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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-31155
EVOLVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3219745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 65TH STREET, SUITE 100, EMERYVILLE, CA 94608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 428-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
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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 [ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ _ ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of September 11, 2001, was approximately
$14,263,512 based upon the closing sale price reported for that date on the
NASDAQ National Market. Shares of common stock held by each officer and
director and by each person who owns more than 5% or more of the outstanding
common stock have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes.
The number of shares outstanding of the registrant's common stock as of
September 11, 2001, was 40,166,616.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 2001 Annual Meeting of
Stockholders to be held on November 15, 2001 are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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EVOLVE SOFTWARE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 21
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure 31
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
Signatures 34
Financial Statements F-1
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. A word such as "expects," "anticipates,"
"intends," "believes" or similar language identifies forward-looking statements.
These forward-looking statements include, among other things, statements about
our anticipated growth strategies, the trends we see in our business and the
markets in which we operate, the features and functionality of our products, our
expectations for our future performance and the market acceptance of our
products, and the status of evolving technologies and software architectures and
their growth potential. Forward-looking statements involve risks and
uncertainties. Our actual results may differ materially from those contemplated
by the forward-looking statements. Factors that might cause or contribute to
these differences include, but are not limited to, those discussed in the
section entitled "Item 1. Business - Factors That May Affect Future Results."
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this report. We undertake no obligation to
publicly revise or update any forward-looking statements to reflect events or
circumstances after the date of this report.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of integrated Internet-based strategic workforce
optimization software for automating people-driven service organizations like
professional services firms and corporate information technology ("IT") groups.
Our Evolve 4 software suite integrates and streamlines the core processes that
are critical to services-oriented organizations which center around managing
project portfolios, project opportunities, professional resources (including
contract workers) and service delivery. Our solution combines the efficiency
gains of automating core business processes with the benefits of online
inter-company collaboration, creating a Strategic Workforce Optimization
Platform for a variety of project-driven services organizations.
We have licensed our solution to over 100 customers who have collectively
purchased it to manage over 82,000 professionals. Our customers include
professional services firms such as EDS and Icon Media Lab, high tech services
organizations at companies such as Sun Microsystems, Novell and Autodesk and
Corporate IT organizations in companies such as CFSBdirect and Fleet Financial.
INDUSTRY BACKGROUND
Organizations have invested in enterprise software applications to automate
back-office business processes such as benefits management, payroll
administration and general ledger accounting. However, they have found that
traditional enterprise applications are difficult to adapt to their specific
requirements for managing and optimizing strategic workforces, and cannot
capture the unique and changing characteristics of the professionals that are an
organization's core resource. Traditional applications can manage and execute
simple purchase and sale transactions, but cannot support the inherently
collaborative nature of project definition and delivery. Moreover, traditional
applications have not been designed to address the complex and distributed
processes that connect managers, employees and contractors within today's
project-driven services organizations.
As a result, these basic processes generally continue to be performed manually,
with spreadsheets, phones and email being the principal tools used. Some
organizations have attempted to internally develop systems to manage the
complexities of their operations. While providing modest efficiency gains,
these nonintegrated, function-specific systems have often failed to meet the
challenges of large and growing organizations with diverse, dynamic, and
distributed business process needs. These systems are often cumbersome and
inflexible and are only capable of managing isolated processes. The lack of
effective process automation solutions often results in misallocated resources,
high overhead costs, missed revenue opportunities and dissatisfaction among
clients, partners and employees.
A new breed of end-to-end Internet-based business solutions has emerged,
combining the efficiency gains of business process automation solutions with the
capabilities of online collaborative networks. Because they integrate disparate
and disconnected processes both within and between businesses, these solutions
attempt to address the challenges of industries with highly customized product
and service requirements, complex business processes, collaborative design,
production and fulfillment workflows, and significant dependence on information
exchange.
Strategic Workforce Optimization ("SWO") platforms are the next wave of critical
corporate applications that focus on a key corporate asset: the workforce. While
Professional Services Automation ("PSA") solutions, which Evolve pioneered,
provide tools to help professional services firms better manage their resources
to increase utilization, utilization is just one component of resource-value
realization, i.e., the impact resources have on profitability and
competitiveness. Evolve continues to provide PSA functionality to address the
resource staffing and utilization challenges faced by services firms, however,
Evolve delivers a broader, more comprehensive SWO platform that can be applied
to a range of markets where the workforce is a key component of value creation
and the work is inherently project-oriented.
Evolve currently targets three market opportunities directly: Global Services
Companies, Services divisions of technology companies and Corporate IT
organizations in Global 2000 companies. These three market opportunities can be
further divided into vertical markets, including information technology,
management consulting, advertising, media, public relations, architecture,
construction, engineering, financial services, law, tax, audit, and health care.
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We believe that businesses where people are the key creators of strategic value
are under increasing competitive and operational pressure due to the following
trends:
- growing complexity of professional service projects;
- increasingly sophisticated, more demanding services acquirers;
- an increasingly competitive market for skilled service professionals;
- a growing need to reduce staff without affecting key business
initiatives;
- increased acceptance of project outsourcing; and
- economic globalization.
We believe that project-driven services organizations are unique in a number of
ways. Unlike product-oriented industries producing homogeneous products using
standard components and processes, project-driven services organizations create
information-based deliverables using human resources ("strategic workers") with
unique knowledge, skills, abilities and availability. These project-based
services organizations require extensive collaboration between services
providers and clients in the definition of project needs and in the sourcing,
delivery and acceptance of services and deliverables. Perhaps most importantly,
project-driven services organizations are increasingly "virtual" organizations,
delivering services through a complex, dynamic network of resources and
providers.
We believe that the unique nature of project-driven services organizations has
created an opportunity for a solution specifically designed to optimize the
strategic workforce. By automating and connecting the business processes of
project-driven services organizations and their customers, integrated SWO
platforms can enable these organizations to better prioritize their needs,
thereby ensuring that human resources are allocated to the most strategic work
and the highest ROI projects.
The professional services market is especially suited for SWO solutions because
consulting firms and professional services organizations within companies share
many identical core business processes for managing service opportunities,
resources and delivery. As Corporate IT is looking to transition to a more
services-oriented model, they too need to focus on value realization to succeed.
Both Corporate IT and consulting firms are challenged by the need to balance
project demand against resource availability, to manage internal and external
services resources, and to accurately assess the financial impact of projects.
The similarity in the processes of both internal and external project-driven
services providers creates a significant opportunity for an integrated SWO
solution to automate the entire value chain and successfully meet the needs of
all market participants.
We believe that an effective SWO platform for project-driven services
organizations must provide:
- an architecture that is designed to capture the inherently virtual,
collaborative, project-oriented and people-centric characteristics of
the project-driven services organizations;
- a set of application modules integrating core business processes;
- an ability to rapidly deploy the solution across the enterprise;
- an integration with existing back-office information systems;
- an ability for a highly distributed and mobile workforce to access the
platform locally or remotely through multiple Internet access devices;
- online inter-company collaboration capabilities that facilitate
efficient interaction across the organization;
- an ability to deploy in either self-hosted or remotely hosted
application service provider (ASP) models; and
- a scalable solution that can be distributed globally across the
enterprise.
THE EVOLVE SOLUTION
We are a leading provider of integrated Internet-based SWO platforms for
automating project-driven services organizations like professional services and
corporate IT. Our solution, Evolve 4, integrates and streamlines the core
processes that are critical to project-based services organizations: managing
project opportunities, strategic workers and service delivery. By integrating
these processes, Evolve 4 provides enhanced visibility of business performance
throughout the enterprise, allowing businesses to more effectively identify and
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pursue revenue opportunities, prioritize their internal and external projects,
increase their operational efficiency and improve the productivity of their
professionals. We enable organizations to integrate the internal business
processes of service providers, partners and acquirers in an efficient,
collaborative environment.
We believe our Evolve 4 SWO platform provides the following benefits to
project-driven services organizations seeking to optimize their strategic
workforce:
Increased Operational Efficiency. Evolve 4 is designed to allow our customers
to achieve significant cost savings and productivity enhancements by offering
the ability to view and manage all of the core processes involved in providing
services across an entire organization. Our solution is accessible to
professionals and managers throughout a project-driven services organization,
allowing them to communicate and collaborate throughout a project. Using our
solution, services providers can rapidly match service professionals with
projects to balance supply and demand for personnel resources within the
extended enterprise. Services providers can also quickly identify low
utilization personnel and lower priority projects to intelligently downsize the
organization. Our Evolve 4 technology also automates and improves workflow
processes and monitors key project parameters, allowing business managers to
analyze and improve performance throughout the enterprise.
Real-time Communication and Collaboration Across the Virtual Organization. Our
solution allows for the real-time, collaborative sale, management, and delivery
of services through a dynamic and complex network of resources and providers.
By connecting not only service professionals within an organization but also to
external services providers, we allow our customers to employ the Internet to
communicate in real-time about changes in project requirements and timing,
resource characteristics, availability and actual time and expense.
Improved Retention of Service Professionals. By enabling professionals to
access and revise their skill profiles, staffing preferences and assignment
schedules in real time, Evolve 4 helps close the gap between professional
development and project staffing needs, improving service professionals' levels
of satisfaction and retention. Improving retention of service professionals
reduces recruitment and training expenses, protects key knowledge assets and can
have a significant impact on operating results of services providers.
Stringently Qualifying Opportunities. We believe our SWO platform enables our
customers to stringently qualify their project opportunities by prioritizing
projects and enhancing the visibility of demand for services within a project,
thereby allowing them to match their available resources to project
opportunities. Our SWO platform provides tools that significantly reduce the
complexity inherent in assessing and matching resource capabilities and
available revenue opportunities on a global basis and across organizational
boundaries. This helps companies focus on selecting the most valuable and
strategic opportunities based on a limited and/or shrinking workforce.
Enhanced Client Satisfaction. Our solution improves client satisfaction by more
effectively matching client needs with the most knowledgeable and experienced
available resources for their project. In addition, Evolve 4 facilitates timely
completion of projects by enabling project managers to collaborate with the
service provider team and the client and make better decisions more quickly. We
believe that collaborative management is essential to increasing client
satisfaction and generating repeat business.
THE EVOLVE STRATEGY
Our objective is to become the leading SWO platform provider for automating the
strategic worker in external and internal services organizations. We intend to
achieve our goal by gaining broad market acceptance for our SWO platform and by
enabling our customers to collaborate online with their services partners and
customers. Key elements of our strategy include:
Extend Market Position Among IT Services Organizations and Leverage Leadership
into Other Markets. Historically, we have targeted our solution primarily at
professional services organizations specializing in IT consulting. We chose to
initially target the IT services market because of its large size and because IT
services professionals face particularly complex collaboration and transactional
processes in selling, managing, and delivering their services. We are now using
our growing portfolio of customer references to penetrate services organizations
in the technology sector and Global 2000 Corporate IT organizations. Building
on our experience and understanding of professional services organizations, we
have taken their best practices and incorporated them into our SWO platform,
which we believe will help us expand into other professional services sectors
such as management consulting and advertising.
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Capitalize on Technology Leadership and Expand Product Offerings. We have
acquired substantial domain expertise in developing solutions addressing the
core business process automation needs of the services organizations. We have
implemented a technical architecture that meets the needs of services
organizations for flexible solutions that can rapidly be configured to meet
their individual requirements and can be expanded or "scaled" as their
organizations grow. The Evolve 4 architecture is designed for rapid and
cost-effective implementation and configuration without requiring modifications
to the application's source code. We will continue to enhance our technology
and expand our service offerings to meet the evolving needs of our customers and
promote broad market adoption and increased usage of our SWO platform solution.
We expect to devote significant resources to building, expanding and continuing
to tightly integrate our SWO platform functionality, as well as enhancing
integration with complementary systems.
Encourage Continued Adoption of Our SWO platform Through Expanded Acquisition,
Deployment and Pricing Options. We make our platform accessible to a broad range
of businesses by providing a range of acquisition and deployment options, all
based on the same technology platform and using our value-based pricing model
which charges customers based on the number of resources managed with our
software.
Take Advantage of Our Installed Base to Increased Sales of Complementary
Services and Increase Penetration of Customer Organizations. We intend to
capitalize on the success of existing deployments to encourage adoption of
Evolve 4 across additional workgroups and divisions within our customers'
organizations. We also will continue to encourage customers to deploy
additional software modules.
PRODUCTS AND SERVICES
Our SWO solution helps external and internal services organizations improve the
effectiveness of their operations and connects them to their clients, partners
and suppliers. Our products capture the inherently virtual, collaborative,
project-oriented and people-centric characteristics of services organizations by
employing the universal accessibility of the Internet, an intuitive interface,
and applications functionality encapsulating our extensive domain expertise.
Our highly configurable rules engine allows the platform to be deployed by a
wide variety of customers supporting different business practices with no source
code changes. This enables us to address the different needs of a diverse base
of customers ranging from small emerging service firms to large complex global
services organizations across a variety of markets.
This graphic is entitled "Evolve Strategic Workforce Optimization."
Description of graphic: The Strategic Workforce Optimization diagram consists
of six boxes aligned around an X and Y axis. An X and Y axis are drawn and
three boxes are placed along each axis with a box in the center where the X/Y
axis meet. A circular line is then drawn around the outside, connecting five of
the boxes. Starting left along the X axis is a box called PLAN. Next moving
into the center is a box called ENGAGE. On the far right of the diagram is the
final box of the X axis called DELIVER. Starting at the top of the Y axis,
above the box in the center, is a box called SOURCE and the last box is below
the center box, which is called ENABLE.
Evolve believes that an integrated solution is required to address the following
needs:
- Plan: Tackle new projects intelligently and align your operations with
corporate goals
- Source: Find the skilled workers you need, just in time, while
reducing hiring costs
- Engage: Deploy the right mix of people for each project and keep teams
on track
- Enable: Accelerate project delivery with online knowledge management
and collaboration tools
- Deliver: Stick to budgets and save
EVOLVE 4
Evolve 4, our flagship product suite, is an enterprise software application
system that is deployed by project-driven services organizations on a
distributed basis across their computer networks or accessed remotely on an
application service provider (ASP) basis. Evolve 4 is a proven end-to-end
solution that can expand to address the needs of rapidly growing organizations.
Evolve 4 automates and integrates the key processes that are critical to the
operational effectiveness of project-driven services organizations. Evolve also
enables collaboration with outside organizations in the areas of project
management, external sourcing of staff and invoicing. The Evolve 4 product
suite consists of seven applications or "modules", which can be deployed
individually, or can be used together to form a comprehensive SWO solution.
These modules are:
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Opportunity Manager: Evolve Opportunity Manager automates key front-end
activities, from tracking new projects and business opportunities to budgeting,
pricing, and capacity planning.
Resource Manager: Evolve Resource Manager is a full-visibility enterprise
scheduling and workflow system that manages resource assignment, project
staffing, and matching the right strategic worker with the right projects in
minutes.
Time & Expense Manager: Evolve Time and Expense enables fast, accurate time and
expense entry and tracking based on project assignments and enables customer
billing or chargebacks to corporate business units.
Delivery Manager: Evolve Delivery Manager features powerful online tools to
enable complete control over project budgets and financial performance. Delivery
Manager connects seamlessly with Evolve Time & Expense Manager so project
financial data displays without manual re-entry.
Contractor Manager: Evolve Contractor Manager, automates the business process
and workflow for sourcing, reviewing, negotiating, paying and procuring
contingent workers such as outside consultants, freelancers and contractors.
Portfolio Manager: Evolve Portfolio Manager provides a powerful, real-time
executive dashboard for tracking project risk, value, and performance which
helps align projects portfolios with corporate strategy.
Knowledge Collaboration: Evolve Knowledge Collaboration system provides
convenient online workspaces and knowledge management tools to help project
teams boost quality, accelerate project delivery, and fully leverage the
organization's intellectual assets.
CUSTOMERS
Our current customers include eBusiness consultants, the services organizations
of traditional software and hardware companies and the internal IT organizations
within Global 2000 companies. The following are case studies of a sample of
Evolve customers who have purchased our solution:
EDS
One of the largest technology services companies in the world, EDS provides
strategy, implementation and hosting services for clients worldwide. The
Texas-based company serves more than 9,000 businesses and government agencies in
55 countries. In January 2001, EDS selected Evolve to streamline global
operations. With Evolve's solution now live with over 5,000 resources on 4
continents, EDS will decrease operational costs and increase utilization and
employee satisfaction. EDS expects Evolve will help them achieve substantial
cost savings in the first year resulting in a rapid return on investment.
ERICSSON
Ericsson has operations in 140 countries and can claim more customers than any
other telecommunications supplier in the world. Four out of every 10 mobile
calls are handled by Ericsson equipment. Ericsson chose to optimize their
professional teams using Evolve's workforce optimization solution. Ericsson can
see how its services professionals are deployed in real time, gain insight into
the future demand for services and integrate employees into worldwide
collaborative business processes.
INAUTIX - (CREDIT SUISSE FIRST BOSTON DIRECT- CSFB)
iNautix is the Technology Group of the Leading Online Brokerage Firm, CSFBDirect
that manages their Global Corporate IT operations. iNautix selected Evolve's
Strategic Workforce Optimization (SWO) solution to manage 1,000 resources of its
high-value, worldwide workforce. Evolve's solution will facilitate key process
areas, optimize the global workforce and align corporate objectives. With
Evolve 4, we believe that iNautix will gain agility, enhance the quality of its
projects and client collaboration, and better manage its knowledge of the
workforce while reducing costs. Evolve's application for optimizing the
strategic workforce will allow the various stakeholders within CSFBdirect to
achieve the corporate goals more effectively and painlessly.
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RYDER LOGISTICS & TRANSPORTATION SYSTEMS WORLDWIDE
Consistently ranked as one of the most admired companies in the transportation
industry, Ryder System Inc. is a global leader in logistics and transportation
management solutions. Evolve was Ryder's top choice for automating the Solution
Design, Implementation and Operations unit. Evolve allows Ryder to better
manage its professional resources and represents a major step towards achieving
the operational efficiencies needed to run the value-generating processes at
Ryder. With Evolve, executives gain real-time visibility into how each
operation is performing, and get instant updates on sales, budgets, staff
availability, and revenue projections. With global visibility and sophisticated
performance-analysis tools from Evolve 4, Ryder can deploy people more
efficiently, cut costs, and build profitable growth strategies.
TECHNOLOGY
At the core of our SWO solution is a highly adaptable, expandable (scalable),
multi-tier, distributed, Internet-based architecture. Our SWO platform
architecture provides a common foundation on which all Evolve products and
services are built, including the various components of the Evolve 4 application
suite. Our architecture includes the following components:
Evolve 4 Server
Some of the key features of our Java-based Evolve 4 application server include:
- the option of running multiple application servers to provide
scalability for large sophisticated organizations;
- patent-pending resource matching algorithms that reduce the time
required to staff projects;
- a flexible object-based design allowing rapid incorporation of new
features and functionality;
- java-based portability that provides flexibility to support multiple
operating environments; and
- Presentation Interface.
We have the flexibility to provide access to a broad set of users by employing
different presentation interfaces:
- Internet Browser - an ease-of-use interface that allows services
organizations to manage and share information through a secure
intranet or Internet connection; and
- Handheld Devices - an interface for mobile access to time and expense
entry through popular personal digital assistants such as Palm
devices.
Our architecture is designed to allow us to quickly develop and introduce new
presentation interfaces that leverage new and emerging access technologies.
sXML
Our SWO platform employs XML (eXtensible Mark-up Language), a common information
exchange standard for electronic commerce. We are in the process of developing
Services XML (sXML), an advanced version of the XML standard optimized for
exchanging information on service opportunities, resources and delivery.
Analytics Engine
We have the ability to report on key data through a sophisticated analytics
engine. These reports are available through our browser-based reporting tools,
which provides views of the entire value chain, such as opportunity and revenue
pipelines, utilization and profitability analysis, and resource supply and
demand planning.
Application Connectors
Our system provides connectors that support common industry standards and
technologies such as JDBC (Java DataBase Connectivity), ODBC (Open DataBase
Connectivity), SQL (Structured Query Language) and Java. These connectors allow
for integration with:
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- external databases;
- third party reporting tools that complement our built-in browser-based
report center capabilities; and
- other enterprise applications such as financial, human resource and
sales force automation systems.
Business Rules Repository
Our SWO platform is designed to capture and store business information, rules
and standards in a single, centralized repository that can be accessed by all
functional modules. This centralized information structure allows for rapid
initial deployment and also facilitates adaptation to changes in the customer's
organization and processes without source code modifications. We also believe
this architecture will allow us to more easily extend our solution to other
industries beyond information technology services.
Security Controller
Our integrated security and administration features store profiles and access
rules within a centralized repository. Customers can specify individual access
rules for employees based on their position within their organization, as well
as for customers, partners and other external parties. Our systems support the
Lightweight Directory Access Protocol (LDAP) security standard for universal
sign-on and authentication functions.
Collaboration and Workflow Manager
Our platform provides sophisticated management of structured knowledge by
capturing organizational processes and data in a notification-driven workflow
management system. Our platform incorporates an integrated messaging system
that notifies users when actions, information or approvals are required. This
system helps to streamline approval processes, monitor resources and facilitate
collaboration among project team participants.
RESEARCH AND DEVELOPMENT
Since our inception in 1995, we have made substantial investments in research
and product development. We believe that our introduction of new and enhanced
products will be a key factor for our future success. As part of our efforts to
generate ideas for enhancing our existing products and for developing new ones,
we maintain an ongoing dialogue with our customers who are facing new workforce
optimization challenges. We have devoted and expect to continue to devote
significant resources to developing new and enhanced products, including new
releases of our Evolve 4 platform.
In January of 2000 we opened a new engineering development center in Chennai,
India. Our India development center is designed to accommodate 50 engineers,
and we believe will allow us to accelerate our engineering efforts. The
development projects planned for the India development center include enhancing
current capabilities and developing new modules within our Evolve 4 SWO
platform.
Our research and development expenses were $19.5 million in 2001, $10.4 million
in 2000 and $5.1 million in 1999, excluding stock-based compensation charges.
We anticipate we will continue to commit substantial resources to research and
development as we continue to respond quickly to rapid technological change,
changing customer needs, frequent product introductions and evolving industry
standards that may render existing products and services obsolete. We currently
have a number of product development initiatives underway, but we cannot be
certain that existing or new customers will embrace any enhanced or new
products.
SALES AND MARKETING
We sell our solutions through our direct sales organization in both North
America and the United Kingdom. To date, international sales have accounted for
less than five percent of our revenue. In the future, we intend to enhance our
market presence through alliances with systems integrators and service partners.
In selling our products, we typically approach both business users and
information technology professionals with an integrated team from our sales and
professional services organizations. Initial sales activities typically include
a demonstration of our product capabilities followed by one or more detailed
technical reviews. Our sales process requires that we work closely with
targeted customers to identify short-term workforce optimization needs and
long-term goals. Our sales team, which includes both sales and technical
professionals, then works with the customer to develop a proposal to address
these needs. In many cases, we collaborate with our customers' senior
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management team, including the chief executive officer, chief information
officer, chief operating officer and chief financial officer. The level of
customer analysis and financial commitment required for many of our product
implementations has caused our sales cycle to range from two to twelve months.
We use a variety of marketing programs to build market awareness of our company,
our brand name and our products, as well as to attract potential customers.
These programs include advertising, market research, product and strategy
updates with industry analysts, public relations activities, direct mail
programs, telemarketing and telesales, seminars, trade shows, speaking
engagements and Web-based marketing. Our marketing organization also produces
marketing materials in support of sales to prospective customers that include
brochures, data sheets, white papers, presentations and demonstrations.
We also seek to establish relationships and alliances with major industry
vendors that will add value to our products and enhance our market presence.
The goal of our efforts is to form alliances with partners who can help
introduce our solutions to their customer base, and to be able to offer to our
own customers additional software applications and consulting and support
services that they are likely to benefit from.
PROFESSIONAL SERVICES
We provide implementation consulting, technical support, end-user training, and
change management to ensure our customers receive the guidance and support they
need to implement and operate our SWO solution. Our professional services
organization has developed implementation methodologies that allow our customers
to rapidly configure and deploy our SWO platform to support their unique
business practices.
In addition to professional services, we offer product maintenance to our
customers. Maintenance services are typically subject to an annual, renewable
contract and are typically priced as a percentage of product license fees. We
bundle maintenance services with our application service provider (ASP) offering
in a single monthly subscription fee. Customers receiving maintenance services
also receive product upgrades as they are released throughout the life of the
maintenance contracts.
COMPETITION
Competition could seriously harm our ability to sell additional software
solutions and subscriptions on prices and terms favorable to us. The markets
for our products are intensely competitive and subject to rapidly changing
technology. We currently compete against providers of enterprise application
software such as Peoplesoft, Siebel and SAP. Companies in each of these areas
may expand their technologies or acquire companies to support greater workforce
optimization functionality and capability. In addition, "in house" information
technology departments of potential customers have developed or may develop
systems that substitute for some of the functionality of our SWO platform.
Some of our competitors' products may be more effective than our products at
performing particular functions or be more customized for particular needs.
Even if these functions are more limited than those provided by our products,
our competitors' software products could discourage potential customers from
purchasing our products. A software product that provides some of the functions
of our solutions, but also performs other tasks, may be appealing to some
customers because it would reduce the number of different types of software
necessary to effectively run their businesses. Further, our competitors may be
able to respond more quickly than we can to changes in customer requirements.
Some of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Our
competitors have made and may also continue to make strategic acquisitions or
establish cooperative relationships among themselves or with other software
vendors. They may also establish or strengthen cooperative relationships with
our current or future partners, thereby limiting our ability to promote our
products through these partners and limiting the number of consultants available
to implement our software.
We believe that the primary competitive factors in our market include:
- a critical mass of prominent customers that have successfully
implemented the solutions;
8
- an underlying software infrastructure that fully encapsulates the
virtual, collaborative, and people-centric characteristics of the
services organizations;
- inter-company collaboration capabilities that facilitate efficient
business processes among services organizations;
- product quality, performance, features, functionality, and usability;
- customer service and support; and
- ease of integration with customers' business processes.
We believe our current products compete favorably with respect to these factors,
although our market is relatively new and evolving rapidly. We may not be able
to maintain our competitiveness in the face of significant competition.
INTELLECTUAL PROPERTY
Our success is dependent on our ability to develop and protect our proprietary
technology and intellectual property rights. We seek to protect our software,
documentation and other written materials primarily through a combination of
patent, trade secret, trademark and copyright laws, confidentiality procedures
and contractual provisions. For example, we license rather than sell our
software and require licensees to enter into license agreements that impose
certain restrictions on the licensees' ability to utilize the software. In
addition, we seek to avoid disclosure of our trade secrets by, among other
things, requiring persons with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
We have been issued a patent in the United States covering the enablement of
dynamically configurable software systems by our Evolve software server. We
also have two patent applications pending in the United States with respect to
the "Team Builder" functionality in our Resource Manager module and the time and
expense functionality of our Time and Expense module. There can be no assurance
that either of these two applications would survive a legal challenge to its
validity or provide significant protection to us. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. 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, particularly in foreign
countries where the laws may not protect proprietary rights as fully as in the
United States. We can offer no assurance that our means of protecting its
proprietary rights will be adequate or that our competitors will not reverse
engineer or independently develop similar technology.
It is also possible that third-parties will claim that we have infringed their
current or future products or technologies. We expect that enterprise
application software developers will increasingly be subject to infringement
claims as the number of products in different industry segments overlap. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, prevent product shipment, cause delays, or require us to enter into
royalty or licensing agreements, any of which could harm our business. Patent
litigation in particular has complex technical issues and inherent
uncertainties. In the event an infringement claim against us was successful and
we could not obtain a license on acceptable terms or license a substitute
technology or redesign to avoid infringement, our business could be harmed.
We rely on software that we have licensed from third-parties, including
Inprise/Borland, ProSight, Actuate, Intraspect and Allaire, to perform key
functions of our Evolve solution and we rely on these and other third-parties to
support their products for our development and customer support efforts. These
companies could terminate our licenses if we breach our agreements with them, or
they could discontinue support of the products we license from them. This could
result in delays or reductions of sales or shipments of our SWO platform until
alternative software can be developed or licensed.
We indemnify some of our customers against claims that our products infringe
upon the intellectual property rights of others. We could incur substantial
costs in defending our company and our customers against infringement claims.
In the event of a claim of infringement, we, or our customers, may be required
to obtain one or more licenses from third parties. We cannot assure you that
such licenses could be obtained from third parties at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any such required license
could have a material adverse effect on our business.
9
EMPLOYEES
As of June 30, 2001, we had a total of 258 full-time employees, including 109 in
research and development, 72 in sales, marketing and business development, 48 in
professional services and 29 in finance and administration. None of our
employees is subject to a collective bargaining agreement. We consider our
employee relations to be good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED.
It is difficult to evaluate our business and our prospects because our revenue
and income potential are unproven. We commenced recognizing sales revenues in
March of 1999. Because of our limited operating history, there may not be an
adequate basis for forecasts of future operating results, and we have only
limited insight into the trends that may emerge in our business and affect our
financial performance.
WE HAVE INCURRED LOSSES SINCE INCEPTION, AND WE MAY NOT BE ABLE TO ACHIEVE
PROFITABILITY.
We have incurred net losses and losses from operations since our inception in
1995, and we may not be able to achieve profitability in the future. As of June
30, 2001, we had an accumulated deficit of approximately $215.8 million. Since
inception, we have funded our business primarily from the sale of our stock and
by borrowing funds, not from cash generated by our business. Despite recent cost
reductions, we expect to continue to incur significant sales and marketing,
research and development, and general and administrative expenses. As is the
case with many enterprise software companies, we have experienced a sequential
quarterly decline in revenue for the quarter ending June 30, 2001, and may
experience a further decline in the current quarter. As a result, we expect to
experience continued losses and negative cash flows from operations. If we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future.
OUR FUTURE OPERATING RESULTS MAY NOT FOLLOW PAST TRENDS DUE TO MANY FACTORS, AND
ANY OF THESE COULD CAUSE OUR STOCK PRICE TO FALL.
We believe that year-over-year comparisons of our operating results are not a
good indication of future performance. Although our operating results have
generally improved from year to year in the recent past, our future operating
results may not follow past trends. It is likely that in some future years our
operating results may be below the expectations of public market analysts and
investors due to factors beyond our control and, as a result, the price of our
common stock may fall.
Factors that may cause our future operating results to be below expectations and
cause our stock price to fall include:
- the lack of demand for and acceptance of our products, product
enhancements and services; for instance, as we expand our target
customer focus beyond the information technology service consultancies
and into internal information technology of corporate customers as
well as into overseas markets, we may encounter increased resistance
to adoption of our business process automation solutions;
- unexpected changes in the development, introduction, timing and
competitive pricing of our products and services or those of our
competitors;
- any inability to expand our direct sales force and indirect marketing
channels both domestically and internationally;
- difficulties in recruiting and retaining key personnel;
- unforeseen reductions or reallocations of our customers' information
technology infrastructure budgets; and
- any delays or unforeseen costs incurred in integrating technologies
and businesses we may acquire.
We plan to aggressively and prudently manage our operating expenses with a focus
on our research and development organization and our direct sales group. Our
operating expenses are based on our expectations of future revenues and are
relatively fixed in the short-term. If revenues fall below our expectations in
any quarter, and we are not able to quickly reduce our spending in response, our
operating results for that quarter would be lower than expected, and our stock
price may fall.
10
WE MAY LOSE EXISTING CUSTOMERS, OR BE UNABLE TO ATTRACT NEW CUSTOMERS, IF WE DO
NOT DEVELOP NEW PRODUCTS OR ENHANCE OUR EXISTING PRODUCTS.
If we are not able to maintain and improve our product-line and develop new
products, we may lose existing customers or be unable to attract new customers.
We may not be successful in developing and marketing product enhancements or new
products on a timely or cost-effective basis. These products, if developed, may
not achieve market acceptance.
A limited number of our customers expect us to develop product enhancements that
may address their specific needs. For instance, we have shared with some of our
customers our internal product roadmap that includes descriptions of new
functional enhancements such as improved time and expense management for future
releases of our software. If we fail to deliver these enhancements on a timely
basis, we risk damaging our relationship with these customers. We have
experienced delays in the past in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of our new releases may cause
some of these customers to forego additional purchases of our products or to
purchase those of our competitors.
WE MUST DIVERSIFY OUR CUSTOMER BASE IN ORDER TO ENHANCE OUR REVENUE AND MEET OUR
GROWTH TARGETS.
We have historically derived a substantial percentage of our revenues from sales
of our products and services to firms that provide technology-oriented
consulting, design and integration services, including a number of firms
specializing in Website design and e-commerce application development. Growth
among these "e-business" consultancies has recently slowed dramatically, and
many such firms have ceased operations or have encountered substantial
difficulties in raising capital to fund their operations. In anticipation of
these developments, we commenced a program to aggressively diversify our client
base, targeting both established consulting services companies and in-house
service departments of large corporations. While we have recorded a number of
significant customer wins in these areas, we may in the future encounter
significant challenges in further expanding our customer base. More established
corporations are often more reluctant to implement innovative enterprise
technologies such as ours, in part because they often have made substantial
investments in legacy applications and information systems. We may also
encounter extended sales cycles with such prospective customers, and slower
rates of adoption of our solutions within their organizations. As we reduce our
sales force headcount in order to reduce expenses, our sales capacity is
diminished which may impact our ability to diversify our customer base. All of
these factors may adversely affect our ability to sustain our revenue growth and
attain profitable operations.
FINANCIAL DIFFICULTIES OF SOME OF OUR CUSTOMERS MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
As discussed above, a substantial portion of our early customers were e-business
consultancies focusing on Web development and e-commerce integration. As public
valuations for many such businesses have declined substantially in recent
months, some of our customers may encounter difficulties in securing additional
financing to meet their obligations, or may seek to limit expenditures to
conserve their cash resources. As a result, we may encounter difficulties in
securing payment of certain customer obligations when due, and may be compelled
to increase our bad debt reserves. Any difficulties encountered in collections
from customers would also adversely affect our cash flow, and would adversely
impact our operating results.
IF THE MARKET FOR PROCESS AUTOMATION SOLUTIONS FOR PROFESSIONAL SERVICES
ORGANIZATIONS AND OTHER STRATEGIC WORKFORCES DOES NOT CONTINUE TO GROW, THE
GROWTH OF OUR BUSINESS WILL NOT BE SUSTAINABLE.
The future growth and success of our business is contingent on growing
acceptance of, and demand for, business process automation solutions for
professional services organizations and other strategic workforces.
Substantially all of our historical revenues have been attributable to the sale
of automation solutions for professional services organizations. This is a
relatively new enterprise application solution category, and it is uncertain
whether major services organizations and service departments of major
corporations will choose to adopt process automation systems. While we have
devoted significant resources to promoting market awareness of our products and
the problems our products address, we do not know whether these efforts will be
sufficient to support significant growth in the market for process automation
products. Accordingly, the market for our products may not continue to grow or,
even if the market does grow in the immediate term, that growth may not be
sustainable.
11
REDUCTIONS IN CAPITAL SPENDING BY CORPORATIONS COULD REDUCE DEMAND FOR OUR
PRODUCTS.
Historically, corporations and other organizations have tended to reduce or
defer major capital expenditures in response to slower economic growth or
recession. Market analysts have observed a significant reduction in the growth
of corporate spending on information technology projects in response to the
current economic slowdown. To the extent that current economic uncertainty
persists, some of the prospective customers in our current sales pipeline could
choose to postpone or reduce orders for our products, or may delay implementing
our solutions within their organizations. In addition, existing customers
seeking to reduce capital expenditures may cancel or postpone plans to expand
use of our products in additional operating divisions, or may defer plans to
purchase additional modules of our solutions. Any of the foregoing would have
an adverse impact on our revenues and our operating results, particularly if the
current period of volatility in the stock market and the general economy is
prolonged.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD-PARTY RESELLERS AND
INTEGRATORS, OUR ABILITY TO GROW REVENUES COULD BE HARMED.
In order to grow our business, we must establish, maintain and strengthen
relationships with third-parties, such as information technology ("IT")
consultants and systems integrators as implementation partners, and hardware and
software vendors as marketing partners. If these parties do not provide
sufficient, high-quality service or integrate and support our software
correctly, our revenues may be harmed. In addition, these parties may offer
products of other companies, including products that compete with our products.
Our contracts with third-parties may not require these third-parties to devote
resources to promoting, selling and supporting our solutions. Therefore, we may
have little control over these third-parties. We cannot assure you that we can
generate and maintain relationships that offset the significant time and effort
that are necessary to develop these relationships, or that, even if we are able
to develop such relationships, these third-parties will perform adequately.
WE MAY NOT BE ABLE TO REDUCE OUR OPERATING EXPENDITURES AS AGGRESSIVELY AS
PLANNED AND WE MAY NEED TO IMPLEMENT ADDITIONAL RESTRUCTURING ACTIVITIES.
In response to the current uncertain economic environment and volatility in the
public equity markets, we recently implemented significant measures designed to
reduce our operating expenses and enhance our ability to attain operating
profitability. For example, from July 1, 2000 through June 30, 2001, we reduced
our employee headcount by 133 persons, with reductions in virtually all areas of
operations. We further reduced our headcount by 47 persons in August 2001. We
expect that our workforce reductions and other expense containment measures will
allow us to continue operations into the foreseeable future.
In order to achieve operating profitability, we will need to achieve significant
additional cost savings in future quarters, without adversely affecting our
revenue growth. Numerous factors could impede our ability to further reduce our
operating expenses. For instance, we currently expect to achieve significant
expense reductions by limiting the headcount of our services organization;
however, we may not be able to achieve the desired savings if we cannot engage
and qualify third-party integration and support partners as rapidly as we hope.
In addition, if our revenue growth fails to meet our current expectations, we
would be forced to seek expense reductions in excess of our current plans, which
may not be achievable. Any of these developments could impede our ability to
achieve profitable operations in accordance with current expectations.
OUR SERVICES REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR SOFTWARE
LICENSE REVENUES, AND AN INCREASE IN SERVICES REVENUES RELATIVE TO LICENSE
REVENUES COULD HARM OUR GROSS MARGINS.
A significant shift in our revenue mix away from license revenues to service
revenues would adversely affect our gross margins. Revenues derived from the
services we provide have substantially lower gross margins than revenues we
derive from licensing our software. The relative contribution of services we
provide to our overall revenues is subject to significant variation based on the
structure and pricing of arrangements we enter into with customers in the
future, and the extent to which our partners provide implementation,
integration, training and maintenance services required by our customers. An
increase in the percentage of total revenues generated by the services we
provide could adversely affect our overall gross margins.
12
DIFFICULTIES WITH THIRD-PARTY SERVICES AND TECHNOLOGIES, AS WELL AS POWER
INTERRUPTIONS, COULD DISRUPT OUR BUSINESS, AND MANY OF OUR COMMUNICATION AND
HOSTING SYSTEMS DO NOT HAVE BACKUP SYSTEMS.
Many of our communications and hosting systems do not have backup systems
capable of mitigating the effect of service disruptions. Our success in
attracting and retaining customers for our Evolve application service provider
("ASP") offering and convincing them to increase their reliance on this solution
depends on our ability to offer customers reliable, secure and continuous
service. This requires that we provide continuous and error-free access to our
systems and network infrastructure. We rely on third-parties to provide key
components of our networks and systems. For instance, we rely on third-party
Internet service providers to host applications for customers who purchase our
solutions on an ASP basis. We also rely on third-party communications services
providers for the high-speed connections that link our Web servers and office
systems to the Internet. Any Internet or communications systems failure or
interruption could result in disruption of our service or loss or compromise of
customer orders and data. These failures, especially if they are prolonged or
repeated, would make our services less attractive to customers and tarnish our
reputation.
In addition, California has recently been experiencing electric power supply
shortages that has resulted in intermittent loss of power in the form of rolling
blackouts. While neither we nor our third-party Internet service providers or
communications services providers have experienced any power failures to date
that have prevented us from continuing our operations, the recurrence of
blackouts may affect our ability to operate our business.
Finally, our third-party Internet and communications services providers have
been and may continue to experience serious financial difficulties, which could
result in the disruption of our ASP offering to our customers as well as
potentially affecting our ability to operate our business. The financial
difficulties of these third-party providers, especially if they go unresolved,
would make our ASP offering less attractive to prospective and current customers
and could tarnish our reputation.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND COMPETITION COULD HARM OUR ABILITY TO
SELL PRODUCTS AND SERVICES AND REDUCE OUR MARKET SHARE.
Competition could seriously harm our ability to sell additional software
solutions and subscriptions on prices and terms favorable to us. The markets
for our products are intensely competitive and subject to rapidly changing
technology. We currently compete against providers of automation solutions for
professional services organizations, such as Peoplesoft, Siebel and SAP. In
addition, we may, in the future, face competition from providers of enterprise
application software or electronic marketplaces. Companies in each of these
areas may expand their technologies or acquire companies to support greater
professional services automation functionality and capabilities. In addition,
"in-house" information technology departments of potential customers have
developed or may develop systems that substitute for some of the functionality
of our product line.
Some of our competitors' products may be more effective than our products at
performing particular functions or be more customized for particular customer
needs. Even if these functions are more limited than those provided by our
products, our competitors' software products could discourage potential
customers from purchasing our products. A software product that provides some
of the functions of our software solutions, but also performs other tasks may be
appealing to these vendors' customers because it would reduce the number of
different types of software necessary to effectively run their businesses.
Further, many of our competitors may be able to respond more quickly than we can
to changes in customer requirements.
Some of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Our
competitors have made and may also continue to make strategic acquisitions or
establish cooperative relationships among themselves or with other software
vendors. They may also establish or strengthen cooperative relationships with
our current or future partners, limiting our ability to promote our products
through these partners and limiting the number of consultants available to
implement our software.
13
THE LENGTHY AND UNPREDICTABLE SALES CYCLES FOR OUR PRODUCTS AND RESISTANCE TO
ADOPTION OF OUR SOFTWARE COULD CAUSE OUR OPERATING RESULTS TO FALL BELOW
EXPECTATIONS.
Our operating results for future periods could be adversely affected because of
unpredictable increases in our sales cycles. Our products and services have
lengthy and unpredictable sales cycles varying from as little as three months to
as much as nine months, which could cause our operating results to be below the
expectations of analysts and investors. Since we are unable to control many of
the factors that will influence our customers' buying decisions, it is difficult
for us to forecast the timing and recognition of revenues from sales of our
solutions.
Customers in our target market often take an extended time evaluating our
products before purchasing them. Our products may have an even longer sales
cycle in international markets. During the evaluation period, a variety of
factors, including the introduction of new products or aggressive discounting by
competitors and changes in our customers' budgets and purchasing priorities, may
lead customers to not purchase or to scale down orders for our products.
As we target industry sectors and types of organizations beyond our core market
of IT services consultancies, we may encounter increased resistance to use of
business process automation solutions, which may further increase the length of
our sales cycles, increase our marketing costs and reduce our revenues. Because
we are pioneering a new solution category, we often must educate our prospective
customers on the use and benefit of our solutions, which may cause additional
delays during the evaluation process. These companies may be reluctant to
abandon investments they have made in other systems in favor of our solution.
In addition, IT departments of potential customers may resist purchasing our
solutions for a variety of other reasons, particularly the potential
displacement of their historical role in creating and running software, and
concerns that packaged software products are not sufficiently customizable for
their enterprises.
OUR REVENUES DEPEND ON ORDERS FROM OUR TOP CUSTOMERS, AND IF WE FAIL TO COMPLETE
ONE OR MORE ORDERS, OUR REVENUES WILL BE REDUCED.
Historically, we have received a significant portion of our revenues from a
small number of customers. For the twelve months ended June 30, 2001, one
customer accounted for 14% of our total revenues. For the twelve months ended
June 30, 2000, sales to two customers accounted for 19% and 13% of total
revenues. In 1999 three customers represented 100% of our revenues. Our future
operating results may be harmed, if we are not able to complete one or more
substantial product sales in any future period or attract new customers, or if a
significant number of customers terminate their relationship with us.
THE LOSS OF KEY PERSONNEL OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD AFFECT OUR ABILITY TO SUCCESSFULLY GROW OUR BUSINESS.
If we are unable to hire and retain a sufficient number of qualified personnel,
particularly in sales, marketing, research and development, services and
support, our ability to grow our business could be affected. The loss of the
services of our key engineering, sales, services or marketing personnel would
harm our operations. For instance, loss of sales and customer service
representatives could harm our relationship with the customers they serve, loss
of engineers and development personnel could impede the development of product
releases and enhancements and decrease our competitiveness, and departure of
senior management personnel could result in a loss of confidence in our company
by customers, suppliers and partners. None of our key personnel is bound by an
employment agreement, and we do not maintain key person insurance on any of our
employees. Because we, like many other technology companies, rely on stock
options as a component of our employee compensation, if the market price of our
common stock decreases or increases substantially, some current or potential
employees may perceive our equity incentives as less attractive. In that case,
our ability to attract and retain employees may be adversely affected.
IF OUR PRODUCTS DO NOT STAY COMPATIBLE WITH WIDELY USED SOFTWARE PROGRAMS, OUR
REVENUES MAY BE ADVERSELY AFFECTED.
Our software products must work with widely used software programs. If these
software programs and operating environments do not remain widely used, or we do
not update our software to be compatible with newer versions of these programs
and systems, we may lose customers.
14
Our software operates only on a computer server running both the Microsoft
Windows NT or Sun Solaris operating system and database software from Microsoft
or Oracle. In order to increase the flexibility of our solution and expand our
client base, we must be able to successfully adapt it to work with other
applications and operating systems. For example, we are in the early stages of
customer deployment on the Sun Solaris operating system. Because this
development effort is not complete, we cannot be certain that we will avoid
significant technical difficulties that could delay or prevent completion of the
development effort.
Our software connects to and uses data from a variety of our customers' existing
software systems, including systems from Oracle and SAP. If we fail to enhance
our software to connect to and use data from new systems of these products, we
may lose potential customers.
THE COST AND DIFFICULTIES OF IMPLEMENTING OUR PRODUCTS COULD SIGNIFICANTLY HARM
OUR REPUTATION WITH CUSTOMERS AND HARM OUR FUTURE SALES.
If our customers encounter unforeseen difficulties or delays in deploying our
products and integrating them with their other systems, they may reverse their
decision to use our solutions, which would reduce our future revenues, could
impact the collection of outstanding receivables, and potentially damage our
reputation. Factors that could delay or complicate the process of deploying our
solutions include:
- customers may need to modify significant elements of their existing IT
systems in order to effectively integrate them with our solutions;
- customers may need to establish and implement internal business
processes within their organizations before they can make effective
use of our software;
- customers may need to purchase and deploy significant additional
hardware and software resources and may need to make significant
investments in consulting and training services; and
- customers may rely on third-party systems integrators to perform all
or a portion of the deployment and integration work, which reduces the
control we have over the implementation process and the quality of
customer service provided to the customer.
OUR SALES ARE CONCENTRATED IN THE IT SERVICES CONSULTING INDUSTRY, AND, IF OUR
CUSTOMERS IN THIS INDUSTRY DECREASE THEIR INFRASTRUCTURE SPENDING OR WE FAIL TO
PENETRATE OTHER INDUSTRIES, OUR REVENUES MAY DECLINE.
Sales to customers in the IT services consulting industry accounted for a
substantial portion of our revenues in fiscal 2000 and 2001. Given the high
degree of competition and the rapidly changing environment in this industry,
there is no assurance that we will be able to continue sales in this industry at
current levels. Many of our customers and potential customers in the IT
services consultancy industry have witnessed drastic declines in their stock
prices, which could limit our current customers from purchasing additional
licenses of our software, and could prevent potential customers from making the
kinds of infrastructure investments that would allow them to purchase our
software in the first place. In addition, we intend to market our products to
professional services departments of large organizations in other industries.
Customers in these new industries are likely to have different requirements and
may require us to change our product design or features, sales methods, support
capabilities or pricing policies. If we fail to successfully address the needs
of these customers, we may experience decreased sales in future periods.
IF WE LOSE KEY LICENSES, WE MAY BE REQUIRED TO DEVELOP OR LICENSE ALTERNATIVES
THAT MAY CAUSE DELAYS OR REDUCTIONS IN SALES OR SHIPMENTS.
We rely on software that we have licensed from third-parties, including
Inprise/Borland, ProSight, Actuate, Intraspect and Allaire to perform key
functions of our Evolve ePlatform, and we rely on these and other third-parties
to support their products for our development and customer support efforts.
These companies could terminate our licenses if we breach our agreements with
them, or they could discontinue support of the products we license from them.
This could result in delays or reductions of sales or shipments of our ePlatform
until alternative software can be developed or licensed.
IF OUR PRODUCTS CONTAIN SIGNIFICANT DEFECTS OR OUR SERVICES ARE NOT PERCEIVED AS
HIGH QUALITY, WE COULD LOSE POTENTIAL CUSTOMERS OR BE SUBJECT TO DAMAGES.
Our products are complex and may contain currently unknown errors, defects,
integration problems or other types of failures, particularly since new versions
are frequently released. In the past we have discovered software errors in some
of our products after introduction. We may not be able to detect and correct
errors before releasing our products commercially. If our commercial products
contain errors, we may:
15
- need to expend significant resources to locate and correct the errors;
- be required to delay introduction of new products or commercial
shipment of products; or
- experience reduced sales and harm to our reputation from dissatisfied
customers.
Our customers also may encounter system configuration problems that require us
to spend additional consulting or support resources to resolve these problems.
Some of our customers have indicated to us that they want a completely
integrated solution, including a single user interface and single database
platform. While our product roadmap calls for such an integrated solution, any
delays in delivering such a solution to our customers may cause them to
downgrade their opinion of our software or to abandon our software.
Because our customers use our software products for critical operational and
decision-making processes, product defects may also give rise to product
liability claims. Although our license agreements with customers typically
contain provisions designed to limit our exposure, some courts may not enforce
all or part of these limitations. Although we have not experienced any product
liability claims to date, we may encounter these claims in the future. Product
liability claims, whether or not they have merit, could:
- divert the attention of our management and key personnel from our
business;
- be expensive to defend; and
- result in large damage awards.
We do not have product liability insurance, and even if we obtain product
liability insurance, it may not be adequate to cover all of the expenses
resulting from such a claim.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success is dependent on our ability to develop and protect our proprietary
technology and intellectual property rights. We seek to protect our software,
documentation and other written materials primarily through a combination of
patent, trade secret, trademark and copyright laws, confidentiality procedures
and contractual provisions. While we have attempted to safeguard and maintain
our proprietary rights, we do not know whether we have been or will be
completely successful in doing so. Further, our competitors may independently
develop or patent technologies that are substantially equivalent or superior to
ours.
We have been issued a patent in the United States covering the enablement of
dynamically configurable software systems by our Evolve software server. We
also have two patent applications pending in the United States with respect to
the "Team Builder" functionality in our Resource Manager module and the time and
expense functionality of our Time and Expense module. There can be no assurance
that either of these two applications would survive a legal challenge to its
validity or provide significant protection to us. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. 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, particularly in foreign
countries where the laws may not protect proprietary rights as fully as in the
United States. We can offer no assurance that our means of protecting its
proprietary rights will be adequate or that our competitors will not reverse
engineer or independently develop similar technology.
IF OTHERS CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, WE COULD
INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM SELLING OUR PRODUCTS.
We cannot provide assurance that others will not claim that we are infringing
their intellectual property rights or that we do not in fact infringe those
intellectual property rights. We have not conducted a search for existing
intellectual property registrations, and we may be unaware of intellectual
property rights of others that may cover some of our technology.
16
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of our management and key personnel from
our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increases these risks. Claims
of intellectual property infringement might also require us to enter into costly
royalty or license agreements.
We may not be able to obtain royalty or license agreements on terms acceptable
to us, or at all. We also may be subject to significant damages or an
injunction against use of our products. A successful claim of patent or other
intellectual property infringement against us would have an immediate material
adverse effect on our business and financial condition.
WE REDUCED OUR WORKFORCE DURING THE SECOND HALF OF THE YEAR, AND, IF WE FAIL TO
MANAGE THIS REDUCTION IN WORKFORCE, OUR ABILITY TO GENERATE NEW REVENUE, ACHIEVE
PROFITABILITY AND SATISFY OUR CUSTOMERS COULD BE HARMED.
We reduced our workforce during the second half of this year after growing
significantly the first half of this year and in previous years. Any failure to
manage this reduction in workforce could impede our ability to increase revenues
and achieve profitability. We reduced our number of employees from 326 at June
30, 2000, to 258 as of June 30, 2001, and further reduced our headcount by 47
persons in August 2001.
As we reduce our sales force headcount in order to reduce expenses, our sales
capacity is reduced which may impact our revenue growth. As we reduce our
service employee headcount, including our consulting services, training and
technical support personnel, we may not be able to provide the same level of
customer responsiveness or expertise, and customer satisfaction may be impacted
as a result.
In order to manage our reduced workforce, we must:
- hire, train and integrate new personnel in response to attrition;
- continue to augment our management information systems;
- manage our sales and services operations, which are in several
locations; and
- expand and improve our systems and facilities.
WE CONTINUE TO OPERATE INTERNATIONALLY, BUT WE MAY ENCOUNTER A NUMBER OF
PROBLEMS IN DOING SO WHICH COULD LIMIT OUR FUTURE GROWTH.
We may not be able to successfully market, sell, deliver and support our
products and services internationally. Any failure to build and manage
effective international operations could limit the future growth of our
business. Expansion into international markets will require significant
management attention and financial resources to open additional international
offices and hire international sales and support personnel. Localizing our
products is difficult and may take longer than we anticipate because of
difficulties in translation and delays we may experience in recruiting and
training international staff. We currently have no experience in developing
local versions of our products, and limited experience in marketing, selling and
supporting our products and services overseas. Doing business internationally
involves greater expense and many additional risks, particularly:
- differences and unexpected changes in regulatory requirements, taxes,
trade laws, tariffs, intellectual property rights and labor
regulations;
- changes in a specific country's or region's political or economic
conditions;
- greater difficulty in establishing, staffing and managing foreign
operations; and
- fluctuating exchange rates.
SECURITY CONCERNS, PARTICULARLY RELATED TO THE USE OF OUR SOFTWARE ON THE
INTERNET, MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE DEMAND FOR OUR PRODUCTS.
Despite our efforts to protect the confidential and proprietary information of
our customers stored on our Evolve ASP solution via virtual private networks and
other security devices, there is a risk that this information will be disclosed
to unintended third-party recipients. To the extent our ability to implement
secure private networks, on our Evolve ASP service, is impaired by technical
problems, or by improper or incomplete procedural diligence by either ourselves
or our customers, sensitive information could be exposed to inappropriate
third-parties such as competitors of our customers, which may in turn expose us
to liability and detrimentally impact our customers' confidence in our ASP
service.
17
RESISTANCE TO ONLINE USE OF PERSONAL INFORMATION REGARDING EMPLOYEES AND
CONSULTANTS MAY HINDER THE EFFECTIVENESS OF AND REDUCE DEMAND FOR OUR PRODUCTS
AND SERVICES.
Companies store information on our ASP offering and on online networks created
by our customers, which may include personal information of their employees,
including employee backgrounds, skills, and other details. These employees may
object to online compilation, transmission and storage of such information, or,
despite our efforts to keep such personal information secure, this information
may be delivered unintentionally to inappropriate third-parties such as
recruiters. Enterprise applications like Evolve have always run on secure
company intranets. The information contained in Evolve databases will be
exposed to the unpredictable security of the Internet, which may create
unforeseen liabilities for us. Evolve is currently targeted primarily to the
North American market, but to the extent that European companies and customers
will have access to it (given the global nature of the Internet), and to the
extent that our services are utilized by Europeans, legal action grounded in
European privacy laws could prevent our ASP service from succeeding in the
European market.
POTENTIAL IMPOSITION OF GOVERNMENTAL REGULATION OR TAXATION ON ELECTRONIC
COMMERCE COULD LIMIT OUR GROWTH.
The adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our solutions, increase our cost of doing business or otherwise have
a material adverse impact on our business. Few laws or regulations currently
directly apply to access commerce on the Internet. Federal, state, local and
foreign governments are considering a number of legislative and regulatory
proposals relating to Internet commerce. As a result, a number of laws or
regulations may be adopted regarding Internet user privacy, taxation, pricing,
quality of products and services and intellectual property ownership. How
existing laws will be applied to the Internet in areas such as property
ownership, copyright, trademark, trade secret and defamation is uncertain. The
recent growth of Internet commerce has been attributed by some to the lack of
sales and value-added taxes on interstate sales of goods and services over the
Internet. Numerous state and local authorities have expressed a desire to
impose such taxes on sales to businesses in their jurisdictions. The Internet
Tax Freedom Act of 1998 prevents imposition of such taxes through October 2001.
If the federal moratorium on state and local taxes on Internet sales is not
renewed, or if it is terminated before its expiration, sales of goods and
services over the Internet could be subject to multiple overlapping tax schemes,
which could substantially hinder the growth of Internet-based commerce.
WE MAY NEED SUBSTANTIAL ADDITIONAL CAPITAL TO FUND CONTINUED BUSINESS OPERATIONS
AT THEIR CURRENT LEVELS IN FISCAL 2002 AND 2003 AND SUCH FINANCING MAY NOT BE
AVAILABLE ON FAVORABLE TERMS, IF AT ALL.
We require substantial amounts of capital to fund our business operations. The
rate at which our capital is utilized is affected by the level of our fixed
expenses (including employee related expenses and expenses relating to real
estate) and variable expenses. Substantial capital has been used to fund our
operating losses. Since inception, we have experienced negative cash flow from
operations and expect to experience significant negative cash flow from
operations for the foreseeable future. In September 2001 we signed a definitive
agreement for a private placement of our Series A Preferred Stock, which is
expected to result in proceeds of at least $13 million. This financing, combined
with the cost reductions we are undertaking, should be sufficient to meet our
immediate working capital requirements. Nonetheless, we may require or seek to
raise additional capital during the 2002 fiscal year. We cannot be certain that
additional financing will be available on favorable terms, if at all. Further,
the additional shares of our capital stock we issue in such financings may
result in additional dilution, which may be substantial. If we need additional
funds and cannot raise them on acceptable terms, we may not be able to continue
our operations at the current level or at all.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. The market price of our
stock could also decline if one or more of our significant stockholders decided
for any reason to sell substantial amounts of our stock in the public market.
As of August 31, 2001, we had 40,166,616 shares of common stock outstanding. Of
these shares, 35,325,418 were freely tradable in the public market, either
without restriction or subject, in some cases, only to S-3 or S-8/S-3 prospectus
delivery requirements, and, in some cases, only to either manner of sale,
volume, or notice requirements of Rule 144 under the Securities Act of 1933, as
18
amended. An additional 3,287,944 shares will become eligible for sale, subject
only to the manner of sale requirements of Rule 144, as our right to repurchase
these shares lapses over time with the continued employment by Evolve of these
stockholders. The remaining 1,553,254 shares that were outstanding as of August
31, 2001 will be freely tradable, subject only to Form S-3 delivery
requirements, upon the effectiveness of the Form S-3 that was filed in September
2001 and that is expected to be amended in October 2001 (as will a further
663,495 shares which were issued on September 19, 2001, and which are subject to
increase or decrease based on Evolve's stock price as of the date the Form S-3
becomes effective).
As of August 31, 2001, we also had 5,092,616 shares subject to outstanding
options under our stock option plans (plus 224,167 options and warrants issued
outside of any plan), and 2,533,725 shares are available for future issuance
under these plans. We have registered the shares of common stock subject to
outstanding options and reserved for issuance under our stock option plans and
1,885,340 remaining shares of common stock are reserved for issuance under our
2000 Employee Stock Purchase Plan. Accordingly, shares underlying vested
options will be eligible for resale in the public market as soon as they are
purchased.
RISKS RELATED TO OUR STOCK
We failed to maintain the minimum closing bid price of $1.00 over 30 consecutive
trading days as required by the Nasdaq National Market. Nasdaq has suspended
this minimum bid price requirement through January 2, 2002. If the minimum bid
price requirement is reinstated after that date and if we are unable to
demonstrate compliance with any Nasdaq requirement, the Nasdaq staff may take
further action with respect to a potential delisting of our stock. We may appeal
any such decision by the Nasdaq staff to the Nasdaq Listing Qualifications
Panel.
ITEM 2. PROPERTIES
Our facilities consist of approximately 72,000 square feet of office space in
Emeryville, California, leased to us until 2007. We estimate that approximately
37,000 square feet of this space is in excess of our needs and are currently
seeking tenants for a sublease. Our excess facilities are covered in more
detail in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." We also maintain sales organizations in various
locations around the United States and the United Kingdom and a research
facility in India, none of which is significant individually or in the
aggregate.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in litigation relating to
claims arising from the ordinary course of business. In February 2001 one of
the Company's early customers filed an action in the United States District
Court alleging claims that certain software and services purchased from the
Company did not satisfy certain contractual obligations. The lawsuit further
alleges that the Company engaged in unfair or deceptive practices in violation
of state law and is seeking treble damages. As the claim is in the early stage
of litigation, it is not possible to estimate the outcome of this contingency.
We believe that there are no other claims or actions pending or threatened
against us, the ultimate disposition of which would have a material adverse
effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2001.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the NASDAQ National Market under the symbol
"EVLV." The price range per share reflected in the table below represents the
highest and lowest sale prices for our stock as reported by the NASDAQ National
Market during each quarter the stock has been publicly traded since August 10,
2000, the date of our initial public offering:
High Low
Quarter ended September 30, 2000 $ 28.75 $ 9.00
Quarter ended December 31, 2000 $ 24.63 $ 4.38
Quarter ended March 31, 2001 $ 9.23 $ 2.00
Quarter ended June 30, 2001 $ 2.84 $ 0.51
The number of holders of record of the shares of our common stock was 784 as of
August 31, 2001. There are approximately 3,100 additional beneficial owners of
our common stock.
We have not paid any cash dividends on our capital stock. We currently intend to
retain any earnings to fund the development and growth of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable future
as our bank credit agreements prohibit payment of cash dividends. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
RECENT SALES OF UNREGISTERED SECURITIES
On June 29, 2001, we issued and sold 1,553,254 shares of common stock to Vivant!
Corporation (Vivant) pursuant to an Asset Acquisition Agreement dated May 22,
2001, as partial consideration for the assets acquired.
USE OF PROCEEDS OF REGISTERED SECURITIES
There has been no change to the disclosure contained in our report on Form 10-Q
for the quarter ended March 31, 2001, regarding the use of proceeds generated by
our initial public offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" presented in Item 7 and more detailed
financial statements presented in Exhibit 14(1) of this Form 10-K. The
consolidated financial data for periods prior to the financial statements
presented in Item 8 of this Form 10-K are derived from audited consolidated
financial statements not included herein. Historical results are not
necessarily indicative of results that may be expected for any future period.
20
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- --------- ---------
Revenues:
Solutions $ 25,398 $ 7,157 $ 150 $ - $ -
Subscriptions 9,549 3,386 367 - -
---------- --------- --------- --------- ---------
Total revenues $ 34,947 $ 10,543 $ 517 $ - $ -
========== ========= ========= ========= =========
Gross profit (loss) 17,576 3,373 (124) - -
Operating loss (107,926) (61,063) (11,126) (9,225) (7,907)
Net loss attributable to common stockholders (111,367) (69,374) (11,471) (10,582) (8,093)
Basic and diluted net loss per common share $ (3.63) $ (22.83) $ (7.21) $ (9.27) $ (12.12)
Shares used in computing basic and diluted net
loss per common share (1) 30,643 3,039 1,591 1,141 668
Selected Expenses:
In-process technology write-off $ - $ 3,126 $ - $ - $ -
Amortization of goodwill and other intangible assets 8,959 2,809 - - -
Restructuring charges 9,724 - - - -
Impairment of goodwill and other intangible assets 19,647 - - - -
Beneficial conversion feature of Series I redeemable
convertible preferred stock 5,977 9,023 - - -
---------- --------- --------- --------- ---------
Total $ 44,307 $ 14,958 $ - $ - $ -
========== ========= ========= ========= =========
JUNE 30,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 22,754 $ 18,660 $ 2,840 $ 2,076 $ 10,702
Working capital 7,126 4,598 1,000 1,180 9,997
Restricted cash - 2,000 - - -
Total assets 47,621 63,979 4,087 3,075 12,673
Long-term debt and capital lease obligations 2,769 4,810 3,899 14,235 13,384
Redeemable convertible preferred stock - 79,514 31,579 11,393 11,393
Total stockholders' (deficit) equity $ 15,343 $(40,632) $(34,734) $(23,587) $(12,919)
(1) See Note 3 of Notes to Consolidated Financial Statements for an explanation of the determination of the
number of shares used in computing basic and diluted net loss per common share data.
ITEM 7. 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 included elsewhere in this report.
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", "projections", and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including risks faced by us described in this Report, including those set forth
under the section entitled "Risk Factors" in Item 1, and the other documents we
file with the Securities and Exchange Commission ("SEC"), including our most
recent reports on Form 10-K, Form 8-K, Form S-1 and Form 10-Q, and amendments
thereto.
21
OVERVIEW
Evolve is a leading provider of solutions that optimize the way high-value
workers deliver high-value work. The Evolve solution enables organizations to
optimize their strategic workforces by integrating and automating key processes
that lie at the intersection of people and projects. Project- and people-driven
organizations can maximize business performance by optimizing their workforce
planning, development, deployment and delivery through the Evolve solution.
Evolve was founded in February 1995. From our inception through December 1998
our activities, funded by the capital we raised, consisted primarily of building
our business infrastructure, recruiting personnel and developing our software
and service offerings. Our Evolve 4 ePlatform was first made commercially
available in March 1999. We recognized our first revenues from our Evolve 4
ePlatform during the quarter ended March 31, 1999. We have incurred substantial
losses since inception and we anticipate that we will continue to incur
operating losses as we make the investments necessary to run our business. Our
accumulated deficit at June 30, 2001, was $215.8 million.
We increased our workforce from June 30, 1999 to June 30, 2000, from 75 to 326
employees. This reflected the results of our investment in developing our
technology and building a direct sales force, a marketing group and a
professional services organization. Our infrastructure expenditures also
increased significantly in 2000 and through the third quarter of 2001 as we
expanded our facilities domestically and internationally and enhanced our
information systems. During the fourth quarter of 2001, in response to market
conditions, we reduced our workforce, restructured our organization and took
other measures to reduce operational expenses. As a result, our headcount at
June 30, 2001, was reduced to 258 employees.
In August 2000 we completed an initial public offering of 5,750,000 shares of
our common stock, resulting in proceeds of approximately $46.5 million, net of
offering costs.
SOURCES OF REVENUE AND REVENUE RECOGNITION
The Company derives revenues from fees for licenses and implementation services
("Solutions revenue") and fees from maintenance, application service providers
and subscription agreements ("Subscription revenue"). The Company recognizes
revenues in accordance with the provisions of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition." The Company also follows the provisions of the Securities
Exchange Commission's Staff Accounting Bulletin No.101 (SAB 101), "Revenue
Recognition in Financial Statements."
Under SOP 97-2 as amended, the Company recognizes revenues when all of the
following conditions are met:
- when persuasive evidence of an agreement exists;
- the delivery of the product has occurred;
- the fee is fixed or determinable; and
- the Company believes that collection of these fees is reasonably
assured.
Generally, the Company has vendor specific objective evidence of fair value for
the maintenance element of software arrangements based on the renewal rates for
maintenance in future years as specified in the contracts. In those cases where
first year maintenance revenue is included in the license fee, the Company
defers the fair value of the first year maintenance revenue at the outset of the
arrangement and recognizes it ratably over the period during which the
maintenance is to be provided, which normally commences on the date the software
is delivered.
Historically, the Company did not have vendor specific objective evidence of
fair value for services specified in certain software arrangements, as the
services were never sold separately. Accordingly, the remaining software
revenue allocated to such software licenses and services was recognized ratably
on a straight-line basis over the period during which the services were
provided, which was generally between six and nine months. In October 2000 the
Company established vendor specific objective evidence of fair value for certain
services. For these contracts, which involve significant implementation or
other services which are essential to the functionality of the software and
which are reasonably estimable, the license and services revenue is recognized
over the period of each implementation, primarily using the
percentage-of-completion method. Labor hours incurred are used as the measure
22
of progress towards completion. Revenue for these arrangements is classified as
Solutions revenue. A provision for estimated losses on engagements is made in
the period in which the loss becomes probable and can be reasonably estimated.
In cases where a sale of a license does not include implementation services
(i.e., a sale of additional seats or a sale of product to be implemented by a
third-party), revenue is recorded upon delivery with an appropriate deferral for
maintenance services, if applicable, provided all of the other relevant
conditions have been met.
The Company generates revenue from its application service provider ("ASP")
business, by hosting the software, and making the solution available to the
customer via the Internet, as well as providing maintenance and other services
to the customer. In such situations, customers pay a monthly fee for the term
of the contract in return for access to the Company's software, maintenance and
other services such as implementation, training, consulting and hosting. For
certain ASP software arrangements for which the Company does not have vendor
specific objective evidence of fair value for the elements of the contract, fees
from such arrangements are recognized on a monthly basis as the hosting service
is provided. In other circumstances where the customer has the right to take
delivery of the software and the Company has vendor specific objective evidence
of fair value for the hosting element of the contract, fees from the arrangement
are allocated between the elements based on the vendor specific objective
evidence. Revenue for these hosting arrangements is classified as Subscriptions
revenue.
License revenue includes product licenses to companies from which the Company
has purchased products and services under separate arrangements executed within
a short period of time ("reciprocal arrangements"). Products and services
purchased in reciprocal arrangements include: 1) software licensed for internal
use, 2) software licensed for resale or incorporation into the Company's
products; and 3) development or implementation services. For reciprocal
arrangements, we consider Accounting Principles Boards or APB No. 29,
"Accounting for Nonmonetary Transactions," and Emerging Issues Task Force or
EITF, Issue No. 86-29, "Nonmonetary Transactions: Magnitude of Boot and
Exceptions to the Use of Fair Value, Interpretation of Accounting Principles
Board No. 29, Accounting for Nonmonetary Transactions" to determine whether the
arrangement is a monetary or nonmonetary transaction. In determining these fair
values, the company considers the recent history of cash sales of the same
products or services in similar sized transactions. Revenues recognized under
reciprocal arrangements were $3.1 million, $369,000 and $0 for the fiscal
years ended June 30, 2001, 2000 and 1999, respectively.
The Company incurs stock-based compensation in connection with stock option
grants and sales of restricted stock to our employees at exercise or sales
prices below the deemed fair market value of our common stock for accounting
purposes. The cumulative difference between the deemed fair value of the
underlying stock at the date the options were granted and the exercise price of
the granted options was $40.3 million as of August 9, 2000, our IPO date. This
amount is being amortized, using the accelerated method of FASB Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable or Award
Plans," over the four-year vesting period of the granted options. Accordingly,
our results from operations will include stock-based compensation expense, at a
minimum, through 2004. We recorded stock-based charges of $17.9 million, $19.3
million, and $218,000 in 2001, 2000 and 1999, respectively.
In connection with the termination of employment of certain executive officers
in fiscal 2001, the Company entered into arrangements with those executive
officers to provide consulting services. For accounting purposes, this was
deemed to be a change in status of the employee and resulted in a new
measurement date for the amended equity awards in accordance with FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation". In addition,
for other executive officers of the Company whose employment was terminated in
fiscal 2001 and where those officers had purchased restricted stock with full
recourse notes, the Company agreed as part of their termination settlement to
allow them to put back to the Company their restricted shares in exchange for
the value of the notes. Accordingly, these notes are accounted for as
non-recourse notes on a variable basis such that the charge/credit arising from
these notes will fluctuate from period to period based on the Company's stock
price. The financial impact of these arrangements is included within stock-based
compensation expense, which has been allocated to the appropriate functional
categories within the Statement of Operations.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data in absolute
dollars for the periods indicated. The data has been derived from the audited
consolidated financial statements contained in this report. The operating
results discussed below do not include the amortization of non-cash stock-based
compensation. These amounts are discussed separately in the section entitled
"Stock-Based Charges" below.
23
(in thousands) YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Revenues:
Solutions $25,398 $ 7,157 $ 150
Subscriptions 9,549 3,386 367
---------- --------- ---------
Total revenues 34,947 10,543 517
---------- --------- ---------
Cost of Revenues:
Solutions 13,034 5,250 251
Subscriptions 4,337 1,920 390
---------- --------- ---------
Total cost of revenues 17,371 7,170 641
---------- --------- ---------
Gross profit (loss) 17,576 3,373 (124)
Operating expenses (excluding stock-based charges):
Sales and marketing 44,866 29,006 3,970
Research and development 22,594 13,716 5,115
General and administrative 19,712 15,779 1,917
In-process technology write-off - 3,126 -
Amortization of goodwill and other
intangible assets 8,959 2,809 -
Restructuring charges 9,724 - -
Impairment of goodwill and other
intangible assets 19,647 - -
---------- --------- ---------
Total operating expenses 125,502 64,436 11,002
Operating loss (107,926) (61,063) (11,126)
Interest income 3,014 1,085 277
Interest expense (339) (378) (697)
Other income (expense) (139) 5 75
---------- --------- ---------
Net loss (105,390) (60,351) (11,471)
Beneficial conversion feature of Series I
redeemable convertible preferred stock. (5,977) (9,023) -
---------- --------- ---------
Net loss attributable to common stockholders $(111,367) $(69,374) $(11,471)
========== ========= =========
REVENUES
Total revenues were $34.9 million, $10.5 million and $517,000 in 2001, 2000 and
1999, respectively, representing increases of 231% from 2000 to 2001 and 1,939%
from 1999 to 2000. For the year ended June 30, 2001, sales to one customer
accounted for 14% of total revenues. For the year ended June 30, 2000, sales to
two customers accounted for 19% and 13% of total revenues. For the year ended
June 30, 1999, sales to three customers accounted for 58%, 32%, and 10% of total
revenues.
Solutions revenue principally consists of software licenses and implementation
services. Solutions revenues were $25.4 million, $7.2 million and $150,000 in
2001, 2000 and 1999, respectively, representing increases of 255% from 2000 to
2001 and 4,671% from 1999 to 2000. The increase from 2000 to 2001 was
attributable to our growing customer base, an increase in the average size of
the sales contracts entered into by our customers and an increase in the amount
of additional purchases by installed customers. The increase from 1999 to 2000
was attributable primarily to an increase in our customer base.
Subscriptions revenue principally consists of applications and maintenance
subscriptions. Subscriptions revenues were $9.5 million, $3.4 million and
$367,000 in 2001, 2000 and 1999, respectively, representing increases of 182%
from 2000 to 2001 and 823% from 1999 to 2000. The increase from 2000 to 2001
was attributable to an increase in the number of customers to whom we contracted
maintenance and ASP services. The increase from 1999 to 2000 was primarily
attributable to an increased customer base.
COST OF REVENUES
Total cost of revenues was $17.4 million, $7.2 million and $641,000 in 2001,
2000 and 1999, respectively, representing increases of 142% from 2000 to 2001
and 1,019% from 1999 to 2000.
Cost of Solutions revenues consists principally of payroll-related costs for
employees and consultants involved in providing services for implementation,
training and consulting, including stock-based compensation. The cost of our
Solutions revenues also includes royalties due to third-parties for integrated
third-party technology, and to a lesser extent printing costs of product
24
documentation, duplication costs for software media, and shipping costs. Cost of
Solutions revenues were $13.0 million, $5.3 million and $251,000 in 2001, 2000
and 1999, respectively, representing increases of 148% from 2000 to 2001 and
1,992% from 1999 to 2000. The increases in both periods were primarily
attributable to increased costs associated with employees and third-party
consultants involved in providing implementation, training, and consulting
services to our expanded customer base. As a percentage of solutions revenues,
cost of solutions revenues was 51%, 73% and 167% in 2001, 2000 and 1999,
respectively. Cost of revenues as a percentage of license revenue may increase
over the current level in the future as we incorporate additional third-party
products in our offerings.
Cost of Subscriptions revenues consists principally of the payroll-related costs
for employees involved in providing support services to customers under
maintenance contracts as well as payroll costs for employees and consultants
involved in providing services for implementation, training and consulting for
ASP customers. Cost of Subscriptions also includes hosting fees required to
service our ASP customers. Cost of Subscriptions revenues was $4.3 million,
$1.9 million and $390,000 in 2001, 2000 and 1999, respectively, representing
increases of 126% from 2000 to 2001 and 392% from 1999 to 2000. The increase in
total cost of Subscriptions revenues was primarily due to increased payroll
costs for employees and third-party consultants involved in providing support
services to customers under maintenance and application subscription contacts.
As a percentage of subscription revenues, cost of subscription revenues were
45%, 57% and 106% in 2001, 2000 and 1999.
The numbers of employees in our service organization has decreased to 48 as of
June 30, 2001, from 137 at June 30, 2000. The average headcount for 2001
increased to 111 from an average of 49 during 2000 and 5 during 1999. We are
seeking to reduce our cost of Solutions and Subscriptions revenues by having our
customers engage third-parties to provide a substantial portion of the
implementation services related to our applications.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of employee
salaries, benefits, commissions and stock-based compensation, and the costs of
advertising, public relations, website development, trade shows, seminars,
promotional materials and other sales and marketing programs. Additionally,
sales and marketing expenses include costs of service personnel that have not
been treated as part of cost of revenues. Sales and marketing expenses were
$44.9 million, $29.0 million, and $4.0 million during 2001, 2000 and 1999,
respectively. The increase in sales and marketing expenses resulted primarily
from building our domestic and international direct sales force, investing in
our sales and marketing infrastructure and increasing our marketing initiatives.
The number of employees in our sales and marketing organization decreased to 72
as of June 30, 2001, from 83 at June 30, 2000. The average headcount for 2001
was 93 compared with an average of 40 for 2000 and 14 for 1999. Stock-based
compensation was $4.6 million for 2001, $5.0 million for 2000 and $94,000 for
1999. As a result of the restructuring which occurred during the quarter ended
June 30, 2001, which included a significant workforce reduction, we expect that
the level of sales and marketing expenses will decline in the next fiscal year.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
personnel and related costs, including stock-based compensation, associated with
our product development efforts, including fees paid to third-parties for
consulting services. Research and development expenses were $22.6 million, $13.7
million, and $5.1 million during 2001, 2000 and 1999, respectively. The increase
in research and development expenses related primarily to an increase in
research and development personnel to 109 at June 30, 2001, from 69 at June 30,
2000. The average headcount for 2001 was 88 compared with an average of 48 for
2000 and 35 for 1999. Fees paid to third-party consultants increased in 2001 as
specialized technical experts were utilized to accelerate the delivery of Evolve
4 and other development initiatives. Stock-based compensation was $3.1 million
for 2001, $3.3 million for 2000 and $58,000 for 1999. During the quarter ended
March 31, 2001, we opened a software development center in India that became
fully operational the following quarter. We believe that an essential part of
our future success is the investment we make in our research and development
organization. We expect that the absolute dollar amount of research and
development expenses will decrease in the next fiscal year because of a decline
in the use of third-party consultants and cost savings associated with lower
operating costs in India.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and expenses, including stock-based compensation,
related to executive, finance and administrative personnel, bad debt expense and
professional service fees. General and administrative expenses were $19.7
million, $15.8 million and $1.9 million in 2001, 2000 and 1999. The increase in
general and administrative expenses resulted primarily from the addition of
executive, finance and administrative personnel to support the growth of our
business. The number of general and administrative employees decreased to 29 at
25
June 30, 2001, from 37 at June 30, 2000. The average headcount for 2001 was 38
compared with an average of 23 for 2000 and 10 for 1999. During 2001 litigation
with PeopleSoft and a former executive, which was settled for $290,000, resulted
in an increase in legal fees included in General and Administrative expenses.
Stock-based compensation was $8.7 million for 2001, $9.6 million for 2000 and
$60,000 for 1999. During 2001 we also had a substantial increase in finance and
administration services resulting from our status as a public company, and
increased bad debt expense resulting from our increased sales. As a result of
our headcount reduction, we expect that general and administrative expenses
relating to personnel will decrease in the next fiscal year.
IN-PROCESS TECHNOLOGY WRITE-OFF. In conjunction with the March 31, 2000,
acquisition of InfoWide, Inc., the Company acquired $3.1 million of in-process
technology that was immediately expensed because technological feasibility had
not been established and no future alternative uses of the technology existed.
The amount allocated to the purchased in-process technology of $3.1 million was
determined based on an appraisal completed by an independent third-party using
established valuation techniques. The projects' percentages-of-completion were
estimated to be in the range between 10% and 67%. The value of this in-process
technology was determined by estimating the resulting cash flows from the sale
of the products resulting from the completion of the in-process technology,
estimating the costs to develop the purchased in-process technology into
commercially viable products and discounting the net cash flows back to their
present value.
In the fourth quarter of fiscal 2001 management determined that the carrying
value of certain goodwill and purchased intangible assets were impaired due to
changes in circumstances from those present at the time these assets were
acquired. At the time of the acquisition, the technology acquired from
InfoWide, Inc. was expected to be utilized in the proposed Services.com
business. As of June 30, 2001, the current and future plans for utilization of
this technology have diminished materially such that expected future cash flows
from the use of the technologies were less than the carrying value of the
underlying assets. Accordingly, an impairment charge of $18.1 million was
recognized in the fourth quarter of fiscal 2001 to reduce the carrying value of
goodwill and purchased intangible assets to the present value of the future
expected cash flows.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. In connection with the
acquisition of InfoWide, Inc., on March 31, 2000, we recorded $32.6 million in
goodwill, purchased technology and other intangible assets including in-process
technology of $3.1 million. During 2001 and 2000, we expensed $9.0 million and
$2.8 million, respectively, associated with the amortization of these and other
intangible assets that were being amortized over periods not exceeding
thirty-six months
RESTRUCTURING COSTS. In April 2001 the Company announced cost control measures
that included a reduction of the workforce, organization restructuring,
consolidation of excess facilities and additional measures focused on reducing
operational expenses. As a result this restructuring, the Company recorded
restructuring charges of $9.7 million classified as operating expenses and
announced a decline in forecasted revenues.
The Company recorded a workforce reduction charge of approximately $1.6 million
relating primarily to severance and fringe benefits of 97 terminated employees.
The number of contractors and temporary workers was also reduced.
The Company recorded a restructuring charge of $6.4 million relating to
consolidation of excess facilities at our Emeryville location. The estimated
facility costs are based upon current estimates to close or sub-lease these
facilities. The estimated costs to sub-lease these facilities are based on
current comparable rates for leases in the market. Should facilities operating
lease rental rates continue to decrease in these markets or should it take
longer than expected to find a suitable tenant to sublease these facilities, the
actual loss could exceed this estimate.
As a result of the workforce reduction and the facilities restructuring, the
Company recorded a charge of $1.7 million for the disposal of fixed assets.
The charge consisted principally of a write-off of $900,000 of leasehold
improvements and $326,000 of furniture related to the excess facilities and
$468,000 of computer hardware and software and telecommunications equipment
related to the workforce reduction.
26
RESTRUCTURING
TOTAL NON-CASH CASH LIABILITIES AT
CHARGES CHARGES PAYMENTS JUNE 30, 2001
-------- --------- ---------- --------------
Workforce reduction $ 1,597 $ - $ (817) $ 780
Consolidation of excess facilities 6,433 (354) 6,079
Fixed assets 1,694 (1,694) -
-------- --------- ---------- --------------
Total $ 9,724 $ (1,694) $ (1,171) $ 6,859
======== ========= ========== ==============
Remaining cash expenditures relating to workforce reductions and termination of
agreements will be paid in the first quarter of fiscal 2002. Amounts related to
the net lease expense due to the consolidation of excess facilities will be paid
over the lease term through fiscal 2007.
IMPAIRMENT OF GOODWILL AND OTHER ASSETS. During the fourth quarter of fiscal
year 2001 Evolve identified indicators of possible impairment of goodwill and
other acquired intangible assets relating to the InfoWide, Inc. acquisition.
These indicators included the deterioration in the business climate, recent
changes in sales and cash flow forecasts and the decision to discontinue the
Services.com service. Accordingly, Evolve compared the undiscounted cash flows
associated with the acquired goodwill and purchased intangible assets with the
respective carrying amounts and determined that an impairment of certain of
these assets existed. As a result, the Company recorded a charge of $19.6
million related to the impairment of goodwill and other intangible assets,
including $14.2 million in goodwill, $376,000 in non-compete agreements and $3.5
million in technology acquired from InfoWide, Inc. as well as $1.5 million
relating to software used in our discontinued Services.com business. The
Company measured the impairment as the amount by which the carrying amount
exceeded the present value of the estimated future cash flows.
OTHER INCOME (EXPENSE), NET. Other income (expense), net was $2.5 million,
$712,000, and ($345,000) in 2001, 2000 and 1999, respectively.
Interest income was $3.0 million, $1.1 million and $277,000 for 2001, 2000 and
1999, respectively. The increase during 2001 is primarily attributable to
interest income derived from increased cash balances resulting from the
completion of the Company's Series I Preferred Stock issuances in June and July
2000 and initial public offering in August 2000. The increase during 2000
resulted primarily from the completion of private equity funding rounds in
September 1999 and September 2000.
Interest expense was $339,000, $378,000 and $697,000 during 2001, 2000 and 1999.
The decrease during 2001 resulted from paying off outstanding non-convertible
notes with IPO funds partially offset by increased interest expense from our
bank credit facility and capital leases. The decrease during 2000 was largely a
result of the conversion of certain convertible debt instruments to preferred
stock during the year ended June 30, 1999.
The results of interest income and expense, net will depend on a number of
factors, which include, but are not limited to, the levels of cash and cash
equivalent balances and the performance of these investments.
BENEFICIAL CONVERSION OF PREFERRED STOCK. We recorded a dividend charge of $6.0
million and $9.0 million for the years ended June 30, 2001 and 2000,
respectively, in respect of a beneficial conversion feature associated with the
sale of approximately 2,000,000 and 3,000,000 shares of our Series I preferred
stock in fiscal 2001 and 2000, respectively, at a price of $6.00 per share. The
deemed fair value for accounting purposes was $9.00 per share.
27
INCOME TAXES. From inception through June 30, 2001, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of June 30, 2001, we had approximately $118.4 million of federal and
$53.7 million of state net operating loss carry-forwards to offset future
taxable income. The federal net operating loss carry-forwards expire on varying
dates from 2015 through 2021 and the state net operating loss carryforwards
expire on varying dates from 2002 through 2006. Given our limited operating
history, our losses incurred to date and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally
accepted accounting principles. Therefore, we have recorded a 100% valuation
allowance against the deferred income tax asset. In addition, utilization of the
loss carry-forward may be subject to limitations due to changes in equity
ownership.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," that
requires companies to record derivative financial instruments on their balance
sheets as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative instrument and whether it qualifies for
hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999 the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," that amends SFAS No. 133 to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In June 2000 the FASB
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB No. 133." SFAS 138 amends the accounting and
reporting standards for certain derivatives and hedging activities such as net
settlement contracts, foreign currency translations and intercompany
derivatives. The Company does not currently hold derivative instruments or
engage in hedging activities. Management's adoption of SFAS 133 did not have a
material effect on our consolidated financial statements.
In March 2000 the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions involving Stock Compensation," an interpretation of
Accounting Principles Board ("APB") Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions cover specific events that
occurred after either December 15, 1998, or January 12, 2000. The adoption of
FIN 44 did not have a material impact on the consolidated financial statements.
The Company adopted FIN 44 beginning July 1, 2000.
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separately from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead would
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. Evolve will continue to amortize
goodwill and purchased intangible assets acquired prior to June 30, 2001, until
it adopts SFAS 142. For business combinations initiated after June 30, 2001,
Evolve will follow the non-amortization method under SFAS 142. The provisions
of each statement may be adopted by Evolve as early as July 1, 2001. Evolve is
currently assessing SFAS No. 141 and 142 and has not determined the impact on
Evolve's consolidated financial statements.
28
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private sales
of common and preferred stock, with net proceeds totaling approximately $133
million. Included in the total is $46.5 million relating from the Company's
Initial Public Offering (IPO), net of offering costs of approximately $5.3
million. We have also raised $12.7 million in funding through the issuance of
debt instruments. As of June 30, 2001, all principal and interest had been paid
on these debt instruments. We have also utilized $4.8 million of a $7.5 million
term loan credit facility. As of June 30, 2001, we had $22.8 million in cash,
cash equivalents and short-term investments and $7.1 million in working capital.
The Company has sustained net losses and negative cash flows from operations
since its inception. The Company's ability to meet its obligations in the
ordinary course of business is dependent on its ability to reduce net operating
expenses and raise additional financing through public or private equity
financing or other sources of financing to fund operations. There is no
assurance that the Company will achieve a reduction of net operating expenses or
that it will be able to raise adequate financing from other sources. Management
believes that its current funds and access to available capital will be
sufficient to enable the Company to meet its planned expenditures through at
least June 30, 2002. If anticipated operating results are not achieved,
management has the intent and it believes that it has the ability, to reduce
expenditures by reductions in headcount so as not to require additional
financial resources, if such resources were not available on terms acceptable to
the Company.
For the year ended June 30, 2001, net cash used in operating activities was
$50.1 million resulting principally from an operating loss of $108.0 million
offset by amortization and depreciation of $12.7 million, impairment of goodwill
of $19.6 million, stock-based charges of $17.9 million and a net decrease in
assets and liabilities of $2.2 million. For the year ended June 30, 2000, net
cash used in operating activities was $24.2 million resulting principally from
an operating loss of $61.1 million offset by amortization and depreciation of
$3.8 million, in-process technology write-off of $3.1 million, stock-based
charges of $19.3 million and a net decrease in assets and liabilities of $9.5
million. For the year ended June 30, 1999, net cash used in operating
activities was $8.3 million resulting principally from an operating loss of
$11.1 million offset by a net decrease in assets and liabilities of $1.9
million.
Net cash used in operating activities was $50.1 million, $24.2 million and $8.3
million for the years ended June 30, 2001, 2000 and 1999, respectively. Net
cash used in operating activities, after adjustment for non-cash items, resulted
primarily from net losses during the period.
Net cash used in investing activities was $10.7 million, $9.4 million and
$41,000 for the years ended June 30, 2001, 2000 and 1999. Net cash used in
investing activities for the year ended June 30, 2001, consisted primarily of
the net purchase and maturity of short-term investments of $2.8 million and the
purchase of property and equipment of $8.6 million. Net cash used in investing
activities for the year ended June 30, 2000, consisted primarily of the purchase
of property and equipment of $7.4 million and of a restricted certificate of
deposit for $2.0 million used to secure a stand-by letter-of-credit for our
Emeryville lease.
Net cash provided by financing activities was $61.9 million, $49.5 million and
$9.1 million for the years ended June 30, 2001, 2000 and 1999, respectively.
Net cash generated from financing activities for the years ended June 30, 2001,
consisted primarily of the net proceeds of $46.5 million for the Company's IPO,
and the issuance of $12.6 million of preferred stock. Net cash generated from
financing activities for the years ended June 30, 2000 and 1999, consisted
primarily of the net proceeds of $47.9 million and $9.5 million, respectively,
from sales of preferred stock.
29
In January 2001 the Company entered into a credit arrangement providing a
line-of-credit of $7.5 million and a $7.5 million term loan credit facility with
interest accruing at the rate of the bank's prime rate plus 0.75% and 1.00%,
respectively. As of June 30, 2001, the Company had utilized $4.8 million of the
term loan credit facility. The loan will be fully repaid over the next two
fiscal years. The minimum payments due under the term loan credit facility are
$2,178,000, $2,377,000 and $198,000 in fiscal 2002, 2003 and 2004, respectively.
Both the line-of-credit and the term loan credit facility are collateralized by
all of the Company's assets, including intellectual property, except for
previously leased equipment. The line-of-credit also includes a $5.0 million
sublimit to secure commercial and/or standby letters-of-credit of which $2.9
million has been utilized to support letters-of-credit issued to the landlord of
the Company's Emeryville facility. Any advances on the line-of-credit mature
one year from the loan documents with interest due monthly. Advances on the
term loan credit facility are due twenty-eight months from the advance with
interest only payments for the first four months and then equal payments of
interest and principal amortized over the remaining twenty-four months. The
Company is required to maintain certain financial ratios as part of the loan
covenants. At June 30, 2001, the Company was in violation of a minimum revenue
covenant (see Recent Developments below).
RECENT DEVELOPMENTS
On September 23, 2001, the Company signed a Series A Preferred Stock Purchase
agreement with new and existing investors for a private placement of 1.3 million
shares of convertible preferred stock for total proceeds of $13 million as well
as warrants to purchase 6.5 million shares of common stock at $1.00 per share.
The preferred stock accretes in kind at a rate of 8% per year and is convertible
into common stock at a price of $.50 per share. In addition, the Company issued
warrants to purchase 1.3 million additional shares of convertible preferred
stock for additional potential proceeds of $13 million which will also include,
upon exercise, warrants to purchase 6.5 million shares of common stock at $1.00
per share. Closing of the arrangement and receipt of the funds is expected on or
before October 15, 2001 and is subject to customary closing conditions, which
the Company expects to be met.
On September 26, 2001, the Company amended its Loan and Security to restructure
the excess credit facilities, and to obtain a waiver of cerain defaults under
the credit arrangement. The Company had been in violation of banks covenants to
maintain minimum revenue levels for the months of April through September 2001.
In connection with the loan amendment, the bank waived these covenant violations
on September 26, 2001 and approved new financial covenants for the periods
commencing October 1, 2001. Under the new covenants, the Company will be
required to: (1) Maintain at all times a minimum Bank Liquidity Ratio of 1.50 to
1.00, reducing to 1:25 to 1.00 at January 31, 2002 and thereafter (the cash
component of this ratio is required to be held at the Bank); (2) Beginning with
the month ending December 31, 2001, maintain on a monthly basis the greater of
(a) Minimum Company Liquidity Ratio of 1.75 to 1.00 or (b) $14,000,000 in
unrestricted cash (unrestricted cash will include any restricted cash held by
the Bank) reducing to $8,000,000 at January 31, 2002 and thereafter; (3)
Beginning with the month ending December 31, 2001, not exceed a leverage maximum
of 2.25 to 1.00; and (4) meet a Milestone covenant of obtaining at least
$10,000,000 in new equity from Investors acceptable to the Bank by October 15,
2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
foreign currency exchange rates, interest rates, and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this
prospectus.
30
Foreign Currency Exchange Rate Risk
To date, all our product sales have been made in North America and to a smaller
extent, Europe. To the extent that our international operations become
meaningful, our financial results could be affected by a variety of factors,
including changes in foreign currency exchange rates or weak economic conditions
in foreign markets. The strengthening of the U.S. dollar could make our products
less competitive in foreign markets given that the vast majority of sales are
currently made in U.S. dollars.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio and outstanding debt obligations. Declines in interest
rates over time would reduce our interest income. Interest rate fluctuations
would also affect interest paid on our line of credit and term loan credit
facility. We do not use derivative financial instruments for speculative or
trading purposes.
Funds in excess of current operating requirements are invested in obligations of
the U.S. government and its agencies and investment grade obligations of state
and local governments and large corporations. Because of the nature of our
investments, we have concluded that there is no material market risk exposure at
June 30, 2001. Therefore, no quantitative tabular disclosures are presented.
The basic objectives of our investment program are to ensure:
- safety and preservation of capital;
- sufficient liquidity to meet cash flow requirements;
- attainment of a consistent market rate of return on invested funds;
and
- avoiding inappropriate concentrations of investments.
Equity Risk
We do not own any marketable equity securities. Therefore, we are not subject to
any direct equity price risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The report of Independent Accountants, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1 immediately
following the signature page and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been none.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information set forth in the section entitled "Proposal No. 1-- Election
of Directors" in Evolve's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the end of Evolve's fiscal year ended June 30, 2001, (the "2001
Proxy Statement"), which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive Compensation
and Related Information" in the 2001 Proxy Statement, which section is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Stock Ownership of
Certain Beneficial Owners and Management" in the 2001 Proxy Statement, which
section is incorporated herein by reference.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships and
Related Transactions" in the 2001 Proxy Statement, which is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed or incorporated by reference as part of
this Annual Report:
(1) Financial Statements
PAGE
----
Report of PricewaterhouseCoopers LLP, Independent Accountants F-1
Consolidated Balance Sheets at June 30, 2001 and 2000 F-2
Consolidated Statements of Operations for the years ended June 30, 2001, 2000 F-3
and 1999
Consolidated Statements of Redeemable Convertible Preferred Stock and F-4
Stockholders' Equity (Deficit) for years ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 F-5
and 1999
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
The following financial statement schedule is filed herewith at page
35.
Schedule II-Valuation Account
32
(3) Exhibits
EXHIBIT
NO. DESCRIPTION
--- -----------
2.1 * Asset Acquisition Agreement, dated as of May 22, 2001, by and between Evolve and
Vivant Corporation.
3.1 ** Amended and Restated Certificate of Incorporation of Registrant.
3.2 ** Bylaws of the Registrant .
4.1 ** Form of stock certificates.
10.1 ** Form of Indemnification Agreement between the Registrant and each of its directors.
10.2 ** Office Building Lease, 1400 65th Street, Emeryville, CA.
10.3 Amended Office Building Lease, 1400 65th Street, Emeryville, CA.
10.4 ** 1995 Stock Option Plan, as amended.
10.5 ** 2000 Stock Plan.
10.6 ** 2000 Employee Stock Purchase Plan.
10.7 ** Employment Offer Letter for John P. Bantleman.
10.8 ** Employment Offer Letter for James J. Bozzini.
10.9 ** Employment Offer Letter for Kurt M. Heikkinen.
10.10 ** Restricted Stock Purchase Agreements for John P. Bantleman dated January 1998,
February 1999 and November 1999.
10.11 ** Restricted Stock Purchase Agreement for James J. Bozzini dated November 1999.
10.12 ** Restricted Stock Purchase Agreements for Kurt M. Heikkinen dated November 1999,
February 2000 and July 2000.
10.13 ** Agreement that provides acceleration for vesting for John P. Bantleman dated
February 1999.
10.14 ** Amended and Restated Stockholder Rights Agreement among certain investors dated
June 2000.
10.15 ** Employment Offer Letter for Joseph A. Fuca.
10.16 * Registration Rights Agreement, dated as of June 29, 2001, by and between Evolve and
Vivant Corporation.
10.17 Subordinated Loan and Security Agreement dated January 31, 2001, by and between
Imperial Bank and Registrant.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
* Filed as an exhibit to the Registrant's Periodic Report on Form 8-K filed July 17,
2001.
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-32796).
(b) Reports on Form 8-K
No report on Form 8-K was filed during the fourth quarter of the fiscal
year ended June 30, 2001.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
Evolve Software, Inc.
Date: September 28, 2001
/s/ JOHN P. BANTLEMAN
-----------------------------------------
John P. Bantleman
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, John P. Bantleman and
Kenneth J. Bozzini, and each one of them, his or her true and lawful
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign any amendments to this Annual Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
------------------ ---------------------------------------- ------------------
/s/ JOHN R. OLTMAN Chairman of the Board September 28, 2001
------------------
John R. Oltman
/s/ JOHN P. BANTLEMAN President, Chief Executive Officer and September 28, 2001
------------------
John P. Bantleman Director (Principal Executive Officer)
/s/ KENNETH J. BOZZINI Chief Financial Officer, Vice President September 28, 2001
------------------
Kenneth J. Bozzini of Finance (Principal Financial and
Accounting Officer)
/s/ JEFFREY M. DRAZAN Director September 28, 2001
------------------
Jeffrey M. Drazan
/s/ JUDITH H. HAMILTON Director September 28, 2001
------------------
Judith H. Hamilton
/s/ PAUL ROCHESTER Director September 28, 2001
------------------
Paul Rochester
34
SCHEDULE II
EVOLVE SOFTWARE, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(IN THOUSANDS)
BALANCE AT CHARGED
BEGINNING TO OPERATING BALANCE AT
YEAR DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---- ------------------------------- ---------- ------------ ---------- ------------
1999 Allowance for doubtful accounts $ - $ - $ - $ -
2000 Allowance for doubtful accounts $ - $ 125.0 $ - $ 125.0
2001 Allowance for doubtful accounts $ 125.0 $ 1,222.3 $ 617.2 $ 730.1
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Evolve Software, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1), present fairly, in all material respects, the
financial position of Evolve Software, Inc. and its subsidiaries at June 30,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule identified in the
accompanying index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
July 30, 2001, except for Note 19, as to which the date is September 27, 2001
F-1
EVOLVE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
----------------------
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 18,660
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,840 -
Accounts receivable, net of allowance for doubtful
accounts $730 and $125, respectively. . . . . . . . . . . . . . . . . . 6,414 3,952
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 2,454 2,273
Notes receivable from related party . . . . . . . . . . . . . . . . . . . . 175 -
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 31,797 24,885
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 10,481 8,830
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,000
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,617 1,213
Note receivable from related party. . . . . . . . . . . . . . . . . . . . . . . - 100
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . 3,726 26,951
---------- ----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,621 $ 63,979
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,670 $ 6,467
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,852 5,965
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,117 7,093
Capital lease obligations, current portion. . . . . . . . . . . . . . . . . 646 762
Restructuring accrual, current portion. . . . . . . . . . . . . . . . . . . 2,208 -
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,178 -
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 24,671 20,287
Capital lease obligations, less current portion . . . . . . . . . . . . . . . . 194 852
Restructuring accrual, less current portion.. . . . . . . . . . . . . . . . . . 4,651 -
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,575 3,958
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 -
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,278 25,097
---------- ----------
Contingencies and commitments (Note 5 and Note 9)
Redeemable convertible preferred stock, $.001 par value, 10,000,000
and 130,000,000 shares authorized as of June 30, 2001 and 2000,
respectively; shares issued and outstanding: zero and 115,541,610 as of
June 30, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . - 79,514
Stockholders' equity (deficit)
Common stock, $0.001 par value; 110,000,000 and 25,000,000 shares
authorized as of June 30, 2001 and 2000, respectively; shares
issued and outstanding: 40,051,956 and 10,305,880 shares
as of June 30, 2001 and 2000, respectively. . . . . . . . . . . . . . 40 10
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 250,485 113,210
Notes receivable from stockholders. . . . . . . . . . . . . . . . . . . . . (7,795) (9,174)
Unearned stock-based compensation . . . . . . . . . . . . . . . . . . . . . (11,732) (40,295)
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . 95 --
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (215,750) (104,383)
---------- ----------
Total stockholder's equity (deficit). . . . . . . . . . . . . . . . . . 15,343 (40,632)
---------- ----------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . $ 47,621 $ 63,979
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Revenues:
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,398 $ 7,157 $ 150
Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,549 3,386 367
---------- --------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,947 10,543 517
---------- --------- ---------
Cost of revenues:(*)
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,034 5,250 251
Subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,337 1,920 390
---------- --------- ---------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 17,371 7,170 641
---------- --------- ---------
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,576 3,373 (124)
Operating expenses:(*)
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,866 29,006 3,970
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,594 13,716 5,115
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . 19,712 15,779 1,917
In-process technology write-off . . . . . . . . . . . . . . . . . . . . . . . - 3,126 -
Amortization of goodwill and other intangible assets. . . . . . . . . . . . . 8,959 2,809 -
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,724 - -
Impairment of goodwill and other intangible assets. . . . . . . . . . . . . . 19,647 - -
---------- --------- ---------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . 125,502 64,436 11,002
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107,926) (61,063) (11,126)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,014 1,085 277
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (339) (378) (697)
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (139) 5 75
---------- --------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105,390) (60,351) (11,471)
Beneficial conversion feature of Series I redeemable convertible preferred stock. (5,977) (9,023) -
Net loss attributable to common stockholders. . . . . . . . . . . . . . . . . . . $(111,367) $(69,374) $(11,471)
========== ========= =========
Net loss per common share -- basic and diluted. . . . . . . . . . . . . . . . . . $ (3.63) $ (22.83) $ (7.21)
========== ========= =========
Shares used in net loss per common share calculation -- basic and diluted . . . . 30,643 3,039 1,591
========== ========= =========
(*) Amounts include non-cash stock based compensation as follows:
Cost of revenues:
Solutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,547 $ 1,382 $ 6
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,557 4,999 94
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,088 3,301 58
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . 8,691 9,595 60
---------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,883 $ 19,277 $ 218
========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
REDEEMABLE
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
---------------- --------- ------------- --------- ------------
BALANCES, JUNE 30, 1998. . . . . . . . . . . . . . . 10,183 $ 11,393 2,113 $ 2 $ 632
Repurchase of common stock . . . . . . . . . . . . . - - (138) - (222)
Issuance of common stock for notes
receivable to related parties . . . . . . . . . . - - 1,996 2 778
Exercise of common stock options . . . . . . . . . . - - 200 - 110
Issuance of common stock options to non-employees. . - - - - 20
Preferred Series F issued upon
conversion of promissory notes. . . . . . . . . . 16,633 10,656 - - -
Issuance of preferred Series G for cash and.
conversion of debt, net of issuance costs of $770 28,000 9,530 - - -
Unearned stock-based compensation. . . . . . . . . . - - - - 577
Amortization of unearned stock-based compensation. . - - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - - -
---------------- --------- ------------- --------- ------------
BALANCES, JUNE 30, 1999. . . . . . . . . . . . . . . 54,816 31,579 4,171 4 1,895
Repurchase of common stock . . . . . . . . . . . . . - - (992) (1) (557)
Repayment of notes receivable. . . . . . . . . . . . - - - - -
Issuance of common stock for notes receivable
to related parties . . . . . . . . . . . . . . . - - 3,296 3 5,715
Exercise of common stock options . . . . . . . . . . - - 1,920 2 3,968
Issuance of common stock and common stock
options to non-employees. . . . . . . . . . . . . - - 11 - 155
Issuance of preferred Series H for cash, net of
issuance costs of $39 . . . . . . . . . . . . . . 35,714 24,961 - - -
Issuance of preferred Series I for cash, net
of issuance costs of $23. . . . . . . . . . . . . 18,047 18,024 - - -
Exercise of warrants for Series G preferred stock. . 6,965 4,950 - - -
Exercise of warrants for common stock. . . . . . . . - - 67 - 800
Issuance of warrants for stock-based settlement. . . - - - - 651
Dividend relative to beneficial conversion feature
related to issuance of Series I preferred stock . - - - - 9,023
Common stock issued for the acquisition of InfoWide. - - 1,833 2 32,998
Unearned stock-based compensation. . . . . . . . . . - - - - 58,562
Amortization of unearned stock-based compensation. . - - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - - -
---------------- --------- ------------- --------- ------------
BALANCES, JUNE 30, 2000. . . . . . . . . . . . . . . 115,542 79,514 10,306 10 113,210
Repurchase of common stock . . . . . . . . . . . . . - - (235) - (835)
Repayment of notes receivable. . . . . . . . . . . . - - - - -
Issuance of common stock for notes receivable
to related party . . . . . . . . . . . . . . . . - - 416 - 2,063
Issuance of common stock under stock option
and stock purchase plans . . . . . . . . . . . . - - 619 1 2,843
Issuance of preferred Series I for cash. . . . . . . 11,953 11,946 - - -
Exercise of warrants for common stock. . . . . . . . - - 233 - 500
Exercise of warrants for Series F preferred stock. . 967 632 - - -
Issuance of common stock in conjunction with initial
public offering, net of issuance costs of $5,284. - - 5,750 6 46,469
Conversion of convertible preferred stock to
common stock at IPO. . . . . . . . . . . . . . . (128,462) (92,092) 21,410 21 92,070
Common stock issued for the acquisition
of Vivant technology . . . . . . . . . . . . . . - - 1,553 2 2,098
Dividend relative to beneficial conversion feature
related to issuance of Series I preferred stock . - - - - 5,977
Unearned stock-based compensation. . . . . . . . . . - - - - (13,910)
Amortization of unearned stock-based compensation. . - - - - -
Foreign currency translation adjustment. . . . . . . - - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - - -
---------------- --------- ------------- --------- ------------
BALANCES, JUNE 30, 2001. . . . . . . . . . . . . . . - $ - 40,052 $ 40 $ 250,485
================ ========= ============= ========= ============
NOTES ACCUMULATED TOTAL
RECEIVABLE UNEARNED OTHER STOCKHOLDERS'
FROM STOCK-BASED COMPREHENSIVE ACCUMULATED EQUITY
STOCKHOLDERS COMPENSATION INCOME DEFICIT (DEFICIT)
-------------- -------------- ------------ ------------- ---------------
BALANCES, JUNE 30, 1998. . . . . . . . . . . . . . . $ (683) $ - $ - $ (23,538) $ (23,587)
Repurchase of common stock . . . . . . . . . . . . . 222 - - - -
Issuance of common stock for notes
receivable to related parties . . . . . . . . . . (780) - - - -
Exercise of common stock options . . . . . . . . . . (24) - - - 86
Issuance of common stock options to non-employees. . - - - - 20
Preferred Series F issued upon
conversion of promissory notes. . . . . . . . . . - - - - -
Issuance of preferred Series G for cash and.
conversion of debt, net of issuance costs of $770 - - - - -
Unearned stock-based compensation. . . . . . . . . . - (577) - - -
Amortization of unearned stock-based compensation. . - 218 - - 218
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - (11,471) (11,471)
-------------- -------------- ------------ ------------- ---------------
BALANCES, JUNE 30, 1999. . . . . . . . . . . . . . . (1,265) (359) - (35,009) (34,734)
Repurchase of common stock . . . . . . . . . . . . . 502 - - - (56)
Repayment of notes receivable. . . . . . . . . . . . 65 - - - 65
Issuance of common stock for notes receivable
to related parties . . . . . . . . . . . . . . . (5,718) - - - -
Exercise of common stock options . . . . . . . . . . (2,758) - - - 1,212
Issuance of common stock and common stock
options to non-employees. . . . . . . . . . . . . - - - - 155
Issuance of preferred Series H for cash, net of
issuance costs of $39 . . . . . . . . . . . . . . - - - - -
Issuance of preferred Series I for cash, net
of issuance costs of $23. . . . . . . . . . . . . - - - - -
Exercise of warrants for Series G preferred stock. . - - - - -
Exercise of warrants for common stock. . . . . . . . - - - - 800
Issuance of warrants for stock-based settlement. . . - - - - 651
Dividend relative to beneficial conversion feature
related to issuance of Series I preferred stock . - - - (9,023) -
Common stock issued for the acquisition of InfoWide. - - - - 33,000
Unearned stock-based compensation. . . . . . . . . . - (58,562) - - -
Amortization of unearned stock-based compensation. . - 18,626 - - 18,626
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - (60,351) (60,351)
-------------- -------------- ------------ ------------- ---------------
BALANCES, JUNE 30, 2000. . . . . . . . . . . . . . . (9,174) (40,295) - (104,383) (40,632)
Repurchase of common stock . . . . . . . . . . . . . 609 - - - (226)
Repayment of notes receivable. . . . . . . . . . . . 543 - - - 543
Issuance of common stock for notes receivable
to related party . . . . . . . . . . . . . . . . (2,063) - - - -
Issuance of common stock under stock option
and stock purchase plans . . . . . . . . . . . . (697) - - - 2,147
Issuance of preferred Series I for cash. . . . . . . - - - - -
Exercise of warrants for common stock. . . . . . . . - - - - 500
Exercise of warrants for Series F preferred stock. . - - - - -
Issuance of common stock in conjunction with initial
public offering, net of issuance costs of $5,284. - - - - 46,475
Conversion of convertible preferred stock to
common stock at IPO. . . . . . . . . . . . . . . - - - - 92,091
Common stock issued for the acquisition
of Vivant technology . . . . . . . . . . . . . . - - - - 2,100
Dividend relative to beneficial conversion feature
related to issuance of Series I preferred stock . - - - ( 5,977) -
Unearned stock-based compensation. . . . . . . . . . 2,987 10,680 - - (243)
Amortization of unearned stock-based compensation. . - 17,883 - - 17,883
Foreign currency translation adjustment. . . . . . . - - 95 - 95
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - (105,390) (105,390)
-------------- -------------- ------------ ------------- ---------------
BALANCES, JUNE 30, 2001. . . . . . . . . . . . . . . $ (7,795) $ (11,732) $ 95 $ (215,750) $ 15,343
============== ============== ============ ============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
EVOLVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(105,390) $(60,351) $(11,471)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss on disposal of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 - 7
Common stock options issued to non-employees. . . . . . . . . . . . . . . . . . . . . . . . - 23 20
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095 125 -
Depreciation and amortization - fixed assets. . . . . . . . . . . . . . . . . . . . . . . . 3,697 852 384
Amortization of goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . 8,958 2,901 -
In-process technology write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,126 -
Non-cash restructuring charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,694 - -
Impairment of goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . 19,647 - -
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 298 571
Stock-based charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,883 19,277 218
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,558) (3,973) (78)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . (198) (1,934) (201)
Notes receivable from related party. . . . . . . . . . . . . . . . . . . . . . . . . . . . (75) (40) (40)
Deposits and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (647) (925) (42)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (796) 6,143 3
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (431) 5,171 331
Restructuring accrual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,859 - -
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024 5,077 1,966
NET CASH USED IN OPERATING ACTIVITIES (50,098) (24,230) (8,332)
---------- --------- ---------
Cash flows from investing activities:
Purchase of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,430) (2,264) -
Maturities of short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,591 2,264 -
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,631) (7,436) (41)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 20 - -
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 (2,000) -
Purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,225) (300) -
Cash acquired upon acquisition of InfoWide. . . . . . . . . . . . . . . . . . . . . . . . . . - 292 -
NET CASH USED IN INVESTING ACTIVITIES (10,675) (9,444) (41)
---------- --------- ---------
Cash flows from financing activities:
Payments under capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . (775) (490) (379)
Repayment of notes payable to related party . . . . . . . . . . . . . . . . . . . . . . . . . - - (100)
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,753 - -
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,060) - -
Proceeds from payment on note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 543 65 -
Proceeds from initial public offering, net. . . . . . . . . . . . . . . . . . . . . . . . . . 46,474 - -
Proceeds from issuance of preferred stock, net of issuance costs. . . . . . . . . . . . . . . 12,577 47,935 9,530
Proceeds from exercise of common stock options. . . . . . . . . . . . . . . . . . . . . . . . 866 1,240 86
Proceeds from exercise of warrants for common stock . . . . . . . . . . . . . . . . . . . . . 500 800 -
Proceeds from employee stock purchase plan. . . . . . . . . . . . . . . . . . . . . . . . . . 1,281 - -
Payments on repurchase of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . (226) (56) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 61,933 49,494 9,137
---------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . 94 - -
Increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 15,820 764
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 18,660 2,840 2,076
---------- --------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 18,660 $ 2,840
========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid to settle litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 290 $ - $ -
========== ========= =========
Cash paid during the period for interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 768 $ 71 $ 121
========== ========= =========
Supplemental schedule of non-cash investing and financing activities:
Assets acquired under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1,495 $ 235
========== ========= =========
Notes receivable from stockholder in exchange for common stock . . . . . . . . . . . . . . . $ 2,760 $ 8,476 $ 804
========== ========= =========
Repurchase of common stock issued for notes receivable . . . . . . . . . . . . . . . . . . . $ 609 $ 502 $ 222
========== ========= =========
Conversion of convertible debt into Series F preferred stock . . . . . . . . . . . . . . . . $ - $ - $ 10,656
========== ========= =========
Conversion of convertible debt into non-convertible promissory note. . . . . . . . . . . . . $ - $ - $ 3,500
========== ========= =========
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,130 $ 29,448 $ -
========== ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
EVOLVE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Evolve Software, Inc. (the "Company" or "Evolve") was incorporated under the
laws of the state of Delaware in February 1995 for the purpose of designing,
developing, marketing and supporting enterprise application software products.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Evolve Software Europe Ltd., Evolve
Software (India) Pvt. Ltd. and Evolve Canada, Inc. which were incorporated in
May 2000, December 2000 and April 2001, respectively.
LIQUIDITY
The Company has sustained net losses and negative cash flows from operations
since its inception. The Company's ability to meet its obligations in the
ordinary course of business is dependent on its ability to reduce net operating
expenses and raise additional financing through public or private equity
financing or other sources of financing to fund operations. There is no
assurance that the Company will achieve a reduction of net operating expenses or
that it will be able to raise adequate financing from other sources. Management
believes that its current funds and access to available capital will be
sufficient to enable the Company to meet its planned expenditures through at
least June 30, 2002. If anticipated operating results are not achieved,
management has the intent and it believes that it has the ability, to reduce
expenditures by reductions in headcount so as not to require additional
financial resources, if such resources were not available on terms acceptable to
the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Evolve and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiaries use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expense accounts are
translated at average exchange rates during each period. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Foreign currency transaction gains and losses, which are recorded in
the statement of operations, have not been material, to date.
USE OF ESTIMATES
The Company has prepared these financial statements in conformity with generally
accepted accounting principles which require the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives revenues from fees for licenses and implementation services
("Solutions revenue") and fees from maintenance, application service provider
and subscription agreements ("Subscription revenue"). The Company recognizes
revenues in accordance with the provisions of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition," as amended. The Company also follows the provisions of the
Securities Exchange Commission's Staff Accounting Bulletin No.101 (SAB 101),
"Revenue Recognition in Financial Statements."
Under SOP 97-2 as amended and SAB 101, the Company recognizes revenues when all
of the following conditions are met:
F-6
- when persuasive evidence of an agreement exists;
- the delivery of the product has occurred;
- the fee is fixed or determinable; and
- the Company believes that collection of these fees is reasonably
assured.
Generally, the Company has vendor specific objective evidence of fair value for
the maintenance element of software arrangements based on the renewal rates for
maintenance in future years as specified in the contracts. In those cases where
first year maintenance revenue is included in the license fee, the Company
defers the fair value of the first year maintenance revenue at the outset of the
arrangement and recognizes it ratably over the period during which the
maintenance is to be provided, which normally commences on the date the software
is delivered.
Historically, the Company did not have vendor specific objective evidence of
fair value for services specified in certain software arrangements, as the
services were never sold separately. Accordingly, the remaining software
revenue allocated to such software licenses and services was recognized ratably
on a straight-line basis over the period during which the services were
provided, which was generally between six and nine months. In October 2000 the
Company established vendor specific objective evidence of fair value for certain
services. For these contracts, which involve significant implementation or
other services which are essential to the functionality of the software and
which are reasonably estimable, the license and services revenue is recognized
over the period of each implementation, primarily using the
percentage-of-completion method. Labor hours incurred are used as the measure
of progress towards completion. Revenue for these arrangements is classified as
Solutions revenue. A provision for estimated losses on engagements is made in
the period in which the loss becomes probable and can be reasonably estimated.
In cases where a sale of a license does not include implementation services
(i.e., a sale of additional seats or a sale of product to be implemented by a
third-party), revenue is recorded upon delivery with an appropriate deferral for
maintenance services, if applicable, provided all of the other relevant
conditions have been met.
The Company generates revenue from its application service provider ("ASP")
business, by hosting the software, and making the solution available to the
customer via the Internet, as well as providing maintenance and other services
to the customer. In such situations, customers pay a monthly fee for the term
of the contract in return for access to the Company's software, maintenance and
other services such as implementation, training, consulting and hosting. For
certain ASP software arrangements for which the Company does not have vendor
specific objective evidence of fair value for the elements of the contract, fees
from such arrangements are recognized on a monthly basis as the hosting service
is provided. In other circumstances where the customer has the right to take
delivery of the software and the Company has vendor specific objective evidence
of fair value for the hosting element of the contract, fees from the arrangement
are allocated between the elements based on the vendor specific objective
evidence. Revenue for these hosting arrangements is classified as Subscriptions
revenue.
License revenue includes product licenses to companies from which the Company
has purchased products and services under separate arrangements executed within
a short period of time ("reciprocal arrangements"). Products and services
purchased in reciprocal arrangements include: 1) software licensed for internal
use, 2) software licensed for resale or incorporation into the Company's
products; and 3) development or implementation services. For reciprocal
arrangements, we consider Accounting Principles Boards or APB No. 29,
"Accounting for Nonmonetary Transactions," and Emerging Issues Task Force or
EITF, Issue No. 86-29, "Nonmonetary Transactions: Magnitude of Boot and
Exceptions to the Use of Fair Value, Interpretation of Accounting Principles
Board No. 29, Accounting for Nonmonetary Transactions" to determine whether the
arrangement is a monetary or nonmonetary transaction. In determining these fair
values, the company considers the recent history of cash sales of the same
products or services in similar sized transactions. Revenues recognized under
reciprocal arrangements were $3.1 million, $369,000 and $0 for the fiscal
years ended June 30, 2001, 2000 and 1999, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with original or
remaining maturities of three months or less at the purchase date. Cash and
cash equivalents include money market funds, commercial paper and various
deposit accounts. Substantially all cash and cash equivalents are on deposit
with four financial institutions. Cash equivalents are recorded at cost, which
approximates fair value.
F-7
INVESTMENTS
The Company classifies all of its investments as "available for sale" in
accordance with the provisions of Financial Accounting Standards Board ("FASB")
Statement of Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, the Company
states its investments at estimated fair value, with unrealized gains and losses
reported in stockholders' equity. The cost of securities sold is based on the
specific identification method. Such securities are anticipated to be used for
current operations and are, therefore, classified as current assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable and
accounts payable, approximate fair value because of their short maturities. The
long-term debt and capital lease obligations are carried at cost, which
approximates fair values due to the proximity of the implicit interest rates of
these financial instruments and the prevailing rates for similar instruments.
RESTRICTED CASH
At June 30, 2000, cash balances of $2.0 million were restricted from withdrawal
and held in a bank in the form of a certificate of deposit. The certificate of
deposit served as collateral supporting standby letters of credit issued to the
Company's landlord for the Emeryville, California facility as security deposits.
CONCENTRATIONS
Cash and cash equivalents are maintained with four major financial institutions,
with high credit ratings, in the United States. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and, therefore, bear minimum risk.
At June 30, 2001, the Company had one customer that represented 11% of accounts
receivable. At June 30, 2000, the Company had two customers that represented
15% and 10% of accounts receivable.
For the year ended June 30, 2001, sales to one customer accounted for 14% of
total revenues. For the year ended June 30, 2000, sales to two customers
accounted for 19% and 13% of total revenues. For the year ended June 30, 1999,
sales to three customers accounted for 58%, 32%, and 10%, respectively, of total
revenues.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method. Computer hardware, computer software and office equipment
are depreciated over three years, furniture and fixtures, telephone equipment
and vehicles are depreciated over five years and leasehold improvements are
amortized over the lesser of seven years or the term of the related lease. When
assets are sold or retired, the cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in the statement of
operations.
Costs relating to the acquisition and development of internal-use software are
capitalized and depreciated over their estimated useful lives, generally three
years or less.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over the
economic lives of the respective assets, which range from one to three years.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets, including
identifiable intangibles and goodwill, periodically, in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of." The Company also assesses the
impairment of enterprise level goodwill, periodically, in accordance with the
F-8
provision of Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets." An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers important that could result in an impairment review
include, but are not limited to, significant underperformance relative to
expected historical or projected future operating results, significant changes
in the manner of use of the acquired assets or the strategy for the Company's
overall business, significant negative industry or economic trends, a
significant decline in the Company's stock price for a sustained period of time,
and the Company's market capitalization relative to net book value. When the
Company determines that the carrying value of a long-lived asset may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company measures any permanent impairment based on projected
discounted cash flows using a discount rate commensurate with the risk inherent
in the Company's current business model.
RECLASSIFICATIONS
Certain amounts have been reclassified in the accompanying financial statements
to conform to the fiscal 2001 presentation. There has been no impact on
stockholders' equity (deficit) or net loss as a result of the reclassification.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research, design and development of products for sale are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release for sale substantially coincide. As a result, the Company
has not capitalized any software development costs, since such costs have not
been significant.
ADVERTISING
Advertising costs totaled $4.7 million, $7.5 million, and $275,000 in the years
ended June 30, 2001, 2000 and 1999, respectively. The Company expenses these
costs as incurred.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities and the
net operating loss and credit carryforwards using enacted tax rates. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
SEGMENT INFORMATION
The Company operates in only one segment, namely workforce optimization software
and, as such, uses only one measure of profitability for internal reporting
purposes. To date substantially all of the Company's revenues have been derived
from within the United States.
STOCK-BASED CHARGES
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS 123 have been presented. Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
grant, between the fair value of the Company's stock and the exercise price of
the option. Stock, stock options, and warrants for stock issued to
non-employees have been accounted for in accordance with the provisions of SFAS
123 and Emerging Issue Task Force Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services."
In March 2000, the Financial Accounting Standards Board ("FASB") issued FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25. The implementation of FIN 44 did not have a
material impact on the Company's financial statements. The Company adopted FIN
44 beginning July 1, 2000.
F-9
COMPREHENSIVE INCOME (LOSS)
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income (loss) and their components in
financial statements. The statement of comprehensive loss follows (in
thousands):
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Net loss $(105,390) $(60,351) $(11,471)
Foreign currency translation adjustment 95 - -
---------- --------- ---------
Comprehensive loss $(105,295) $(60,351) $(11,471)
========== ========= =========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," that
requires companies to record derivative financial instruments on their balance
sheets as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative instrument and whether it qualifies for
hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999 the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," that amends SFAS No. 133 to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In June 2000 the FASB
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of FASB No. 133." SFAS 138 amends the accounting and
reporting standards for certain derivatives and hedging activities such as net
settlement contracts, foreign currency translations and intercompany
derivatives. The Company does not currently hold derivative instruments or
engage in hedging activities. Management's adoption of SFAS 133 did not have a
material effect on our consolidated financial statements.
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separately from goodwill. Recorded
goodwill and intangibles will be evaluated against these new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead would
be reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. Evolve will continue to amortize
goodwill and purchased intangible assets acquired prior to June 30, 2001, until
it adopts SFAS 142. For business combinations initiated after June 30, 2001,
Evolve will follow the non-amortization method under SFAS 142. The provisions
of each statement may be adopted by Evolve as early as July 1, 2001. Evolve is
currently assessing SFAS No. 141 and 142 and has not determined the impact on
Evolve's consolidated financial statements.
NOTE 2. ACQUISITIONS
On June 29, 2001, Evolve acquired certain assets of Vivant! Corporation
("Vivant"). The total acquisition cost was approximately $3.1 million primarily
compromised of $910,000 in cash, 1,553,254 shares of the Company's common stock
valued at $1.6 million, a future stock commitment valued at a minimum of
$525,000 and $137,000 for transaction related expenses. The Company, with the
assistance of an independent valuation, recorded approximately $2.2 million in
developed technology, $717,000 in goodwill and $187,000 in acquired workforce
upon this acquisition which was accounted for as a purchase. The results of
Vivant's operations have been included in the consolidated financial statements
since and date of acquisition.
The number of shares issued to Vivant at the closing of the acquisition is
subject to adjustment (by issuance of additional shares or redemption of
existing shares) based on the market value of the Evolve common stock as of the
time the registration of such shares becomes effective. In addition, Evolve has
F-10
agreed to issue to Vivant additional shares of its common stock with a value of
no less than $525,000 and no more than $4,425,000 at specified times based on
receipts from the sale of Vivant's products for the shorter of twenty-four
months from the date of the agreement or eighteen months from the Company's
first customer contract that incorporates Vivant technology. The Company is
still refining its purchase price allocation, which may result in adjustments in
future periods.
On March 31, 2000, the Company acquired all the common stock of InfoWide, Inc.
for a total consideration of 1.8 million shares of common stock and
approximately $70,000 of related expenses. The acquisition consideration,
together with transaction expenses, was valued at $33.0 million. InfoWide was
incorporated on April 15, 1998, under the laws of the state of Delaware.
InfoWide provided a web-hosted, financial management package designed for
professional services organizations. The acquisition was accounted for as a
purchase and the results of operations of InfoWide have been included in the
consolidated financial statements from the date of acquisition. At the date of
the acquisition, InfoWide's assets less liabilities totaled $496,000. The
Company recorded approximately $22.6 million in goodwill, $5.8 million in
developed technology, $3.1 million in in-process technology and $990,000 in
other intangibles.
The Company amortizes goodwill and other intangible assets over periods of
between one and three years. Amortization of the intangible assets will be
determined after the Company reviews SFAS No. 142 "Goodwill and Other Intangible
Assets."
The amount allocated to the purchased technology of $3.1 million was determined
based on an appraisal completed by an independent third-party using established
valuation techniques and was expensed upon acquisition, because technological
feasibility had not been established and no future alternative uses existed.
The projects' percentages of completion were estimated to be in the range
between 10% and 67%. The value of this in-process technology was determined by
estimating the resulting cash flows from the sale of the products resulting from
the completion of the in-process technology, estimating the costs to develop the
purchased in-process technology into commercially viable products and
discounting the net cash flows back to their present value.
In the fourth quarter of fiscal 2001 management determined that the carrying
value of certain goodwill and purchased intangible assets were impaired due to
changes in circumstances from those present at the time these assets were
acquired. At the time of the acquisition, the technology acquired from
InfoWide, Inc. was expected to be utilized in the proposed Services.com
business. As of June 30, 2001, the current and future plans for utilization of
this technology have diminished materially such that expected future cash flows
from the use of the technologies were less than the carrying value of the
underlying assets. Accordingly, an impairment charge of $18.1 million was
recognized in the fourth quarter of fiscal 2001 to reduce the carrying value of
goodwill and purchased intangible assets to the present value of the future
expected cash flows. See also "Note 14. Restructuring and Impairment Charges."
The following unaudited pro forma consolidated financial information presents
the combined results of the Company with InfoWide, Inc. and Viviant as if the
acquisitions had occurred on July 1, 1998, after giving effect to certain
adjustments, principally the elimination of in-process technology write-off and
amortization of goodwill and other intangible assets. This unaudited pro forma
consolidated financial information does not necessarily reflect the results of
operations that would have occurred had the acquisitions been completed on July
1, 1998 (in thousands except loss per share amounts).
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Revenues $ 35,122 $ 10,604 $ 517
========== ========= =========
Net loss $(122,999) $(81,268) $(25,212)
========== ========= =========
Basic and diluted net loss per share $ (3.69) $ (14.29) $ (5.94)
========== ========= =========
NOTE 3. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during each period. Since we have a net
loss for all periods presented, net loss per share on a diluted basis is
equivalent to basic net loss per share. Common shares issuable upon exercise of
stock options and warrants and upon conversion of convertible preferred stock
are excluded because the effect would be anti-dilutive. A reconciliation of the
numerator and denominator (both in thousands) used in the calculation of basic
and diluted net loss per share follows:
F-11
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Numerator
Net loss $(105,390) $(60,351) $(11,471)
Beneficial conversion feature of Series I redeemable
Convertible preferred stock (5,977) (9,023) -
---------- --------- ---------
Net loss attributable to common stockholders $(111,367) $(69,374) $(11,471)
========== ========= =========
Denominator
Weighted average common shares 35,637 7,007 2,899
Weighted average common shares subject to repurchase (4,994) (3,968) (1,308)
---------- --------- ---------
Denominator for basic and diluted calculation 30,643 3,039 1,591
========== ========= =========
The following table summarizes common stock equivalents that are not included in
the denominator used in the diluted net loss per common share calculation
because to do so would be antidilutive for the periods indicated (in thousands):
JUNE 30,
---------------------
2001 2000 1999
----- ------ ------
Shares issuable under stock options 5,806 2,070 928
Shares of unvested stock subject to repurchase 3,573 5,250 2,261
Shares issuable pursuant to warrants to purchase
common and convertible preferred stock 9 414 1,641
Shares of convertible preferred stock on an "as if
converted" basis - 19,258 9,137
----- ------ ------
9,388 26,992 13,967
===== ====== ======
NOTE 4. ISSUANCE OF DEBT
In January 2001 the Company entered into a credit arrangement providing a
line-of-credit of $7.5 million and a $7.5 million term loan credit facility with
interest accruing at the rate of the bank's prime rate plus 0.75% and 1.00%,
respectively. At June 30, 2001, these rates were 7.75% and 8.0%, respectively.
As of June 30, 2001, the Company had utilized $4.8 million of the term loan
credit facility. The loan will be fully repaid over the next two fiscal years.
Both the line-of-credit and the term loan credit facility are collateralized by
all of the Company's assets, including intellectual property, except for
previously leased equipment. The line-of-credit also includes a $5.0 million
sublimit to secure commercial and/or standby letters-of-credit of which $2.9
million has been utilized to support letters-of-credit issued to the landlord of
the Company's Emeryville facility. Any advances on the line-of-credit mature one
year from the loan documents with interest due monthly. Advances on the term
loan credit facility are due twenty-eight months from the advance with interest
only payments for the first four months and then equal payments of interest and
principal amortized over the remaining twenty-four months. The Company is
required to maintain certain financial ratios as part of the loan covenants. At
June 30, 2001, the Company was in violation of a minimum revenue covenant (see
Note 19. Subsequent Events).
Principal payments due under the term loan and the line-of-credit facility are
as follows (in thousands):
Year ended June 30,
2002 $ 2,178
2003 2,377
2004 198
---------
Total $ 4,753
=========
Current portion $ 2,178
=========
Long term portion $ 2,575
=========
NOTE 5. CONTINGENCIES
From time to time, the Company may become involved in litigation relating to
claims arising from the ordinary course of business. In February 2001 one of
the Company's early customers filed an action in the United States District
Court alleging claims that certain software and services purchased from the
Company did not satisfy certain contractual obligations. The lawsuit further
alleges that the Company engaged in unfair or deceptive practices in violation
of state law and is seeking treble damages. As the claim is in the early stage
of litigation, it is not possible to estimate the outcome of this contingency.
F-12
The Company believes that there are no other claims or actions pending or
threatened against it, the ultimate disposition of which would have a material
adverse effect on the Company.
NOTE 6. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments consisted of the following (in
thousands):
JUNE 30,
----------------
2001 2000
------- -------
Checking balances $ 4,410 $18,104
Money market funds 9,601 57
Commercial paper 4,310 499
Government agencies 4,343 -
Certificates of deposit 90 -
------- -------
Total $22,754 $18,660
------- -------
Included in cash and cash equivalents $19,914 $18,660
Included in short-term investments 2,840 -
------- -------
Total $22,754 $18,660
======= =======
The estimated fair value of all cash equivalents and short-term investments is
equal to their cost.
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
JUNE 30,
------------------
2001 2000
-------- --------
Computer hardware $ 6,091 $ 5,121
Computer software 2,585 1,972
Furniture and fixtures and office equipment 2,062 1,831
Leasehold improvements 2,725 1,260
Vehicles 78 -
Software developed for internal use - 718
-------- --------
13,541 10,902
Less: Accumulated depreciation and amortization (3,060) (2,072)
-------- --------
Property and equipment, net $10,481 $ 8,830
======== ========
The Company leases certain computer hardware and software, and furniture and
fixtures under capital leases. The total cost and accumulated amortization of
these assets as of June 30, 2001 and 2000 are as follows (in thousands):
JUNE 30,
-----------------
2001 2000
------- --------
Computer hardware $1,564 $ 2,684
------- --------
Computer software 167 214
Furniture and fixtures - 216
1,731 3,114
Less: Accumulated depreciation and amortization (326) (1,502)
------- --------
Property and equipment, net $1,405 $ 1,612
======= ========
F-13
NOTE 8. GOODWILL AND OTHER INTANGIBLES ASSETS
(in thousands) JUNE 30,
----------------
2001 2000
------- -------
Goodwill $ 718 $22,580
------- --------
Purchased technologies 2,925 5,877
Domain name 405 405
Assembled workforce 187 990
------- --------
4,235 29,852
Accumulated amortization (509) (2,901)
------- --------
$3,726 $26,951
======= ========
NOTE 9. COMMITMENTS
Capital leases
Future minimum lease payments under capital leases as of June 30, 2001, are as
follows (in thousands):
JUNE 30, 2001
===============
2002 $ 685
2003 234
---------------
Total minimum lease payments 919
Less amount representing interest (79)
---------------
Present value of minimum lease payments 840
Less current portion of capital lease obligations (646)
---------------
Long-term portion of capital lease obligations $ 194
===============
Operating leases
The Company leases its office facilities under operating leases expiring through
July 2007. Future minimum obligations under noncancelable operating leases at
June 30, 2001, are as follows (in thousands):
JUNE 30, 2001
--------------
2002 $ 3,395
2003 2,973
2004 2,976
2005 2,849
2006 2,597
Thereafter 2,816
--------------
$ 17,606
==============
Rent expense under operating leases for the years ended June 30, 2001, 2000 and
1999 was $2.7 million, $747,000 and $483,000, respectively.
NOTE 10. ACCRUED LIABILITIES
(in thousands) JUNE 30,
--------------
2001 2000
------ ------
Accrued compensation and related expenses $2,915 $3,914
Professional fees 948 1,141
Other 1,989 910
------ ------
Total $5,852 $5,965
====== ======
F-14
NOTE 11. STOCK-BASED CHARGES
In connection with stock option grants, issuance of restricted stock subject to
vesting rights and modifications of option awards, the Company has recorded
stock-based charges of $17.9 million, $19.3 million and $218,000 for the years
ended June 30, 2001, 2000 and 1999, respectively. Stock-based charges,
allocated across functional areas, affected the following items in the
consolidated statements of operations (in thousands):
YEAR ENDED JUNE 30,
=======================
2001 2000 1999
------- ------ ------
Cost of revenues:
Solutions $ 1,547 $ 1,382 $ 6
Operating expenses:
Sales and marketing 4,557 4,999 94
Research and development 3,088 3,301 58
General and administrative 8,691 9,595 60
------- ------ ------
Total $17,883 $19,277 $ 218
======= ======= =====
In connection with the termination of two employees, in February 2001, the
Company modified the remaining vesting provisions of the restricted stock awards
for a total of 177,084 shares with a weighted average exercise price of $1.03.
As a result of the award modification and change to non-employee status, the
value of these awards was determined using the Black-Scholes option pricing
model and are subject to revision each financial reporting period until the
shares are vested. The related adjustment reduced additional paid-in capital,
unearned stock-based compensation and stock-based charges, during the year ended
June 30, 2001, by $2.5 million, $1.2 million and $1.3 million, respectively.
The restricted stock awards will continue to vest during the consulting periods
ranging from six to twelve months from the date of separation. As a result, the
charge may be subject to substantial increase or decrease based on future
changes in the market price of the Company's common stock.
In connection with the termination of three employees, in the fourth quarter of
fiscal 2001, the Company modified the remaining vesting provisions of the
restricted stock awards for a total of 649,222 shares with a weighted average
exercise price of $3.99. Additionally, these three employees were given an
option of a one-time right to return the shares to the Company in exchange for
cancellation of the stockholders loans and related interest with which the
purchase price was previously paid. As a result of the award modification and
change to non-employee status, the value of these awards was determined using
the Black-Scholes option pricing model and is subject to revision each financial
reporting period until the shares are exercised or expire. The related
adjustment reduced additional paid-in capital, unearned stock-based
compensation, stock-based charges and loans and interest to shareholders, during
the year ended June 30, 2001, by $6.0 million, $1.0 million, $1.8 million and
$3.2 million, respectively. The restricted stock awards will continue to vest
during the consulting periods of six months from the date of separation. As a
result, the charge may be subject to substantial increase or decrease based on
future changes in the market price of the Company's common stock.
NOTE 12. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are as follows (in thousands):
JUNE 30,
-------------------------------
2001 2000 1999
--------- --------- ---------
Net operating loss carryforwards $ 43,385 $ 23,909 $ 11,309
Restructuring reserve 2,421 - -
Capitalized research & development 1,554 - -
Depreciation 491 (203) 77
Capitalized start-up costs - net 872 1,416 1,945
Accrued liabilities 843 1,523 121
InfoWide acquisition liability - (2,735) -
Research and development credit 2,952 1,866 1,823
--------- --------- ---------
Total deferred assets 52,518 25,776 15,275
Less valuation allowance (52,518) (25,776) (15,275)
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such time as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
At June 30, 2001, the Company had federal and state net operating loss
carryforwards of approximately $118.4 million and $53.7 million, respectively,
available to reduce future taxable income. These carryforwards expire through
2021 and 2006, respectively. In addition, the Company has research and
development tax credit carryforwards of approximately $2.1 million and $1.2
respectively, for federal and state income tax purposes at June 30, 2001. The
research and development tax credit carryforwards expire in 2021.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income may be subject to restrictions attributable to equity
transactions that result in change in ownership as defined in the Tax Reform Act
of 1986. These restrictions may limit on an annual basis the Company's future
use of its net operating loss carryforwards and research and development tax
credit.
NOTE 13. EMPLOYEE SAVINGS AND INVESTMENT
401(K) PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings Plan, participating employees may defer a percentage (not to exceed 15%
or $10,500) of their eligible pretax earnings. All employees of the Company are
eligible to participate in the Savings Plan. The Company is not required to
contribute to the Savings Plan and has made no contributions since the inception
of the Savings Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 2000 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the board of directors and stockholders of the Company in August 2000
and became effective upon the closing of the IPO in August of 2000. A total of
2,000,000 shares have been reserved for issuance under the Purchase Plan. The
purchase plan provides for automatic annual increases in the number of shares
reserved for issuance under the plan in an amount equal to the lesser of 1) the
number of shares issued pursuant to this plan during the proceeding fiscal year,
2) 1,000,000 shares, or 3) such lesser amount as may be determined by the Board
of Directors. Under the Purchase Plan, eligible employees may purchase common
stock in an amount not to exceed 15% of the employee's cash compensation. The
purchase price will be 85% of the common stock fair value at the lower of
certain plan-defined dates. As of June 30, 2001, there have been 207,882 shares
issued, at a price of $6.16, and 1,792,118 reserved for future issuance.
NOTE 14. RESTRUCTURING AND IMPAIRMENT CHARGES
During the quarter ended June 30, 2001, the Company recorded a restructuring
charge of $9.7 million to account for charges designed to reduce future costs
and strengthen the Company's position to execute its strategy. The
restructuring charges included $1.6 million of severance related costs, which
F-15
resulted from the involuntary termination of 97 employees or 27% of its
workforce. These employees were primarily in the Company's United States
operations. Of these severance related costs, $780,000 are payable during
fiscal 2002. Facilities related restructuring charges, resulting from the
consolidation of excess facilities, totaled $6.4 million. At June 30, 2001, the
remaining balance totaled $6.1 million of which $1.4 million is included in
short-term liabilities and $4.7 is included in long-term liabilities. The
future obligation of the facilities restructuring charges is included in the
future minimum lease payments payable under non-cancelable operating leases at
June 30, 2001. As a result of the workforce reduction and the facilities
restructuring, the Company recorded a non-cash charge of $1.7 million for the
disposal of excess fixed assets. This charge consisted principally of $1.2
million for leasehold improvements and furniture related to the excess
facilities and $468,000 for computer hardware and software and
telecommunications equipment related to the workforce reduction.
(in thousands) SEVERANCE ACCRUAL OF FIXED
AND RELATED LEASE ASSET
CHARGES COMMITMENTS WRITE-OFF TOTALS
----------- ------------- ---------- --------
Total restructuring charges $ 1,597 $ 6,433 $ 1,694 $ 9,724
Amount paid (817) (354) - (1,171)
Non-cash charges - - (1,694) (1,694)
----------- ------------- ---------- --------
Accrued liabilities at June 30, 2001 $ 780 $ 6,079 $ - $ 6,859
=========== ============= ========== ========
Short-term $ 780 $ 1,428 $ - $ 2,208
Long-term $ - $ 4,651 $ - $ 4,651
During the fourth quarter of fiscal year 2001 Evolve identified indicators of
possible impairment of goodwill and other acquired intangible assets relating to
the InfoWide, Inc. acquisition. These indicators included the deterioration in
the business climate, recent changes in sales and cash flow forecasts and the
decision to discontinue the Services.com service. Accordingly, Evolve compared
the undiscounted cash flows associated with the acquired goodwill and purchased
intangible assets with the respective carrying amounts and determined that an
impairment of certain of these assets existed. As a result, the Company
recorded a charge of $19.6 million related to the impairment of goodwill and
other intangible assets, including $14.2 million in goodwill, $376,000 in
non-compete agreements and $3.5 million in technology acquired from InfoWide,
Inc. as well as $1.5 million relating to software used in our discontinued
Services.com business. The Company measured the impairment as the amount by
which the carrying amount exceeded the present value of the estimated future
cash flows.
NOTE 15. STOCKHOLDER'S EQUITY
COMMON AND PREFERRED STOCK
In fiscal 2001 the Company increased its authorized common stock to 110,000,000
shares and reduced its authorized preferred stock to 10,000,000 shares. Par
value on both classes of stock was reduced from $.01 per share to $.001 per
share. Each share of common stock is entitled to one vote. The holders of
common stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior
rights of holders of all classes of preferred stock outstanding. As of June 30,
2001, no dividends have been declared. At June 30, 2001 and 2000, 3,572,847 and
5,266,253 unvested shares of common stock, respectively, were subject to
repurchase at the original purchase price.
Under the Company's Certificate of Incorporation, as amended in June 2000, the
Company was authorized to issue 130,000,000 shares of preferred stock. From
inception through June 30, 2001, the Company issued preferred stock as follows:
F-16
AMOUNT
NET OF PAR LIQUIDATION COMMON
ORIGINAL ISSUANCE SHARES ISSUED AND VALUE PREFERENCE STOCK
ISSUE PRICE COSTS ($000) AUTHORIZED OUTSTANDING AMOUNT ($000) EQUIVALENTS
------------ ------------- ----------- ----------- ------- ----------- -----------
Series A $ 0.40 $ 452 1,167,500 1,167,500 $ 0.01 $ 467 194,583
Series B $ 1.00 3,030 3,125,000 3,075,000 0.01 3,075 512,500
Series C $ 1.00 988 1,000,000 1,000,000 0.01 1,000 166,667
Series D $ 1.00 2,905 2,940,000 2,940,000 0.01 2,940 490,000
Series E $ 2.00 4,018 2,030,000 2,000,000 0.01 4,000 333,333
Series F $ 0.65 11,288 17,600,000 17,600,000 0.01 11,578 2,933,334
Series G $ 0.36-$0.71 14,480 35,000,000 34,965,000 0.01 14,975 5,827,500
Series H $ 0.70 24,961 35,715,000 35,714,289 0.01 25,000 5,952,382
Series I $ 1.00 29,970 30,000,000 30,000,000 0.01 30,000 4,999,999
------------- ----------- ----------- ----------- -----------
Total $ 92,092 128,577,500 128,461,789 $ 93,035 21,410,298
============= =========== =========== =========== ===========
On August 9, 2000, the Company completed its initial public offering ("IPO") of
5,750,040 shares of common stock at an initial offering price of $9.00 per share
for net proceeds of $46.5 million. All preferred stock was converted into
21,410,298 shares of common stock on the effective date of the Company's IPO.
The preferred stock was converted at the common stock equivalents shown in the
chart above.
WARRANTS
In October 1995, in connection with an equipment lease agreement, the Company
granted the lessor warrants to purchase 25,000 shares of Series B preferred
stock at an exercise price equal to $1.00 per share. These warrants are
exercisable through October 6, 2005, and, if fully exercised, will convert into
4,166 shares of common stock. As of June 30, 2001, all of the warrants remain
outstanding. The value of these warrants was not significant to the financial
statements.
In November 1995, in connection with a lease agreement for office space, the
Company granted the lessor a warrant for 200,000 shares of the Company's Series
B preferred stock at an exercise price of $1.00 per share, exercisable through
May 31, 1996, and 25,000 shares of the Company's Series B preferred stock at an
exercise price of $1.00 per share, exercisable through January 1, 2001. As of
June 30, 2001, 75,000 of these warrants were exercised in prior periods and
150,000 had expired.
In February 1997, the Company granted an investor warrants to purchase 30,000
shares of Series E preferred stock at an exercise price of $2.00 per share,
exercisable through February 2002. As of June 30, 2001, all of the warrants
remain outstanding. If fully exercised, these warrants will convert into 5,000
shares of common stock. The value of these warrants was not significant to the
financial statements.
In March and April 1997, in conjunction with the issuance of the 8.5% Senior
Subordinated Convertible Notes, the Company issued warrants to purchase 211,250
shares of common stock to noteholders and warrants to purchase 10,600 shares of
common stock to the managers of the offering. All of these warrants were to
purchase the shares at the lesser of $12.00 per share or the conversion price.
The value of these warrants was $903,000 and represented a discount to the face
value of the debt. In December 1998, in conjunction with the conversion of the
8.5% Senior Subordinated Convertible Notes into Series F preferred stock at
$0.6534 per share, the remaining unamortized discount of $285,000 was offset to
equity and the common stock warrants were canceled. At the same time, the
Company issued 16,633,169 shares of Series F preferred stock and $3.5 million of
non-convertible promissory notes with interest at 8.5% per annum to holders of
the notes, and a warrant to purchase 966,831 shares of Series F preferred stock
to the managers of the offering. During the year ended June 30, 2001, all of
these warrants were exercised.
In November 1998, the Company granted seven investors warrants to purchase
7,000,000 of Series G preferred stock valued at $770,000 at a purchase price of
$0.7143 per share. The warrants terminated on the earlier of five years from
the date of issuance or upon the initial public offering of the Company with
gross proceeds from the offering of $10.0 million and per share price to the
public of no less than $1.00 per share. During the year ended June 30, 2000,
warrants for 6,965,000 shares of Series G preferred stock were exercised.
During the year ended June 30, 2001, the remaining 35,000 warrants expired.
F-17
In December 1998, in connection with a Company's license and service agreement,
the Company granted a licensee warrants to purchase 66,667 shares of the
Company's common stock at an exercise price of $12.00 per share, exercisable
upon the payment of $4.0 million in program license fees. The warrants
terminated on the earlier of five years from the date of issuance or upon the
initial public offering of the Company. During the year ended June 30, 2000,
all of the warrants for shares of common stock were exercised.
In September 1999 the Company granted an investor warrants valued at $651,000 to
purchase 233,333 shares of common stock at a purchase price of $2.14 per share.
The warrants terminated on the earlier of seven years from the date of issuance
or upon the initial public offering of the Company. During the year ended June
30, 2001, all the warrants for shares of common stock were exercised.
In all cases, the fair value of the warrants was estimated using the
Black-Scholes option-pricing model. The estimates were made based on the full
contractual terms of the warrants at their appropriate ranges of risk-free
interest rates, expected volatility and expected lives, and a zero annual
dividend yield.
NOTE 16. STOCK OPTIONS
1995 STOCK OPTION PLAN
Under the terms of the 1995 Stock Option Plan (the "1995 Plan"), eligible
employees, directors and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 100% and 85% of the fair
value on the grant date for incentive stock options and nonqualified stock
options, respectively. The Company originally authorized 416,667 shares of
common stock for issuance under the 1995 Plan, but with various amendments over
the years the Company increased the number of shares issuable under the 1995
Plan to 5,833,333. The options granted under the 1995 Plan are exercisable over
a maximum term of ten years from the date of grant and generally vest over a
four to five year period. Options are exercisable immediately but have a right
of repurchase, which generally lapses ratably over four to five years. In some
instances, fully vested options are granted. Options granted under the 1995
Plan are subject to the right of first refusal by the Company. Concurrent with
the Company's IPO and its adoption of the 2000 Stock Plan during August 2000,
the 1995 Plan was rendered inactive and no new options have been nor will be
granted out of the 1995 Plan. There still are stock options outstanding under
the 1995 Plan, and those options remain governed by the terms of the 1995 Plan.
At the time of the IPO, all of the shares underlying the outstanding options
under the 1995 Plan were registered with the SEC on Form S-8.
2000 STOCK OPTION PLAN
During August 2000 the board of directors and shareholders of the Company
approved the 2000 Stock Plan. Under the terms of the 2000 Stock Plan (the "2000
Plan"), eligible employees, directors and consultants can receive options to
purchase shares of the Company's common stock at a price not less than 100% of
the fair value on the grant date for incentive stock options and at a price
determined by the Administrator for nonqualified stock options. Stock Purchase
Rights may also be granted under the 2000 Plan. The Company originally
authorized 4,000,000 shares of common stock for issuance under the 2000 Plan,
plus an annual increase to be added on the first day of the Company's fiscal
year beginning in fiscal 2002 equal to the lesser of (i) the number of shares
subject to options or Stock Purchase Rights granted during the preceding fiscal
year, (ii) 2,000,000 Shares, or (iii) a lesser amount determined by the Board of
Directors. The options granted under the 2000 Plan are exercisable over a
maximum term of ten years from the date of grant and generally vest over a four
year period, with a one-year cliff followed by three years of monthly vesting.
In some instances, fully vested options are granted. Concurrent with the
Company's IPO during August 2000 all of the shares reserved for under the 2000
Plan were registered with the SEC on Form S-8.
OUT-OF-PLAN OPTIONS
During fiscal year 2001 the Company issued four nonqualified stock options to
purchase 215,000 shares of common stock to employees of its UK subsidiary.
Although these options were issued outside of any plan, they conform to almost
all of the requirements of the 2000 Stock Plan.
A summary of the combined activity under the 1995 and 2000 plans, as well as the
out-of-plan option grants is set forth below:
F-18
OUTSTANDING OPTIONS
-------------------------------------------------
WEIGHTED
SHARES NUMBER EXERCISE AGGREGATE AVERAGE
AVAILABLE OF PRICE PER PRICE EXERCISE
FOR GRANT SHARES SHARE ($000) PRICE
----------- ----------- --------------- ---------- ---------
Balances, June 30, 1998 (16,102) 447,492 $ 0.30 - $1.80 521 $ 1.16
Additional shares authorized 1,083,333 - -
Options granted (885,382) 885,382 $ 0.30 - $1.80 363 0.42
Options exercised - (200,584) $ 0.30 - $1.80 (109) 0.54
Options cancelled 204,144 (204,144) $ 0.30 - $1.80 (202) 0.96
----------- ----------- ----------
Balances, June 30, 1999 385,993 928,146 $ 0.30 - $1.80 573 0.60
Additional shares authorized 3,333,333 - -
Options granted (3,471,353) 3,471,353 $ 0.30 - $7.50 13,466 3.86
Options exercised - (1,919,596) $ 0.30 - $7.50 (3,917) 1.92
Options cancelled 402,006 (402,006) $ 0.30 - $7.50 (540) 1.38
----------- ----------- ----------
Balances, June 30, 2000 649,979 2,077,897 $ 0.30 - $7.50 9,582 4.62
Additional shares authorized 798,333 - -
2000 Stock Plan 4,000,000 - -
Options granted (5,926,824) 5,926,824 $ 1.15 - $25.31 24,334 4.12
Options exercised - (521,410) $ 0.30 - $ 9.00 (2,234) 4.28
Options cancelled 623,483 (623,483) $ 1.20 - $25.31 (4,672) 7.49
Options cancelled & retired - (1,053,506) $ 0.30 - $25.31 (5,394) 5.12
----------- ----------- ----------
Balances, June 30, 2001 144,971 5,806,322 $ 0.30 - $25.31 21,616 $ 3.72
=========== =========== ==========
Options exercisable without the right of repurchase at June 30, 2001, 2000, and
1999 are 801,273, 116,594 and 280,692.
The following table summarizes information with respect to stock options
outstanding at June 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
---------------- ----------- ---------------- --------- ----------- ---------
0.30 - $1.15 583,557 9.35 $ 1.03 55,195 $ 0.30
1.20 - $1.20 1,786,322 9.72 1.20 80,561 1.20
1.50 - $1.50 8,332 8.57 1.50 - -
1.56 - $1.56 970,536 9.82 1.56 73,240 1.56
1.80 - $4.88 663,011 8.92 4.08 172,306 3.80
5.91 - $7.06 580,508 9.06 6.20 219,987 6.00
7.50 - $7.50 298,551 8.83 7.50 101,848 7.50
9.00 - $9.00 796,835 9.11 9.00 92,882 9.00
10.25 - $14.50 100,670 9.37 11.67 5,254 14.50
25.31 - $25.31 18,000 9.22 25.31 - -
----------- -----------
0.30 - $25.31 5,806,322 9.40 $ 3.72 801,273 $ 7.97
F-19
The following information concerning the Company's stock option plan is provided
in accordance with Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). The Company has
continued to account for its plan in accordance with APB No. 25.
The weighted average fair value per share of the options granted for the years
ended June 30, 2001, 2000, and 1999 is $2.25, $1.32 and $0.10, respectively.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
YEARS ENDED JUNE 30,
-----------------------
2001 2000 1999
------ ------ ------
Risk-free interest rate 5.23% 6.25% 5.81%
Expected life (in years) 5 5 5
Dividends - - -
Because the Company was not publicly traded until August 9, 2000, the date of
the Initial Public Offering, the minimum value method, which excludes
volatility, was used in the determination of the value of options granted to
employees in 1999 and 2000. For the year 2001 volatility was 143%.
The following pro forma net loss information has been provided following the
provisions of SFAS 123 (in thousands, except per share data):
YEARS ENDED JUNE 30,
--------------------------------
2001 2000 1999
---------- --------- ---------
Net loss attributable to common stochulders:
As reported $(111,367) $(69,374) $(11,471)
Pro forma $(114,112) $(74,192) $(11,561)
Net loss per common share-basic and diluted:
As reported $ (3.63) $ (22.83) $ (7.21)
Pro forma $ (3.72) $ (24.41) $ (7.27)
In connection with the granting of stock options and the issuance of restricted
stock to our employees and the granting of equity instruments to non-employees
for services rendered, we recorded deferred stock-based charges (credits)
totaling approximately ($10.7) million and $59.0 million as of June 30, 2001 and
2000. This amount represents the difference between the exercise or purchase
price at which the stock options were granted or the restricted stock was
issued, and the deemed fair value of our common stock for accounting purposes on
the date of grant or issuance. This amount is included as a component of
stockholders' equity and, in accordance with the method described in Financial
Accounting Standards Board Interpretation No. 28, is being amortized on an
accelerated basis by charges to operations over the vesting period of the
options and restricted stock, which is generally four years. This resulted in
an expense of $17.9 million for the year ended June 30, 2001, and an expense of
$19.3 million for the year ended June 30, 2000.
NOTE 17. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the year ended June 30, 1998, the Company loaned two of its officers and
directors an aggregate of $450,000. Each of the full recourse loans is due five
years from the date of issuance, relates to the purchase of common stock of the
Company. In addition, the loans may be prepaid in part or in full without
notice or penalty, and are represented by a promissory note which bears interest
at the Applicable Federal Rate at the date of issuance (ranging from 5.69% to
6.39% per annum). Interest on these notes is due on maturity.
On June 30, 1998, the Company loaned a stockholder, who is also an executive
officer of the Company, $19,691. The loan was due on December 31, 1998, and was
represented by a promissory note bearing interest of 7% per annum. Interest was
due upon maturity of the note. The loan was repaid during fiscal 1999. On
March 9, 1999, June 30, 1999, and September 30, 1999, the Company issued
additional loans to the stockholder for $20,000, $40,000 and $40,000,
respectively, with interest bearing at a rate of 6% per annum. The principal
and accrued interest were due on the earlier of June 30, 2001, thirty days after
termination other than for death or disability, or one year after termination
F-20
for death or disability. The loans are represented by three full recourse
promissory notes and are collateralized by all shares of the Company's common
stock held by the borrower. On June 30, 2001, the due date on all these notes
was extended to October 19, 2001. On June 19, 2001, the Company issued an
additional loan to the stockholder for $75,000 with interest bearing at a rate
of 7.5% per annum. The principal and accrued interest are due on October 19,
2001. The loan is represented by a full recourse promissory note and is
collateralized by all shares of the Company's common stock held by the borrower.
During the year ended June 30, 1999, the Company loaned seven of its officers
and directors an aggregate of $780,025 under the Company's Restricted Stock
Purchase agreements with the officers and directors. All of the loans relate to
the purchase of common stock of the Company and are collateralized by the pledge
of common stock of the Company. In addition, the loans may be prepaid in part
or in full without notice or penalty, and are represented by full recourse
promissory notes, which bear interest ranging from 5% to 7%. The notes are due
four to five years from date of issuance.
During the year ended June 30, 2000, the Company loaned seventeen of its
officers, directors, employees, investors and vendors an aggregate of $5.7
million under the Company's Restricted Stock Purchase agreements. All of the
full recourse loans relate to the purchase of common stock of the Company. In
addition, the loans may be prepaid in part or in full without notice or penalty,
and are represented by promissory notes, which bear interest ranging from 6% to
7%. The notes are due three to five years from date of issuance.
During the year ended June 30, 2000, the Company exercised its right to
repurchase 924,306 shares of unvested common stock from six stockholders under
the right to repurchase option of the Restricted Stock Purchase agreements
entered into by the Company and the six stockholders. In connection with the
repurchase of common stock, the Company cancelled the related stockholder loans
for an aggregate amount of $502,292.
During the year ended June 30, 2001, the Company loaned four of its officers and
two of its directors, an aggregate of $2.1 million in connection with the
purchase of common stock of the company. All of the loans are full recourse.
In addition, the loans may be prepaid in part or in full without notice or
penalty, and are represented by promissory notes, which bear interest ranging
from 6% to 7%. The notes are due three to five years from date of issuance.
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly financial data for 2000 and 2001 (amounts
in thousands, except for per share amounts.)
2000 2001
---------------------------------------- ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- --------- --------- --------- --------- --------- ---------
Revenues
Solutions $ 338 $ 1,079 $ 2,331 $ 3,409 $ 5,047 $ 6,440 $ 8,846 $ 5,065
Subscriptions 195 475 1,178 1,538 1,912 2,815 2,417 2,405
-------- -------- --------- --------- --------- --------- --------- ---------
Total revenues 533 1,554 3,509 4,947 6,959 9,255 11,263 7,470
Gross profit (loss) (113) 698 1,406 1,382 2,261 4,109 6,276 4,930
Net loss attributable to
common stockholders (5,253) (7,608) (19,701) (36,812) (31,252) (22,368) (19,902) (37,845)
Basic and diluted net loss per share $ (2.58) $ (3.15) $ (7.04) $ (7.48) $ (1.50) $ (0.67) $ (0.59) $ (1.09)
NOTE 19. SUBSEQUENT EVENTS
PRIVATE PLACEMENT
On September 23 2001, the Company signed a definitive Series A Preferred Stock
Purchase agreement with new and existing investors for a private placement of
1.3 million shares of convertible preferred stock at $10.00 for total proceeds
of $13 million as well as warrants to purchase 6.5 million shares of common
stock at $1.00 per share. In addition, the Company issued warrants to purchase
1.3 million additional shares of convertible preferred stock for additional
potential proceeds of $13 million which will also include upon exercise warrants
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to purchase 6.5 million shares of common stock at $1.00 per share. Closing of
the arrangement and receipt of the funds is expected on or before October 15,
2001 and is subject to customary closing conditions, which the Company expects
to be met.
SERIES A CONVERTIBLE PREFERRED STOCK
Voting Rights. The Series A convertible preferred stockholders will have voting
rights on an as-if converted to common stock basis based on the conversion ratio
as of the closing date. So long as no less than 75% of the preferred stock is
outstanding, the Series A convertible preferred stockholders will vote as a
separate class to elect three directors to the Board of Directors. The number of
directors may decrease to two based on the number of preferred stock warrants
which are exercised and may be further reduced upon partial conversion of the
Series A convertible preferred.
Conversion. Shares of the convertible preferred stock may, at the option of the
holder, be converted at any time into common stock by dividing the liquidation
preference per share of Series A Preferred by the conversion price of $0.50 per
share, subject to adjustment based on anti-dilution provisions, including the
expected issuance of additional common stock in connection with the Vivant!
acquisition and certain litigation settlements, if any, in excess of $1 million.
The convertible preferred stock will automatically convert into common stock
after five years from the date of issuance if the common stock price exceeds
$5.00 for 30 consecutive trading days.
Dividends. The Series A convertible preferred stock will share in all dividends
declared on the common stock on an as converted basis.
Liquidation Preferences. The stated liquidation preference of the convertible
preferred stock is equal to the original sales price ($13 million) plus
accretion from the date of issuance of 8% per annum compounded quarterly. In the
event of a change or control, the convertible preferred stockholders are
entitled to receive the greater of a) the amount of the liquidation preference
that would be accreted over five years once more senior obligations have been
satisfied or b) the amount which the convertible preferred stockholders would be
entitled to if the convertible preferred stock were converted to common stock.
The Board of Directors has approved a resolution to increase the authorized
common stock to accommodate the issuance of the convertible preferred stock and
the effect of these potential conversions, subject to stockholder approval.
WARRANT
Preferred stock warrants. The Company issued Form A and Form B preferred stock
warrants to purchase a total of 1.3 million shares of series A convertible
preferred stock at $10.00 per share. These warrants are exercisable for a period
of up to one year from the issuance date subject to certain acceleration events.
Upon exercise of the convertible preferred stock warrants in full, the
shareholders will receive additional warrants to purchase 6.5 million shares of
common stock.
Common stock warrants. The Company issued common stock warrants to purchase 6.5
million shares of Common Stock at $1.00 per share. The common stock warrants
expire on the seventh anniversary of the initial closing and include
anti-dilution provisions. In the event of a change of control, the holders of
the common stock warrants are entitled to receive the value of any unexercised
portion of the warrants based on a Black-Scholes calculation. At the election of
the Company, this may be paid either in cash or stock provided that the stock
received is freely tradable. Upon issuance the Company will measure the value of
the warrants using the Black-Scholes option pricing model. The value of the
common stock warrants will fluctuate with the price and volatility measure of
the Company's common stock.
IMPERIAL BANK
On September 26, 2001, the Company amended its Loan and Security to restructure
the excess credit facilities, and to obtain a waiver of certain defaults under
the Agreement.
Restructuring of Credit Facilities
The revolving line of credit was reduced from $7,500,000 to $3,000,000, with the
Standby Letter of Credit sublimit correspondingly reduced to $3,000,000 of which
$2,901,127 was outstanding at August 31, 2001 . The term loan facility was
reduced from $7,500,000 to $4,356,718, the balance of the Company's term loan as
of August 31, 2001. In addition, the interest rate charged on the term loan
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increased 50 basis points to the Bank's Prime Rate plus 1.50% per annum. Under
the amended agreement, the line of credit is now due on March 31, 2002 rather
than January 31, 2002 and the term loan continues to be repaid in monthly
installments through July 31, 2003. The Company also agreed to pay $7,500 in
waiver and restructuring fees, to transfer $7,500,000 in cash to the Bank and to
sign a compensating balance agreement under which the cash balances held at the
Bank would be collateral for the balances outstanding under the line of credit
and term loans. On September 27, 2001 the Company paid the fees and transferred
funds to the Bank.
Waiver of Covenant Violations
The Company had been in violation of banks covenants to maintain minimum revenue
levels for the months of April through September 2001. In connection with the
loan amendment, the bank waived these covenant violations on September 26, 2001
and approved new financial covenants for the periods commencing October 1, 2001.
Under the new covenants, the Company will be required to: (1) Maintain at all
times a minimum Bank Liquidity Ratio of 1.50 to 1.00, reducing to 1:25 to 1.00
at January 31, 2002 and thereafter (the cash component of this ratio is required
to be held at the Bank); (2) Beginning with the month ending December 31, 2001,
maintain on a monthly basis the greater of (a) Minimum Company Liquidity Ratio
of 1.75 to 1.00 or (b) $14,000,000 in unrestricted cash (unrestricted cash will
include any restricted cash held by the Bank) reducing to $8,000,000 at January
31, 2002 and thereafter; (3) Beginning with the month ending December 31, 2001,
not exceed a leverage maximum of 2.25 to 1.00; and (4) meet a Milestone covenant
of obtaining at least $10,000,000 in new equity from Investors acceptable to the
Bank by October 15, 2001.
F-23
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
2.1 * Asset Acquisition Agreement, dated as of May 22, 2001, by and between Evolve and
Vivant Corporation.
3.1 ** Amended and Restated Certificate of Incorporation of Registrant.
3.2 ** Bylaws of the Registrant .
4.1 ** Form of stock certificates.
10.1 ** Form of Indemnification Agreement between the Registrant and each of its directors.
10.2 ** Office Building Lease, 1400 65th Street, Emeryville, CA.
10.3 Amended Office Building Lease, 1400 65th Street, Emeryville, CA.
10.4 ** 1995 Stock Option Plan, as amended.
10.5 ** 2000 Stock Plan.
10.6 ** 2000 Employee Stock Purchase Plan.
10.7 ** Employment Offer Letter for John P. Bantleman.
10.8 ** Employment Offer Letter for James J. Bozzini.
10.9 ** Employment Offer Letter for Kurt M. Heikkinen.
10.10 ** Restricted Stock Purchase Agreements for John P. Bantleman dated January 1998,
February 1999 and November 1999.
10.11 ** Restricted Stock Purchase Agreement for James J. Bozzini dated November 1999.
10.12 ** Restricted Stock Purchase Agreements for Kurt M. Heikkinen dated November 1999,
February 2000 and July 2000.
10.13 ** Agreement that provides acceleration for vesting for John P. Bantleman dated
February 1999.
10.14 ** Amended and Restated Stockholder Rights Agreement among certain investors dated
June 2000.
10.15 ** Employment Offer Letter for Joseph A. Fuca.
10.16 * Registration Rights Agreement, dated as of June 29, 2001, by and between Evolve and
Vivant Corporation.
10.17 Subordinated Loan and Security Agreement dated January 31, 2001, by and between
Imperial Bank and Registrant.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers, LLP Independent Accountants
* Filed as an exhibit to the Registrant's Periodic Report on Form 8-K filed July 17,
2001.
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-32796).
(b) Reports on Form 8-K
No report on Form 8-K was filed during the fourth quarter of the fiscal
year ended June 30, 2001.