10-Q 1 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2000 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 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 000-27985 QUINTUS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0021612 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
47212 MISSION FALLS COURT FREMONT, CALIFORNIA 94539 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (510) 624-2800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the registrant's common stock as of July 31, 2000 was 39,997,348. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 QUINTUS CORPORATION INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of June 30, 2000 and March 31, 2000.......................................... 1 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended June 30, 2000 and 1999.................................................... 2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000 and 1999................... 3 Notes to Condensed Consolidated Financial Statements........ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 3. Qualitative and Quantitative Disclosures About Market Risk........................................................ 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 18 Item 2. Changes in Securities and Use of Proceeds................... 18 Item 3. Defaults Upon Senior Securities............................. 18 Item 4. Submission of Matters to a Vote of Securities Holders....... 18 Item 5. Other Information........................................... 18 Item 6. Exhibits and Reports on Form 8-K............................ 18 Signature............................................................ 21
3 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUINTUS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) ASSETS
JUNE 30, MARCH 31, 2000 2000 -------- --------- CURRENT ASSETS: Cash and cash equivalents................................. $ 18,888 $ 21,867 Short-term investments.................................... 38,436 37,209 Accounts receivable, less allowance for doubtful accounts of $1,663 and $1,323................................... 30,041 22,580 Prepaid expenses and other assets......................... 1,251 2,072 -------- -------- Total current assets.............................. 88,616 83,728 Property and equipment, net................................. 6,103 5,061 Purchased technology, less accumulated amortization of $3,725 and $3,279......................................... 3,287 1,421 Intangible assets, less accumulated amortization of $16,793 and $7,925................................................ 290,995 41,583 Other assets................................................ 6,397 327 -------- -------- Total assets...................................... $395,398 $132,120 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 4,193 $ 6,383 Accrued compensation and related benefits................. 4,393 4,011 Other accrued liabilities................................. 3,148 2,803 Deferred revenue.......................................... 9,977 7,668 Current portion of capital lease obligations.............. 189 177 Current portion of long-term debt......................... 692 730 -------- -------- Total current liabilities......................... 22,592 21,772 Capital lease obligations, less current portion............. 506 300 Long-term debt, less current portion........................ 695 934 Commitment (Note 4) STOCKHOLDER'S EQUITY: Convertible preferred stock, $0.001 par value; authorized shares -- 10,000,000 in June 2000 and March 2000; issued and outstanding shares -- none in June 2000 and March 2000............................................. -- -- Common stock, $0.001 par value; authorized shares -- 100,000,000 in June 2000 and March 2000; issued and outstanding shares -- 39,802,210 in June 2000 and 33,478,191 in March 2000...................... 39 33 Additional paid-in capital................................ 440,254 161,632 Notes receivable from stockholders........................ (5,104) (223) Deferred compensation..................................... (1,787) (2,076) Accumulated other comprehensive loss...................... (130) (98) Accumulated deficit....................................... (61,667) (50,154) -------- -------- Total stockholders' equity........................ 371,605 109,114 -------- -------- Total liabilities and stockholders' equity........ $395,398 $132,120 ======== ========
See accompanying notes to condensed consolidated financial statements. 1 4 QUINTUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 2000 1999 -------- -------- REVENUES: License................................................... $ 13,669 $ 6,126 Service................................................... 4,831 4,167 -------- ------- Total revenues.................................... 18,500 10,293 COST OF REVENUES: License................................................... 26 218 Service................................................... 4,167 2,421 -------- ------- Total cost of revenues............................ 4,193 2,639 -------- ------- Gross profit................................................ 14,307 7,654 OPERATING EXPENSES: Sales and marketing....................................... 9,142 4,314 Research and development.................................. 4,815 1,873 General and administrative................................ 2,448 998 Amortization of intangibles............................... 9,315 796 Acquired in-process technologies.......................... 606 -- Stock-based compensation.................................. 189 169 -------- ------- Total operating expenses.......................... 26,515 8,150 -------- ------- Loss from operations........................................ (12,208) (496) OTHER INCOME (EXPENSE): Interest expense.......................................... (288) (195) Interest income........................................... 983 1 -------- ------- 695 (194) Net loss.................................................... (11,513) (690) ======== ======= OTHER COMPREHENSIVE LOSS: Changes in accumulated translation adjustments............ (58) 49 Changes in unrealized gain on short-term investments...... 26 -- -------- ------- Comprehensive loss.......................................... $(11,545) $ (641) ======== ======= BASIC AND DILUTED NET LOSS PER COMMON SHARE: Basic and diluted net loss per common share................. $ (0.32) $ (0.20) ======== ======= Shares used in computation, basic and diluted............... 35,631 3,428 ======== =======
See accompanying notes to condensed consolidated financial statements. 2 5 QUINTUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 2000 1999 -------- -------- OPERATING ACTIVITIES: Net loss.................................................. $(11,513) $ (690) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 9,879 1,115 Stock based compensation............................... 189 169 Noncash interest expense............................... 100 -- Acquired in-process technologies....................... 606 -- Provision for doubtful accounts........................ 200 100 Changes in operating assets and liabilities: Accounts receivable.................................. (6,455) (2,194) Prepaid expenses and other current assets............ 784 (722) Accounts payable..................................... (2,183) 1,631 Accrued compensation and related benefits............ 273 (31) Other accrued liabilities............................ (160) (92) Deferred revenue..................................... 1,966 (109) -------- ------- Net cash used in operating activities....................... (6,314) (823) -------- ------- INVESTING ACTIVITIES: Purchase of business, net of cash acquired................ 9,829 -- Purchase of property and equipment........................ (887) (295) Purchase of short-term investments........................ (21,949) -- Maturities of short-term investments...................... 20,748 -- Increase in other assets.................................. (6,068) (2) -------- ------- Net cash provided by (used in) investing activities......... 1,673 (297) -------- ------- FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 1,931 160 Repurchase of common stock................................ (9) (5) Borrowings (repayment) under bank line of credit.......... -- (4,870) Borrowings (repayments of) bank loan...................... (277) 4,530 Principal payments on capital lease obligations........... (39) (13) -------- ------- Net cash provided by (used in) financing activities......... 1,606 (198) -------- ------- Effect of exchange rate on cash and cash equivalents........ 56 -- Net decrease in cash and cash equivalents................... (2,979) (1,318) Cash and cash equivalents at beginning of period............ 21,867 1,785 -------- ------- Cash and cash equivalents at end of period.................. $ 18,888 $ 467 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW: Cash paid for interest.................................... $ 153 $ 195 ======== ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock and assumption of options and warrants for the acquisition of Mustang.com............ $271,825 $ -- Unrealized gain on short-term investments................. $ 26 $ -- Issuance of common stock for notes receivable............. $ 4,881 $ 165
See accompanying notes to condensed consolidated financial statements. 3 6 QUINTUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Quintus Corporation ("Quintus") and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of its financial position and results of operations for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles. The result of operations for the three months ended June 30, 2000 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods. The information included in this report should be read in conjunction with the audited consolidated financial statements and notes thereto included in Quintus' 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 2, 2000. 2. BUSINESS COMBINATIONS On May 18, 2000, Quintus completed its acquisition of Mustang.com, Inc. ("Mustang.com"). Mustang.com develops, markets, services and supports the Mustang Message Center, an e-mail management software solution that offers companies and other enterprises the ability to manage their inbound e-mail and Internet-based inquiries in a timely and accurate manner. The transaction was accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of Mustang.com have been included in Quintus' consolidated financial statements since the acquisition date. Quintus issued 5,394,143 shares of common stock and assumed options and warrants to purchase 635,916 shares and 40,667 shares of common stock, respectively. The purchase price for the acquisition was $273.9 million, based on capital stock issued, the value of options and warrants assumed, and transaction costs incurred. Quintus recognized a charge for in-process technologies of $606,000 in the quarter ended June 30, 2000. The fair market value of assets acquired and liabilities assumed in the acquisition were as follows (in thousands): Tangible assets............................................. $ 13,921 Goodwill and other intangible assets........................ 260,593 In-process research and development......................... 606 Liabilities assumed......................................... (1,182) -------- $273,938 ========
Intangible assets consist of purchased technology and assembled workforce of $3.3 million which are being amortized over four years, trademark and trade name and customer related intangibles of $3.5 million which are being amortized over two and a half years, and goodwill of $253.8 million which are being amortized over five years. The in-process research and development of $606,000 was expensed upon acquisition. The acquired technology provides a comprehensive framework to manage high volumes of e-mail and Internet based customer interactions. The in-process research and development represents technology which has not yet reached technological feasibility and does not have alternative future uses. This amount was charged to Quintus' operations during the quarter ended June 30, 2000. The in-process research and development was identified and valued through extensive interviews and discussions with Quintus and Mustang.com management and the analysis of data provided by Mustang.com concerning developmental products, their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The income forecast method, which included an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each in-process research and development project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. The Company is in the process of incorporating certain aspects of the acquired in-process technologies to the Company's eContact Suite version 5.6 which is expected to be released in November 2000. 4 7 QUINTUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On November 10, 1999, Quintus completed its acquisition of Acuity Corporation ("Acuity"), a company specializing in providing Web based customer interaction software. The transaction was accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of Acuity have been included in Quintus' consolidated financial statements since the acquisition date. Quintus issued 2,021,146 shares of common stock and 3,047,378 shares of preferred stock. The shares of preferred stock were converted to common stock upon the completion of the initial public offering on November 16, 1999. In addition, Quintus assumed warrants and options to purchase 328,364 shares and 422,867 shares of common stock, respectively. The purchase price for the acquisition was $47.1 million based on capital stock issued, the value of the options and warrants assumed, and transaction costs incurred. Quintus recognized a charge for in-process technologies of $3.0 million in the quarter ended December 31, 1999. The fair market value of assets acquired and liabilities assumed in the acquisition were as follows (in thousands): Tangible assets............................................. $ 3,616 Goodwill and other intangible assets........................ 44,609 In-process research and development......................... 3,000 Liabilities assumed......................................... (4,079) ------- $47,146 =======
Intangible assets consist of purchased technology and assembled workforce of $1.4 million which are being amortized over four years, trademark and trade name, customer related intangibles and goodwill of $43.2 million which are being amortized over five years. The in-process research and development of $3.0 million was expensed upon acquisition. The acquired technology provides a comprehensive framework to manage internet-based customer interactions, including Web self-service, Web chat, browser-based collaboration and Web-call back. The in-process research and development represents technology which has not yet reached technological feasibility and does not have alternative future uses. The estimated value of this in-process technology of $3.0 million was charged to Quintus' operations during the quarter ended December 31, 1999. The in-process research and development was identified and valued through extensive interviews and discussions with Quintus and Acuity management and the analysis of data provided by Acuity concerning developmental products, their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The income forecast method, which included an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each in-process research and development project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. The Company is in the process of incorporating certain aspects of the acquired in-process technology to the Company's eContact Suite version 5.5.1 which is expected to be released in September 2000. The following unaudited pro forma consolidated results of operations for the three months ended June 30, 2000 and 1999 assume the acquisition of Mustang.com and Acuity occurred as of the beginning of each period. The one-time $606,000 and $3.0 million charge for purchased in-process technology from Mustang.com and Acuity, respectively, were excluded from the pro forma results as they were material nonrecurring charges.
THREE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 2000 1999 -------- -------- Revenues.................................................... $ 19,216 $ 12,395 Net loss from operations.................................... (18,517) (18,540) Loss per share.............................................. $ (0.48) $ (1.71)
5 8 QUINTUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. COMMON STOCK AND NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED ------------------- JUNE 30, JUNE 30, 2000 1999 -------- -------- Net loss (numerator)........................................ $(11,513) $ (690) ======== ====== Shares (denominator): Weighted average common shares outstanding................ 36,648 4,280 Weighted average common shares outstanding subject to repurchase............................................. (1,017) (852) -------- ------ Shares used in computation, basic and diluted............... 35,631 3,428 ======== ====== Loss per share, basic and diluted........................... $ (0.32) $(0.20) ======== ======
For the above mentioned periods, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:
JUNE 30, ---------------------- 2000 1999 --------- ---------- Convertible preferred stock................................. -- 16,575,515 Shares of common stock subject to repurchase................ 1,053,537 817,967 Outstanding options......................................... 4,556,767 2,026,789 Outstanding warrants........................................ 758,889 1,047,645 --------- ---------- 6,369,193 20,467,916 ========= ==========
4. COMMITMENT On June 23, 2000, the Company entered into a 10 year lease commitment of approximately 103,000 square feet of office space for its new worldwide headquarters in Dublin, California. The estimated lease commencement date is November 22, 2000. Future rental payments approximate $3.4 million per year with an increase of four percent each year. In conjunction with the lease, the Company established two $3.0 million letters of credit for a total of $6.0 million with a financial institution as collateral for the lease, subject to reduction based on the financial performance of the Company during the term of the lease. The amount is included in other assets as of June 30, 2000. 5. NOTES RECEIVABLE FROM STOCKHOLDERS On April 27, 2000 the Company loaned an officer $4,880,700 for the exercise of 550,000 stock options. The Company entered into a stock pledge agreement with the officer and became the holder of a full-recourse promissory note from the officer in the amount of $4,880,700 bearing interest at 6.71%, compounded annually. Principal and interest are due on April 26, 2004. 6. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet 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 and whether it 6 9 QUINTUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) qualifies for hedge accounting. SFAS No. 133 will be effective for Quintus' fiscal year ending March 31, 2002. Management believes that this statement will not have a significant impact on Quintus' financial position, results of operations or cash flows. In December 1999, the Securities Exchange Commissions ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 will be effective for Quintus' fiscal year ending March 31, 2001. The Company is in the process of evaluating the effects, if any, of SAB 101. 7. SIGNIFICANT CUSTOMERS Three customers accounted for 16.2%, 11.8%, and 10.6% of total revenues in the first quarter of fiscal 2001, respectively. One unrelated customer accounted for 19.7% of total revenues in the first quarter of fiscal 2000. Two customers accounted for 17.8% and 11.3% of accounts receivable at June 30, 2000, respectively. One unrelated customer accounted for 18.4% of accounts receivable at June 30, 1999. 8. LEGAL MATTERS Quintus may be a potential defendant in lawsuits and claims arising in the ordinary course of business. While the outcomes of such claims, lawsuits, or other proceedings cannot be predicted with certainty, management expects that such liability, to the extent not provided by insurance or otherwise, will not have a material adverse effect on Quintus' financial condition. 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained or incorporated by reference in this section, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Quintus' actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed elsewhere in this report in the section entitled "Risk Factors." OVERVIEW Quintus provides a comprehensive e-Customer Relationship Management or eCRM solution to manage customer interactions, such as customer orders, inquiries and service requests, and deliver consistent customer service across multiple communication channels, including the Internet, email and the telephone. Quintus' eContact software suite includes applications that address the needs of customer service representatives and agents in sales and service, consumer relations, technical support and human resources centers and a routing engine to manage customer interactions. These applications and Quintus' routing engine can be sold separately or in a group. eContact enables companies to handle high volumes of customer interactions and leverage opportunities to sell additional products and services to their customers. The Quintus eContact software suite allows companies to personalize, route and manage customer interactions. Quintus' eContact suite enables consistent customer service through the use of common rules for prioritizing, handling and responding to customer interactions, shared customer profile information, uniform strategies for selling additional products and services to customers, and consolidated management and reporting functions that allow companies to capture and analyze customer information. Quintus sells its products to customers in North and South America, Europe, South Africa and Asia Pacific through a direct sales force and indirectly through resellers and distribution partners. All of Quintus' sales are denominated in U.S. dollars. International revenues accounted for 16.6% of total revenues in the first quarter of fiscal 2001. Quintus intends to establish additional distribution relationships with partners outside of the United States, and it expects international revenues to continue to increase as a percentage of its total revenues in the future. Quintus also expects that sales of its products to a limited number of parties will continue to account for a large percentage of total revenues for the foreseeable future. On May 16, 2000, Quintus entered into a worldwide reseller, marketing and technology alliance with Siebel Systems, Inc., a supplier of eBusiness application software. Under the terms of the alliance, Quintus will market and sell Siebel eBusiness Applications through Quintus' worldwide sales force and distribution channels, and Siebel will license Quintus' eContact universal queuing technology to add multimedia queuing and intelligent routing capabilities to future Siebel eBusiness Application releases. Quintus has also become a Strategic Software Partner in the Siebel Alliance program, which provides for joint marketing and sales programs between the two companies. As a result of this alliance, Quintus anticipates that its cost of revenues will increase by the reseller fee incurred from selling Siebel's eBusiness Applications, thereby, decreasing the gross margin percentage. However, the gross profit may or may not change significantly due to the level of total license and service revenues generated. 8 11 RESULTS OF OPERATIONS The following sets forth Quintus' results of operations as a percentage of total revenues. The results of operations as a percentage of total revenues for the three months ended June 30, 1999 do not include the operations of Mustang.com and Acuity as they were acquired in May 2000 and November 1999, respectively.
THREE MONTHS ENDED ------------------ JUNE 30, JUNE 30, 2000 1999 -------- -------- Revenues: License................................................... 73.9% 59.5% Service................................................... 26.1 40.5 ----- ----- Total revenues.................................... 100.0 100.0 Cost of Revenues: License................................................... 0.2 2.1 Service................................................... 22.5 23.5 ----- ----- Total cost of revenues............................ 22.7 25.6 ----- ----- Gross profit................................................ 77.3 74.4 Operating Expenses: Sales and marketing....................................... 49.4 41.9 Research and development.................................. 26.0 18.2 General and administrative................................ 13.2 9.7 Amortization of intangibles............................... 50.4 7.7 Acquired in-process technologies.......................... 3.3 -- Stock-based compensation.................................. 1.0 1.7 ----- ----- Total operating expenses.......................... 143.3 79.2 ----- ----- Loss from operations........................................ (66.0) (4.8) Other income (expense), net................................. 3.8 (1.9) ----- ----- Net loss.................................................... (62.2)% (6.7)% ===== =====
REVENUES Total Revenues. Total revenues in the first quarter of fiscal 2001 increased 79.7% to $18.5 million from $10.3 million in the first quarter of fiscal 2000. License. License revenues in the first quarter of fiscal 2001 increased 123.1% to $13.7 million from $6.1 million in the first quarter of fiscal 2000. The increase in license revenues in fiscal 2001 from fiscal 2000 was primarily due to an increase in the number of licenses sold to new and existing customers and increased sales generated by Quintus' expanded sales force. The increase in the number of licenses was primarily due to increased market acceptance of Quintus' products, both in the United States and internationally. Service. Service revenues in the first quarter of fiscal 2001 increased 15.9% to $4.8 million from $4.2 million in the first quarter of fiscal 2000. The increase was primarily due to growth in Quintus' installed base of customers with a maintenance contract and maintenance renewals from products licensed in prior periods. Service revenues decreased to 26.1% as a percentage of total revenues in the first quarter of fiscal 2001 from 40.5% in the first quarter of fiscal 2000. Quintus expects service revenues as a percentage of total revenues to decrease in the future due to the growth of license revenues. COST OF REVENUES License. Cost of licenses consists primarily of royalties, product packaging, documentation, and production. Cost of licenses decreased 88.1% to $26,000 in the first quarter of fiscal 2001 from $218,000 in the first quarter of fiscal 2000. Cost of licenses as a percentage of license revenues decreased to 0.2% in the first 9 12 quarter of fiscal 2001 from 3.6% in the first quarter of fiscal 2000. The decrease in fiscal 2001 was primarily due to a decrease in sales of third-party license revenues and the resulting decrease in third-party royalty payments. The cost of licenses may vary significantly in the future, depending on the mix of internally developed and third-party products. Service. Cost of services consists primarily of personnel costs and third-party consulting fees associated with implementation, customization, maintenance and other support services. Cost of services increased 72.1% to $4.2 million in the first quarter of fiscal 2001 from $2.4 million in the first quarter of fiscal 2000, representing 86.3% and 58.1% of service revenues, respectively. The dollar increase was primarily due to the number of third-party consultants Quintus engaged to provide consulting and implementation of its products and an increase in its installed base for its maintenance contracts. Cost of services as a percentage of service revenues increased primarily due to a decrease in margins for service revenues. Cost of services as a percentage of service revenues may vary between periods due to the mix of services provided and the resources used to provide these services. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, bonuses, travel, public relations, marketing materials, and trade shows. Sales and marketing expenses increased 111.9% to $9.1 million in the first quarter of fiscal 2001 from $4.3 million in the first quarter of fiscal 2000, representing 49.4% and 41.9% of total revenues, respectively. The dollar and percentage of total revenues increases were primarily due to the expansion of Quintus' worldwide sales and marketing organization, which increased to 141 employees in the first quarter of fiscal 2001 from 62 employees in the first quarter of fiscal 2000, an increase in sales commissions associated with increases in revenues and higher marketing costs due to expanded advertising and promotional activities. Quintus intends to invest substantial resources to expand its direct sales force and other distribution channels, to establish additional sales offices in the United States and internationally, and to conduct marketing programs to support its existing and new product offerings. As a result, sales and marketing expenses in absolute dollar are expected to increase in future periods. Research and Development. Research and development expenses consist primarily of personnel and related expenses associated with the development of new products, the enhancement and localization of existing products, and quality assurance and testing costs incurred prior to commercial production. Research and development expenses increased 157.1% to $4.8 million in the first quarter of fiscal 2001 from $1.9 million in the first quarter of fiscal 2000, representing 26.0% and 18.2% of total revenues, respectively. The dollar and percentage of total revenues increases were primarily due to increases in personnel, which increased to 115 employees in the first quarter of fiscal 2001 from 51 employees in the first quarter of fiscal 2000. Quintus anticipates that research and development expenses in absolute dollars will continue to increase in future periods. To date, all research and development costs have been expensed as incurred. General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for finance and human resource employees, as well as accounting, legal, other professional fees and allowance for doubtful accounts. General and administrative expenses increased 145.3% to $2.4 million in the first quarter of fiscal 2001 from $998,000 in the first quarter of fiscal 2000, representing 13.2% and 9.7% of total revenues, respectively. The dollar and percentage of total revenues increases were primarily due to increases in personnel, which increased to 53 employees in the first quarter of fiscal 2001 from 26 employees in the first quarter of fiscal 2000, and associated expenses necessary to manage and support Quintus' increased scale of operations and expenses related to being a public company. Quintus currently expects general and administrative expenses in absolute dollars to increase in the future as it continues to expand its infrastructure. Amortization of Intangibles. Amortization of intangibles represents costs arising from Quintus' acquisition of Mustang.com in May 2000, its acquisition of Acuity in November 1999, and its acquisition of Nabnasset in November 1997. Amortization is recorded on a straight-line basis over a period of three to five years ending May 2005. Amortization of intangibles was $9.3 million and $796,000 in the first quarter of fiscal 2001 and fiscal 2000, respectively, representing 50.4% and 7.7% of total revenues, respectively. 10 13 Acquired In-Process Technologies. In May 2000, Quintus acquired Mustang.com for $273.9 million based on capital stock issued, the value of options and warrants assumed, and transaction costs incurred. This transaction was accounted for as a purchase. In this acquisition acquired technology included both existing technology and in-process research and development. The valuation of acquired technology was made by applying the income forecast method, which considers the present value of cash flows by product lines. Acquired in-process technologies of $606,000 were charged to operations in the first quarter of fiscal 2001, as the technologies did not have alternative future uses as of the date of the acquisition. There were no acquired in-process technologies in the first quarter of fiscal 2000. Stock-Based Compensation. During the first quarter of fiscal 2001 and fiscal 2000, Quintus recorded deferred stock-based compensation of zero and $710,000 relating to stock options granted to employees, respectively. Such amounts represent the difference between the exercise price and the deemed fair market value of Quintus' common stock at the date of grant. These amounts are being amortized over the vesting periods of the granted options. Quintus recognized $189,000 and $169,000 of stock-based compensation in operating expenses in the first quarter of fiscal 2001 and 2000, respectively. Other Income (Expense), Net. Other net income of $695,000 in the first quarter of fiscal 2001 consisted primarily of interest income from Quintus' investments of initial public offering proceeds in short-term investments. Other expense of $194,000 in the first quarter of fiscal 2000 was primarily due to Quintus' line of credit with a financial institution, which was repaid in full during the third quarter of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, Quintus' principal source of liquidity was approximately $57.3 million of cash, cash equivalents and short-term investments. Cash used in operating activities was $6.3 million and $823,000 in the first of fiscal 2001 and fiscal 2000, respectively. Cash used in the first quarter of fiscal 2001 was primarily due to a net loss of $11.5 million, an increase in accounts receivable, and a decrease in accounts payable, offset in part by depreciation and amortization expenses. Cash used in the first quarter of fiscal 2000 was primarily due to an increase in accounts receivable, offset in part by an increase in accounts payable and depreciation and amortization expenses. Cash provided by (used in) investing activities was $1.7 million and ($297,000) in the first quarter of fiscal 2001 and fiscal 2000, respectively. Cash provided by investing activities in the first quarter of fiscal 2001 was primarily due to cash acquired from the acquisition of Mustang.com, offset in part by an increase in other assets due to the letters of credit totaling $6.0 million for collateral on a facility lease. Cash used in investing activities in the first quarter of fiscal 2000 was primarily due to purchases of property and equipment. Cash provided by (used in) financing activities was $1.6 million and ($198,000) in the first quarter of fiscal 2001 and fiscal 2000, respectively. Cash provided by financing activities in the first quarter of fiscal 2001 consisted primarily of net proceeds from the issuance of common stock, offset in part by principal repayments of Quintus' bank loans. Cash used in financing activities in the first quarter of fiscal 2000 was primarily due to principal repayments of Quintus' bank line of credit, offset in part by bank borrowings. Quintus may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. Quintus currently anticipates that its current cash, cash equivalents and investments will be sufficient to meet its anticipated cash needs for working capital and capital for at least the next 12 months. Thereafter, Quintus may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, Quintus may not be able to raise it on acceptable terms or at all. 11 14 RISK FACTORS QUINTUS MAY NOT ACHIEVE PROFITABILITY AND, AS A RESULT, THE TRADING PRICE OF ITS COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT Quintus has not had a profitable quarter and it cannot assure you that it will become profitable. Quintus expects to increase its sales and marketing, research and development, and other expenses as it attempts to grow its business. As a result, Quintus will need to generate significant revenues to become profitable, which it may be unable to do. If Quintus fails to become profitable, the trading price of its common stock could decline significantly. Quintus has funded its operations through the sale of equity securities, borrowings and the sale of its products and services. Quintus incurred net losses of $11.5 million and $690,000 in the first quarter of fiscal 2001 and 2000, respectively. As of June 30, 2000, Quintus had an accumulated deficit of $61.7 million. In addition, in May 2000, Quintus acquired Mustang.com which had incurred net losses of $245,000, $906,000, and $1.2 million in the three months ended March 31, 2000 and in years ended December 31, 1999 and 1998, respectively. Mustang.com had an accumulated deficit of $7.5 million as of March 31, 2000. In November 1999, Quintus acquired Acuity which had incurred net losses of $4.6 million, $7.7 million, and $6.6 million in the nine months ended September 30, 1999 and in years ended December 31, 1998 and 1997, respectively. Acuity had an accumulated deficit of $25.3 million as of September 30, 1999. In connection with its acquisitions of Mustang.com and Acuity, Quintus recorded approximately $305.2 million of goodwill and intangible assets, which will be amortized on a monthly basis over periods of two and a half to five years. In connection with the acquisitions of Mustang.com and Acuity, Quintus recognized a charge for in-process technologies of approximately $606,000 and $3.0 million in the quarter ending June 30, 2000 and December 31, 1999, respectively. QUINTUS' RESULTS OF OPERATIONS MAY SUFFER IF IT ENCOUNTERS TECHNICAL DIFFICULTIES, DELAYS AND UNFORESEEN EXPENSES AS IT FURTHER DEVELOPS ITS ECONTACT SUITE Quintus has been selling and implementing its integrated eContact suite and the components for managing email and Internet-based customer interactions for only a limited period of time. Quintus has also recently integrated Mustang.com's Mustang Message Center and Acuity's WebCenter and WebACD products into its eContact suite. Quintus may encounter technical difficulties, delays and unforeseen expenses as Quintus integrates these and other functionalities into its eContact suite and continues its development efforts. Such differences or delays could harm Quintus' results of operations. IF IMPLEMENTATIONS OF THE QUINTUS ECONTACT SUITE SUFFER PROBLEMS OR DELAYS, QUINTUS' REPUTATION AND FUTURE OPERATING RESULTS MAY BE HARMED To successfully implement its eContact suite, Quintus must integrate eContact with a wide variety of complex systems currently used by its customers. If these implementations meet with significant technological obstacles, Quintus may be forced to spend additional resources, harming its operating results. If the ease and speed of these implementations do not meet the expectations of its customers, Quintus' reputation and ability to sell its eContact suite will be harmed. BECAUSE QUINTUS' QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THE TRADING PRICE OF ITS COMMON STOCK IS LIKELY TO BE VOLATILE It is likely that in some future quarter Quintus' revenues and operating results will fall below the expectations of market analysts and investors. If this happens, the trading price of Quintus common stock may fall substantially. Quintus' revenues and operating results are likely to vary significantly from quarter to quarter due to a variety of factors, including the risks described in this section. Quintus' ability to forecast revenues is limited. Quintus derives substantially all of its revenues from licenses of Quintus' software and related services. License revenues in any quarter are substantially dependent on orders booked and shipped in that quarter, and Quintus cannot predict revenues for any future quarter with any significant degree of certainty. In addition, Quintus expects that sales derived through indirect channels, 12 15 which are more difficult to forecast, may increase as a percentage of total revenues in the future. Quintus' expenses are relatively fixed and are based, in part, on its expectations of future revenues. Consequently, if revenue levels do not meet Quintus' expectations, its operating results will suffer. BECAUSE QUINTUS DEPENDS UPON A LIMITED NUMBER OF LARGE SALES FOR A SUBSTANTIAL PORTION OF ITS REVENUES, THE FAILURE TO OBTAIN LARGE PROSPECTIVE CUSTOMERS COULD CAUSE QUINTUS' REVENUES TO FALL QUICKLY AND UNEXPECTEDLY Quintus depends upon a limited number of large sales for a substantial portion of its revenues in each quarter. For example, in the first quarter of fiscal 2001, its three largest customers accounted for 16.2%, 11.8%, and 10.6% of its total revenues, respectively. Quintus' failure to successfully close one or more large sales in any particular period could cause its revenues to drop quickly and unexpectedly. Quintus expects to continue to be dependent upon a limited number of customers for a significant portion of its revenues, and these customers are expected to vary from period-to-period. The loss of prospective major customers could result in its failure to meet quarterly revenue expectations, causing the trading price of its common stock to fall. QUINTUS RELIES HEAVILY ON ITS INDIRECT DISTRIBUTION CHANNELS The loss of a reseller, the failure of a reseller to sell its products, or its failure to attract and retain qualified new resellers in the future could harm Quintus' business. Typically its resellers do not have minimum purchase or resale obligations, can cease marketing Quintus' products at any time, and may offer competing products. Quintus intends to expand its indirect distribution channels by establishing additional relationships with resellers and distribution partners. Competition for these relationships is intense, and Quintus may be unable to establish relationships on favorable terms, if at all. Even if Quintus is successful in establishing these relationships, they may not substantially increase its revenues. QUINTUS FACES A NUMBER OF RISKS RELATED TO QUINTUS' RECENT ACQUISITIONS OF MUSTANG.COM AND ACUITY, AND QUINTUS MAY FACE SIMILAR RISKS IN THE FUTURE IF QUINTUS ACQUIRES OTHER BUSINESSES OR TECHNOLOGIES In May 2000 and November 1999, Quintus acquired Mustang.com, a company located in Bakersfield, California and Acuity, a company located in Austin, Texas, respectively. Quintus previously had no other operations in either of these two locations. Quintus is currently integrating Mustang.com's products, personnel, and systems, and unknown complications could arise in the future. Although Quintus' integration of Acuity's products, personnel and systems is largely complete, unknown complications could arise in the future. If difficulties stemming from these integrations arise in the future, Quintus' business and operating results are likely to suffer. In addition, the acquisition of Mustang.com was Quintus' fourth acquisition within the last four years, and it may make more acquisitions in the future. If Quintus is unable to integrate effectively any newly acquired businesses, technologies or products, Quintus' operating results could suffer. Integrating any newly acquired businesses, technologies or products may be expensive and time-consuming. Future acquisitions could also result in large and immediate write-offs for in-process research and development, increased amortization charges or the incurrence of debt and contingent liabilities. To finance acquisitions, Quintus may need to raise additional funds through public or private financings. Additional funds may not be available on favorable terms, or at all, and, in the case of equity financings, may result in dilution to Quintus shareholders. Moreover, Quintus may not be able to operate any acquired businesses profitably or otherwise implement its growth strategy successfully. BECAUSE MANY OF QUINTUS' SALES PEOPLE ARE NEW HIRES AND HIRING ADDITIONAL SALES PERSONNEL IS PARTICULARLY COMPETITIVE, IT MAY BE UNABLE TO EXPAND ITS BUSINESS Quintus has replaced a large number of its sales people during the last year. As a result, many of its sales personnel are new to Quintus. Quintus expects its new sales personnel will require substantial training in its products and sales practices. New sales personnel tend to be less productive than those with greater experience selling its products. Moreover, Quintus intends to hire additional direct sales force personnel in the United States. Competition for qualified sales personnel is particularly intense in the software industry. In the past, Quintus has experienced difficulty hiring employees with appropriate qualifications in the time frame desired. 13 16 Any delays or difficulties Quintus encounters in these recruiting, training or retention efforts could impair its ability to attract new customers and enhance its relationships with existing customers. BECAUSE THE ECRM MARKET IS HIGHLY COMPETITIVE, QUINTUS MAY NOT BE ABLE TO SUCCEED AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT If Quintus fails to compete successfully in the highly competitive and rapidly changing eCRM market, it may not be able to succeed and you may lose part or all of your investment. Quintus faces competition primarily from customer relationship management software firms, emerging Internet customer interaction software vendors and computer telephony software companies. Quintus also faces competition from traditional call center technology providers, large enterprise application software vendors, independent systems integrators, consulting firms and in-house IT departments. Because barriers to entry into the software market are relatively low, Quintus expects to face additional competition in the future. Many of Quintus' competitors can devote significantly more resources to the development, promotion and sale of products than Quintus can, and many of them can respond to new technologies and changes in customer preferences more quickly than Quintus can. Further, other companies with resources greater than Quintus may attempt to gain market share in the eCRM market by acquiring or forming strategic alliances with its competitors. BECAUSE QUINTUS DEPENDS ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL AND IMPLEMENT ITS PRODUCTS, ITS REVENUES WILL LIKELY SUFFER IF IT DOES NOT DEVELOP AND MAINTAIN THESE RELATIONSHIPS Quintus relies on systems integrators to promote, sell and implement its solution. If Quintus fails to maintain and develop relationships with systems integrators, its revenues will likely suffer. Quintus currently relies on systems integrators such as Ernst and Young, Cambridge Technology Partners and eLoyalty to recommend its products to their customers and to install its products. If Quintus is unable to rely on systems integrators to implement its products, Quintus will likely have to provide these services itself, resulting in increased costs. As a result, its ability to grow may be harmed. In addition, systems integrators may develop, market or recommend products that compete with its products. For this reason, Quintus must cultivate its relationships with these firms, and its failure to do so could result in reduced sales revenues. Further, if these systems integrators fail to implement Quintus' products successfully, its reputation may be harmed. BECAUSE THE SALES CYCLE FOR QUINTUS' PRODUCTS CAN BE QUITE LENGTHY, IT IS DIFFICULT FOR QUINTUS TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE The timing of Quintus' revenues is difficult to predict in large part due to the length and variability of the sales cycle for its products. Companies often view the purchase of Quintus' products as a significant and strategic decision. As a result, companies tend to take significant time and effort evaluating Quintus' products. The amount of time and effort depends in part on the size and the complexity of the deployment. This evaluation process frequently results in a lengthy sales cycle, typically ranging from three to nine months. During this time Quintus may incur substantial sales and marketing expenses and expend significant management efforts. Quintus does not recoup these investments if the prospective customer does not ultimately license its product. IF QUINTUS IS UNABLE TO INTRODUCE NEW ECRM PRODUCTS OR PRODUCT ENHANCEMENTS ON A TIMELY BASIS, OR IF THE MARKET DOES NOT ACCEPT THESE PRODUCTS OR PRODUCT ENHANCEMENTS, QUINTUS' BUSINESS WILL SUFFER The eCRM market is new and is likely to change rapidly. Quintus' future success will depend on its ability to effectively and timely anticipate changing customer requirements and offer products and services that meet these demands. Potential customers may seek features that its products do not have. As a result, Quintus may need to develop these features, and this may result in a longer sales cycle, increased research and development expenses and reduced profit margins. In addition, the development of new or enhanced eCRM products is a complex and uncertain process. Quintus may experience design, development, marketing and other difficulties that could delay or prevent the introduction of new products and enhancements. For example, 14 17 Quintus' ability to introduce new products would be impaired if Quintus cannot continue to attract, hire, train and retain highly skilled personnel. QUINTUS' FAILURE TO MANAGE ITS RAPID GROWTH COULD INCREASE ITS COSTS AND HARM ITS BUSINESS Quintus has experienced rapid growth and plans to continue to significantly expand its operations. Quintus may not be able to manage this growth effectively, which would impair its ability to attract and service customers and cause it to incur higher operating costs. Expanding its operations has placed a significant strain on its personnel and other resources. Its revenues have grown to $18.5 million in the first quarter of fiscal 2001 from $10.3 million in the first quarter of fiscal 2000. Quintus' headcount increased to 402 as of June 30, 2000 from 181 employees as of June 30, 1999. To manage its growth effectively, Quintus may need to further improve its operational, financial and management systems. Quintus cannot assure you that it will improve these systems adequately. IF QUINTUS DOES NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF ITS INTERNATIONAL OPERATIONS, ITS OPERATING RESULTS MAY SUFFER Quintus has limited experience in international operations and may not be able to compete effectively in international markets. Quintus currently intends to expend significant financial and management resources to expand its international operations. Quintus believes that the future expansion of its international operations is important to the growth of its business. Most of its international sales are generated through resellers and distributors, and Quintus expects substantial costs and resources will be required to continue to train and support these resellers. Among the various risks Quintus faces in conducting business internationally are: - difficulties and costs of staffing and managing foreign operations; - longer accounts receivable payment cycles and possible difficulties in collecting accounts receivable, which may increase Quintus' operating costs and hurt its financial performance; - technology standards that are different from those on which Quintus products are designed, which could require expensive redesigns of Quintus' products; - political and economic instability; - unexpected changes in regulatory requirements that could make Quintus' products and services more expensive and therefore less attractive to potential customers; and - fluctuations in currency exchange rates and the imposition of currency exchange controls. UNKNOWN SOFTWARE DEFECTS COULD HARM QUINTUS' BUSINESS AND REPUTATION Quintus' software interacts with other complex systems and software. Its software products may contain defects, particularly when first introduced. Despite Quintus' software testing procedures, it may not discover software defects that affect its products until after they are deployed. These defects could result in: - damage to Quintus' reputation; - product returns or lost sales; - product liability claims against Quintus; - delays in or loss of market acceptance of Quintus' products; and - unexpected expenses and diversion of resources to remedy errors. The occurrence of any of these events would hurt Quintus' operating results. In addition, Quintus' customers generally use its products together with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. Therefore, even if these problems are not caused by Quintus' 15 18 products, they may cause Quintus to incur significant warranty and repair costs, divert the attention of its engineering personnel and cause significant customer relations problems. ALTHOUGH QUINTUS HAS TAKEN MEASURES TO PROTECT ITS INTELLECTUAL PROPERTY, ITS COMPETITIVE POSITION MAY SUFFER IF THESE MEASURES PROVE TO BE INADEQUATE Third parties may infringe or misappropriate Quintus' copyrights, trademarks and similar proprietary rights. Quintus cannot be certain that the steps it has taken to prevent the misappropriation of its intellectual property are adequate, particularly in foreign countries where the laws may not protect its proprietary rights as fully as in the United States. Quintus relies on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect its intellectual property rights. In addition, Quintus enters into confidentiality agreements with its employees and certain customers, vendors and strategic partners. Quintus cannot assure you that any patents will be issued from applications it has filed or that any of its issued patent will protect its intellectual property. Furthermore, other parties may independently develop similar or competing technology or design around any patents that may be issued to Quintus. QUINTUS MAY FACE COSTLY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS Companies have in the past alleged that Quintus' products infringe their patents, and others may make similar allegations in the future. Such claims, or other claims that Quintus' products infringe other intellectual property rights, may force Quintus to seek expensive licenses, re-engineer its products, engage in expensive and time-consuming litigation or stop marketing the challenged product. Further, by contract Quintus typically indemnifies its customers against infringement claims related to its products. Intellectual property litigation is expensive and time-consuming and could divert management's attention away from running Quintus' business. This litigation could also require Quintus to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all. Quintus' failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis in a cost-effective manner would harm its business. SALES OF QUINTUS COMMON STOCK INTO THE PUBLIC MARKET COULD HARM THE MARKET PRICE OF QUINTUS COMMON STOCK AND ITS ABILITY TO RAISE MONEY THROUGH SALES OF EQUITY SECURITIES The value of an investment in Quintus common stock and Quintus' ability to raise money through the sale of additional equity securities could be adversely affected if its existing shareholders sell large amounts of their Quintus common stock into the public market. If significant volumes of Quintus common stock are sold into the public market, the market price of its common stock, and therefore the value of your investment, could fall. This could impair Quintus' ability to raise capital through the sale of additional equity securities. With the exception of the shares sold in its initial public offering, substantially all of its currently outstanding shares were subject to transfer restrictions that recently expired on May 14, 2000. An increase in sales of Quintus' common stock as a result of the expiration of these transfer restrictions could cause the trading price of Quintus' common stock to fall. ANTI-TAKEOVER PROVISIONS IN QUINTUS CHARTER DOCUMENTS, AS WELL AS PROVISIONS OF EMPLOYMENT AGREEMENTS OF SOME OF ITS KEY EXECUTIVE OFFICERS, COULD PREVENT OR DELAY A CHANGE IN CONTROL OF QUINTUS Provisions in Quintus' bylaws and in its certificate of incorporation may have the effect of delaying or preventing a change of control or changes in management of Quintus. These provisions include: - the requirement that a special meeting of shareholders may only be called by shareholders owning at least a majority of its outstanding shares; - the ability of its board of directors to issue preferred stock without shareholder approval; and - the right of its board of directors to elect a director to fill a vacancy created by the expansion of the board of directors. 16 19 Some of Quintus' officers have agreements with it that provide for acceleration of vesting following certain sales or mergers of Quintus. These provisions could make Quintus' acquisition by a third party more costly and could delay or prevent a change of control or changes in its management. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At June 30, 2000, Quintus had an outstanding balance of $1.4 million in loans with interest rates ranging from 8.25% to 10.00%. A 10.00% movement in market interest rates would not significantly impact Quintus' financial position or results of operations. Quintus' interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of its funds are invested in instruments with maturity of less than two years. Quintus' policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. Funds in excess of current operating requirements are primarily invested in obligations of large corporations. Due to the nature of Quintus' investments, its has concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. 17 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Changes in Securities On June 13, 2000, Quintus issued 44,393 shares of common stock pursuant to the exercise of warrants previously issued to stockholders of Quintus. Quintus received $99,999 in connection with these warrant exercises. The sale of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder, as transactions by an issuer not involving any public offering. With regard to the sales of securities exempted by Section 4(2) of the Securities Act, the recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution and appropriate legends were affixed to the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION --------- ----------- 2.2(2) Agreement and Plan of Merger between the Registrant and Mustang.com, Inc., dated February 25, 2000. 2.1(3) Agreement and Plan of Reorganization by and among Registrant, Acuity Corp., Ribeye Acquisition Corp. and certain stockholders of Acuity Corp., dated September 10, 1999. 3.3(3) Registrant's Restated Certificate of Incorporation. 3.5(3) Registrant's Amended and Restated Bylaws. 4.1(3) Reference is made to Exhibits 3.3 and 3.5. 4.2(3) Specimen Common Stock certificate. 4.3(3) Registrant's Amended and Restated Investors Rights Agreement, dated November 10, 1999. 10.1(3) Form of Indemnification Agreement entered into between Registrant and each of its directors and officers. 10.2(3) 1995 Stock Option Plan and forms of agreements thereunder. 10.3(3) 1999 Stock Incentive Plan and forms of agreements thereunder. 10.4(3) Employee Stock Purchase Plan.
18 21
EXHIBIT NUMBER DESCRIPTION --------- ----------- 10.5(3) 1999 Director Option Plan. 10.6(3) Light Industrial Lease between Registrant and Teachers Insurance and Annuity Association of America, dated October 6, 1995. 10.7(3) Sublease between Registrant and Oryx Technology Corporation and SurgX Corporation, dated October 1, 1999. 10.8(3)+ Software Distribution Agreement dated May 5, 1997, between Nabnasset Corporation and Lucent Technologies Inc. 10.10(3)+ Authorized OEM/Reseller Agreement dated December 22, 1998, between Registrant and Brightware, Inc. 10.11(3) Employment agreement between Registrant and Alan Anderson, dated May 23, 1995 and Notice of Grant of Stock Option. 10.12(3) Employment agreement between Registrant and John Burke, dated June 11, 1999. 10.13(3) Loan and Security Agreement between Registrant and Silicon Valley Bank, dated September 18, 1998. 10.14(3) Sublease Agreement between Pavilion Technologies, Inc. and Acuity Corp., dated December 19, 1996. 10.15(4)+ Authorized OEM/Reseller Agreement between Registrant and Lipstream Networks, Inc., dated December 3, 1999. 10.16(4) Sublease between Registrant and Advanced Radio Telecom Corp., dated December 13, 1999, and Corresponding Master Lease. 10.17(4) Second Amendment to OEM/Reseller Agreement between Registrant and Brightware, Inc., dated December 22, 1999. 10.18(1)+ Amendment No. 5 to the Software Distribution Agreement Between Registrant and Lucent Technologies Inc. dated February 23, 2000. 10.19 Master lease between Registrant and Koll Dublin Corporate Center L.P., date June 23, 2000. 10.20 Employment agreement between Registrant and Paul Bartlett, dated April 27, 2000. 10.21 Agreement of Merger Between Registrant and Mustang.com, Inc. dated May 18, 2000. 10.22 Promissory Note Between Registrant and Paul Bartlett dated April 27, 2000. 21.1(1) Subsidiaries of the Registrant. 27.1 Financial Data Schedule.
--------------- (1) Incorporated herein by reference to the Registrant's 2000 Annual Report on Form 10-K filed June 2, 2000. (2) Incorporated herein by reference to the Registrant's Registration Statement on Form S-4/A filed April 11, 2000. (3) Incorporated herein by reference to the Registrant's Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on November 15, 1999. (4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 14, 2000. + Portions of these exhibits have been omitted pursuant to requests for confidential treatment. 19 22 (b) REPORTS ON FORM 8-K On May 3, 2000, Quintus filed a report on Form 8-K to supplement the proxy statement filed on April 11, 2000 in connection with the acquisition of Mustang.com. On May 25, 2000, Quintus filed a report on Form 8-K to announce the completion of its acquisition of Mustang.com. 20 23 QUINTUS CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned, thereunto duly authorized. QUINTUS CORPORATION Date: August 14, 2000 By: /s/ SUSAN SALVESEN ------------------------------------ Susan Salvesen Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 21 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION --------- ----------- 2.2(2) Agreement and Plan of Merger between the Registrant and Mustang.com, Inc., dated February 25, 2000. 2.1(3) Agreement and Plan of Reorganization by and among Registrant, Acuity Corp., Ribeye Acquisition Corp. and certain stockholders of Acuity Corp., dated September 10, 1999. 3.3(3) Registrant's Restated Certificate of Incorporation. 3.5(3) Registrant's Amended and Restated Bylaws. 4.1(3) Reference is made to Exhibits 3.3 and 3.5. 4.2(3) Specimen Common Stock certificate. 4.3(3) Registrant's Amended and Restated Investors Rights Agreement, dated November 10, 1999. 10.1(3) Form of Indemnification Agreement entered into between Registrant and each of its directors and officers. 10.2(3) 1995 Stock Option Plan and forms of agreements thereunder. 10.3(3) 1999 Stock Incentive Plan and forms of agreements thereunder. 10.4(3) Employee Stock Purchase Plan. 10.5(3) 1999 Director Option Plan. 10.6(3) Light Industrial Lease between Registrant and Teachers Insurance and Annuity Association of America, dated October 6, 1995. 10.7(3) Sublease between Registrant and Oryx Technology Corporation and SurgX Corporation, dated October 1, 1999. 10.8(3)+ Software Distribution Agreement dated May 5, 1997, between Nabnasset Corporation and Lucent Technologies Inc. 10.10(3)+ Authorized OEM/Reseller Agreement dated December 22, 1998, between Registrant and Brightware, Inc. 10.11(3) Employment agreement between Registrant and Alan Anderson, dated May 23, 1995 and Notice of Grant of Stock Option. 10.12(3) Employment agreement between Registrant and John Burke, dated June 11, 1999. 10.13(3) Loan and Security Agreement between Registrant and Silicon Valley Bank, dated September 18, 1998. 10.14(3) Sublease Agreement between Pavilion Technologies, Inc. and Acuity Corp., dated December 19, 1996. 10.15(4)+ Authorized OEM/Reseller Agreement between Registrant and Lipstream Networks, Inc., dated December 3, 1999. 10.16(4) Sublease between Registrant and Advanced Radio Telecom Corp., dated December 13, 1999, and Corresponding Master Lease. 10.17(4) Second Amendment to OEM/Reseller Agreement between Registrant and Brightware, Inc., dated December 22, 1999. 10.18(1)+ Amendment No. 5 to the Software Distribution Agreement Between Registrant and Lucent Technologies Inc. dated February 23, 2000. 10.19 Master lease between Registrant and Koll Dublin Corporate Center L.P., date June 23, 2000. 10.20 Employment agreement between Registrant and Paul Bartlett,dated April 27, 2000. 10.21 Agreement of Merger Between Registrant and Mustang.com, Inc. dated May 18, 2000.
25
EXHIBIT NUMBER DESCRIPTION --------- ----------- 10.22 Promissory Note Between Registrant and Paul Bartlett dated April 27, 2000. 21.1(1) Subsidiaries of the Registrant. 27.1 Financial Data Schedule.
--------------- (1) Incorporated herein by reference to the Registrant's 2000 Annual Report on Form 10-K filed June 2, 2000. (2) Incorporated herein by reference to the Registrant's Registration Statement on Form S-4/A filed April 11, 2000. (3) Incorporated herein by reference to the Registrant's Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on November 15, 1999. (4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 14, 2000. + Portions of these exhibits have been omitted pursuant to requests for confidential treatment.