Amendment No. 5 to the Callidus Software Form S-1

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

We are selling 5,000,000 shares of our common stock. We have granted the underwriters an option to purchase up to 750,000 additional shares of common stock to cover over-allotments.

This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $12.00 and $14.00 per share. We have applied to have the common stock included for quotation on the Nasdaq National Market under the symbol “CALD.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Enterprise Incentive Management Solutions

Aligning Employee, Sales and Channel Incentives with Corporate Strategy and Shareholder Value.

Solutions for the Strategic Enterprise™

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Until , 2003 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully before making an investment decision, including the “Risk Factors” section and the consolidated financial statements and the notes to those statements.

We are a leading provider of Enterprise Incentive Management (EIM) software systems to global companies across multiple industries. Large enterprises use EIM systems to model, administer, analyze and report on incentive compensation, or “pay-for-performance,” plans, which compensate employees and business partners for the achievement of targeted quantitative and qualitative objectives, such as sales quotas, product development milestones and customer satisfaction. We provide a suite of software products that enable companies to access applicable transaction data, allocate compensation credit to appropriate employees and business partners, determine relevant compensation measurements, payment amounts and timing, and accurately report on compensation results. By facilitating effective management of complex pay-for-performance programs, our products allow our customers to increase productivity, improve profitability and achieve competitive advantage. Our product suite is based on our proprietary technology and extensive expertise in pay-for-performance programs and provides the flexibility and scalability required to meet the dynamic EIM requirements of large, complex businesses across multiple industries. Our installed base of over 75 active customers includes industry leaders in the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries, such as Allstate, J.P. Morgan Chase & Co., AT&T Wireless, DIRECTV and Apple Computer.

While pay-for-performance programs are increasingly recognized as important management tools for companies, the administration of pay-for-performance programs presents complex challenges due to the large numbers of potential payees, compensation transactions, incentive programs and corporate policies involved. For large and complex pay-for-performance programs, these payments can represent millions of separate calculations per pay period, with total payouts ranging from approximately $100 million to over $1 billion annually. Currently, the majority of large businesses administer these programs using manual methods or internally developed solutions that do not adequately address these challenges. Failure to effectively meet these challenges erodes the effectiveness of incentive compensation, impairs management’s ability to adapt pay-for-performance programs to changing corporate objectives and results in costly errors. We believe that large enterprises are increasingly seeking dedicated EIM solutions to manage their pay-for-performance programs and, as a result, that the EIM market represents a substantial new market opportunity. However, the development of the EIM market will depend upon the extent to which large companies determine that the management of pay-for-performance programs warrants the purchase of externally-developed specialized software solutions. As a result, the market for dedicated and specialized EIM systems is currently small, newly emerging and difficult to measure and it may not achieve the growth we anticipate.

We develop, market, install and support a suite of EIM products to address the complex challenges of pay-for-performance programs for large enterprises. Our software products are designed to be administered using an easily understandable menu of commands, or rules, that allow business users, who are otherwise unfamiliar with computer software programming techniques, to create and manage enterprise incentive compensation plans. We provide a transparent and reliable data resource for enterprises to plan and manage pay-for-performance programs and accurately allocate credit among a wide range of payees. Our product suite allows management to accurately calculate and coordinate the payment of incentive compensation based on a highly flexible and scalable software architecture. In addition, our reporting

product enables management to accurately report incentive compensation results to payees on a timely basis. Our products are designed to enable large enterprises to achieve competitive advantages by ensuring that employees, agents and business partners are focused on achieving sales quotas, development milestones and other targeted business objectives, thereby increasing productivity and driving bottom line results. We believe we provide the most advanced EIM solutions available for three principal reasons:

We Solve Complex Pay-for-Performance Problems. By focusing exclusively on solving the challenges and complexities inherent in pay-for-performance programs, we have developed a suite of EIM products designed to enable timely and accurate planning, calculation and management of variable, salary and management-by-objective (MBO) compensation, as well as dispute resolution, referral tracking and reporting.

We Address Key Industry-Specific Requirements. We believe that extensive knowledge of our customers’ industry-specific incentive compensation programs and requirements, or domain expertise, is critical to designing a successful EIM system. We apply our domain expertise to build specific functionality into our products to address the key requirements of the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries.

We Have Superior Technology. Our products are based on our proprietary rules-based software and run on our grid computing architecture, which enables customers to increase computing performance by harnessing a virtually unlimited number of processors within the enterprise. We believe this technology differentiates our products and offers superior performance, scalability and flexibility in an easy-to-use and reliable system, resulting in a lower total cost of ownership than manual methods and internally developed solutions.

Our objective is to extend our leadership position in the EIM market for large businesses. To achieve this goal we are pursuing the following strategies:

Capitalize on Our Technological Leadership. We intend to leverage our six years of experience in the EIM market and our technological leadership by continuing to invest in research and development to expand our product line and increase our products’ functionality, and thereby to capitalize on the EIM market opportunity.

Continue Our Industry-Specific Focus and Develop Additional Referenceable Accounts. Our domain expertise enables our products to offer industry-specific advantages in functionality, implementation and deployment for our five key markets and allows us to achieve greater efficiency and effectiveness in our sales, marketing and product development efforts. We intend to add industry leaders as customers in each of our key markets and to leverage these referenceable accounts to increase penetration of these markets.

Increase the Industry-Specific Modeling and Analytic Capabilities of Our Products. We are developing new products and product enhancements to provide customers with more extensive industry-specific modeling and analytic capabilities required in increasingly competitive marketplaces.

Continue to Build Loyalty Through Superior Customer Care. As we grow our installed base, we intend to increase our investment in customer care to further strengthen customer loyalty and referenceability.

We were incorporated in Delaware as TallyUp Software Inc. in 1996 and changed our name to Callidus Software Inc. in 1997. Our principal executive offices are located at 160 West Santa Clara Street, Suite 1500, San Jose, California 95113 and our telephone number is (408) 808-6400. Our website address is http://www.callidussoftware.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

The number of shares to be outstanding after the offering is based on 17,488,261 shares outstanding on September 30, 2003 and excludes:


	•	5,297,034 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.95 per share as of September 30, 2003 (of which an aggregate of 70,500 shares subject to options held by two of our executive officers will become vested and exercisable as a result of the consummation of this offering);

	•	843,197 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.63 per share as of September 30, 2003; and

	•	3,697,588 shares of common stock available for future issuance under our various stock plans, plus the annual increases in the number of shares authorized under each of our stock plans beginning July 1, 2004.


	•	gives effect to a 3-for-5 reverse split of our common stock effected on November 6, 2003 and the conversion of all of our outstanding preferred stock into common stock effective upon the consummation of this offering; and

	•	assumes no exercise by the underwriters of their option to purchase 750,000 additional shares of our common stock in this offering.

The following table sets forth a summary of our consolidated financial data for the periods presented. This summary consolidated financial data should be read together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes contained elsewhere in this prospectus. The consolidated balance sheet data is set forth as of September 30, 2003 both on an actual basis and on an as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $13.00 per share. See “Use of Proceeds” and “Capitalization.”

An investment in our common stock involves a high degree of risk. You should consider the risks described below carefully and all of the information contained in this prospectus before deciding whether to purchase our common stock. If any of the adverse events described in the following risk factors actually occurs, our business, financial condition and results of operations may suffer significantly. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock.

We have a history of losses, and we cannot assure you that we will achieve or sustain profitability. If we fail to do so, our stock price may decline.

We incurred net losses of $25.4 million for 2000, $20.8 million for 2001 and $19.1 million for 2002. Taking account of the $2.6 million of stock-based compensation we recorded in the first nine months of 2003, we recorded net income of approximately $171,000 in the nine months ended September 30, 2003. After this offering, we expect to significantly increase our expenses in the near term in order to expand our business. In addition, based on stock options granted through September 30, 2003, we expect to amortize an aggregate of $1.9 million and $5.9 million of deferred stock-based compensation in the three months ending December 31, 2003 and in 2004, respectively. We expect that these increased operating expenses and amortization charges will result in a net loss for the quarter and year ending December 31, 2003. In addition, these increased expenses and charges will adversely affect our future operating results and may result in or contribute to net losses in future periods. We cannot assure you that we will be able to achieve or sustain profitability on a quarterly or annual basis. Our results of operations will be harmed if our revenues do not increase at a rate equal to or greater than increases in our expenses or if our revenues are insufficient for us to achieve or sustain profitability. If we are not able to achieve or sustain profitability, our stock price may decline and we may require additional financing, which may not be available.

Our quarterly revenues and operating results can be difficult to predict and can fluctuate substantially, which may harm our results of operations.

Our revenues, particularly our license revenues, are difficult to forecast and are likely to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside of our control. These factors include:


	•	Competitive conditions in our industry, including new products, product announcements and special pricing offered by our competitors;

	•	varying size, timing and contractual terms of orders for our products, which may delay the recognition of revenues;

	•	the discretionary nature of our customers’ purchase and budget cycles and changes in their budgets for software and related purchases;

	•	strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

	•	our ability to timely complete our service obligations related to product sales;

	•	general weakening of the economy resulting in a decrease in the overall demand for computer software and services;

	•	the utilization rate of our professional services personnel and the degree to which we use third-party consulting services;

	•	changes in our pricing policies;

	•	timing of product development and new product initiatives;


	•	our ability to hire, train and retain sufficient sales and professional services staff; and

	•	changes in the mix of revenues attributable to higher-margin product license revenues as opposed to substantially lower-margin service revenues.

In addition, we make assumptions and estimates as to the timing and amount of future revenues in budgeting our future operating costs and capital expenditures. Specifically, our sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transactions. We aggregate these estimates periodically to generate our sales forecasts and then evaluate the forecasts to identify trends in our business. Because our costs are relatively fixed in the short term and a substantial portion of our license revenue contracts are completed in the latter part of a quarter, we may be unable to reduce our expenses to avoid or minimize the negative impact on our quarterly results of operations if our estimates prove inaccurate and our anticipated revenues are not realized. As a result, our quarterly results of operations could be worse than anticipated, which could adversely affect our stock price.

Our quarterly license revenues are dependent on a relatively small number of transactions involving sales of our products to new customers, and any delay or failure in closing one or more of these transactions could adversely affect our results of operations.

Our quarterly license revenues are dependent upon a relatively small number of transactions involving sales of our products to new customers, and to date recurring license revenues from existing customers have not comprised a substantial part of our revenues. As such, even minor variations in the rate and timing of conversion of our sales prospects into revenues could result in our failure to meet revenue objectives in future periods. In addition, based upon the terms of our customer contracts, we recognize the bulk of our license revenues for a given sale either at the time we enter into the agreement and deliver the product, or over the period in which we perform any services that are essential to the functionality of the product. Unexpected changes in contractual terms late in the negotiation process or changes in the mix of contracts we enter into could therefore materially and adversely affect our license revenues in a quarter. Delays or reductions in the amount of customers’ purchases would adversely affect our revenues, results of operations and financial condition and could cause our stock price to decline.

Our products have long sales cycles, which make it difficult to plan our expenses and forecast our results.

The sales cycles for our products are generally between six and nine months for the majority of our sales, and in some cases can be a year or longer. It is therefore difficult to predict the quarter in which a particular sale will occur and to plan our expenditures accordingly. The period between our initial contact with a potential customer and its purchase of our products and services is relatively long due to several factors, including:


	•	The complex nature of our products;

	•	the need to educate potential customers about the uses and benefits of our products;

	•	the requirement that a potential customer invest significant resources in connection with the purchase and implementation of our products;

	•	budget cycles of our potential customers that affect the timing of purchases;

	•	customer requirements for competitive evaluation and internal approval before purchasing our products;

	•	potential delays of purchases due to announcements or planned introductions of new products by us or our competitors; and

	•	the lengthy approval processes of our potential customers, many of which are large organizations.

The delay or failure to complete sales in a particular quarter would reduce our revenues in that quarter, as well as any subsequent quarters over which revenues for the sale would likely be recognized. If

Managing large-scale deployments of our products requires substantial technical implementation and support by us or third-party service providers. Failure to meet these requirements could cause a decline or delay in recognition of our revenues and an increase in our expenses.

Our customers may require large, enterprise-wide deployments of our products, which require a substantial degree of technical implementation and support. It may be difficult for us to manage the timeliness of these deployments and the allocation of personnel and resources by us or our customers. Failure to successfully manage this process could harm our reputation and cause us to lose existing customers, face potential customer disputes or limit the number of new customers that purchase our products, which could adversely affect our revenues and increase our technical support and litigation costs.

Our software license customers have the option to receive implementation, maintenance, training and consulting services from our internal professional services organization or from outside consulting organizations. If we are unable to expand our internal professional services organization to keep pace with sales, we will be required to increase our use of third-party service providers to help meet our implementation and service obligations. If we require a greater number of third-party service providers than we currently have available, we will be required to negotiate additional arrangements, which may result in lower gross margins for maintenance or service revenues.

If a customer selects a third-party implementation service provider and such implementation services are not provided successfully and in a timely manner, our customers may experience increased costs and errors, which may result in customer dissatisfaction and costly remediation and litigation, any of which could adversely impact our operating results and financial condition.

Our success depends upon our ability to develop new products and enhance our existing products. Failure to successfully introduce new or enhanced products to the market may adversely affect our operating results.


	•	Rapid technological advances in hardware and software development;

	•	evolving standards in computer hardware, software technology and communications infrastructure;

	•	changing customer needs; and

	•	frequent new product introductions and enhancements.

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance, we must enhance and improve existing products and we must also continue to introduce new products and services. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results. Further, any new products we develop may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to successfully develop new products or enhance and improve our existing products or if we fail to position and/or price our products to meet market demand, our business and operating results will be adversely affected.

A substantial majority of our revenues are derived from TrueComp and related products and services and a decline in sales of these products and services could adversely affect our operating results and financial condition.

We derive a substantial majority of our revenues from TrueComp and related products and services, and revenues from these products and services are expected to continue to account for a substantial majority of our revenues for the foreseeable future. Because we generally sell licenses to our products on a perpetual basis and deliver new versions and enhancements to customers who purchase maintenance contracts, our future license revenues are substantially dependent on sales to new customers. In addition,

substantially all of our TrueInformation product sales have historically been made in connection with TrueComp sales. As a result of these factors, we are particularly vulnerable to fluctuations in demand for TrueComp. Accordingly, if demand for TrueComp and related products and services declines significantly, our business and operating results would be adversely affected.

Errors in our products could affect our reputation, result in significant costs to us and impair our ability to sell our products.

Our products are complex and, accordingly, they may contain errors, or “bugs,” that could be detected at any point in their product life cycle. Errors in our products could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. Customers relying on our products to calculate and pay incentive compensation may have a greater sensitivity to product errors and security vulnerabilities than customers for software products in general. The costs incurred in correcting any product errors may be substantial and would adversely affect our operating margins. While we plan to continually test our products for errors and work with customers through our customer support services organization to identify and correct bugs, errors in our products may be found in the future.

Because our customers depend on our software for their critical business functions, any interruptions could result in:


	•	Lost or delayed market acceptance and sales of our products;

	•	product liability suits against us;

	•	lost sales revenues;

	•	diversion of development resources;

	•	injury to our reputation; and

	•	increased service and warranty costs.

While our software license agreements typically contain limitations and disclaimers that purport to limit our liability for damages for errors in our software, such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.

If we do not compete effectively with companies selling EIM software, our revenues may not grow and could decline.

We have experienced, and expect to continue to experience, intense competition from a number of software companies. We compete principally with vendors of EIM software, such as Centive, Motiva (which was recently acquired by Siebel Systems) and Synygy, vendors of enterprise resource planning software, such as Oracle, PeopleSoft and SAP, and vendors of customer relationship management software, such as Siebel Systems. Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

Many of our competitors and potential competitors have significantly greater financial, technical, marketing, service and other resources than we have. Many of these companies also have a larger installed base of users, have longer operating histories or have greater name recognition than we have. Some of our competitors’ products may be more effective than our products at performing particular EIM system functions or may be more customized for particular customer needs in a given market. Even if our competitors provide products with more limited EIM system functionality than our products, these products may incorporate other capabilities, such as recording and accounting for transactions, customer orders or inventory management data. A product that performs these functions, as well as some of the functions of our software solutions, may be appealing to some customers because it would reduce the

Our products must be integrated with software provided by a number of our existing or potential competitors. These competitors could alter their products in ways that inhibit integration with our products, or they could deny or delay access by us to advance software releases, which would restrict our ability to adapt our products to facilitate integration with these new releases and could result in lost sales opportunities.

If we are required to change our pricing models to compete successfully, our margins and operating results will be adversely affected.

The intensely competitive market in which we do business may require us to reduce our prices. If our competitors offer deep discounts on certain products or services in an effort to recapture or gain market share or to sell other software or hardware products, we may be required to lower prices or offer other favorable terms to compete successfully. Any such changes would be likely to reduce our margins and could adversely affect our operating results. Some of our competitors may bundle software products that compete with ours for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the number of sales or with lower spending, then the reduced revenues resulting from lower prices would adversely affect our margins and operating results.

Potential customers that outsource their technology projects offshore may come to expect lower rates for professional services than we are able to provide profitably, which could impair our ability to win customers and achieve profitability.

Many of our potential customers have begun to outsource technology projects offshore to take advantage of lower labor costs, and we believe that this trend will continue. Due to the lower labor costs in some countries, these customers may demand lower hourly rates for the professional services we provide, which may erode our margins for our maintenance and service revenues or result in lost business.

Our maintenance and service revenues produce substantially lower gross margins than our license revenues, and an increase in service revenues relative to license revenues would harm our overall gross margins.

Our maintenance and service revenues, which include fees for consulting, implementation, maintenance and training, were 46% of our revenues for the nine months ended September 30, 2003 and 63% of our revenues for 2002. Our maintenance and service revenues have substantially lower gross margins than our license revenues. An increase in the percentage of total revenues represented by maintenance and service revenues would adversely affect our overall gross margins.

Maintenance and service revenues as a percentage of total revenues have varied significantly from quarter to quarter due to fluctuations in licensing revenues, economic changes, change in the average selling prices for our products and services, our customers’ acceptance of our products and our sales force execution. In addition, the volume and profitability of services can depend in large part upon:


	•	Competitive pricing pressure on the rates that we can charge for our professional services;

	•	the complexity of the customers’ information technology environment;

	•	the resources directed by customers to their implementation projects; and

	•	the extent to which outside consulting organizations provide services directly to customers.

Any erosion of our margins for our maintenance and service revenues, or any adverse changes in the mix of our license versus maintenance and service revenues would adversely affect our operating results.

We will not be able to maintain our sales growth if we do not attract, train or retain qualified sales personnel.

We depend on our direct sales force for most of our sales and have made significant expenditures in recent years to expand our sales force. Our future success will depend in part upon the continued expansion and increased productivity of our sales force. To the extent we experience attrition in our direct sales force, we will need to hire replacements. We face intense competition for sales personnel in the software industry, and we cannot be sure that we will be successful in hiring, training or retaining these personnel in accordance with our plans. Even if we hire and train a sufficient number of sales personnel, we cannot be sure that we will generate enough additional revenues to exceed the cost of the new personnel. If we fail to successfully maintain and expand our sales force, our future sales will be adversely affected.

We may lose sales opportunities and our business may be harmed if we do not successfully develop and maintain strategic relationships to implement and sell our products.

We have relationships with third-party consulting firms, systems integrators and software vendors. These third parties may provide us with customer referrals, cooperate with us in marketing our products and provide our customers with systems implementation services or overall program management. However, we do not have formal agreements governing our ongoing relationship with certain of these third-party providers and the agreements we do have generally do not include obligations with respect to generating sales opportunities or cooperating on future business. Should any of these third parties go out of business or choose not to work with us, we may be forced to increase the development of those capabilities internally, incurring significant expense and adversely affecting our operating margins. Any of our third-party providers may offer products of other companies, including products that compete with our products. We could lose sales opportunities if we fail to work effectively with these parties or they choose not to work with us.

Acquisitions and investments present many risks, and we may not realize the anticipated financial and strategic goals for any such transactions.

We may in the future acquire or make investments in complementary companies, products, services and technologies. Such acquisitions and investments involve a number of risks, including:


	•	We may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;

	•	we may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

	•	we may have difficulty incorporating the acquired technologies or products with our existing product lines;

	•	there may be customer confusion where our products overlap with those of the acquired company;

	•	we may have product liability associated with the sale of the acquired company’s products;

	•	our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;

	•	we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

	•	the acquisition may result in litigation from terminated employees or third-parties; and

	•	we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an investment or acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including proceeds of this offering, to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as of acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

For our business to succeed, we need to attract, train and retain qualified employees and manage our employee base effectively. Failure to do so may adversely affect our operating results.

Our success depends on our ability to hire, train and retain qualified employees and to manage our employee base effectively. Competition for qualified personnel is intense, particularly in the San Francisco Bay area where our headquarters are located, and the high cost of living increases our recruiting and compensation costs. We cannot assure you that we will be successful in hiring, training or retaining qualified personnel. If we are unable to do so, our business and operating results will be adversely affected.

We have recently experienced changes in our senior management team and the loss of key personnel or any inability of these personnel to perform in their new roles could adversely affect our business.

In September 2002, we hired Ronald J. Fior as our Chief Financial Officer and in June 2003, we hired Bertram W. Rankin as our Senior Vice President of Worldwide Marketing. Prior to joining Callidus, Mr. Fior served as Chief Financial Officer of Remedy Corporation from 1998 until its acquisition by Peregrine Systems in 2001. As a result of Peregrine’s subsequent financial restatements and bankruptcy case, Mr. Fior and the former officers and directors of Remedy have become involved in litigation both as plaintiffs against the former board and management of Peregrine for fraud and as defendants against former Remedy stockholders in relation to the sale of Remedy to Peregrine. While these cases do not allege any impropriety with respect to Remedy’s financial statements and Mr. Fior believes the litigation pending against him is without merit, these matters could nonetheless require significant amounts of Mr. Fior’s attention, which could distract him from his responsibilities with Callidus. In addition, we continue to recruit senior management personnel to support our growing operations. Our success will depend to a significant extent on our ability to assimilate these changes in our leadership team and to retain the services of our executive officers, including Reed D. Taussig, our President and Chief Executive Officer, and our other key employees. If we lose the services of one or more of our executives or key employees, if we fail to successfully assimilate our recent changes in our management team or if one or more of our executives or key employees decides to join a competitor or otherwise compete directly or indirectly with us, this could harm our business and could affect our ability to successfully implement our business plan.

If we fail to adequately protect our proprietary rights and intellectual property, we may lose valuable assets, experience reduced revenues and incur costly litigation to protect our rights.

We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and

services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent that we engage in international activities, our exposure to unauthorized copying and use of our products and proprietary information will increase.

We enter into confidentiality or license agreements with our employees and consultants and with the customers and corporations with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

Our results of operations may be adversely affected if we are subject to a protracted infringement claim or one that results in a significant damage award.

From time to time, we receive claims that our products or business infringe or misappropriate the intellectual property of third parties. Our competitors or other third parties may challenge the validity or scope of our intellectual property rights. We believe that software developers will be increasingly subject to claims of infringement as the functionality of products in our market overlaps. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:


	•	Require costly litigation to resolve;

	•	absorb significant management time;

	•	cause us to enter into unfavorable royalty or license agreements;

	•	require us to discontinue the sale of our products;

	•	require us to indemnify our customers or third-party systems integrators; or

	•	require us to expend additional development resources to redesign our products.

We may also be required to indemnify our customers and third-party systems integrators for third-party products that are incorporated into our products and that infringe the intellectual property rights of others. Although many of these third parties are obligated to indemnify us if their products infringe the rights of others, this indemnification may not be adequate.

In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Any of this litigation could be costly for us to defend, have a negative effect on our results of operations and financial condition or require us to devote additional research and development resources to change our products.

We depend on technology of third parties licensed to us for our TruePerformance product, our rules engine and the analytics and web viewer functionality for our products and the loss or inability to maintain these licenses or errors in such software could result in increased costs or delayed sales of our products.

We distribute our TruePerformance product under license from Cézanne Software, the developer of the product. In addition, we license technology from several software providers for our rules engine, analytics and web viewer. We anticipate that we will continue to license technology from third parties in the future. This software may not continue to be available on commercially reasonable terms, if at all.

Some of the products we license from third parties could be difficult to replace, and implementing new software with our products could require six months or more of design and engineering work. The loss of any of these technology licenses could result in delays in the license of our products until equivalent technology, if available, is developed or identified, licensed and integrated. In addition, our products depend upon the successful operation of third-party products in conjunction with our products, and therefore any undetected errors in these products could prevent the implementation or impair the functionality of our products, delay new product introductions and/or injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which could result in higher royalty payments and a loss of product differentiation.

Our revenues might be harmed by resistance to adoption of our software by information technology departments.

Some potential customers may have already made a substantial investment in other third-party or internally developed software designed to model, administer, analyze and report on pay-for-performance programs. These companies may be reluctant to abandon these investments in favor of our software. In addition, information technology departments of potential customers may resist purchasing our software 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. If the market for our products does not grow for any of these reasons, our revenues may be harmed.

Our inability to manage growth could affect our business adversely and harm our ability to sustain profitability.

To support our growth plans, we need to expand our existing management, operational, financial, human resources, customer service and management information systems and controls. This expansion will require significant capital expenditures and may divert our financial resources from other projects such as the development of new products or product upgrades. We may be unable to expand these systems and to manage our growth successfully, and this inability would adversely affect our business.

Mergers of or other strategic transactions by our competitors could weaken our competitive position or reduce our revenues.

If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. For example, Siebel Systems recently announced that it has acquired Motiva, which may result in substantial new investment by Siebel Systems in products that compete with ours. Our competitors may also establish or strengthen cooperative relationships with our current or future systems integrators, third-party compensation consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our products and limiting the number of consultants available to implement our software. Disruptions in our business caused by these events could reduce our revenues.

If we are required or elect to account for employee stock option and employee stock purchase plans using the fair value method, it could significantly increase our net loss and net loss per share.

There has been ongoing public debate about whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such compensation. If we elect or are required to record an expense for our stock-based compensation plans using the fair value method, we could have significant additional compensation expense. For example, if we had historically accounted for stock-based compensation plans using the fair value method prescribed in Financial Accounting Standards Board Statement 123 as amended by Statement 148, in 2002 we would have recorded approximately $547,000 in additional expenses, and our basic and diluted loss per share would have been increased by $0.40 per share. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise

price at or above fair value at the grant date or for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as an expense using the fair value method. See Notes 1 and 5 of our consolidated financial statements and our discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies and Use of Estimates” for a more detailed presentation of our accounting for stock-based compensation.

We may expand our international sales efforts but do not have substantial experience in international markets, and may not achieve the expected results.

We may expand our international operations, and any such expansion would require substantial financial resources and a significant amount of attention from our management. International operations involve a variety of risks, particularly:


	•	Unexpected changes in regulatory requirements, taxes, trade laws and tariffs;

	•	differing ability to protect our intellectual property rights;

	•	differing labor regulations;

	•	greater difficulty in supporting and localizing our products;

	•	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.

We have limited experience in marketing, selling and supporting our products and services abroad. If we invest substantial time and resources in order to grow our international operations and are unable to do so successfully and in a timely manner, our business and operating results could be seriously harmed.

Our business communications, infrastructure and facilities are vulnerable to damage from human error, physical or electronic security breaches, power loss and other utility failures, fire, earthquake, flood, sabotage, vandalism and similar events. Although the source code for our software products is held by escrow agents outside of the San Francisco Bay area, our internal-use software and back-up are both located in the San Francisco Bay area. If a natural or man-made disaster were to hit this area, we may lose all of our internal-use software data. Despite precautions, a natural disaster or other incident could result in interruptions in our service or significant damage to our infrastructure. In addition, failure of any of our telecommunications providers could result in interruptions in our services and disruption of our business operations. Any of the foregoing could impact our provision of services and fulfillment of product orders, and our ability to process product orders and invoices and otherwise timely conduct our business operations.

Because some existing stockholders will together beneficially own 75% of our outstanding stock after this offering, the voting power of other stockholders, including purchasers in this offering, will be effectively limited.

After this offering, it is anticipated that, based on share ownership as of September 30, 2003 (including shares issuable upon exercise of outstanding options and warrants exercisable within 60 days of September 30, 2003), our officers, directors, major stockholders and their affiliates will beneficially own or control, directly or indirectly, 18,352,979 shares of common stock, which in the aggregate will represent approximately 75% of the outstanding shares of common stock (or 72% if the underwriters’ over-allotment option is exercised in full). As a result, if some of these persons or entities act together, they will have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business

combination. This may delay or prevent an acquisition or cause the market price of our stock to decline. Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a relatively longer period, they may be more interested in selling the Company to an acquiror than other investors or may want us to pursue strategies that are different from the wishes of other investors.

A substantial number of shares will be eligible for sale in the near future, which could cause our common stock price to decline significantly.

Additional sales of our common stock in the public market after this offering, or the perception that such sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have 22,488,261 shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants. See “Summary — The Offering” for a detailed discussion of shares included and excluded from this number. The 5,000,000 shares to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933. Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters that restrict their ability to transfer their stock for 180 days from the date of this prospectus. For a description of these agreements, see “Underwriting.” After the lock-up agreements expire, an aggregate of approximately 17,488,261 additional shares will be eligible for sale in the public market, subject in most cases to the limitations of either Rule 144 or Rule 701 under the Securities Act. See “Shares Eligible for Future Sale.”

In addition, Citigroup, on behalf of the underwriters, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements, which would result in more shares being available for sale in the public market at earlier dates. Sales of common stock by existing stockholders in the public market, the availability of these shares for sale, our issuance of securities or the perception that any of these events might occur could materially and adversely affect the market price of our common stock.

There has been no prior public market for our common stock. Our stock price is likely to be volatile and could decline following this offering, resulting in a substantial loss on your investment.

Prior to this offering, there has not been a public market for our common stock. An active trading market for our common stock may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. In addition, the initial public offering price has been determined through negotiations between us and the representatives of the underwriters and may bear no relationship to the price at which the common stock will trade upon completion of this offering. The stock market in general, and the market for technology-related stocks in particular, has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this prospectus and others such as:


	•	Our operating performance and the performance of other similar companies;

	•	developments with respect to intellectual property rights;

	•	publication of research reports about us or our industry by securities analysts;

	•	speculation in the press or investment community;

	•	terrorist acts; and

	•	announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments.

As a new investor, you will incur substantial dilution as a result of this offering.

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $10.18 per share, assuming an initial public offering price of $13.00 per share, and new investors will own 22% of our outstanding common stock. This dilution is due in large part to earlier investors having generally paid substantially less than the initial public offering price when they purchased their shares. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors. Assuming the exercise in full of all of our outstanding employee stock options and warrants as of September 30, 2003, investors purchasing common stock in this offering would incur immediate dilution of a total of $10.32 per share, assuming an initial public offering price of $13.00 per share, and would own 17% of our outstanding common stock. In addition, as a result of this offering, the vesting of an aggregate of 70,500 shares subject to options granted to our Chief Executive Officer, Reed Taussig, and our Senior Vice President, Research and Development, Robert Warfield, will accelerate. These shares may be purchased at a weighted average exercise price of $0.91, and would be worth an aggregate of approximately $917,000 based on an assumed initial public offering price of $13.00 per share. See the section entitled “Dilution” elsewhere in this prospectus.

Because we do not intend to pay dividends, you will not receive funds without selling shares and depending on when you sell your shares, you may lose the entire amount of your investment.

We have never declared or paid any cash dividends on our capital stock and do not intend to pay cash dividends in the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any proceeds in respect of your stock prior to selling it. We also cannot assure you that you will receive a return on your investment when you do sell your shares or that you will not lose the entire amount of your investment.

Our management has broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.

Our management could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return. We plan to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies. Until we use the proceeds of this offering, we plan to invest the net proceeds in interest-bearing, investment-grade securities, which may not yield a favorable rate of return. If we do not invest or apply the proceeds of this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline, and we may require additional financing, which may not be available.

We expect that the net proceeds from this offering, together with our other capital resources, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to:


	•	Develop enhancements and additional features for our products;

	•	develop new products and services;

	•	hire, train and retain employees;

	•	enhance our infrastructure;

	•	respond to competitive pressures or unanticipated requirements;

	•	pursue international expansion;

If any of the foregoing consequences occur, our stock price may fall and you may lose some or all of your investment.

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential acquiror were to make a hostile bid for us, the acquiror would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. The acquiror would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and will not be able to cumulate votes at a meeting, which will require the acquiror to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.

Our board of directors also has the ability to issue preferred stock that could significantly dilute the ownership of a hostile acquiror. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.

Our board of directors could choose not to negotiate with an acquiror that it did not believe was in our strategic interests. If an acquiror is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, you could lose the opportunity to sell your shares at a favorable price.

We have made statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We undertake no obligation to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

We estimate that the net proceeds from the sale of 5,000,000 shares of common stock by us in this offering will be approximately $57.7 million ($66.8 million if the underwriters’ over-allotment option is exercised in full) based on an assumed initial public offering price of $13.00 per share and after deducting underwriting discounts and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional working capital, establish a public market for our common stock, facilitate our future access to public capital markets and demonstrate increased financial stability to potential customers. We have not undertaken any evaluations or studies regarding specific application of the net proceeds of this offering. While we have not identified specific allocations for applying the net proceeds from this offering, we currently expect to use these proceeds for general corporate purposes, including expansion of our sales and marketing and research and development efforts, working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies. We have no present commitments or agreements with respect to any acquisition or investment. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. Our management will retain broad discretion in the allocation of the net proceeds of this offering. The amounts we actually spend will depend on a number of factors, including the amount of our future revenues and other factors described elsewhere in this prospectus.

We have never declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Callidus Software®, the Callidus Software logo and TrueComp® are registered trademarks of Callidus Software and TruePerformance^TM, TrueComp Grid^TM, TrueComp Manager^TM, TrueInformation^TM, TrueIntegration^TM, TrueResolution^TM and TrueReferral^TM are unregistered trademarks of Callidus Software. All trademarks, service marks and trade names of other companies that appear in this prospectus are the property of their respective holders.

The following table sets forth our cash and cash equivalents, bank line of credit and capitalization as of September 30, 2003 on an actual basis and as adjusted to reflect our receipt of the estimated net proceeds from the sale of 5,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $13.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. This table gives effect to a planned increase in the number of authorized shares of common stock, which will be effected in an amendment to our certificate of incorporation that will be effective upon the consummation of this offering and, in the case of the as adjusted data, the conversion of all of our outstanding shares of preferred stock into common stock effective upon the consummation of this offering. You should read this table along with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.


	•	5,297,034 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.95 per share as of September 30, 2003;

	•	843,197 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.63 per share as of September 30, 2003; and

	•	3,697,588 shares of common stock available for future issuance under our various stock plans, plus the annual increases in the number of shares authorized under each of our stock plans beginning July 1, 2004.

Options to purchase 1,780,396 shares of our common stock at a weighted average exercise price per share of $2.05 are fully vested and exercisable as of September 30, 2003.

Our pro forma net tangible book value as of September 30, 2003 was approximately $5.8 million, or approximately $0.33 per share. Pro forma net tangible book value per share represents the amount of our total assets reduced by the amount of our total liabilities and divided by the total number of shares of common stock outstanding, after giving effect to the automatic conversion of our preferred stock into common stock upon consummation of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the 5,000,000 shares of common stock offered by us at an assumed initial public offering price of $13.00 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2003 would have been approximately $63.5 million, or $2.82 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $2.49 per share to existing stockholders and an immediate dilution of $10.18 per share to new investors purchasing shares of our common stock at the initial public offering price. The following table illustrates this dilution on a per share basis:

Dilution is determined by subtracting pro forma net tangible book value per share after the offering from the initial public offering price per share.

The following table sets forth, on a pro forma basis, as of September 30, 2003, the number of shares of common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $13.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

If the underwriters exercise their over-allotment option in full, the percentage of shares held by existing stockholders will decrease to 75% of the total shares outstanding, and the number of shares held by new investors will increase to 5,750,000, or 25% of the total shares outstanding.

The foregoing discussion and tables are based upon the number of shares issued and outstanding on September 30, 2003 and assume no exercise of options and warrants outstanding as of September 30, 2003. As of that date, there were 5,297,034 shares of our common stock issuable upon exercise of options outstanding at a weighted average exercise price of $1.95 per share and 843,197 shares of our common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $3.63 per share. Assuming the exercise in full of all the outstanding options and warrants, as adjusted net tangible book value as of September 30, 2003 would be $2.68 per share, representing an immediate increase in the net tangible book value of $2.35 per share to our existing stockholders and an immediate decrease in the net tangible book value of $10.32 per share to purchasers of our common shares in this offering.

The selected consolidated financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. We have derived the consolidated statement of operations data for the years ended December 31, 2000, 2001 and 2002 and the nine months ended September 30, 2003 and the consolidated balance sheet data as of December 31, 2001 and 2002 and September 30, 2003 from the audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998, 1999 and 2000 were derived from the audited consolidated financial statements that are not included in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2002 were derived from the unaudited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected for future periods and interim results are not necessarily indicative of results for the entire year.

The following information should be read together with our consolidated financial statements, including the notes thereto, and other information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties.

We are a leading provider of Enterprise Incentive Management (EIM) software systems to global companies across multiple industries. Large enterprises use EIM systems to model, administer, analyze and report on incentive compensation, or pay-for-performance, plans, which compensate employees and business partners for the achievement of targeted quantitative and qualitative objectives, such as sales quotas, product development milestones and customer satisfaction. We provide a suite of software products that enable companies to access applicable transaction data, allocate compensation credit to appropriate employees and business partners, determine relevant compensation measurements, payment amounts and timing, and accurately report on compensation results. By facilitating effective management of complex pay-for-performance programs, our products allow our customers to increase productivity, improve profitability and achieve competitive advantage. Our product suite is based on our proprietary technology and extensive expertise of pay-for-performance programs and provides the flexibility and scalability required to meet the dynamic EIM requirements of large, complex businesses across multiple industries.

We were incorporated in 1996, and began selling our first product, TrueComp, in mid-1999. In 2000, the first full year of TrueComp sales, our license revenues grew to $8.9 million, total revenues grew to $22.2 million and we incurred a net loss of $25.4 million. At the same time, we grew our organization to a total of 180 personnel, largely in anticipation of future revenue growth. In 2001, license revenue growth was adversely affected by the general reduction in IT spending resulting from the economic downturn in the United States and the September 11 terrorist attacks, and we experienced a year-over-year decline in license revenues of 23% to $6.9 million. This decline was offset in 2001 by growth in our maintenance and service revenues, such that overall revenues grew by 3% and our net loss decreased by 18% to $20.8 million in 2001 compared to 2000. In 2002, license revenues grew by 43% to $9.8 million and total revenues grew by 16% to $26.6 million and our net loss decreased 8% to $19.1 million, compared to 2001. Since the second quarter of 2002, our quarterly license revenues have grown by comparison to the prior year period for six consecutive quarters. For the nine months ended September 30, 2003, we had total revenues of $49.4 million and net income of approximately $171,000. From inception through September 30, 2003, we generated aggregate net losses of $94.4 million.

While pay-for-performance programs have been widely used by large enterprises for years, the market for dedicated and specialized EIM software applications is newly emerging. As a result, and because we sell our products on a perpetual license basis, substantially all of our license and associated services revenues in a quarter are derived from sales to new customers. In addition a substantial majority of our revenues have been, and are likely to continue to be, from licenses, maintenance and services related to our TrueComp product. While no single customer accounted for 10% or more of our revenues in 2000 or 2001, and only two customers, DIRECTV and Sprint, accounted for more than 10% of our revenues for 2002, our quarterly revenues generally depend on large sales of licenses or services to a relatively small number of customers. As such, the failure of the EIM market to develop as anticipated or any decline in sales of our TrueComp product or delay or deferral of any large purchases by any of our customers could materially and adversely affect our revenues and operating results in future quarters.

License Revenues. We generate license revenues from the sale of perpetual licenses to use our products, which we generally price on a per payee basis. In circumstances where third-party systems integrators provide integration and configuration services for deployment of our products, or the integration

and configuration services we are to provide are not deemed essential to the functionality of the related software, we generally recognize all of the license revenues at the time the product has been delivered. In circumstances where we provide integration and configuration services and these services are deemed essential to the functionality of the related software, we recognize the revenues from these licenses on a percent-of-completion basis, with license fees recorded as deferred revenue pending recognition. Because our license revenue recognition differs based on contract terms and customer requirements, our license revenues may vary from period to period depending upon the mix of these arrangements we enter into in such periods. Please refer to “— Application of Critical Accounting Policies and Use of Estimates — Revenue Recognition,” for further information regarding license revenue recognition.

Maintenance and Service Revenues. Maintenance and service revenues consist of sales of maintenance and upgrade rights associated with the sale of software licenses, integration and configuration services and training. We generally sell maintenance on an annual basis and provide customers with the right to receive product enhancements and new versions of the products purchased, as well as technical support. Maintenance revenues are recorded as deferred revenue at the time the associated license is sold or a maintenance renewal is purchased, and are recognized ratably over the term of the maintenance agreement. We derive service revenues when we provide integration, configuration or training services to customers. We price these services on a time-and-materials basis and we generally recognize these revenues when the services are performed. Integration and configuration services often are not started until one to two months after the software license is sold and generally take five to six months to complete; however, some integration and configuration projects can take twelve months or longer depending on the complexity of the project.

Our cost of license revenues consists primarily of third-party royalties. Our cost of maintenance and service revenues consists primarily of salaries, benefits, travel and related overhead for technical support, training and consulting personnel, the cost of subcontractors for professional services and the cost of materials delivered with product enhancements and new releases. Because the cost of maintenance and service revenues is substantially higher, as a percentage of related revenues, than the cost of license revenues, our overall gross margins vary from period to period as a function of the mix of maintenance and service versus license revenues in such periods.

Sales and marketing expenses consist primarily of salaries, benefits and commissions, advertising, referral fees on direct sales, promotional campaigns and materials, travel and other related overhead. To date, all of our research and development expenses have been expensed as incurred, and consist primarily of salaries and benefits, as well as facilities and other related overhead. General and administrative expenses consist primarily of salaries and benefits, as well as finance, accounting, legal and administrative costs and related overhead. Prior to 2002, general and administrative expenses also included amortization of goodwill recorded in connection with our acquisition of The Rob Hand Consulting Group in 1999.

We record deferred stock-based compensation when we grant stock options to employees with an exercise price lower than the deemed fair value of our common stock for financial accounting purposes on the date of grant. Deferred stock-based compensation is then amortized using the accelerated method as outlined in Statement of Financial Interpretations (FIN) 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. At September 30, 2003, we had total deferred stock-based compensation of approximately $11.4 million, which will be amortized over four years from the date of grant of the related options. For the quarter ending December 31, 2003 and for 2004, we expect to amortize approximately $1.9 million and $5.9 million, respectively, of deferred stock-based compensation, based on options issued prior to September 30, 2003.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The application of GAAP requires our management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee. Please refer to Note 1 to the consolidated financial statements for a further description of our accounting policies.

We generate revenues primarily by licensing software and providing maintenance and professional services to our customers. Our software arrangements typically include: (i) an end-user license fee paid in exchange for the use of our products in perpetuity, generally based on a specified number of payees; and (ii) a maintenance arrangement that provides for technical support and product updates, generally over a period of twelve months. If we are selected to provide integration and configuration services, then the software arrangement will also include professional services, generally priced on a time-and-materials basis. Depending upon the elements in the arrangement and the terms of the related agreement, we recognize license revenues under either the residual or the contract accounting method.

Residual Method. License fees are recognized upon delivery when licenses are either sold separately from integration and configuration services, or together with integration and configuration services, provided that (i) the criteria described below have been met, (ii) payment of the license fees is not dependent upon performance of the integration and configuration services, and (iii) the services are not otherwise essential to the functionality of the software. We recognize these license revenues using the residual method pursuant to the requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. Under the residual method, revenues are recognized when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., professional services and maintenance), but does not exist for one or more of the delivered elements in the arrangement (i.e., the software product). Each license arrangement requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each undelivered element.

We allocate revenue to each undelivered element based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. For a certain class of transactions, the fair value of the maintenance portion of our arrangements is based on stated renewal rates. The fair value of the professional services portion of the arrangement is based on the hourly rates that we charge for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items for which

Contract Accounting Method. For arrangements where services are considered essential to the functionality of the software, such as where the payment of the license fees is dependent upon performance of the services, both the license and services revenues are recognized in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We generally use the percentage-of-completion method because we are able to make reasonably dependable estimates relative to contract costs and the extent of progress toward completion. However, if arrangements do not allow us to make reasonably dependable estimates we will use the completed-contract method. If total cost estimates exceed revenues, we accrue for the estimated loss on the arrangement.

For all of our software arrangements, we will not recognize revenue until persuasive evidence of an arrangement exists and delivery has occurred, the fee is fixed or determinable and collection is deemed probable. We evaluate each of these criteria as follows:

Evidence of an Arrangement. We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement.

Delivery. We consider delivery to have occurred when media containing the licensed programs is provided to a common carrier or, in the case of electronic delivery, the customer is given access to the licensed programs. Our typical end-user license agreement does not include customer acceptance provisions.

Fixed or Determinable Fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. We consider payment terms greater than 90 days to be beyond our customary payment terms. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable.

Collection is Deemed Probable. We conduct a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, we defer the revenue and recognize the revenue upon cash collection.

A customer typically prepays maintenance for the first twelve months, and the related revenues are deferred and recognized over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Professional services revenues primarily consist of integration and configuration services related to the installation of our products and training revenues. Our implementation services do not involve customization to, or development of, the underlying software code. Substantially all of our professional services arrangements are on a time-and-materials basis. To the extent we enter into a fixed-fee services contract, a loss will be recognized any time the total estimated project cost exceeds project revenues.

Certain arrangements result in the payment of customer referral fees to third parties that resell our software products. In these arrangements, license revenues are recorded, net of such referral fees, at the time the software license has been delivered to a third-party reseller and an end-user customer has been identified. To the extent a referral fee is paid to a third party when we sell directly to the end-user, the referral fee is recorded as a selling expense.

In arrangements where we purchase a third party’s products or services and sell products or services to the same party within a relatively short time period, we account for such concurrent arrangements in accordance with APB Opinion No. 29, Accounting for Nonmonetary Transactions, Emerging Issues Task Force 86-29, Nonmonetary Transactions: Magnitude of Boot and the Exception to the Use of Fair Value and the American Institute of Certified Public Accountants Technical Practice Aids 5100.46 and 5100.47, Nonmonetary Exchanges of Software. Accordingly, we record revenue on these transactions if the fair

value of the products or services purchased or sold can be determined and the technology received in the transaction is expected, at the time of the exchange, to be deployed. If we are unable to determine the fair value of the products purchased or sold, or if the deployment of the purchased product is uncertain, we record the transaction at the historical cost basis of the products or services sold. During 2000, we entered into four sets of such concurrent transactions in which we and third parties purchased each other’s software products and services for internal use. In these transactions, we received net cash consideration of approximately $604,000. Excluding net cash consideration, revenues recognized from these transactions were $1.2 million, or 6% of total revenues, in 2000 and approximately $402,000, or 2% of total revenues, in 2001. The fair value of the products purchased were recorded as property and equipment in the amount of $1.1 million, and are being amortized over their useful lives, generally three years. The amounts we paid for maintenance and services of approximately $105,000 and approximately $480,000 in 2000 and 2001, respectively, in these transactions were recorded as general and administrative expense as incurred. We did not enter into any concurrent transactions in 2001, 2002 or the nine months ended September 30, 2003.

We must make estimates of the uncollectibility of accounts receivable. The allowance for doubtful accounts, which is netted against accounts receivable on our balance sheets, totaled approximately $47,000 at December 31, 2001, approximately $129,000 at December 31, 2002 and approximately $130,000 at September 30, 2003. We record an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. Management specifically analyzes accounts receivable and historical bad debts experience, customer creditworthiness, current economic trends, international situations (such as currency devaluation) and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Should any of these factors change, the estimates made by management will also change, which could affect the level of our future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts may be required and such provision may be material.

We generally guarantee that our services will be performed in accordance with the criteria agreed upon in the statement of work. Should these services not be performed in accordance with the agreed upon criteria, we would provide remediation services until such time as the criteria are met. In accordance with Statement of Financial Accounting Standards (SFAS) 48, Revenue Recognition When Right of Return Exists, management must use judgments and make estimates of sales return reserves related to potential future requirements to provide remediation services in connection with current period service revenues. When providing for sales return reserves, we analyze historical experience of actual remediation service claims as well as current information on remediation service requests as they are the primary indicators for estimating future service claims. Material differences may result in the amount and timing of our revenues if for any period actual returns differ from management’s judgments or estimates. The sales return reserve balances, which are netted against our accounts receivable on our balance sheets, were $0 at December 31, 2001, approximately $152,000 at December 31, 2002 and approximately $647,000 at September 30, 2003.

We have adopted SFAS 123, Accounting for Stock-Based Compensation, but in accordance with SFAS 123, we have elected not to apply fair value-based accounting for our employee stock option plans. Instead, we measure compensation expense for our employee stock option plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, and related interpretations. We record deferred stock-based compensation to the extent the deemed fair value of our common stock for financial accounting purposes exceeds the exercise price of stock options granted to employees on the date of grant, and amortize these amounts to expense using the accelerated method over the vesting schedule of the options, generally four years. The deemed fair value of our common stock is determined by our board of directors. Because there has been no public market for our stock, the board of directors determined the deemed fair value of our common stock by considering a

number of factors, including, but not limited to, our operating performance, significant events in our history, issuances of our convertible preferred stock, trends in the broad market for technology stocks and the expected valuation we would obtain in an initial public offering. We recorded deferred stock-based compensation of $1.7 million, $0, $0 and $13.0 million and amortization of such deferred compensation of $4.3 million, $1.9 million, approximately $424,000 and $1.6 million in the years ended December 31, 2000, 2001 and 2002 and the nine months ended September 30, 2003, respectively. Based on deferred stock-based compensation recorded as of September 30, 2003, we expect to amortize $1.9 million and $5.9 million in the three months ending December 31, 2003 and in 2004, respectively. Had different assumptions or criteria been used to determine the deemed fair value of the stock options, materially different amounts of stock compensation expenses could have been reported.

As required by SFAS 123, as modified by SFAS 148, Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123, we provide pro forma disclosure of the effect of using the fair value-based method of measuring stock-based compensation expense. For purposes of the pro forma disclosure, we estimate the fair value of stock options issued to employees using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected life of options and our expected stock price volatility. Therefore, the estimated fair value of our employee stock options could vary significantly as a result of changes in the assumptions used. See Note 1 to our consolidated financial statements included elsewhere in this prospectus.

We are subject to income taxes in both the United States and foreign jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Our deferred tax assets consist primarily of net operating loss carryforwards. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is recognized if it is more likely than not that some portion of the deferred tax assets will not be recognized. We provided a full valuation allowance against our net deferred tax assets at December 31, 2001 and 2002 and September 30, 2003. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets would increase income in the period such determination was made. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

The following table sets forth certain consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated. Period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.

License Revenues. License revenues grew by 292% from $6.8 million, or 37% of total revenues, in the nine months ended September 30, 2002, to $26.6 million, or 54% of total revenues, in the nine months ended September 30, 2003. The increase in license revenues was the result of sales to new customers resulting from the growth in our direct sales force, customer referrals from new partner relationships and an improved economic environment. The increase in license revenues as a percentage of total revenue was due to strong software license revenue growth and a lower revenue growth rate in our services organization due to an increased use of third-party implementation partners performing the integration and configuration services in connection with new product sales.

Maintenance and Service Revenues. Maintenance and service revenues grew by 95% from $11.7 million in the nine months ended September 30, 2002 to $22.8 million in the nine months ended

September 30, 2003. The absolute dollar increase in maintenance and service revenues was attributable to an increase in integration and configuration services for new customers and, to a lesser extent, increased maintenance fees associated with increased product sales. As a percentage of total revenues, maintenance and service revenues decreased from 63% in the 2002 period to 46% in the 2003 period. The decrease in maintenance and service revenues as a percentage of total revenues was, as discussed above, due to increased use of third-party implementation partners performing the integration and configuration services associated with new license sales.

Cost of License Revenues. Cost of license revenues increased by 181% from approximately $518,000 in the nine months ended September 30, 2002 to $1.5 million in the nine months ended September 30, 2003. The increase in absolute dollars was attributable to third-party royalty costs associated with the higher volume of license sales in the 2003 period. As a percentage of license revenues, cost of license revenues decreased from 8% in the 2002 period to 5% in the 2003 period. The lower cost of license revenues as a percentage of license revenues was due to increased sales of products that carry lower third-party royalties, resulting in a lower average royalty cost per license.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 77% from $10.1 million in the nine months ended September 30, 2002 to $17.9 million in the nine months ended September 30, 2003. The increase in absolute dollars was due to $3.6 million of higher personnel costs associated with increased headcount, $2.3 million in higher fees paid to sub-contractors that we use to supplement our work force and $1.6 million in higher travel expenses relating to the increase in integration and configuration services. As a percentage of maintenance and service revenues, cost of maintenance and service revenues decreased from 87% in the 2002 period to 79% in the 2003 period. The decrease as a percentage of maintenance and service revenues is attributable to higher utilization rates of service personnel who bill for their services on an hourly basis and overhead costs being applied to a larger amount of revenues.

Gross Margin. Our gross profit as a percentage of total revenues, or gross margin, increased from 42% for the nine months ended September 30, 2002 to 61% for the nine months ended September 30, 2003. The improvement in our gross margin is attributable primarily to the shift in revenue mix to higher margin license revenues, which represented 54% of total revenues for the 2003 period, compared to 37% of total revenues for the 2002 period. To a lesser extent, the improvement was also attributable to the individual improvements in our license margin and our maintenance and service margin discussed above. In the future, we expect our gross margins to fluctuate depending on the mix of license versus maintenance and service revenues recorded.

Sales and Marketing. Sales and marketing expenses increased by 54% from $9.2 million in the nine months ended September 30, 2002 to $14.2 million in the nine months ended September 30, 2003. Increases to our sales and marketing headcount led to an increase in personnel expense of $1.5 million. Commission expense increased by $1.7 million due to the higher license and maintenance sales. Marketing program fees increased by approximately $715,000 due to increased advertising and promotional activity. In addition, sales and marketing travel and other ancillary costs increased by approximately $569,000 due to the increased headcount. As a percentage of total revenues, sales and marketing expenses decreased from 50% in the 2002 period to 29% in the 2003 period, due to an increase in the amount of sales generated per sales representative as compared to the prior period, an increase in the number of sales through our third-party partners and overhead costs being applied to a larger amount of revenues. We expect sales and marketing expenses to continue to increase in absolute dollars as we expand our sales force and increase marketing activities.

Research and Development. Research and development expenses decreased by 7% from $8.6 million in the nine months ended September 30, 2002 to $8.0 million in the nine months ended September 30, 2003. The higher level of research and development expense in the 2002 period is principally attributable to an outsourced development project that resulted in increased contractor fees of approximately $497,000.

As a percentage of total revenues, research and development expenses decreased from 47% in the 2002 period to 16% in the 2003 period. The decrease as a percentage of total revenues was the result of revenues increasing 167% while the research and development expenses decreased slightly. We expect research and development expenses to increase in absolute dollars in the future as we increase our spending to enhance the functionality of existing products and introduce new products.

General and Administrative. General and administrative expenses increased by 30% from $3.5 million in the nine months ended September 30, 2002 to $4.5 million in the nine months ended September 30, 2003. The increase in absolute dollars was attributable to an increase of approximately $612,000 in personnel expense associated with increased headcount and an increase of approximately $260,000 in professional fees for legal services. As a percentage of total revenues, general and administrative expenses decreased from 19% in the 2002 period to 9% in the 2003 period. The decrease as a percentage of total revenues was the result of the revenues increasing 167% while the general and administrative costs increased by 30%. We expect general and administrative expenses to continue to increase in absolute dollars in the future as we invest in infrastructure to support continued growth and incur additional expenses related to being a public company.

Stock-based Compensation. Stock-based compensation increased from approximately $366,000 in the nine months ended September 30, 2002 to $2.6 million in the nine months ended September 30, 2003. The increase is due to approximately $952,000 of stock-based compensation recorded in the 2003 period in connection with the issuance of 453,000 shares of Series G preferred stock to certain of our executive officers and key employees at a discount to the deemed fair value of such stock for financial accounting purposes and $1.6 million of amortization of deferred stock-based compensation recorded in the 2003 period.

Interest expense was essentially unchanged year over year, totalling approximately $408,000 for the nine months ended September 30, 2002 and approximately $403,000 for the nine months ended September 30, 2003. Interest expense paid on our line of credit and loans decreased by approximately $198,000 due to lower average outstanding balances for the 2003 period compared to the 2002 period. This decrease was offset by amortization of the loan discounts associated with the fair value of warrants granted in connection with our credit facility, which increased by approximately $192,000 in the 2003 period compared to the 2002 period.

Other income, net decreased 62% from approximately $132,000 for the nine months ended September 30, 2002 to approximately $50,000 for the nine months ended September 30, 2003. Other income, net consists primarily of interest income on bank balances which decreased by approximately $82,000 due to lower average balances outstanding in the 2003 period compared to the 2002 period.

We recorded a provision for income taxes of approximately $175,000 for the nine months ended September 30, 2003. The provision relates to income taxes currently payable on income generated in non-U.S. tax jurisdictions and state and federal income taxes payable due to limits on the amount of net operating losses that may be applied against income generated in 2003 under temporary tax regulations. For the nine months ended September 30, 2002, no provision for income taxes was recorded due to our net loss position. At September 30, 2003, we maintained a full valuation allowance against our deferred tax assets based on the determination that it was more likely than not that some or all of the deferred tax assets would not be realized.

We recorded a transitional impairment loss of approximately $123,000 in January 2002 upon the adoption of SFAS 142, Goodwill and Other Intangible Assets. The transitional impairment loss was based on an assessment of the implied fair value of goodwill at the time of adoption of SFAS 142. The impairment loss reduced the carrying value of the goodwill we recorded in connection with our acquisition of The Rob Hand Consulting Group in 1999 to zero as of January 1, 2002.

License Revenues. License revenues grew by 43% from $6.9 million, or 30% of total revenues, in 2001 to $9.8 million, or 37% of total revenues, in 2002. The increase in license revenues in 2002 resulted in part from strong license sales in the fourth quarter of 2002 of $3.0 million compared to approximately $345,000 of license revenues in the same period of 2001. We believe our license revenues in 2001 were negatively affected by the general reduction in IT spending in the aftermath of the September 11 terrorist attacks and the overall economic downturn in the United States during 2001. The increase in license revenues as a percentage of total revenues in 2002 was due to the reduced sale of licenses in 2001 resulting from the general reduction in IT spending during that year.

Maintenance and Service Revenues. Maintenance and service revenues grew by 5% from $16.0 million in 2001 to $16.8 million in 2002. As a percentage of total revenues, maintenance and service revenues decreased from 70% in 2001 to 63% in 2002. The absolute dollar increase in 2002 was the result of an increase in integration and configuration projects associated with our increased license revenues.

Cost of License Revenues. Cost of license revenues increased by 25% from approximately $650,000 in 2001 to approximately $814,000 in 2002. The increase in absolute dollars in 2002 was primarily attributable to third-party royalty costs on higher license revenues. As a percentage of license revenues, cost of license revenues decreased from 9% in 2001 to 8% in 2002. The lower cost of license revenues as a percentage of revenues for 2002 was due to increased average license values which did not increase unit based royalty costs.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 8% from $13.1 million, or 82% of maintenance and service revenues, in 2001 to $14.2 million, or 85% of maintenance and service revenues, in 2002. The increase in absolute dollars and as a percentage of related revenues in 2002 was due to increased personnel costs of $1.2 million associated with the increase in the number of integration and configuration, training and technical support personnel. In addition, travel and entertainment cost also increased by approximately $460,000. Increases to personnel and travel costs were partially offset by a reduction in contractor fees. The staffing level of internal integration and configuration personnel reduced the need for third-party contractors resulting in a decrease of these expenses by approximately $798,000.

Gross Margin. Our gross margin increased from 40% in 2001 to 43% in 2002 due to a shift in revenue mix to higher margin license revenues, which represented 37% of total revenues for 2002 compared to 30% for 2001. Increased license revenues contributed $2.8 million to gross margin, which was partially offset by an approximately $376,000 decrease in maintenance and service gross margin.

Sales and Marketing. Sales and marketing expenses increased by 13% from $12.0 million in 2001 to $13.5 million in 2002. As a percentage of revenues, sales and marketing expenses were relatively constant at 52% in 2001 compared to 51% in 2002. The absolute dollar increase in 2002 was associated with increased commission costs of $1.8 million resulting from increased license sales and increased travel and entertainment costs of approximately $342,000. These increases were partially offset by a decrease in marketing program fees of approximately $442,000 due to cost control measures and a decrease in personnel costs of approximately $200,000 due to a decrease in the marketing headcount and a reduction in average salary expense.

Research and Development. Research and development expenses increased by 4% from $10.7 million in 2001 to $11.1 million in 2002. The absolute dollar increase was associated with the increase in contractor fees related to third-party development services of approximately $215,000 and an increase in personnel costs of approximately $162,000 as a result of higher average salaries. As a percentage of total revenues, research and development expenses decreased from 47% in 2001 to 42% in 2002. The decrease

General and Administrative. General and administrative expenses increased by 4% from $4.9 million in 2001 to $5.1 million in 2002. As a percentage of total revenues, general and administrative expenses decreased from 21% in 2001 to 19% in 2002. The increase in absolute dollars in 2002 was attributable to an increase in outside legal fees of approximately $826,000 associated with litigation expenses. This increase was partially offset by approximately $332,000 decrease in personnel costs resulting from a decrease in average headcount, approximately $211,000 decrease in goodwill amortization due to our adoption of SFAS 142, Goodwill and Other Intangible Assets, on January 1, 2002, and approximately $98,000 decrease in depreciation and overhead expenses.

Stock-based Compensation. Stock-based compensation expenses decreased by 77% from $1.9 million in 2001 to approximately $424,000 in 2002. The decrease was primarily due to the accelerated amortization of previously recorded deferred stock-based compensation from options granted with exercise prices below the deemed fair value of our common stock on the date of grant.

Interest expense decreased 36% from approximately $916,000 in 2001 to approximately $582,000 in 2002. Interest expense in 2001 included approximately $170,000 in interest on our $8.0 million of convertible promissory notes, which were outstanding from September 2000 to March 2001. In addition, interest expense paid on our line of credit and loans decreased approximately $192,000 in 2002 as a result of the continued paydown of outstanding equipment financing loan balances and the replacement of our prior line of credit with a new line of credit at a lower interest rate.

Other income, net decreased 59% from approximately $331,000 in 2001 to approximately $137,000 in 2002. Other income, net consists primarily of interest income on bank balances which decreased approximately $194,000 due to lower average balances outstanding and lower interest rates in 2002 compared to 2001.

We recorded a transitional impairment loss of approximately $123,000 in January 2002 upon the adoption of SFAS 142, Goodwill and Other Intangible Assets. The transitional impairment loss was based on an assessment of the implied fair value of goodwill at the time of adoption. The impairment loss reduced the carrying value of goodwill we recorded in connection with our acquisition of The Rob Hand Consulting Group in 1999 to zero as of January 1, 2002.

License Revenues. License revenues decreased by 23% from $8.9 million, or 40% of total revenues, in 2000 to $6.9 million, or 30% of total revenues, in 2001. License revenues for 2001 were adversely affected by the general reduction in IT spending, particularly in third and fourth quarter, subsequent to the September 11 terrorist attacks and the overall economic downturn in the United States during 2001. License revenues for the quarter ended December 31, 2001 was approximately $345,000 as compared to $2.4 million for the quarter ended December 31, 2000. The decrease in license revenues as a percentage of total revenues was due to the general reduction in IT spending reducing license revenues more than maintenance and service revenues, which were supported, in part by integration and configuration projects already in progress prior to the September 11 terrorist attacks.

Maintenance and Service Revenues. Maintenance and service revenues increased by 21% from $13.3 million, or 60% of total revenues, in 2000 to $16.0 million, or 70% of total revenues, in 2001. The absolute dollar increase in maintenance and service revenues was attributable to an increase in integration and configuration services for new customers and, to a lesser extent, increased maintenance fees associated with sales of new licenses. The increase in maintenance and service revenues as a percentage of total revenues is attributable to the decrease in license revenues referenced above.

Cost of License Revenues. Cost of license revenues decreased by 23% from approximately $840,000 in 2000 to approximately $650,000 in 2001. Cost of license revenues as a percentage of related revenues was unchanged at 9% in 2001 and 2000. The decrease in cost of license revenues in absolute dollars in 2001 was attributable to the decrease in third-party royalty costs associated with the decrease in license revenues.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 17% from $11.2 million in 2000 to $13.1 million in 2001. As a percentage of related revenues, cost of maintenance and service revenues decreased from 84% in 2000 to 82% in 2001. The increase in absolute dollars in 2001 was due to increased personnel costs of $1.1 million associated with the increase in the number of integration and configuration, training and technical support personnel. Additionally, facilities and overhead costs increased by approximately $304,000 and travel and entertainment increased by approximately $200,000.

Gross Margin. Our gross margin decreased from 46% in 2000 to 40% in 2001, primarily due to the decrease in higher margin license revenues as a percentage of total revenues from 40% in 2000 to 30% in 2001. The absolute dollar decrease in our gross margin of $1.0 million was attributable to the 23% decrease in license revenues, which resulted in a $1.8 million decrease in gross margin. This decrease was partially offset by an increase of approximately $811,000 in the gross margin generated by maintenance and services.

Sales and Marketing. Sales and marketing expenses decreased by 26% from $16.1 million, or 73% of total revenues, in 2000 to $12.0 million, or 52% of total revenues, in 2001. The absolute dollar decrease in 2001 was attributable to cost cutting measures that resulted in a $2.1 million decrease in personnel costs from a decrease in headcount and lower average salaries. Travel and entertainment costs decreased by approximately $310,000 due to the reduced headcount and cost control measures. Additionally, marketing program fees were reduced by $1.0 million due to cost control measures and professional fees were decreased by approximately $757,000 as a result of the elimination of our contracting arrangement for the management of our European operations. As a result of the decrease in absolute costs, sales and marketing expenses decreased as a percentage of total revenues.

Research and Development. Research and development expenses increased by 10% from $9.7 million, or 44% of total revenues, in 2000 to $10.7 million, or 47% of total revenues, in 2001. The absolute dollar increase in 2001 was associated with costs of increased headcount, resulting in additional expenses of $1.8 million, partially offset by a decrease in contractor fees of $1.6 million resulting from the conversion of many contract developers to employees. Additionally, the increase in headcount contributed to an increase in facilities and overhead costs of approximately $872,000.

General and Administrative. General and administrative expenses decreased by 4% from $5.0 million, or 23% of total revenues, in 2000 to $4.9 million, or 21% of total revenues, in 2001. The absolute dollar decrease in 2001 was attributable to a reduction in professional fees of approximately $436,000 due to cost control measures. This decrease was partially offset by an increase in personnel expenses of approximately $242,000 related to an increase in average salary.

Stock-based Compensation. Stock-based compensation expense decreased by 56% from $4.3 million in 2000 to $1.9 million in 2001. The decrease was primarily due to the accelerated amortization of previously recorded deferred stock-based compensation from options granted with exercise prices below the deemed fair value of our common stock on the date of grant.

Interest expense increased 16% from approximately $793,000 in 2000 to approximately $916,000 in 2001. Interest expense paid on our line of credit and loans increased by approximately $123,000 due to

Other income, net decreased 14% from approximately $383,000 in 2000 to approximately $331,000 in 2001. Other income, net consists primarily of interest income on bank balances which decreased by approximately $52,000 due to lower average balances outstanding and lower interest rates in 2001 compared to 2000.

The tables below show our unaudited consolidated quarterly statements of operations data for each of the eleven most recent quarters, as well as the percentage of revenues for each line item shown. This information has been derived from our unaudited consolidated financial statements, which, in our opinion, have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. The results of operations for any quarter are not necessarily indicative of the results of operations in any future period.


Delaware	7371	77-0438629
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to Callidus Software (before expenses)	$	$


SUMMARY
RISK FACTORS
FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
COMPANY INFORMATION
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
RELATED PARTY TRANSACTIONS
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 10.10
EXHIBIT 23.1


Common stock offered		5,000,000 shares

Common stock to be outstanding after this offering		22,488,261 shares

Use of proceeds		We anticipate that we will use the net proceeds of this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies.

Dividend policy		We have never declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Nasdaq National Market symbol		CALD

Risk factors		See “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in our common stock.



																		Nine Months Ended
			Year Ended December 31,															September 30,

			1998			1999			2000			2001			2002			2002			2003

																		(unaudited)
Consolidated Statement of Operations Data:
Revenues:
	License revenues		$	—		$	1,334		$	8,879		$	6,860		$	9,820		$	6,795		$	26,617
	Maintenance and service revenues			9			4,756			13,302			16,033			16,766			11,706			22,832

		Total revenues		9			6,090			22,181			22,893			26,586			18,501			49,449
Gross profit				9			(1,196	)		10,158			9,140			11,560			7,849			30,056
Operating expenses:
	Sales and marketing			3,349			8,684			16,115			12,003			13,527			9,241			14,215
	Research and development			2,354			4,852			9,701			10,659			11,118			8,603			8,026
	General and administrative			974			2,668			5,048			4,859			5,053			3,497			4,547
	Stock-based compensation(1)			1,064			3,229			4,312			1,878			424			366			2,569

		Total operating expenses		7,741			19,433			35,176			29,399			30,122			21,707			29,357

Income (loss) from operations				(7,732	)		(20,629	)		(25,018	)		(20,259	)		(18,562	)		(13,858	)		699
Net income (loss)			$	(7,575	)	$	(20,536	)	$	(25,428	)	$	(20,844	)	$	(19,130	)	$	(14,257	)	$	171

Net income (loss) per share:
	Basic		$	(35.07	)	$	(28.72	)	$	(23.83	)	$	(17.24	)	$	(13.98	)	$	(10.48	)	$	0.12

	Diluted		$	(35.07	)	$	(28.72	)	$	(23.83	)	$	(17.24	)	$	(13.98	)	$	(10.48	)	$	0.01

Weighted average shares:
	Basic			216			715			1,067			1,286			1,368			1,360			1,453

	Diluted			216			715			1,067			1,286			1,368			1,360			20,713

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


Francis S. Currie, Esq. Davis Polk & Wardwell 1600 El Camino Real Menlo Park, California 94025 (650) 752-2000		John D. Wilson, Esq. Shearman & Sterling LLP 1080 Marsh Road Menlo Park, California 94025 (650) 838-3600


	Page

Summary		1
Risk Factors		5
Forward-Looking Statements		17
Use of Proceeds		18
Dividend Policy		18
Company Information		18
Capitalization		19
Dilution		20
Selected Consolidated Financial Data		21
Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Business		41
Management		53
Related Party Transactions		66
Principal Stockholders		71
Description of Capital Stock		75
Shares Eligible for Future Sale		78
Underwriting		81
Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock		84
Legal Matters		85
Experts		85
Where You Can Find More Information		85
Index to Consolidated Financial Statements		F-1



	As of September 30, 2003

	Actual		As Adjusted

			(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	15,198	$	72,898
Working capital		4,593		62,293
Total assets		29,558		87,258
Total liabilities		23,794		23,794
Total stockholders’ equity		5,764		63,464


	•	pursue acquisition opportunities; or

	•	continue to fund our operations.


Assumed initial public offering price per share				$	13.00
	Pro forma net tangible book value per share as of September 30, 2003	$	0.33
	Increase in pro forma net tangible book value per share attributable to new investors		2.49

Pro forma net tangible book value per share after this offering					2.82

Dilution per share to new investors				$	10.18



		Shares of Common
		Stock Purchased					Total Consideration					Average
												Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders			17,488,261		78	%	$	85,777,762		57	%	$	4.90
New Investors			5,000,000		22			65,000,000		43			13.00

	Total		22,488,261		100	%	$	150,777,762		100	%



																		Nine Months
			Year Ended December 31,															Ended September 30,

			1998			1999			2000			2001			2002			2002			2003

																		(unaudited)
Consolidated Statement of Operations Data:
Revenues:
	License revenues		$	—		$	1,334		$	8,879		$	6,860		$	9,820		$	6,795		$	26,617
	Maintenance and service revenues			9			4,756			13,302			16,033			16,766			11,706			22,832

		Total revenues		9			6,090			22,181			22,893			26,586			18,501			49,449
Cost of revenues:
	License revenues			—			241			840			650			814			518			1,454
	Maintenance and service revenues			—			7,045			11,183			13,103			14,212			10,134			17,939

		Total cost of revenues		—			7,286			12,023			13,753			15,026			10,652			19,393

Gross profit				9			(1,196	)		10,158			9,140			11,560			7,849			30,056
Operating expenses:
	Sales and marketing			3,349			8,684			16,115			12,003			13,527			9,241			14,215
	Research and development			2,354			4,852			9,701			10,659			11,118			8,603			8,026
	General and administrative			974			2,668			5,048			4,859			5,053			3,497			4,547
	Stock-based compensation(1)			1,064			3,229			4,312			1,878			424			366			2,569

		Total operating expenses		7,741			19,433			35,176			29,399			30,122			21,707			29,357

Income (loss) from operations				(7,732	)		(20,629	)		(25,018	)		(20,259	)		(18,562	)		(13,858	)		699
Interest expense and other income, net				157			93			(410	)		(585	)		(445	)		(276	)		(353	)

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle				(7,575	)		(20,536	)		(25,428	)		(20,844	)		(19,007	)		(14,134	)		346

Provision for income taxes				—			—			—			—			—			—			175



	As of December 31,											As of
												September 30,
	1998		1999		2000			2001		2002		2003

Consolidated Balance Sheet Data:
Cash and cash equivalents	$	2,909	$	14,877	$	3,272		$	12,034	$	12,833	$	15,198
Working capital		2,213		10,363		(12,116	)		6,971		650		4,593
Total assets		4,257		22,508		15,625			19,664		20,695		29,558
Long-term debt, less current portion		17		1,570		2,308			439		986		669
Total liabilities		904		10,084		23,904			8,974		18,602		23,794
Total stockholders’ equity (deficit)		3,353		12,424		(8,279	)		10,690		2,093		5,764


	*Allowance for Doubtful Accounts and Sales Return Reserve*



			Year Ended									Nine Months Ended
			December 31,									September 30,

			2000			2001			2002			2002			2003

												(unaudited)
Revenues:
	License revenues			40	%		30	%		37	%		37	%		54	%
	Maintenance and service revenues			60			70			63			63			46

		Total revenues		100			100			100			100			100
Cost of revenues (as a percent of related revenues):
	License revenues			9			9			8			8			5
	Maintenance and service revenues			84			82			85			87			79

		Total cost of revenues		54			60			57			58			39

Gross profit				46			40			43			42			61
Operating expenses:
	Sales and marketing			73			52			51			50			29
	Research and development			44			47			42			47			16
	General and administrative			23			21			19			19			9
	Stock-based compensation			19			8			2			2			5

		Total operating expenses		159			128			113			117			59

Income (loss) from operations				(113	)		(88	)		(70	)		(75	)		2
Interest expense and other income, net				(2	)		(3	)		(2	)		(1	)		(1	)

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle				(115	)		(91	)		(71	)		(76	)		1
Provision for income taxes				—			—			—			—			—
Income (loss) before cumulative effect of change in accounting principle				(115	)		(91	)		(71	)		(76	)		1
Cumulative effect of change in accounting principle				—			—			—			(1	)		—

Net income (loss)				(115	)%		(91	)%		(72	)%		(77	)%		1	%


	Lehman Brothers


	U.S. Bancorp Piper Jaffray


	*Strategy*


	*General*



		Three Months Ended

		Mar 31,			Jun 30,			Sept 30,			Dec 31,			Mar 31,			Jun 30,			Sept 30,			Dec 31,			Mar 31,			Jun 30,			Sept 30,
		2001			2001			2001			2001			2002			2002			2002			2002			2003			2003			2003


		(unaudited)
		(in thousands)
Revenues:
	License revenues	$	3,575		$	1,655		$	1,285		$	345		$	2,716		$	2,508		$	1,571		$	3,025		$	7,708		$	8,895		$	10,014
	Maintenance and service revenues		4,192			4,672			4,015			3,154			3,127			3,790			4,789			5,060			5,427			7,748			9,657

Total revenue			7,767			6,327			5,300			3,499			5,843			6,298			6,360			8,085			13,135			16,643			19,671
Cost of revenues:
	License revenues		340			148			108			54			179			187			152			296			498			513			443
	Maintenance and service revenues		3,647			3,848			2,947			2,661			3,069			3,258			3,807			4,078			4,271			5,999			7,669

Total cost of revenues			3,987			3,996			3,055			2,715			3,248			3,445			3,959			4,374			4,769			6,512			8,112

Gross profit			3,780			2,331			2,245			784			2,595			2,853			2,401			3,711			8,366			10,131			11,559
Operating expenses:
	Sales and marketing		3,672			3,488			2,476			2,367			3,006			3,056			3,179			4,286			3,554			5,210			5,451
	Research and development		3,077			3,045			2,331			2,206			2,462			2,765			3,376			2,515			2,703			2,563			2,760
	General and administrative		1,229			1,218			922			1,490			801			1,373			1,323			1,556			1,282			1,243			2,022
	Stock-based compensation		712			513			393			260			159			121			86			58			1,120			272			1,177

Total operating expenses			8,690			8,264			6,122			6,323			6,429			7,316			7,964			8,415			8,659			9,288			11,410

Income (loss) from operations			(4,910	)		(5,933	)		(3,877	)		(5,539	)		(3,833	)		(4,462	)		(5,563	)		(4,704	)		(293	)		843			149
Interest expense and other income, net			(361	)		13			(152	)		(85	)		(85	)		(73	)		(118	)		(169	)		(76	)		(134	)		(143	)

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle			(5,271	)		(5,920	)		(4,029	)		(5,624	)		(3,918	)		(4,535	)		(5,681	)		(4,873	)		(369	)		709			6
Provision for income taxes			—			—			—			—			—			—			—			—			—			172			3

Income (loss) before cumulative effect of change in accounting principle			(5,271	)		(5,920	)		(4,029	)		(5,624	)		(3,918	)		(4,535	)		(5,681	)		(4,873	)		(369	)		537			3
Cumulative effect of change in accounting principle			—			—			—			—			(123	)		—			—			—			—			—			—

Net income (loss)		$	(5,271	)	$	(5,920	)	$	(4,029	)	$	(5,624	)	$	(4,041	)	$	(4,535	)	$	(5,681	)	$	(4,873	)	$	(369	)	$	537		$	3