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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29251
FIREPOND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1462409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
890 WINTER STREET, WALTHAM, MASSACHUSETTS 02451
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(781) 487-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of January 31, 2001 there were 35,980,263 shares of the Registrant's
Common Stock outstanding.
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2
FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JANUARY 31, 2001
TABLE OF CONTENTS
PAGE
NO.
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
October 31, 2000 and January 31, 2001..................... 2
Condensed Consolidated Statements of Operations --
Three Months Ended January 31, 2000 and 2001.............. 3
Condensed Consolidated Statements of Cash Flows --
Three Months Ended January 31, 2000 and 2001.............. 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
SIGNATURES.................................................. 25
EXHIBIT INDEX............................................... 26
1
3
FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 79,500 $ 74,596
Short-term investments.................................... 36,733 26,059
Accounts receivable, net.................................. 15,418 14,870
Unbilled services......................................... 1,676 2,970
Prepaid expenses and other current assets................. 2,436 6,443
-------- --------
Total current assets.............................. 135,763 124,938
Property and equipment, net................................. 6,887 7,869
Restricted cash............................................. 550 550
Other assets................................................ 1,120 1,139
-------- --------
$144,320 $134,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 403 $ 285
Accounts payable.......................................... 4,851 3,455
Accrued liabilities....................................... 13,395 11,168
Deferred revenue.......................................... 15,207 15,167
-------- --------
Total current liabilities......................... 33,856 30,075
Stockholders' equity:
Common stock, $0.01 par value --
Authorized -- 100,000,000 shares at October 31, 2000
and January 31, 2001;
Issued and outstanding -- 35,596,022 shares at October
31, 2000 and 35,980,263 shares at January 31, 2001.... 356 360
Additional paid-in capital................................ 195,166 196,180
Accumulated deficit....................................... (78,135) (86,744)
Deferred compensation..................................... (6,077) (4,854)
Other comprehensive loss.................................. (846) (521)
-------- --------
Total stockholders' equity........................ 110,464 104,421
-------- --------
$144,320 $134,496
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
4
FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED JANUARY 31,
------------------
2000 2001
------- -------
Revenues:
Product-related revenues:
License................................................ $ 3,907 $ 4,034
Services and maintenance............................... 4,458 8,273
------- -------
Total product-related revenues.................... 8,365 12,307
Custom development services............................... 3,612 2,240
------- -------
Total revenues.................................... 11,977 14,547
------- -------
Cost of revenues:
License................................................ 129 69
Product-related services and maintenance(1)............ 2,283 8,533
Custom development services............................ 1,599 677
------- -------
Total cost of revenues............................ 4,011 9,279
------- -------
Gross profit................................................ 7,966 5,268
Operating expenses:
Sales and marketing(1).................................... 6,418 6,852
Research and development(1)............................... 3,697 4,678
General and administrative(1)............................. 1,962 2,891
Stock-based compensation(1)............................... 1,167 696
------- -------
Total operating expenses.......................... 13,244 15,117
------- -------
Loss from operations........................................ (5,278) (9,849)
Interest income (expense)................................... (807) 1,740
Other income (expense), net................................. 262 (499)
------- -------
Net loss.................................................... $(5,823) $(8,608)
Net loss per share (Note 5(a)):
Basic and diluted net loss per share...................... $ (0.58) $ (0.24)
======= =======
Basic and diluted weighted average common shares
outstanding............................................ 10,101 35,548
======= =======
Pro forma net loss per share (Note 5(b)):
Pro forma net loss per share.............................. $ (0.21) $ (0.24)
======= =======
Pro forma basic and diluted weighted average common shares
outstanding............................................ 27,566 35,548
======= =======
---------------
(1) The following summarizes the departmental allocation of the stock-based
compensation charge:
THREE MONTHS
ENDED JANUARY 31,
------------------
2000 2001
-------- ------
Cost of revenue............................................. $ 44 $ 10
Operating expenses:
Sales and marketing....................................... 640 72
Research and development.................................. 296 61
General and administrative................................ 187 553
------ ----
Total stock-based compensation.............................. $1,167 $696
====== ====
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
5
FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED JANUARY 31,
-------------------
2000 2001
------- --------
Cash flows from operating activities:
Net loss.................................................. $(5,823) $ (8,608)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation expense....................... 1,167 696
Depreciation and amortization.......................... 797 949
Non-cash interest expense.............................. 413 --
Changes in assets and liabilities:
Accounts receivable.................................. (1,654) 670
Unbilled services.................................... 184 (1,293)
Prepaid expenses and other current assets............ (23) (4,007)
Accounts payable..................................... (2,332) (1,330)
Accrued liabilities.................................. 1,643 (2,161)
Deferred revenue..................................... 1,721 (40)
------- --------
Net cash used in operating activities............. (3,907) (15,124)
------- --------
Cash flows from investing activities:
Purchases of short term investments....................... -- (6,754)
Purchases of property and equipment....................... (688) (1,875)
Proceeds from the sale and maturities of short-term
investments............................................ -- 17,490
Increase in other assets.................................. (318) (76)
------- --------
Net cash provided by (used in) investing
activities....................................... (1,006) 8,785
------- --------
Cash flows from financing activities:
Net borrowings on line of credit.......................... 205 --
Proceeds from subordinated notes payable.................. 6,000 --
Payments on long-term debt................................ (431) (118)
Proceeds from stock options and warrants exercised........ 437 1,544
Increase in subscription receivables...................... (30) --
------- --------
Net cash provided by financing activities......... 6,181 1,426
------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (17) 9
------- --------
Net increase (decrease) in cash and cash equivalents........ 1,251 (4,904)
Cash and cash equivalents, beginning of period.............. 2,120 79,500
------- --------
Cash and cash equivalents, end of period.................... $ 3,371 $ 74,596
======= ========
Supplemental cash flow information:
Interest paid............................................. $ 394 $ 8
======= ========
Noncash investing and financing activities:
Warrants issued in conjunction with subordinated notes
payable................................................ $ 1,904 $ --
======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
6
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Firepond, Inc., together with its wholly owned subsidiaries (the
"Company"), is a leading global provider of integrated e-business sales and
marketing solutions that enable companies to optimize their customer
relationships and maximize the effectiveness of their Internet-based and
traditional sales channels. The Company provides software and services that
allow its customers to merge their e-commerce selling, customer relationship
management, and channel management strategies on a single, Internet-based
platform.
The accompanying consolidated financial statements include the accounts of
Firepond, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the accompanying financial
statements.
The accompanying condensed consolidated financial statements for the three
months ended January 31, 2001 and 2000 are unaudited and have been prepared on a
basis consistent with the October 31, 2000 audited financial statements and
include normal recurring adjustments which are, in the opinion of management,
necessary for the fair presentation of the results of these periods. These
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the fiscal
year ended October 31, 2000 included in the Company's Form 10-K. The results of
operations for the three months ended January 31, 2001 are not necessarily
indicative of results to be expected for the entire year or any other period.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue based on the provisions of AICPA Statement
of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended by SOP
No. 98-9, and SOP No. 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.
The Company generates revenue from two primary sources: (1) product-related
license and service revenue and (2) custom development service revenue.
Product-Related Revenue
Product-related license revenue is generated from licensing the rights to
the use of the Company's packaged software products. Product-related service
revenue is generated from sales of maintenance, consulting and training services
performed for customers that license the Company's products.
The Company has concluded that the implementation services are essential to
the customer's use of the packaged software products in arrangements where the
Company is responsible for implementation services. As such, the Company
recognizes revenue for these arrangements following the percentage-of-completion
method over the implementation period. Percentage of completion is measured by
the percentage of implementation hours incurred to date compared to estimated
total implementation hours. This method is used because management has
determined that past experience has shown expended hours to be the best measure
of progress on these engagements. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the entire loss on
the contract is recorded.
In situations where the Company is not responsible for implementation
services, the Company recognizes revenue on delivery of the packaged software if
there is persuasive evidence of an arrangement, collection is probable, the fee
is fixed or determinable and vendor-specific objective evidence exists to
allocate the total fees to all elements of the arrangement.
5
7
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In situations where the Company is not responsible for implementation
services and is also obligated to provide unspecified additional software
products in the future, the Company recognizes revenue as a subscription over
the term of the commitment period.
Vendor-specific objective evidence is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple-element arrangements could consist of software
products, upgrades, enhancements, maintenance, consulting and training services.
Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Consulting revenue is primarily related to
implementation services performed on a time-and-materials basis under separate
service arrangements. Revenue from consulting and training services is
recognized as services are performed.
The Company generally bills for services on a monthly basis. The Company
generally bills for product license fees upon commencement of the contract.
However, in some situations the Company may delay billing based on the terms of
the contract. The Company has recorded deferred revenue on amounts billed or
collected by the Company before satisfying the above revenue recognition
criteria. Deferred revenue consisted of the following:
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
(IN THOUSANDS)
Product license....................................... $ 8,740 $ 8,565
Product-related services.............................. 1,344 2,170
Product-related maintenance........................... 2,865 3,471
Custom development services........................... 2,258 961
------- -------
$15,207 $15,167
======= =======
Unbilled product license fees for which the Company has not recognized or
deferred revenue totaled $5,923,000 at October 31, 2000 and $3,630,000 at
January 31, 2001.
Custom Development Services Revenue
The Company provides ongoing services related to custom development
projects including software and data maintenance. Revenue from these
arrangements is recognized as the services are performed. The Company also
performs custom development services under fixed-price contracts, for which
revenue is recognized using the percentage-of-completion method. These services
consist of the development of highly customized applications utilizing core
software technology. These contracts typically range in terms of one to five
years. Percentage of completion is measured by the percentage of implementation
hours incurred to date to estimated total implementation hours. This method is
used because management considers expended hours to be the best measure of
progress on these engagements. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the entire loss on
the contract is recorded.
Unbilled services represent amounts due to the Company under custom
development service agreements for work performed that had not been billed as of
the period end. The Company bills customers under custom development contracts
upon achieving performance milestones or by billing dates, as specified in the
contracts.
6
8
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(b) Cash and Cash Equivalents
The Company accounts for cash equivalents based on the guidance in
Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Cash equivalents are
short-term, highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value. Cash equivalents at October 31, 2000 and January 31, 2001
consisted of interest-bearing bank deposits, money market accounts and
commercial paper.
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
(IN THOUSANDS)
Cash and cash equivalents:
Cash...................................................... $ 7,186 $ 1,731
Money market accounts..................................... 4,095 14,384
Commercial paper.......................................... 68,219 58,481
------- -------
Total cash and cash equivalents................... $79,500 $74,596
======= =======
(c) Short-term Investments
In accordance with SFAS No. 115 and based on the Company's intentions
regarding these instruments, the Company has classified all short-term
investments as available-for-sale. These investments consist primarily of
corporate notes and bonds with an original maturity of less than a year. Other
comprehensive loss in stockholder's equity included an unrealized holding loss
of $4,000 for October 31, 2000 and an unrealized holding gain of $58,000 for
January 31, 2001.
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
(IN THOUSANDS)
Short-term investments:
Certificates of deposit (average 70 days to maturity)..... $ -- $ 2,004
Commercial paper.......................................... 15,329 --
Corporate notes and bonds (average 105 days to
maturity).............................................. 21,404 24,055
------- -------
Total short-term investments...................... $36,733 $26,059
======= =======
(d) Comprehensive Income (Loss)
The components of comprehensive loss for the three months ended January 31,
2000 and 2001 are as follows:
THREE MONTHS
ENDED JANUARY 31,
------------------
2000 2001
------- -------
(IN THOUSANDS)
Comprehensive loss:
Net loss.................................................. $(5,823) $(8,608)
Other comprehensive loss
Unrealized gain on short-term investments.............. -- 62
Foreign currency translation........................... (188) 263
------- -------
Comprehensive loss.......................................... $(6,011) $(8,283)
======= =======
7
9
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. NOTE RECEIVABLE FROM OFFICER
On November 28, 2000, the Company's Board of Directors approved a loan
facility to Klaus Besier, the Company's Chairman and Chief Executive Officer,
allowing borrowings up to $3,000,000 bearing interest at the applicable federal
rate in effect during the term of the note. On January 9, 2001, the Company's
Board of Director's approved an increase in the loan facility to $4,000,000. The
outstanding principal together with unpaid interest is due and payable on the
earlier of October 31, 2001, an event of default, or an event of maturity, as
defined. The promissory note is secured by a pledge of 500,000 shares of common
stock of FirePond, Inc. and a covenant of cross default of other stock option
agreements between Besier and the Company. Amounts totaling $3,575,489 have been
advanced to Besier under this facility and is included in other current assets
as of January 31, 2001.
4. ACCRUED LIABILITIES
Accrued liabilities consists of:
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
(IN THOUSANDS)
Payroll and related costs................................. $ 4,142 $ 2,416
Other..................................................... 9,253 8,752
------- -------
Total accrued liabilities......................... $13,395 $11,168
======= =======
5. NET LOSS PER SHARE
(a) Net Loss Per Share
Net loss per share is computed based on the guidance of SFAS No. 128,
Earnings per Share. SFAS No. 128 requires companies to report both basic loss
per share, which is computed by dividing the net loss applicable to common
stockholders by the weighted average number of common shares outstanding, and
diluted loss per share, which is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding
plus the weighted average dilutive potential common shares outstanding using the
treasury stock method. As a result of the losses incurred by the Company for
both the three months ended January 31, 2000 and 2001, all potential common
shares were antidilutive and were excluded from the diluted net loss per share
calculations.
Under Securities and Exchange Commission Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued or granted for nominal
consideration before the anticipated effective date of a company's initial
public offering must be included in the calculation of basic and diluted net
loss per share as if they had been outstanding for all periods presented. The
Company has determined that there were no issuances of common stock and
convertible preferred stock for nominal consideration.
8
10
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be antidilutive:
THREE MONTHS
ENDED JANUARY 31,
------------------
2000 2001
------- -------
(IN THOUSANDS)
Common stock options and warrants.......................... 11,163 11,041
====== ======
Convertible preferred stock................................ 19,098 --
====== ======
Preferred stock warrants................................... 864 --
====== ======
(b) Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of preferred stock that converted upon the
completion of the Company's initial public offering, using the if-converted
method, from the original date of issuance.
The following table reflects the reconciliation of the shares used in the
computation of pro forma loss per share:
THREE MONTHS
ENDED JANUARY 31,
------------------
2000 2001
------- -------
(IN THOUSANDS)
Pro forma basic and diluted:
Weighted average common shares outstanding used in
computing basic and diluted net loss per share......... 10,101 35,548
Weighted average common shares issuable upon the
conversion of preferred stock.......................... 13,403 --
Weighted average common shares issuable upon settlement of
the priority payments.................................. 3,813 --
Weighted average common shares issuable upon exercise of
series F preferred stock warrants...................... 249 --
------ ------
Weighted average common shares outstanding used in
computing pro forma basic and diluted net loss per
share.................................................. 27,566 35,548
====== ======
6. STOCKHOLDERS' EQUITY (DEFICIT)
(a) Recapitalization
Upon the closing of the initial public offering in February 2000, the
Company's certificate of incorporation was amended and restated to change its
authorized capital stock to 100,000,000 shares of $0.01 par value common stock
and 5,000,000 shares of $0.01 par value preferred stock.
(b) Stock Options and Warrants
The Company granted stock options to employees and consultants that require
the recognition of stock-based compensation expense. Additionally, the Company
granted stock warrants to certain customers and to strategic business partners.
Stock-based compensation related to grants to employees represents the
amortization, over the vesting period of the option, of the difference between
the exercise price of options granted to employees and the fair market value of
its common stock for financial reporting purposes. Stock-based
9
11
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
compensation related to grants to non-employees represents the fair market value
of the options and warrants granted as computed using an established option
valuation formula. As of January 31, 2001, the deferred compensation balance was
$4,854,000 and will be recognized as an expense over the vesting period of the
underlying stock options for options granted to employees and as earned for
non-employees in accordance with EITF 96-18.
The Company granted options to employees to purchase 1,013,206 shares of
common stock at a weighted-average exercise price of $8.35 per share during the
three months ended January 31, 2001.
7. SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information related to operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate, discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions
how to allocate resources and assess performance. The Company's chief operating
decision maker, as defined under SFAS No. 131, is its chief executive officer.
The Company views its operations and manages its business as two segments,
product-related licenses and services and custom development services. The
Company's reportable segments are strategic business units that provide distinct
services to the end customer. They are managed separately because each business
segment requires different marketing and management strategies. The Company's
approach is based on the way that management organizes the segments within the
Company for making operating decisions and assessing performance.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not allocate
operating expenses between its two reportable segments. Therefore, the Company's
measure of performance for each reportable segment is based on total net revenue
and direct costs of services, which are reported separately in the accompanying
condensed consolidated statements of operations and no additional disclosure is
required. The Company does not identify assets and liabilities by segment and
therefore, identifiable assets, capital expenditures and depreciation and
amortization are not reported by segment.
The majority of the Company's revenues are derived from the United States
with approximately 36% coming from foreign countries. Revenues from contracts
entered into by our Netherlands' subsidiaries contributed approximately 22% of
our revenues for the three months ended January 31, 2001. No single country
contributed greater than 10% of our total revenues for the three months ended
January 31, 2000, other than the United States.
8. SUBSEQUENT EVENTS
(a) Brightware Acquisition
On February 15, 2001, pursuant to an Agreement and Plan of Merger between
the Company and Brightware, Inc. (Brightware), the Company acquired 100% of the
issued and outstanding capital stock of Brightware, a supplier of eCustomer
assistance software. The Company acquired the capital stock of Brightware in
exchange for $8,500,000 in cash and the issuance of 2,825,305 shares of common
stock for a total purchase price of approximately $23,000,000. A portion of the
purchase price is conditional on Brightware achieving specific financial
performance objectives. The acquisition will be accounted for using the purchase
method in accordance with APB No. 16. Accordingly, the results of operations of
Brightware, from the date of acquisition will be included in the results of
operations of the Company.
10
12
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(b) Loss Contingency
On March 2, 2001 the Company entered into an agreement in principle with a
customer which will require the Company to pay to a customer an estimated $1.6
million as a resolution of outstanding contractual matters. This issue arose
subsequent to January 31, 2001. The Company will record this transaction as a
charge to operations in the quarter ended April 30, 2001.
11
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements
that involve risks and uncertainties. Words such as anticipates, expects,
intends, plans, believes, seeks, estimates and similar expressions identify such
forward-looking statements. The forward-looking statements contained herein are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from these expressed in such
forward-looking statements. Factors that might cause such a difference include,
among other things, those set forth under "Overview", "Liquidity and Capital
Resources" and "Risk Factors" included in these sections and those appearing
elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting forward-looking statements.
OVERVIEW
We are a leading global provider of integrated e-business sales and
marketing solutions that enable companies to optimize their customer
relationships and maximize the effectiveness of their Internet-based and
traditional sales channels. We provide software and services that allows our
customers to merge their e-commerce selling, customer relationship management,
and channel management strategies on a single, Internet-based platform. From our
inception in 1983 through 1997, we generated revenue primarily through providing
custom development services. These services consisted of the development of
highly customized applications utilizing core software technology, and related
software maintenance and data maintenance services. In early fiscal 1997, we
undertook a plan to change our strategic focus from a custom development
services company to a software product company providing more standardized
solutions. Our first packaged software product was introduced in May 1997. We
released the Firepond Application Suite in October 1999 and renamed and
repackaged the FirePond Application Suite as the SalesPerformer Suite in
December 2000. As a result of these efforts, product-related revenue as a
percentage of total revenue increased from 1.5% in fiscal 1997 to 76.5% in
fiscal 2000 and to 84.6% in the three months ended January 31, 2001.
We anticipate that product-related revenue from product licenses will grow
as result of increased market acceptance of our products, the recent
introduction of the SalesPerformer Suite, and increases in both the size and
productivity of our sales force. Therefore, we expect that a higher percentage
of total revenue will be attributable to product-related revenue in the future.
Unlike our custom development services, our product-related services represent
the implementation of our packaged software products.
We also anticipate a continued decline in custom development services
revenue, as we have strategically de-emphasized that business and do not plan to
accept new custom development contracts. Custom development services revenue
will continue to represent a material portion of total revenue until existing
custom development contracts and related maintenance agreements are completed.
Custom development services revenue in the future will be primarily from ongoing
software maintenance and data maintenance services that we provide under custom
development services contracts. The rate of decline in custom development
revenue depends in part on our ability to convert custom development services
customers to our software products.
We derive revenue principally from software product licenses;
product-related consulting and training, support and maintenance services; and
custom development services and related support and maintenance.
We acquired 100% of the issued and outstanding shares of capital stock of
Signature Software, Inc. (Signature) on September 27, 2000. The acquisition was
accounted for as a purchase in accordance with APB No. 16. Accordingly, the
results of operations of Signature have been included in the Company's results
of operations since the date of acquisition. In addition, subsequent to January
31, 2001, the Company acquired 100% of the issued and outstanding shares of
capital stock of Brightware, Inc. (Brightware). This acquisition will also be
accounted for using the purchase method in accordance with APB No. 16.
Accordingly, the results of operations of Brightware from the date of
acquisition, February 15, 2001, will be included in the results of operations of
the Company.
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We recognize revenue under Statement of Position, or SOP, No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-9, and SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. We generally recognize revenue from product-related license
agreements over the implementation period. We recognize this revenue following
the percentage-of-completion method over the implementation period because we
have concluded that the implementation services are essential to our customers'
use of our packaged software products. Percentage of completion is measured by
the percentage of implementation hours incurred to date to total estimated
implementation hours.
We recognize revenue from product-related support and maintenance services
ratably over the term of the contract, typically one year. Product-related
support and maintenance services include technical support and unspecified
upgrade and maintenance rights. We recognize consulting and training revenue as
the services are performed. Consulting and training revenue is primarily related
to implementation services performed on a time-and-materials basis under
separate service arrangements.
Revenue from custom software development projects can be either fixed-price
or on a time-and-materials basis. We recognize revenue as the services are
performed when the project is based on time-and-materials. We recognize revenue
on a percentage-of-completion method when the project is a fixed-price contract.
Percentage-of-completion is determined based on the number of hours incurred to
date on a project compared to the total estimated hours.
Since May 1998, we have been investing heavily in the infrastructure
necessary to expand our global operations, including the formation and staffing
of international subsidiaries. We expect to continue to invest in our
international operations as we expand our international direct sales channel and
enhance our marketing effort to increase our worldwide market share.
We have invested heavily in research and development. Research and
development expenses have been increasing since early fiscal 1997 when we began
the development of our software products. Since the introduction of our first
software product, we have determined that technological feasibility of our
software products occurs late in the development cycle and close to general
release of the products, and that the development costs incurred between the
time technological feasibility is established and general release of the product
are not material. Therefore, beginning in June 1997, we expense these costs as
incurred to research and development expense. To enhance our product offering
and market position, we believe it is essential for us to continue to make
significant investment in research and development. As a result, we anticipate
our research and development expenses will increase in the future.
We have granted stock options to employees and consultants that require us
to record stock-based compensation expense. We have also granted stock warrants
to certain customers and to strategic business partners. Stock-based
compensation related to grants to employees represents the amortization, over
the vesting period of the option, of the difference between the exercise price
of options granted to employees and the fair market value of our common stock
for financial reporting purposes. Stock-based compensation related to grants to
non-employees represents the fair market value of the options and warrants
granted as computed using an established option valuation formula. We recorded
stock-based compensation expense of approximately $1.2 million and $696,000 for
the three months ended January 31, 2000 and January 2001, respectively. As of
January 31, 2001, the deferred compensation balance was approximately $4.9
million and will be amortized over the remaining vesting period of the options
and warrants.
We have incurred quarterly and annual losses intermittently since we were
formed, and regularly since we began transitioning to a software product
business in early fiscal 1997. We incurred net losses of $27.0 million for
fiscal 1997, $9.0 million for fiscal 1998, $28.9 million for fiscal 1999, $16.3
million for fiscal 2000, and $8.6 million for the three months ended January 31,
2001. We expect to continue to incur losses on both a quarterly and annual basis
in the future.
On March 2, 2001 we entered into an agreement in principle with a customer
which will require us to pay to a customer an estimated $1.6 million as a
resolution of outstanding contractual matters. This issue arose subsequent to
January 31, 2001. We will record this transaction as a charge to operations in
the quarter ended April 30, 2001.
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As of October 31, 2000, we had available a net operating loss carryforward
of approximately $46.0 million to reduce future federal and state income taxes,
if any. This carryforward expires beginning in 2012 and may be subject to review
and possible adjustment by the Internal Revenue Service. The Tax Reform Act of
1986 contains provisions that may limit the amount of net operating loss
carryforwards that we may utilize in any one year in the event of cumulative
changes in ownership over a three-year period in excess of 50%. The Company's
wholly owned foreign subsidiaries have net operating loss carryforwards of
approximately $16 million as of October 31, 2000.
RESULTS OF OPERATIONS
The following table presents selected consolidated financial data as a
percentage of total net revenue:
THREE MONTHS ENDED
JANUARY 31,
------------------
2000 2001
------ ------
Revenue:
Product-related revenue:
License................................................ 32.6% 27.7%
Services and maintenance............................... 37.2 56.9
----- -----
Total product-related revenue..................... 69.8 84.6
Custom development services............................ 30.2 15.4
----- -----
Total revenue..................................... 100.0 100.0
----- -----
Cost of revenue:
License................................................... 1.1 0.5
Product-related services and maintenance.................. 19.1 58.6
Custom development services............................... 13.3 4.7
----- -----
Total cost of revenue............................. 33.5 63.8
----- -----
Gross profit................................................ 66.5 36.2
Operating expenses:
Sales and marketing....................................... 53.6 47.0
Research and development.................................. 30.9 32.2
General and administrative................................ 16.4 19.9
Stock-based compensation.................................. 9.7 4.8
----- -----
Total operating expenses.......................... 110.6 103.9
----- -----
Loss from operations........................................ (44.1) (67.7)
Interest income (expense)................................... (6.7) 11.9
Other income (expense), net................................. 2.2 (3.4)
----- -----
Net loss.................................................... (48.6)% (59.2)%
===== =====
Comparison of Three Months Ended January 31, 2000 and 2001
Revenue. Total revenue increased $2.5 million, or 21.5%, to $14.5 million
in the three months ended January 31, 2001 from $12.0 million in the three
months ended January 31, 2000. This increase is attributable to a 47.1% increase
in product related revenue, offset by a 38.0% decrease in custom development
service revenue.
License. License revenue increased $127,000, or 3.3%, to $4.0 million
in the three months ended January 31, 2001 from $3.9 million in the three
months ended January 31, 2000. License revenue as a percentage of total
revenue decreased to 27.7% in the three months ended January 31, 2001 from
32.6% in the three months ended January 31, 2000. The increase in license
revenues in absolute dollars is
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primarily attributable to an increase in the number of licenses implemented
during the first quarter of fiscal 2001. The decrease as a percentage of
total revenue is the result of product services and maintenance revenue
increasing at a greater rate than license revenue. License revenue for the
quarter ended January 31, 2001 has declined by $3.5 million or 46.3%
compared to the three months ended October 31, 2000. We believe this
decline is attributable to a global slowdown in information technology
spending experienced by software companies in our industry. In addition, in
our pursuit of customer satisfaction, we have experienced slower revenue
recognition from our current customer implementations than anticipated due
to performing professional services outside of the original scope of the
engagement for no incremental revenue. Over the long term we anticipate
that license revenue will grow as a result of additional license sales
resulting from increased market acceptance of our products, a growing
customer base, increased marketing efforts, and improved productivity of
our sales force.
Product service and maintenance. Product service and maintenance
revenue increased $3.8 million, or 85.6%, to $8.3 million in the three
months ended January 31, 2001 from $4.5 million in the three months ended
January 31, 2000. Product services and maintenance revenue as a percentage
of total revenue increased to 56.9% in the three months ended January 31,
2001 from 37.2% in the three months ended January 31, 2000. Approximately
$2.8 million of the increase is attributable to the increase in the number
of consulting engagements and maintenance agreements related to the
increased license revenue in this period as well as an increased amount of
services provided for the license implementations in this period as
compared to the prior year period. Additionally, approximately $1.0 million
of the increase is attributable to a greater number of post-license
implementation consulting engagements and maintenance contracts in this
period.
Custom development services. Custom development services revenue
decreased $1.4 million, or 38.0%, to $2.2 million in the three months ended
January 31, 2001 from $3.6 million in the three months ended January 31,
2000. Custom development services revenue as a percentage of total revenue
decreased to 15.4 % in the three months ended January 31, 2001 from 30.2%
in the three months ended January 31, 2000. The decrease in absolute
dollars and as a percentage of total revenue is due to the change of our
strategic focus. We expect custom development services revenue to continue
to decline.
Cost of revenue. Total cost of revenue increased $5.3 million, or 131.3%,
to $9.3 million in the three months ended January 31, 2001 from $4.0 million in
the three months ended January 31, 2000. Total cost of revenue as a percentage
of total revenue increased to 63.8% in the three months ended January 31, 2001
from 33.5% in the three months ended January 31, 2000.
Cost of license revenue. Cost of license revenue consists primarily
of costs of royalties, media, product packaging, and other production cost.
Cost of license revenue decreased $60,000, or 46.5% to $69,000 in the three
months ended January 31, 2001 from $129,000 in the three months ended
January 31, 2000. Cost of license revenue as a percentage of license
revenue decreased to 1.7% in the three months ended January 31, 2001 from
3.3% in the three months ended January 31, 2000. The decrease in cost of
license revenue is due primarily to a decrease in royalty charges.
Cost of product-related services and maintenance revenue. Cost of
product-related services and maintenance revenue consists primarily of
salaries and related costs for consulting, training and customer support
personnel, including cost of services provided by third-party consultants
engaged by us. Cost of product-related services and maintenance revenue
increased $6.2 million, or 273.8%, to $8.5 million in the three months
ended January 31, 2001 from $2.3 million in the three months ended January
31, 2000. Cost of product-related services and maintenance revenue as a
percentage of product-related services and maintenance revenue increased to
103.1% in the three months ended January 31, 2001 from 51.2% in the three
months ended January 31, 2000. The increase in absolute dollars was
primarily due to increased staff and consulting resources to support a
greater number of product-related engagements in this period. The increase
as a percentage of revenue was primarily due to lower billing rates
realized on certain large engagements in this period as well as lower
realized average revenue per hour on certain fixed price services contracts
in this period. These increases were caused by the Company pursuing
customer
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satisfaction and performing services outside of the scope of the original
engagement for no incremental revenue.
Cost of custom development services revenue. Cost of custom
development services revenue consists primarily of salaries and related
costs for development, consulting, training and customer support personnel
related to our custom development projects, including cost of services
provided by third-party consultants engaged by us. Cost of custom
development services revenue decreased $922,000, or 57.7%, to $677,000 in
the three months ended January 31, 2001 from $1.6 million in the three
months ended January 31, 2000. Cost of custom development services as a
percentage of custom development services revenue decreased to 30.2% in the
three months ended January 31, 2001 from 44.3% in the three months ended
January 31, 2000. The decrease in absolute dollars is primarily due to
decreased staff supporting fewer custom development services engagements.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses for sales and marketing personnel
and promotional expenses. Sales and marketing expenses increased $434,000, or
6.8%, to $6.9 million in the three months ended January 31, 2001 from $6.4
million in the three months ended January 31, 2000. Sales and marketing expenses
as a percentage of total revenue decreased to 47.0% in the three months ended
January 31, 2001 from 53.6% in the three months ended January 31, 2000. Sales
and marketing expenses increased in absolute dollars primarily due to the
increase in headcount in the sales operations, particularly our international
direct sales channel, as well as an approximate $250,000 increase in marketing
program spending to promote our product. Sales and marketing expenses decreased
as a percentage of total revenue primarily due to our revenue increasing at a
greater rate than our sales and marketing expense. We believe sales and
marketing expenses will continue to increase in absolute dollars as we expand
our sales and marketing organization and initiate additional marketing programs.
Research and development expenses. Research and development expenses
consist primarily of salaries and personnel-related costs and the costs of
contractors associated with the development of new products, the enhancement of
existing products, and the performance of quality assurance and documentation
activities. Research and development expenses increased $981,000, or 26.5%, to
$4.7 million in the three months ended January 31, 2001 from $3.7 million in the
three months ended January 31, 2000. Research and development expenses as a
percentage of total revenue increased to 32.2% in the three months ended January
31, 2001 from 30.9% in the three months ended January 31, 2000. These expenses
increased in absolute dollars and as a percentage of total revenue primarily as
a result of increased utilization of engineering and product development
contractors associated with our investment in the SalesPerformer Suite. We
expect research and development expenses will continue to increase as we enhance
our existing products and develop new products.
General and administrative expenses. General and administrative expenses
consist primarily of salaries, and other personnel-related costs for executive,
financial, human resource, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses increased $929,000, or 47.3%, to $2.9 million in the three months ended
January 31, 2001 from $2.0 million in the three months ended January 31, 2000.
General and administrative expenses as a percentage of total revenue increased
to 19.9% in the three months ended January 31, 2001 from 16.4% in the three
months ended January 31, 2000. These expenses increased in absolute dollars and
as a percentage of total revenue primarily as a result of increased headcount
and increased cost of infrastructure necessary to support our growth. We expect
that general and administrative expenses will continue to increase to support
our expanding operations.
Stock-based compensation expense. Stock-based compensation expense
decreased $471,000, or 40.4%, to $696,000 in the three months ended January 31,
2001 from $1.2 million in the three months ended January 31, 2000. Stock-based
compensation expense as a percentage of total revenue decreased to 4.8% in the
three months ended January 31, 2001 from 9.7% in the three months ended January
31, 2000. If we had allocated our stock-based compensation to the departments
for which the services were performed in the three months ended January 31,
2001, the allocation would have increased cost of revenue by $10,000, sales and
marketing expenses by $72,000, research and development expenses by $61,000 and
general and administrative expenses by $553,000. For the three months ended
January 31, 2000, the allocation would have increased
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cost of revenue by $44,000, sales and marketing expenses by $640,000, research
and development expenses by $296,000 and general and administrative expenses by
$187,000. The decrease in stock-based compensation expense in the first quarter
of fiscal 2001 consists primarily of an approximate $660,000 decline in expense
associated with unvested non-employee options and warrants due a decline in the
Company's stock price and an approximate $300,000 decline in amortization of
below fair market value employee stock option grants, offset by a $487,000
expense in this period associated with the acquisition of Signature Software in
September 2000.
Interest income (expense), net. Interest income (expense), net, improved
to $1.7 million of income in the three months ended January 31, 2001 from
$807,000 of expense in the three months ended January 31, 2000. The improvement
is primarily due to interest earned on increased cash and cash equivalents and
short-term investments as a result of our initial public offering on February 4,
2000.
Other income (expense), net. Other income (expense), net primarily
consists of bank fees and foreign currency transaction gains and losses. Other
income (expense), net decreased $761,000 to $499,000 in expense in the three
months ended January 31, 2001 from $262,000 in income in the three months ended
January 31, 2000. The decline is primarily due to foreign currency transaction
losses in the three months ended January 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2001, cash and cash equivalents were $74.6 million and
short-term investments were $26.1 million as compared with cash and cash
equivalents of $79.5 million and short-term investments of $36.7 million as of
October 31, 2000. Our working capital at January 31, 2001 was $94.9 million,
compared to working capital of $101.9 million at October 31, 2000.
Net cash used in operating activities was $15.1 million in the three months
ended January 31, 2001, compared with net cash used in operating activities of
$3.9 million in the three months ended January 31, 2000. Cash used in operating
activities in the three months ended January 31, 2001 was primarily attributable
to our net loss, an increase in unbilled services and prepaid expenses and other
current assets and a decrease in accounts payable and accrued liabilities offset
in part by non-cash expenses including stock-based compensation expense,
depreciation and amortization.
Net cash provided by investing activities was $8.8 million in the three
months ended January 31, 2001, compared with net cash used in investing
activities of $1.0 million in the three months ended January 31, 2000. Net cash
provided by investing activities in the three months ended January 31, 2001 was
primarily attributable to the purchase and sale of short-term investments offset
in part by the purchase of property and equipment to support our expanding
operations.
Net cash provided by financing activities was $1.4 million in the three
months ended January 31, 2001, compared with $6.2 million in the three months
ended January 31, 2000. Net cash provided by financing activities for the three
months ended January 31, 2001 were primarily from the exercise of stock options
partially offset by payments on long-term debt.
Subsequent to January 31, 2001, the Company acquired 100% of the issued and
outstanding capital stock of Brightware, Inc. In connection with this
transaction, the Company expects to use approximately $18.0 to $20.0 million in
cash for deal consideration, net liabilities assumed and costs incurred to
combine the entities.
We anticipate continued spending on capital expenditures consistent with
anticipated growth in operations, infrastructure and personnel. We believe that
our existing cash balances will be sufficient to meet our anticipated cash need
for working capital and capital expenditures for at least the next 12 months.
However, we may need to raise additional funds in the next 12 months or in the
future to support more rapid expansion of our sales force, develop new or
enhanced products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If we seek to raise additional funds, we may not be able to obtain
funds on terms which are favorable or acceptable to us. If we raise additional
funds through the issuance of equity securities, the percentage ownership of our
existing stockholders would be reduced. Furthermore, these securities may have
rights, preferences or privileges senior to our common stock.
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RISK FACTORS
As defined under Safe Harbor provisions of The Private Securities
Litigation Reform Act of 1995, except for the historical information contained
herein, some of the matters discussed in this filing contain forward-looking
statements regarding future events that are subject to risks and uncertainties.
The following factors, among others, could cause actual results to differ
materially from those described by such statements.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE
We have incurred quarterly and annual losses intermittently since we were
formed in 1983, and regularly since fiscal 1997. We incurred net losses of $9.0
million for fiscal 1998, $28.9 million for fiscal 1999, $16.3 million for fiscal
2000 and $8.6 million for the three months ended January 31, 2001. We expect to
continue to incur losses on both a quarterly and annual basis and we are
uncertain if or when we will become profitable. Moreover, we expect to continue
to incur significant sales and marketing and research and development expenses,
and, as a result, we will need to generate significant revenues to achieve and
maintain profitability. We may not sustain our growth or generate sufficient
revenues to attain profitability.
DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL
We currently derive a significant portion of our license revenues in each
quarter from a small number of relatively large orders, and we generally
recognize revenues from our licenses over the related implementation period. If
we are unable to recognize revenues from one or more substantial license sales
planned for a particular fiscal quarter, our operating results for that quarter
would be seriously harmed. In addition, the purchase of our products typically
involves a substantial commitment of resources by our customers or their
consultants over an extended period of time. The time required to complete an
implementation may vary from customer to customer and may be protracted due to
unforeseen circumstances. Because our revenues from implementation, maintenance
and training services are largely correlated with our license revenues, a
decline in license revenues would also cause a decline in our services revenues
in the same quarter and in subsequent quarters. Because our sales cycle is long,
we may have difficulty predicting when we will recognize revenues. If our
quarterly revenues or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could fall substantially
and we could become subject to securities class-action litigation. Litigation,
if instituted, could result in substantial costs and a diversion of management's
attention and resources, which would materially adversely affect our business,
financial condition and results of operations.
A DECLINE IN INFORMATION TECHNOLOGY SPENDING COULD REDUCE THE SALE OF OUR
PRODUCTS
Average license fees for our products typically range from approximately
several hundred thousand dollars to several million dollars. Often this
represents a significant IT capital expenditure for the companies to which we
target our sales efforts. If a decline in IT spending should occur, whether
resulting from a weakened economy or other factors, we may be unable to maintain
or increase our sales volumes and achieve our targeted revenue growth.
DIFFICULTIES AND FINANCIAL BURDENS ASSOCIATED WITH ACQUISITIONS COULD HARM OUR
BUSINESS AND FINANCIAL RESULTS
On February 15, 2001, we acquired all of the outstanding stock of
Brightware, Inc. Our product range and customer base have increased in the
recent past due in part to this acquisition. There can be no assurance that the
integration of all of the acquired technologies will be successful or will not
result in unforeseen difficulties that may absorb significant management
attention.
In the future, we may acquire additional businesses or product lines. The
recently completed acquisition, or any future acquisition, may not produce the
revenue, earnings or business synergies that we anticipated, and an acquired
product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired companies
into our business may also result in unforeseen difficulties. Unforeseen
operating difficulties may absorb significant management attention, which we
might otherwise devote to our existing
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business. Also, the process may require significant financial resources that we
might otherwise allocate to other activities, including the ongoing development
or expansion of our existing operations.
If we pursue a future acquisition, our management could spend a significant
amount of time and effort identifying and completing the acquisition. If we make
a future acquisition, we could issue equity securities which would dilute
current stockholders' percentage ownership, incur substantial debt, assume
contingent liabilities, incur a one-time charge or be required to amortize
goodwill.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY, OUR FUTURE
SUCCESS IS UNCERTAIN
Although FirePond was incorporated in 1983, we have only been focused on
providing software products since 1997. Because we have only been focused on
providing software products for a short time, we have a limited operating
history pursuing this business model. The revenue and income potential of the
market for e-business sales and marketing solutions is unproven. As a result,
our historical financial statements are not an accurate indicator of our future
operating results. In addition, we have limited insight into trends that may
emerge and affect our business, and we cannot forecast operating expenses based
on our historical results. In evaluating FirePond, you should consider the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets. If we are not able to successfully address these
risks, our business could be harmed.
A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH WOULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS
A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
in Minsk, Belarus. Unpredictable developments in the political, economic and
social conditions in Belarus, or our failure to renew our consulting agreement
with this organization on terms similar to our current agreement, could
eliminate or reduce the availability of these product development and
implementation services. If access to these services were to be unexpectedly
eliminated or significantly reduced, our ability to meet development objectives
vital to our ongoing strategy would be hindered, and our business could be
seriously harmed.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE SALESPERFORMER SUITE, WHICH HAS BEEN
RECENTLY INTRODUCED AND MAY NOT BE WIDELY ADOPTED BY OUR CUSTOMERS
We expect to derive substantially all of our product license revenues in
the future from FirePond Application Suite and its component products, which
were released in October 1999, and renamed and repackaged as the SalesPerformer
Suite in December 2000. Our business depends on the successful release,
introduction and customer acceptance of this new suite of products. We expect
that we will continue to depend on revenues from new and enhanced versions of
the SalesPerformer Suite, and our business would be harmed if our target
customers do not adopt and expand their use of the SalesPerformer Suite and its
component products.
WE DEPEND ON KEY PERSONNEL AND MUST ATTRACT AND RETAIN ADDITIONAL QUALIFIED
PERSONNEL TO BE SUCCESSFUL
Our success depends upon the continued contributions of our senior sales,
engineering and management personnel, who perform important functions, and would
be difficult to replace. Specifically, we believe that our future success is
highly dependent on Klaus P. Besier, our chairman and chief executive officer,
and other senior management personnel. The loss of the services of any key
personnel, particularly senior management and engineers, could seriously harm
our business.
In addition, our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled employees, particularly marketing
personnel, software engineers and other senior personnel. Our failure to attract
and retain the highly trained technical personnel that are integral to our
product development, professional services and support teams may limit our
ability to develop new products or product enhancements.
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FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND CONSULTING
FIRMS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND DELAY THE GROWTH OF OUR
REVENUES
At times we rely on systems integrators and consulting firms to recommend
our products to their customers and to install and support our products for
their customers. To increase our revenues and implementation capabilities, we
must develop and expand our relationships with systems integrators and
consulting firms. If these firms fail to implement our products successfully for
their clients, we may not have the resources to implement our products on the
schedule required by the client which would result in our inability to recognize
revenues from the license of our products to these customers.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE WHICH MAY LEAD TO LOSSES BY
INVESTORS AND RESULT IN SECURITIES LITIGATION
The trading price of our common stock has been and may continue to be
highly volatile and could be subject to wide fluctuations in price in response
to various factors, many of which are beyond our control, including quarterly
variations in our results of operations; changes in recommendations by the
investment community or in their estimates of our revenues or operating results;
speculation in the press or investment community; strategic actions by our
competitors, such as product announcements or acquisitions; and general market
conditions.
In addition, the stock market in general and the Nasdaq National Market and
securities of Internet and software companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to their operating performance. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. Litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would materially adversely affect our business, financial
condition and results of operations.
FAILURE TO INCREASE OUR INTERNATIONAL REVENUES COULD SERIOUSLY HARM OUR BUSINESS
International revenues currently account for a significant percentage of
our total revenues. We expect international revenues to continue to account for
a significant percentage of total revenues in the future and we believe that we
must continue to expand our international sales activities to be successful.
However, foreign markets for our products may develop more slowly than currently
anticipated. International revenues as a percentage of total product-related
revenues were 13% in fiscal 1999, 36% in fiscal 2000 and 42% for the three
months ended January 31, 2001. Our failure to expand our international sales
could have a significant negative impact on our business.
FAILURE TO EFFECTIVELY MANAGE OUR GEOGRAPHICALLY DISPERSED ORGANIZATION COULD
HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS OPERATIONS
If we fail to manage our geographically dispersed organization, we may fail
to meet or exceed our objectives and our revenues may decline. We perform
research and development activities in Minnesota, New Jersey, Massachusetts and
Belarus, and our executive officers and other key employees are similarly
dispersed throughout the United States, Europe and Asia. This geographic
dispersion requires significant management resources that our locally based
competitors do not need to devote to their operations. In addition, the
expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources.
INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL AND CONTINUED RAPID
GROWTH MAY STRAIN OUR OPERATIONS
We have experienced a period of rapid growth and expansion requiring a
significant increase in new personnel to support our growth and the market
opportunity. All members of our senior management team have joined Firepond
since May 1997, and we continue to experience turnover at the senior management
level. This may place a significant burden on our management and our internal
resources. If we are not able to install
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adequate systems, procedures and controls to support our future operations in an
efficient and timely manner, or if we are unable to otherwise manage growth
effectively, our business could be harmed.
INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES COULD PREVENT US FROM
INCREASING OR SUSTAINING REVENUES AND PREVENT US FROM ACHIEVING OR SUSTAINING
PROFITABILITY
The market for integrated e-business sales and marketing solutions is
intensely competitive and we expect that this competition will increase. Many of
our current and potential competitors have longer operating histories, greater
name recognition and substantially greater resources than we do. Therefore, they
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or customer requirements. If we are
unable to compete effectively, our revenues could significantly decline.
IF E-BUSINESS SALES AND MARKETING SOLUTIONS ARE NOT WIDELY ADOPTED, WE MAY NOT
BE SUCCESSFUL
Our products address a new and emerging market for e-business sales and
marketing solutions. The failure of this market to develop, or a delay in the
development of this market, would seriously harm our business. The success of
e-business sales and marketing solutions depends substantially upon the
widespread adoption of the Internet as a primary medium for commerce and
business applications. The Internet infrastructure may not be able to support
the demands placed on it by the continued growth upon which our success depends.
Moreover, critical issues concerning the commercial use of the Internet, such as
security, reliability, cost, accessibility and quality of service, remain
unresolved and may negatively affect the growth of Internet use or the
attractiveness of commerce and business communication over the Internet.
IF WE ARE UNABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS THAT
RESPOND EFFECTIVELY TO CHANGING TECHNOLOGY, OUR REVENUES MAY DECLINE
Our market is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements, and evolving industry standards. Advances in Internet technology
or in e-commerce software applications, or the development of entirely new
technologies to replace existing software, could lead to new competitive
products that have better performance or lower prices than our products and
could render our products obsolete and unmarketable. In addition, if a new
software language or operating system becomes standard or is widely adopted in
our industry, we may need to rewrite portions of our products in another
computer language or for another operating system to remain competitive. If we
are unable to develop new and enhanced products on a timely basis that respond
to changing technology, our business could be seriously harmed.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, THE LOSS OF WHICH COULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION
We license technology from a small number of software providers for use
with our products. In addition, the effective implementation of our products
depends upon the successful operation of third-party licensed technology in
conjunction with our products. We anticipate that we will continue to license
and rely on technology from third parties in the future. This technology may not
continue to be available on commercially reasonable terms, if at all, and some
of the technology we license would be difficult to replace. The loss of the use
of this technology would result in delays in the license and implementation of
our products until equivalent technology, if available, is identified, licensed
and integrated. In turn, this could prevent the implementation or impair the
functionality of our products, delay new product introductions, or injure our
reputation.
CLAIMS MAY BE BROUGHT AGAINST US IF WE HIRE FORMER EMPLOYEES OF OUR COMPETITORS,
WHICH MAY CAUSE US TO INCUR SUBSTANTIAL COSTS
Companies in the software industry, whose employees accept positions with
competitors, frequently claim that those competitors have breached, or
encouraged the breach of, noncompetition and nondisclosure agreements. These
claims have been made against us in the past, and we may receive claims in the
future as we hire additional qualified personnel. If a claim were to be made
against us, it could result in material
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litigation. We could incur substantial costs in defending ourselves against any
of these claims, regardless of the merits of these claims.
IF WE ARE UNABLE TO PROVIDE ADEQUATE PROFESSIONAL SERVICE AND CUSTOMER SUPPORT,
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS WILL BE HARMED
Our ability to continue to grow, to retain current and future customers and
to recognize revenues from our licenses depends in part upon the quality of our
professional service and customer support operations. Failure to offer adequate
integration, consulting and other professional services in connection with the
implementation of our products, and ongoing customer support, either directly or
through third parties, could materially and adversely affect our operating
results and reputation, and could cause demand for our products to decline.
IF OUR NEW AND COMPLEX PRODUCTS FAIL TO PERFORM PROPERLY, OUR REVENUES WOULD BE
ADVERSELY AFFECTED
Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or may cause our products to fail to
meet our customers' expectations. Our products may be particularly susceptible
to bugs or performance degradation because of the evolving nature of Internet
technologies and the stress that full deployment of our products over the
Internet to thousands of end-users may cause. Product performance problems could
result in loss of or delay in revenues, loss of market share, failure to achieve
market acceptance, diversion of development resources or injury to our
reputation.
PRODUCT LIABILITY CLAIMS RELATED TO OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS
COULD RESULT IN SUBSTANTIAL COSTS
Our products are critical to the business operations of our customers. If
one of our products fails, a customer may assert a claim for substantial damages
against us, regardless of our responsibility for the failure. Our product
liability insurance may not cover claims brought against us. Product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Any product liability claims, whether or not
successful, could seriously damage our reputation and our business.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY HARM OUR ABILITY TO
COMPETE
Our success and ability to compete is dependent in part upon our
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
Existing patent, copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
Therefore, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing the unauthorized
use of our products is difficult. Some of our contractual arrangements provide
third parties with access to our source code and other intellectual property
upon the occurrence of specified events. This access could enable these third
parties to use our intellectual property and source code to develop and
manufacture competing products, which would adversely affect our performance and
ability to compete. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could materially
adversely affect our future operating results.
CLAIMS ALLEGING INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL PROPERTY COULD
RESULT IN SIGNIFICANT EXPENSE TO US AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS
The software and other Internet-related industries are characterized by the
existence of frequent litigation of intellectual property rights. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business.
Any claims, with or without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management personnel, cause
product shipment delays, disrupt our relationships with our customers or require
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us to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon our operating results. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. If a claim against us is successful and we cannot obtain a license to the
relevant technology on acceptable terms, license a substitute technology or
redesign our products to avoid infringement, our business, financial condition
and results of operations would be materially adversely affected.
CONTROL BY OUR EXECUTIVE OFFICERS, DIRECTORS AND ASSOCIATED ENTITIES MAY LIMIT
YOUR ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS
REQUIRING STOCKHOLDER APPROVAL
As of January 31, 2001 our executive officers, directors and their
affiliates own approximately 48% of the outstanding shares of our common stock.
These stockholders have significant influence over matters requiring approval by
our stockholders, including the election of directors and the approval of
mergers or other business combination transactions. This concentration of
ownership could have the effect of delaying or preventing a change in our
control or discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material adverse effect on the market price of
the common stock or prevent our stockholders from realizing a premium over the
market price for their shares of common stock.
FUTURE SALES OF OUR STOCK COULD CAUSE OUR STOCK PRICE TO FALL
Sales of a substantial number of shares of our common stock in the public
market could cause the market price of our common stock to decline. In addition,
the sale of these shares could impair our ability to raise capital through the
sale of additional equity securities.
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT AND LOWER THE VALUE OF OUR COMMON STOCK
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred stock without
further stockholder approval, which could adversely affect the holders of our
common stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and Belarus and sell them
worldwide. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Since our sales are currently priced in U.S. dollars and are
translated to local currency amounts, a strengthening of the dollar could make
our products less competitive in foreign markets. Interest income and expense
are sensitive to changes in the general level of U.S. interest rates,
particularly since our investments are in short-term instruments and our
long-term debt and available line of credit require interest payments calculated
at variable rates. Based on the nature and current levels of our investments and
debt, however, we have concluded that there is no material market risk exposure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are engaged in legal proceedings incidental to the normal course of
business. Although the ultimate outcome of these matters cannot be determined,
we believe that the final outcome of these proceedings will not seriously harm
our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Third Amended and Restated Certificate of Incorporation of
Firepond, Inc. (incorporated by reference to Exhibit 3.3 to
the Firepond, Inc. registration statement on Form S-1, as
amended (File No. 333-90911) which was originally filed with
the SEC on November 12, 1999.)
3.2 Amended and Restated By-laws of Firepond, Inc. (incorporated
by reference to Exhibit 3.5 to the Firepond, Inc.
registration statement on Form S-1, as amended (File No.
333-90911) which was originally filed with the SEC on
November 12, 1999.)
(B) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIREPOND, INC.
/s/ KLAUS P. BESIER
--------------------------------------
Klaus P. Besier
Chairman, President, Chief Executive
Officer
and Director (Principal Executive
Officer)
/s/ PAUL K. MCDERMOTT
--------------------------------------
Paul K. McDermott
Chief Financial Officer and Vice
President of Finance
and Administration (Principal
Financial
Officer and Principal Accounting
Officer)
Dated: March 19, 2001
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Third Amended and Restated Certificate of Incorporation of
Firepond, Inc. (incorporated by reference to Exhibit 3.3 to
the Firepond, Inc. registration statement on Form S-1, as
amended (File No. 333-90911) which was originally filed with
the SEC on November 12, 1999.)
3.2 Amended and Restated By-laws of Firepond, Inc. (incorporated
by reference to Exhibit 3.5 to the Firepond, Inc.
registration statement on Form S-1, as amended (File No.
333-90911) which was originally filed with the SEC on
November 12, 1999.)
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