 340,452 shares held of record by Andrew Dent, of which 170,226 shares are subject to rights of repurchase by Concur which lapse in increments over time. Does not include 4,000 shares held by the Dent- Widner Family Trust, FBO Ian MacKenzie Dent, referred to in note 10 below. (10) Represents 336,452 shares held of record by Melissa Widner and 4,000 shares held by the Dent-Widner Family Trust, FBO Ian MacKenzie Dent. (11) Represents 64,180 shares held of record by Jon T. Matsuo and 198,000 shares subject to options exercisable within 60 days of February 28, 1999 held by Mr. Matsuo. Mr. Matsuo is the Executive Vice President of Worldwide Sales of Concur. (12) Represents 200,208 shares held of record by Sterling R. Wilson and 26,000 shares subject to options exercisable within 60 days of February 28, 1999 held by Mr. Wilson. Mr. Wilson is the Chief Financial Officer and Executive Vice President of Operations of Concur. (13) Represents 74,724 shares held of record by Comdisco, Inc. and 124,267 shares subject to warrants exercisable within 60 days of February 28, 1999 held by Comdisco, Inc.. (14) Represents 164,180 shares held of record by Rajeev Singh and 25,750 shares subject to options exercisable within 60 days of February 28, 1999 held by Mr. Singh. Mr. Singh is the Executive Vice President of Products of Concur. (15) Russell P. Fradin is President, Employer Services North America, of ADP, Inc. (16) Prior to this offering, represents 12,894,639 shares held of record by current executive officers and directors as a group and 2,586,750 shares subject to options or warrants exercisable within 60 days of February 28, 1999 held by current executive officers and directors as a group. After this offering, represents 11,893,259 shares held of record by current executive officer and directors as a group and 2,586,750 shares subject to options and warrants exercisable within 60 days of February 28, 1999 held by current executive officers and directors as a group. 72 75 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists 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 February 28, 1999 there were 17,101,641 shares of common stock outstanding, held of record by 77 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 our 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. Our stock is not entitled to preemptive rights and is not subject to conversion or redemption. Subject to the rights of creditors and holders of preferred stock which may be outstanding at the time, upon our liquidation, dissolution or winding-up, the assets legally available for distribution to stockholders would be distributable ratably among the holders of the common stock. PREFERRED STOCK No shares of preferred stock are outstanding. Our 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, without any further vote or action by the stockholders. Our 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 Concur. We have no current plan to issue any shares of preferred stock. WARRANTS As of February 28, 1999 we had outstanding warrants to purchase an aggregate of 2,224,267 shares of our common stock. ANTI-TAKEOVER PROVISIONS We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, the statute prohibits a publicly-held Delaware corporation from entering into a "business combination" with any "interested stockholder" for a three-year period after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or transaction resulting in a financial benefit to an interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of Concur's voting capital stock. Our certificate of incorporation and bylaws do not exclude us from the restrictions imposed under Section 203. The provisions of Section 203 may 73 76 encourage companies interested in acquiring us to negotiate in advance with our board of directors 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 Concur, which could depress the market price of our common stock and which could deprive the stockholders of opportunities to realize a premium on shares of our common stock held by them. Our certification of incorporation and bylaws also 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. These provisions make it more difficult for a third party to acquire a majority of our voting stock or effect a change in control of Concur. See "Risk Factors--Our corporate governance structure may delay or prevent our acquisition by another company." REGISTRATION RIGHTS Beginning in December 1999, the holders of 11,815,794 shares of our common stock (including 2,224,267 shares issuable upon exercise of warrants) will have rights to require the registration of such shares under the Securities Act. Subject to certain limitations, if requested by holders of such shares, we must file a registration statement under the Securities Act covering all securities requested to be included by all holders with registration rights. In addition, if we propose to register any of our common stock, the holders of stock with registration rights 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 will be borne by us. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our Common Stock is Norwest Bank Minnesota, National Association. 74 77 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 18,920,261 shares of common stock outstanding (19,355,261 shares if the underwriters' over-allotment option is exercised in full). Of this amount, the 2,900,000 shares offered hereby will be available for immediate sale in the public market as of the date of this prospectus. An additional 3,864,410 shares are not subject to restrictions and will be available for sale in the public market as of the date of this prospectus.
APPROXIMATE SHARES DAYS AFTER THE DATE OF ELIGIBLE FOR THIS PROSPECTUS FUTURE SALE COMMENT ---------------------- ------------ ------- Immediately.................... 6,764,410 Freely tradable shares sold in the initial public offering and in this offering, and shares salable under Rule 701 that are not subject to lock-up agreements June 14-July 16, 1999.......... 44,094 Shares salable under Rule 144 and Rule 145 not subject to 90-day lock-up agreements from this offering; expiration of 180-day lock-up agreements from our initial public offering 90 days........................ 11,165,868 90-day lock-up agreements from this offering released Over 90 days................... 895,708 Restricted securities held for one year or less
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 a number of shares that does not exceed the greater of (a) 1% of the then outstanding shares of common stock (approximately 189,203 shares immediately after the offering), or (b) 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. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Concur. A person or persons whose shares are aggregated who is not deemed to have been our affiliate 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. Concur, our directors, executive officers, and greater than 1% stockholders 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 90 days from the effective date of the Registration Statement except that we may, without such consent, grant options and sell shares pursuant to our stock plans. We filed a registration statement on Form S-8 under the Securities Act to register 5,445,086 shares of our common stock subject to outstanding stock options or reserved for issuance under our stock and option plans, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. 75 78 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, U.S. Bancorp Piper Jaffray Inc., Volpe Brown Whelan & Company, LLC and FAC/Equities, a division of First Albany Corporation, have severally agreed with Concur 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...................................... U.S. Bancorp Piper Jaffray Inc. ........................... Volpe Brown Whelan & Company, LLC.......................... First Albany Corporation................................... ---------- Total............................................ 2,900,000 ==========
The representatives have advised Concur 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 completion of this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives of the underwriters. No such reduction shall change the amount of proceeds to be received by Concur and the selling stockholders as set forth on the cover page of this prospectus. Over-Allotment Option. Concur has granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 435,000 additional shares of common stock at the same price per share as Concur and the selling stockholders will receive for the 2,900,000 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 2,900,000 shares offered hereby. If purchased, such additional shares will be sold by the underwriters on the same terms as those on which the 2,900,000 shares are being sold. Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters, Concur 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. Lock-up Agreements. Under the terms of lock-up agreements, each officer and director and certain security holders have agreed with the representatives of the underwriters for a period of 90 days after the effective date of the registration statement filed with the Securities and Exchange Commission in connection with 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 76 79 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, Concur has agreed that during the 90 days following the effective date of this prospectus, Concur 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 (a) Concur's sales of shares in this offering, (b) the issuance of common stock upon the exercise of outstanding options or warrants or (c) Concur's issuance of options or shares under its 1998 Equity Incentive 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. Persons and entities affiliated with Hambrecht & Quist LLC purchased an aggregate of 25,225 shares of Concur's Series E preferred stock in June 1998. The purchase of such shares has been deemed by the National Association of Securities Dealers, Inc. to constitute underwriting compensation in connection with Concur's initial public offering. As a result, such affiliates of Hambrecht & Quist LLC agreed that they will not sell, transfer, assign or hypothecate such shares until one year following the effective date of Concur's initial public offering, except to officers or partners (not directors) of Hambrecht & Quist LLC or other underwriters and/or their officers or partners. 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." Stabilization. The representatives have advised Concur that, under Regulation M under the Securities Exchange Act, certain persons participating in this 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 this 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 this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives of the underwriters in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives of the underwriters have advised Concur that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Passive Market Making. In connection with this offering, certain underwriters and selling group members (if any) who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in the common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act, during the business day prior to the pricing of this offering, 77 80 before the commencement of offers or sales of the common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for Concur by Fenwick & West LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys at Fenwick & West LLP own an aggregate of 4,190 shares of our common stock. 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 in this prospectus, and are included in reliance upon such reports, given upon the authority of such firm as experts in accounting and auditing. The 1997 American Express Travel and Entertainment Management Process Study referred to in this prospectus has been prepared by American Express. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedule. For further information with respect to us and our common stock being offered, see the registration statement and its exhibits and schedule. A copy of the registration statement and its exhibits and schedule may be inspected without charge at the public reference facilities maintained by the SEC located at Room 1024, 450 Fifth Street, Washington, D.C. 20549 and at the SEC'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. 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 SEC. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including as, that file electronically with the SEC. We are subject to the information and periodic reporting requirements of the Securities Exchange Act and we file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC's public reference rooms and the Web site of the SEC referred to above. 78 81 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONCUR TECHNOLOGIES, INC. Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets as of September 30, 1997 and 1998 and December 31, 1998................................ F-3 Consolidated Statements of Operations for the Years Ended September 30, 1996, 1997, and 1998 and for the three months ended December 31, 1997 and 1998................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 1996, 1997, and 1998 and for the three months ended December 31, 1998.............. F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998 and for the three months ended December 31, 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-28 Balance Sheet as of December 31, 1997 and June 30, 1998..... F-29 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-30 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-31 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-32 Notes to Financial Statements............................... F-33 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Consolidated Financial Statements (Unaudited)..... F-37 Pro Forma Consolidated Statements of Operations for the Year Ended September 30, 1998 (Unaudited)...................... F-38 Notes to Pro Forma Consolidated Financial Statements (Unaudited)............................................... F-39
F-1 82 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Concur Technologies, Inc. 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' equity (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 18, as to which the date is December 9, 1998 F-2 83 CONCUR TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, ------------------- DECEMBER 31, 1997 1998 1998 -------- -------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents......................... $ 6,695 $ 15,629 $ 53,277 Accounts receivable, net of allowance for doubtful accounts of $170 and $547 at September 30, 1997, and 1998, respectively; $597 at December 31, 1998............................................ 4,365 4,988 3,172 Prepaid expenses and other current assets......... 165 536 313 Note receivable from stockholders................. -- 167 167 -------- -------- -------- Total current assets....................... 11,225 21,320 56,929 Equipment and furniture, net........................ 1,088 2,162 2,263 Deposits and other assets........................... 51 336 2,551 Note receivable from stockholders, net of current portion........................................... -- 333 333 Capitalized technology and other intangible assets............................................ -- 880 801 -------- -------- -------- Total assets............................... $ 12,364 $ 25,031 $ 62,877 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.................................. $ 1,082 $ 1,838 $ 2,540 Accrued liabilities............................... 1,294 3,850 6,214 Accrued commissions............................... 509 902 1,007 Current portion of accrued payment to stockholders.................................... -- 167 167 Current portion of long-term debt................. 329 2,033 2,470 Current portion of capital lease obligations...... 351 1,004 1,288 Deferred revenues................................. 1,477 3,052 3,328 -------- -------- -------- Total current liabilities.................. 5,042 12,846 17,014 Accrued payment to stockholders, net of current portion........................................... -- 333 333 Long-term debt, net of current portion.............. 2,171 5,632 5,040 Capital lease obligations, net of current portion... 1,516 2,127 1,978 Deferred rental expense............................. -- 183 183 Redeemable convertible preferred stock: Issued and outstanding shares -- 8,564,893 and 10,213,553 in 1997 and 1998, respectively (Note 11)....................... 17,264 29,685 -- Redeemable convertible preferred stock warrants..... 81 444 -- Commitments Stockholders' equity (deficit): Preferred stock, par value $0.001 per share: Authorized shares -- 5,000,000, no shares issued and outstanding.............................. -- -- -- Common stock, par value $0.001 per share: Authorized shares -- 60,000,000 Issued and outstanding shares -- 2,289,493 and 3,098,543 at September 30, 1997 and 1998, respectively; 17,029,732 at December 31, 1998......................................... 259 6,276 76,398 Deferred stock compensation....................... -- (452) (384) Accumulated deficit............................... (13,969) (32,043) (37,685) -------- -------- -------- Total stockholders' equity (deficit)....... (13,710) (26,219) 38,329 -------- -------- -------- Total liabilities and stockholders' equity (deficit)............................... $ 12,364 $ 25,031 $ 62,877 ======== ======== ========
See accompanying notes. F-3 84 CONCUR TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------- ----------------- 1996 1997 1998 1997 1998 ------- ------- -------- ------- ------- (UNAUDITED) Revenues, net: Licenses......................... $ 1,717 $ 6,347 $ 11,696 $ 2,036 $ 4,045 Services......................... 242 1,923 5,463 1,079 1,960 ------- ------- -------- ------- ------- Total revenues................ 1,959 8,270 17,159 3,115 6,005 Cost of revenues: Licenses......................... 386 394 558 82 224 Services......................... 839 2,269 5,684 1,097 2,453 ------- ------- -------- ------- ------- Total cost of revenues........ 1,225 2,663 6,242 1,179 2,677 ------- ------- -------- ------- ------- Gross profit....................... 734 5,607 10,917 1,936 3,328 Operating expenses: Sales and marketing.............. 2,936 5,896 12,353 2,206 4,687 Research and development......... 1,793 3,401 6,434 1,083 2,612 General and administrative....... 963 1,815 4,687 837 1,637 Acquired in-process technology (Note 3)...................... -- -- 5,203 -- -- ------- ------- -------- ------- ------- Total operating expenses.............. 5,692 11,112 28,677 4,126 8,936 ------- ------- -------- ------- ------- Loss from operations............... (4,958) (5,505) (17,760) (2,190) (5,608) Interest income.................... 92 130 331 54 225 Interest expense................... (43) (88) (467) (135) (222) Other expense, net................. (44) (61) (178) (12) (37) ------- ------- -------- ------- ------- Net loss........................... $(4,953) $(5,524) $(18,074) $(2,283) $(5,642) ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share (unaudited)....... $ (1.58) $ (0.21) $ (0.40) ======== ======= ======= Shares used in calculation of pro forma basic and diluted net loss per share (unaudited)............ 11,419 10,863 13,968 ======== ======= ======= Historical basic and diluted net loss per share................... $ (2.17) $ (2.41) $ (7.45) $ (0.99) $ (1.01) ======= ======= ======== ======= ======= Shares used in calculation of historical basic and diluted net loss per share................... 2,282 2,288 2,425 2,298 5,570 ======= ======= ======== ======= =======
See accompanying notes. F-4 85 CONCUR TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK DEFERRED TOTAL -------------------- STOCK ACCUMULATED STOCKHOLDERS' SHARES AMOUNT COMPENSATION DEFICIT EQUITY (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) Proceeds from initial public offering, net of offering costs (unaudited)........ 3,365,000 37,369 -- -- 37,369 Conversion of redeemable convertible preferred stock into common stock (unaudited).............. 10,213,553 29,685 -- -- 29,685 Conversion of redeemable convertible preferred warrants into common stock warrants (unaudited).............. -- 444 -- -- 444 Proceeds from issuance of common stock from exercise of common stock warrants (unaudited)..... 225,000 2,616 -- -- 2,616 Issuance of common stock from net exercise of common stock warrants (unaudited).............. 33,537 -- -- -- -- Issuance of common stock from exercise of stock options (unaudited)...... 94,099 8 -- -- 8 Amortization of deferred stock compensation (unaudited).............. -- -- 68 -- 68 Net loss (unaudited)........ -- -- -- (5,642) (5,642) ---------- ------- ----- -------- -------- Balance at December 31, 1998 (unaudited)................. 17,029,732 $76,398 $(384) $(37,685) $ 38,329 ========== ======= ===== ======== ========
See accompanying notes. F-5 86 CONCUR TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------- ------------------ 1996 1997 1998 1997 1998 ------- ------- -------- ------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss......................................... $(4,953) $(5,524) $(18,074) $(2,283) $ (5,642) Adjustments to reconcile net loss to net cash used in operating activities: Acquired in-process technology............... -- -- 5,203 -- 79 Amortization of deferred stock compensation.............................. -- -- 409 -- 68 Warrant expense.............................. 5 53 23 Depreciation and amortization................ 144 393 629 124 277 Provisions for bad debts..................... 91 45 453 33 50 Other........................................ 17 -- 183 -- -- Changes in operating assets and liabilities: Accounts receivable....................... (451) (3,901) (1,040) 146 1,766 Notes receivable from stockholders........ -- -- (500) -- -- Prepaid expenses and other assets......... 63 (84) (616) (43) (1,992) Accounts payable.......................... (24) 454 756 (657) 702 Accrued liabilities....................... 597 927 2,535 637 2,469 Deferred revenues......................... 412 1,026 1,575 (274) 276 ------- ------- -------- ------- -------- Net cash used in operating activities............ (4,099) (6,611) (8,464) (2,317) (1,947) ------- ------- -------- ------- -------- INVESTING ACTIVITIES Purchases of equipment and furniture............. (420) (1,020) (40) (24) (6) Payment in connection with acquisition of 7Software...................................... -- -- (130) -- -- ------- ------- -------- ------- -------- Net cash used in investing activities............ (420) (1,020) (170) (24) (6) ------- ------- -------- ------- -------- FINANCING ACTIVITIES Proceeds from initial public offering............ -- -- -- -- 37,369 Proceeds from exercise of preferred stock warrants....................................... -- -- -- -- 2,616 Proceeds from sales leaseback transaction........ -- 1,800 192 192 -- Proceeds from capital lease financing............ -- 67 -- -- -- Proceeds from borrowings......................... 563 3,087 5,500 -- -- Payments on borrowings........................... (380) (925) (335) (82) (155) Payment on capital leases........................ -- -- (500) (22) (237) Issuance of common stock......................... 1 -- 13 3 8 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 91 39,601 ------- ------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents.................................... 3,144 1,010 8,934 (2,250) 37,648 Cash and cash equivalents at beginning of period......................................... 2,541 5,685 6,695 6,695 15,629 ------- ------- -------- ------- -------- Cash and cash equivalents at end of period....... $ 5,685 $ 6,695 $ 15,629 $ 4,445 $ 53,277 ======= ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest........................... $ 27 $ 76 $ 398 $ 62 $ 180 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......................................... -- -- 1,572 478 372 Conversion of redeemable convertible preferred stock and warrants into common stock and common stock warrants................................. -- -- -- -- 29,992 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 87 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) 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 and reincorporated in Delaware on November 25, 1998. Operations commenced during 1994. Unaudited Interim Financial Information The financial information as of December 31, 1998 and for the periods ended December 31, 1997 and 1998 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such dates and the operations and cash flows for the periods then ended. Operating results for the period ended December 31, 1998 are not necessarily indicative of results that may be expected for the entire year. 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. 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 has been modified by SOP 98-4 and SOP 98-9 as it relates to certain transactions. These standards generally require revenues earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, postcontract customer support, installation and F-7 88 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Full guidelines for SOP 97-2 and related modifications have not 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. 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. F-8 89 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 fiscal 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. 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 F-9 90 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the local currency in the country in which the subsidiary is located. Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during the year. The translation adjustment resulting from this process was insignificant at September 30, 1997 and 1998, respectively and at December 31, 1998. Gains and losses on foreign currency transactions are included in the consolidated statement of operations as incurred. To date, gains and losses on foreign currency transactions have not been significant. 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 F-10 91 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements), SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information;" and SOP 97-2, "Software Revenue Recognition." Each of these standards became 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 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 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. F-11 92 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 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. 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, F-12 93 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 3. ACQUISITION (CONTINUED) and (v) redesign and rewriting of the administrative functionality. Based on management's initial 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. 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 -------------------- PRO ACTUAL 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 F-13 94 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 3. ACQUISITION (CONTINUED) 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 In fiscal 1998, the Company had a $2.0 million line of credit for operating needs. 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. In March 1999, the line of credit was increased to $4.0 million under substantially similar terms and was amended to expire in March 2000. 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 F-14 95 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) 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 expired 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-15 96 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (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. F-16 97 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 8. INCOME TAXES (CONTINUED) 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) ------- ------- $ -- $ -- ======= =======
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. 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. F-17 98 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED) 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
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 ========= =========
During the three months ended December 31, 1998, common stock options for 797,265 shares were granted with a weighted average exercise price of $12.39; options for 94,099 shares were exercised with a weighted average exercise price of $0.09; and options for 14,394 shares were canceled with a weighted average exercise price of $6.20; thereby resulting in 2,228,293 options outstanding at December 31, 1998 with a weighted average exercise price of $5.05; of which 670,583 options were exercisable with a weighted average exercise price of $0.19. 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 F-18 99 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 9. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED) 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 in October 1999 and bear interest at the higher of 5% or the minimum interest rate required to avoid implied interest under the Internal Revenue Code, payable annually. These notes are full recourse and are secured by the common stock purchased with the proceeds thereof. F-19 100 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 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 1,003,499 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. In connection with the initial public offering referred to in Note 19, all redeemable convertible preferred stock automatically converted into common 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 ========== ===========
F-20 101 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED) 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 were 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. At the time of the initial public offering, the warrants were exercised. 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. 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. At the time of the initial public offering, the warrants were exercised. 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, 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. 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 had 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 utilized the $1.5 million additional financing available under the agreement. This commitment expired December 31, 1998 under the terms of the agreement. F-21 102 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS (CONTINUED) 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. As all of the shares of Series E Preferred Stock are converted into shares of common stock in connection with the initial public offering of the Company's common stock, this warrant will automatically be converted into common stock warrants exercisable for 2,325,000 shares of the Company's common stock. The terms of the warrant provide that it 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 initial public offering or on or before October 15, 1999. In connection with an amendment to a standstill agreement with TRS, the Board of Directors subsequently rescinded its 25% reduction in the number of shares that can be acquired on or before October 15, 1999. At the time of the initial public offering, the initial traunch of this warrant was exercised for 225,000 shares of common stock. 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 converted into common stock warrants upon the closing of the initial public offering of the Company's common stock. F-22 103 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 12. STOCKHOLDERS' EQUITY The Company has reserved shares of common stock for future issuance as follows:
SEPTEMBER 30, DECEMBER 31, 1998 1998 ------------- ------------ Outstanding stock options................. 1,539,521 2,228,293 Stock Options available for grant: 1994 Stock Option Plan............... 354,768 327,612 1998 Equity Incentive Plan........... 3,240,000 2,564,285 Director Stock Option Plan........... 240,000 160,000 Employee Stock Purchase Plan.............. 320,000 320,000 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 -- Warrants to purchase common stock......... -- 2,237,454 ---------- --------- Total........................... 18,481,581 7,837,644 ========== =========
All of the shares of our common stock which remained available for issuance under the 1994 Stock Option Plan when the 1998 Equity Incentive Plan became effective, became available for issuance under the 1998 Equity Incentive Plan. F-23 104 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 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.
THREE MONTHS YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, ---------------------------- ------------------- 1996 1997 1998 1997 1998 ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss........................ $(4,953) $(5,524) $(18,074) $ (2,283) $ (5,642) ======= ======= ======== ======== ======== Basic and diluted net loss per common share.................. $ (2.17) $ (2.41) $ (7.45) $ (.99) $ (1.01) ======= ======= ======== ======== ======== Weighted average number of common shares used for basic and diluted per share amounts....................... 2,282 2,288 2,425 2,298 5,570 ======= ======= -------- -------- -------- Weighted average common shares issuable upon pro forma conversion of preferred stock......................... 8,994 8,565 8,398 -------- -------- -------- Weighted average number of shares used for pro forma per share amounts................. 11,419 10,863 13,968 ======== ======== ======== Pro forma basic and diluted net loss per share................ $ (1.58) $ (0.21) $ (0.40) ======== ======== ========
Options to purchase 2,228,253 shares of common stock with exercise prices of $0.03 to $12.50 per share and warrants to purchase 2,237,454 shares of common stock at a range of $3.65 to $85.00 per share were outstanding at December 31, 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. F-24 105 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 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. Strategic Marketing Alliance Agreement with ADP, Inc. In November 1998, the Company entered into a strategic alliance agreement with ADP, Inc., a subsidiary of Automatic Data Processing, Inc., under which ADP has agreed to refer potential customers for travel and entertainment expense management software products and services exclusively to the Company. The Company and ADP also agreed to jointly market the Company's travel and entertainment expense report processing products and services to ADP customers. 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 F-25 106 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 16. SIGNIFICANT AGREEMENTS (CONTINUED) 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 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 and received proceeds of $41,000 under the terms of a sales referral agreement. 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. For the quarter ended December 31, 1998, the Company paid fees of $55,000 and received proceeds totaling $219,000 under the terms of the sales referral agreement. At December 31, 1998, accounts receivable from stockholders was $0 and accounts payable to stockholders were $264,000. 18. 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 reverse split was approved for a range of split ratios by the Stockholders in October 1998. The split ratio of 1-to-2.5 was determined on November 16, 1998. The reverse stock split was effected on December 9, 1998. 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. 19. INITIAL PUBLIC OFFERING ("IPO") AND FOLLOW-ON OFFERING (UNAUDITED) On December 16, 1998, the Company issued 3,365,000 shares of its Common Stock (including 465,000 shares issued upon the exercise of the underwriters' over allotment option) at an initial public offering price of $12.50 per share. The net proceeds to the F-26 107 CONCUR TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF DECEMBER 31, 1998 AND FOR EACH OF THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998 IS UNAUDITED.) (CONTINUED) 19. INITIAL PUBLIC OFFERING ("IPO") AND FOLLOW-ON OFFERING (UNAUDITED) (CONTINUED) Company from the offering, net of offering costs were approximately $37.4 million. In connection with the IPO, warrants were exercised to purchase 225,000 shares of common stock at a price of $11.625 per share, resulting in additional proceeds to the Company totaling $2.6 million. Concurrent with the IPO, each outstanding share of the Company's redeemable convertible preferred stock was automatically converted into one share of Common Stock and remaining preferred stock warrants for 2,237,454 shares were automatically converted into warrants for the purchase of 2,237,454 shares of common stock. On March 15, 1999, the Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to execute a follow-on offering of its common stock to the public. F-27 108 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-28 109 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-29 110 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-30 111 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-31 112 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-32 113 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. F-33 114 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) 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. 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 ------------ ----------- Computer equipment........... $20 $20 Furniture, fixtures, and equipment.................. 2 12 --- --- 22 32 Accumulated depreciation..... (1) (4) --- --- $21 $28 === ===
F-34 115 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) 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. 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. F-35 116 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) 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 ------------ ----------- Deferred tax asset relating to net $ -- $ 52 operating loss 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-36 117 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-37 118 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-38 119 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. F-39 120 CONCUR TECHNOLOGIES, INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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-40 121 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 to service providers. Concur Technologies provides travel and entertainment expense management and 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. The Company also 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 dominant Web-based integrated solution provider of employee-facing business applications throughout the extended enterprise. GATEFOLD Graphic: Box divided into 4 vertical sections and one horizontal section on the top. Next to the first vertical section is a screen shot of Employee Desktop. The next four are headed by "Preparation," "Approval," "Processing" and "Data Analysis and Reporting," respectively. There are pictures of nine screen shots showing various stages of the software. The top four screen shots describe CompanyStore and the bottom four describe XMS. The top horizontal section includes the Concur logo on the left and text on the right. Text: Right of Concur logo: Concur products automate the preparation, approval, processing and data analysis of travel and entertainment expense reports and procurement requisitions, using a single user interface. By automating manual paper-based processes, customers can reduce costs and collect and analyze data to consolidate purchases with preferred vendors and to negotiate vendor discounts. Under first vertical: Employee Desktop gives employees instant access to expense reporting and procurement applications, as well as status updates, frequently asked questions and helpful tips about the applications. Under "Preparation": [CompanyStore logo] Using CompanyStore's simple user interface, orders are placed on-line through a customized electronic catalog. [XMS logo] Expense Reports are easily prepared using a checkbook-style user interface and are prepopulated with corporate charge card data. Under "Approval": CompanyStore allows the enterprise to determine how the requisitions should be processed. XMS allows the enterprise to determine the approval process and automatically flags those reports that are not in compliance. Under "Processing": 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. 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. Under "Data Analysis and Reporting": Better data allows managers to determine how best to control costs, negotiate more favorable supplier arrangements and consolidate vendors. Provides access to expense trends and data, allowing consolidation of vendors and negotiation of vendor discounts. 122 PAGE 45 This graphic depicts the interconnection of various systems. A box with four divisions, captioned "Concur Applications," appears at the top. The top division contains the Employee Desktop logo and the bottom three divisions contain the XMS logo, the CompanyStore logo and "Future Applications" in text. A box with eight divisions, captioned "Concur Common Technology Platform," appears below the "Concur Applications" box. The eight divisions contain the text captions "Prepopulation," "Workflow/Routing," "Business Intelligence," "Security," "Messaging," "Business Rules," "User Management," and "Database." A box with five divisions, captioned "ERP Platforms," appears below the "Concur Technology Platform" box. The five divisions contain the text captions "SAP," "Oracle," "PeopleSoft," "Others" and "Legacy Systems." A box with four divisions, captioned "E-Commerce," appears to the right of the other three boxes. The four divisions contain the text captions "Travel Services," "Corporate Charge Card Suppliers," "Vendors & Suppliers" and "Financial Institutions." "Concur Common 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: Three screen shots, one of an Employee Desktop page, one of a CompanyStore page, and one of an XMS page. The Employee Desktop, CompanyStore and XMS logos appear next to the corresponding screen shots. A large Concur logo without the words "Concur-TM TECHNOLOGIES" in the center of the circle. Text: Top of page titled: Concur's Employee Desktop Suite. Employee Desktop-TM integrates our employee-facing applications and provides a business portal through which corporate customers can deliver information and services to their employees. CompanyStore-TM is an Intranet application for the procurement of goods and services that reduces processing costs and enables customers to consolidate purchases with preferred vendors. The Xpense Management Solution-TM is the market leading travel expense automation product. BACK COVER Graphic: Concur logo with shadow. Dark background. 123 LOGO -----END PRIVACY-ENHANCED MESSAGE-----