UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------ -------------
Commission File Number: 000-31139
RESONATE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3228496
(State of incorporation) (I.R.S. Employer
Identification No.)
385 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 27,321,144.
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RESONATE INC.
INDEX
Page
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999............................................................ 3
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2000 and September 30, 1999........... 4
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2000 and September 30, 1999...................... 5
Notes to the Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 12
Risk Factors.................................................................. 17
Item 3. Qualitative and Quantitative Disclosures About Market Risks............... 28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 29
Item 2. Changes in Securities and Use of Proceeds................................. 29
Item 3. Defaults Upon Senior Securities........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders....................... 30
Item 5. Other Information......................................................... 30
Item 6. Exhibits and Reports on Form 8-K........................................... 30
Signatures............................................................................ 32
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2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RESONATE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
September 30, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 95,101 $ 5,011
Short-term investments 21,895 6,988
Accounts receivable, net 4,924 3,751
Prepaid expenses and other current assets 1,342 320
----------- -----------
Total current assets 123,262 16,070
Property and equipment, net 4,994 2,160
Other assets 193 156
----------- -----------
Total assets $ 128,449 $ 18,386
=========== ===========
LIABILITIES MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt, current $ 2,892 $ 1,725
Accounts payable 2,233 983
Accrued liabilities 2,527 1,635
Deferred revenue 4,878 3,399
Capital lease obligation, current 1,073 654
----------- -----------
Total current liabilities 13,603 8,396
Debt, long-term 2,581 2,422
Capital lease obligation, long-term 641 924
----------- -----------
Total liabilities 16,825 11,742
----------- -----------
Mandatorily redeemable convertible preferred stock;
no par value -- 28,027
Mandatorily redeemable convertible preferred stock
warrants -- 374
----------- -----------
-- 28,401
----------- -----------
Stockholders' equity (deficit):
Series A convertible preferred stock;
$0.0001 par value -- --
Preferred stock; $0.0001 par value -- --
Common stock; $0.0001 par value 3 1
Additional paid-in capital 202,935 29,371
Notes receivable from stockholders (1,055) (755)
Unearned stock-based compensation (17,934) (18,948)
Accumulated deficit (72,325) (31,426)
----------- -----------
Total stockholders' equity (deficit) 111,624 (21,757)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 128,449 $ 18,386
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
3
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RESONATE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product $ 4,621 $ 2,306 $ 10,871 $ 5,184
Services 1,504 590 3,602 1,298
----------- ----------- ---------- -----------
Total revenue 6,125 2,896 14,473 6,482
Cost of revenue:
Product 75 23 165 57
Services (excluding stock-based
compensation of $445, $31, $1,302
and $55, respectively) 1,315 313 3,545 557
----------- ----------- ---------- -----------
Total cost of revenue 1,390 336 3,710 614
----------- ----------- ---------- -----------
Gross profit (excluding stock-based
compensation of $445, $31, $1,302
and $55, respectively) 4,735 2,560 10,763 5,868
Operating expenses:
Research and development (excluding
stock-based compensation of $868,
$274, $2,855 and $627, respectively) 3,358 1,812 9,408 4,407
Sales and marketing (excluding stock-based
compensation of $1,392, $1,039,
$4,340 and $1,541, respectively) 7,111 2,907 20,080 7,303
General and administrative (excluding stock-
based compensation of $1,147, $504,
$3,504 and $1,231, respectively) 1,436 976 4,335 2,391
Stock-based compensation 3,852 1,848 12,001 3,454
----------- ----------- ---------- -----------
Total operating expenses 15,757 7,543 45,824 17,555
----------- ----------- ---------- -----------
Loss from operations (11,022) (4,983) (35,061) (11,687)
Interest and other income (expense), net 1,035 8 912 (116)
----------- ----------- ---------- ------------
Net loss (9,987) (4,975) (34,149) (11,803)
Beneficial conversion of Series F
preferred stock 6,750 -- 6,750 --
----------- ----------- ---------- -----------
Net loss attributable to common stockholders $ (16,737) $ (4,975) $ (40,899) $ (11,803)
=========== =========== ============= ===========
Net loss per share:
Basic and diluted $ (0.90) $ (0.98) $ (3.83) $ (2.54)
=========== =========== ========== ===========
Shares used in per share calculation 18,549 5,052 10,669 4,644
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
4
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RESONATE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (34,149) $ (11,803)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,511 544
Provision for doubtful accounts 305 --
Stock-based compensation 12,001 3,454
Issuance of stock and stock options for services 712 402
Warrant related non-cash interest expense 93 94
Changes in assets and liabilities:
Accounts receivable (1,478) (80)
Prepaid expenses and other current assets (1,022) 85
Other assets (37) (41)
Accounts payable 1,250 474
Accrued liabilities 892 442
Deferred revenue 1,943 1,373
----------- -----------
Net cash used in operating activities (17,979) (5,056)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,292) (3)
Purchase of short-term investments (14,935) (4,946)
------------ ------------
Net cash used in investing activities (18,227) (4,949)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in initial public
offering, net of issuance costs 88,166 --
Proceeds from issuance of long-term debt 2,364 4,910
Repayments of long-term debt (1,387) (768)
Principal payments under capital lease obligations (661) (157)
Proceeds from issuance of mandatorily redeemable
convertible stock, net of issuance costs 37,000 12,982
Proceeds from exercise of preferred stock warrants 10 5
Proceeds from issuance of common stock upon exercise of stock options 804 62
----------- -----------
Net cash provided by financing activities 126,296 17,034
----------- -----------
Net increase in cash and cash equivalents 90,090 7,029
Cash and cash equivalents at beginning of period 5,011 4,322
----------- -----------
Cash and cash equivalents at end of period $ 95,101 $ 11,351
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
5
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (all of
which are normal and recurring in nature) necessary to present fairly the
financial position, results of operations and cash flows of Resonate Inc. and
its subsidiary. The results of operations for the interim periods presented are
not necessarily indicative of the results that may be expected for any future
interim periods or for the full year. These condensed consolidated financial
statements and notes thereto should be read in conjunction with the financial
statements and the notes to the financial statements contained in our
Registration Statement on Form S-1 (File No. 333-31730) and our Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 filed with the Securities and
Exchange Commission.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
We derive revenue from licenses of our software and related services, which
include implementation and integration services, technical services, training
and consulting. Revenue is recognized when there is persuasive evidence of an
arrangement for a fixed and determinable fee that is probable of collection and
when delivery and installation has occurred. We generally recognize revenue
under the residual method as prescribed by Statement of Position No. 97-2 "
Software Revenue Recognition" and Statement of Position No. 98-9 "Modification
of SOP No. 97-2 with Respect for Certain Transactions" whereby revenue is
allocated to each undelivered element based upon the fair value of each element
when sold separately and the residual amount is then allocated to the delivered
element.
We have also entered into a limited number of contracts which involve
significant implementation or customization essential to the functionality of
our product. Product and services revenue under such arrangements is recognized
under the percentage-of-completion method using labor hours incurred as the
measure of progress towards completion. We classify revenue from these
arrangements as product and services revenue, respectively, based upon the
estimated fair value of each element. Provisions for estimated contract losses
are recognized in the period in which the loss becomes probable and can be
reasonably estimated.
Product revenue from existing reseller arrangements is recognized when
reported by the reseller upon re-licensing of our software to end-users. Our
agreements with our customers and resellers do not contain product return
rights.
For arrangements with extended payment terms, revenue is recognized at the
earlier of when the payment is due or when the cash is received.
6
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
We also derive revenue from providing access to our products for a
specified period of time. Revenue is recognized on such arrangements as the
license fees become due and payable. No revenue was recognized under such
arrangements during 1999. For the three and nine months ended September 30,
2000, revenue recognized under such arrangements was not significant.
Services revenue consists of professional services and maintenance fees.
Professional services primarily consist of software installation and
integration, consulting and training. Professional services revenue is
recognized as such services are performed. Services revenue from maintenance
agreements, which include services such as technical product support and
unspecified product upgrades, are recognized ratably over the term of the
agreement, generally one year.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider all highly liquid investments purchased with a maturity of
three months or less at the date of acquisition to be cash equivalents; those
with original maturities greater than three months and current maturities less
than twelve months from the balance sheet date are considered short-term
investments. Cash equivalents and short-term investments are considered
available-for-sale securities and are carried at cost, which approximates fair
value. Our investment portfolio consists of both fixed and variable rate
financial instruments, including commercial paper, money market funds,
government agency securities and highly rated corporate bonds and notes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to a concentration of
credit risk consist of cash, cash equivalents, short-term investments and
account receivable. We limit our exposure to credit loss by placing our cash,
cash equivalents and short-term investments with major financial institutions.
During each of the three months ended September 30, 2000 and 1999, one
customer accounted for 33% and 22% of our total revenue, respectively. During
the nine months ended September 30, 2000 and 1999, one customer accounted for
21% and 11% of our total revenue, respectively. At September 30, 2000, one
individual customer accounted for 11% of our total accounts receivable. At
December 31, 1999, one individual customer accounted for 16% of our total
accounts receivable.
NET LOSS PER SHARE
We compute net loss per share in accordance with SFAS No. 128, "Earnings
per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is computed
by dividing the net loss available to common stockholders for the period by the
weighted average number of shares of common stock outstanding during the period
excluding shares of common stock subject to repurchase. Diluted net loss per
share is the same as basic net loss per share because the calculation of diluted
net loss per share excludes potential shares of common stock since their effect
is antidilutive.
7
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table sets forth the computation of basic and diluted net
loss per share available to common stockholders (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $ (16,737) $ (4,975) $ (40,899) $(11,803)
========== ========== ========== =========
Basic and diluted:
Weighted average shares 20,179 6,516 12,299 6,108
Weighted average common stock subject to repurchase (1,630) (1,464) (1,630) (1,464)
---------- ---------- ---------- ---------
Shares used in computing basic and diluted net
loss per share 18,549 5,052 10,669 4,644
========= ========= ========= ========
Basic and diluted net loss per share $ (0.90) $ (0.98) $ (3.83) $ (2.54)
========= ========= ========= ========
</TABLE>
The following table sets forth the weighted average potential shares of
common stock that are not included in the basic and diluted net loss per share
available to common stockholders calculation above because to do so would be
antidilutive (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C>
Weighted average effect of common stock equivalents:
Series A Preferred Stock -- 1,815 -- 1,815
Series B Preferred Stock -- 3,856 -- 3,856
Series C Preferred Stock -- 3,230 -- 3,230
Series D Preferred Stock -- 2,687 -- 984
Warrants to purchase Series A Preferred Stock 56 76 58 76
Warrants to purchase Series B Preferred Stock -- 3 -- 3
Warrants to purchase Series C Preferred Stock 210 213 188 189
Warrants to purchase Common Stock 77 66 73 66
Employee stock options 92 1,892 317 1,721
Common Stock subject to repurchase agreements 1,630 1,464 1,630 1,464
--------- --------- --------- --------
2,065 15,302 2,266 13,404
========= ========= ========= ========
</TABLE>
8
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
COMPREHENSIVE INCOME
We have adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
The components of comprehensive income that are excluded from net income are not
significant, individually or in the aggregate, and therefore, no separate
statement of comprehensive income has been presented.
SEGMENT INFORMATION
We adopted the provisions of SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." We identify our operating segments based on
business activities, management responsibility and geographic location. During
the period presented, we operated in a single business segment primarily in the
United States. Through September 30, 2000, foreign operations were not
significant in either revenue or investment in long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB No. 133". SFAS 137 deferred the effective date of SFAS 133 until
the first quarter of the fiscal year beginning after June 15, 2000. We will
adopt SFAS 133 in the quarter ending March 31, 2001. We have not engaged in
hedging activities or invested in derivative instruments and accordingly, do not
believe the implementation of SFAS 133 will have a material effect on our
financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees", the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 was effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. FIN 44 has not had a material impact on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We have
complied with the guidance in SAB 101.
9
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
Nine Months Ended
September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Supplemental cash flow information:
Issuance of warrants to purchase Series C mandatorily
redeemable convertible preferred stock in
connection with subordinated debt $ -- $ 259
========= =========
Issuance of warrants to purchase common stock in
connection with strategic partnership $ 464 $ --
========= =========
Capital lease obligations $ 1,053 $ 322
========= =========
Common Stock issued in exchange for notes receivable $ 300 $ 755
========= =========
</TABLE>
NOTE 3. PRIVATE PLACEMENTS
In July 2000, we issued 1,389,603 shares of Series F Preferred Stock
("Series F") at $19.43 per share for net proceeds of approximately $27 million
in a private placement. All shares of Series F were automatically converted into
1,607,142 shares of our common stock upon the closing of our initial public
offering in August 2000. Upon completion of our initial public offering, we
recorded a charge to additional paid in capital of $6.8 million representing the
fair value of the beneficial conversion feature of Series F.
NOTE 4. COMPLETION OF INITIAL PUBLIC OFFERING
Effective August 2, 2000, we issued 4,000,000 shares of our common stock at
an initial public offering price of $21.00 per share. Also sold in this offering
were 600,000 shares upon the exercise of the underwriters' overallotment option.
The proceeds from the offering, net of offering costs were approximately $88.2
million. Concurrent with the closing of our initial public offering, each
outstanding share of our convertible preferred stock was automatically converted
into common stock.
NOTE 5. 2000 EQUITY INCENTIVE PLANS
In March 2000, our Board of Directors, ("the Board") adopted and in July
2000, the stockholders approved the 2000 Stock Plan and the 2000 Employee Stock
Purchase Plan, which became effective upon our initial public offering in August
2000. Each plan is administered by the Board or by a committee of the Board.
A total of 3,200,000 shares of common stock are authorized and reserved for
issuance under the 2000 Stock Plan ("Stock Plan"), plus annual increases equal
to the lesser of:
- 1,500,000 shares;
- 5% of the outstanding shares on such date; or
- a lesser amount to be determined by the Board.
10
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RESONATE INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Stock Plan allows awards to be granted in the form of incentive stock
options, nonstatutory stock options and stock purchase rights. Unless terminated
sooner by the Board, the Stock Plan will terminate automatically in 2010.
A total of 1,000,000 shares of common stock are reserved for issuance under
the Employee Stock Purchase Plan ("ESPP"), plus annual increases equal to the
lesser of:
- 750,000 shares;
- 2.5% of the outstanding shares on such date; or
- a lesser amount to be determined by the Board.
The ESPP permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's gross earnings and commissions, but
not to exceed the established maximum. Such amounts are applied to the purchase
from the Company of shares of common stock at the end of each offering period at
a price that is generally 85% of the lower of the fair market value of the
common stock at the beginning and at the end of the offering period. The plan
contains consecutive, overlapping 24 month offering periods. Each offering
period includes four six-month purchase periods. The plan will terminate in
2010.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. These forward-looking statements are typically denoted in
this report by the phrases "anticipates," "believes," "expects," "plans," and
similar phrases. All forward-looking statements included in this report are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences are discussed in this
item under the heading "Risk Factors" on page 17 of this report and the risks
discussed in our other Securities and Exchange Commission filings.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included under Item 1
beginning on page 3 of this report, our Registration Statement on Form S-1
declared effective by the Securities and Exchange Commission on August 2, 2000,
our Quarterly Report on Form 10-Q filed for the three months ended June 30, 2000
with the Securities and Exchange Commission and "Risk Factors" on page 17 in
this report.
OVERVIEW
We develop and market a family of software products and services that
ensure high levels of availability and performance for Internet, intranet and
extranet applications. Our family of software products integrates network
traffic management and systems monitoring and management functions, which
together provide real-time monitoring, reporting and automated service level
control of eBusiness applications. We call the collection of capabilities that
our products provide Internet services management.
Resonate was founded in July 1995 and began substantive operations in April
1996. From April 1996 through the first quarter of 1997, we primarily engaged in
research activities, developing our products and building our business
infrastructure. We began shipping our first software product, Central Dispatch,
and first generated revenue from software license fees and implementation and
consulting fees, in the first quarter of 1997. We released our Global Dispatch
software product in the first quarter of 1998 and our Commander software product
in the third quarter of 1999. In the nine months ended September 30, 2000, we
derived approximately 74% of our product revenue from our Central Dispatch
product. Although our revenue increased in each quarter during 1999 and in the
first nine months of 2000, we incurred significant costs to develop our
technology, products and services, to continue the recruitment of research and
development personnel, to build a sales force and a professional services
organization, and to expand our general and administrative infrastructure. Our
total headcount increased from 42 at December 31, 1997 to 251 at September 30,
2000.
We market and sell our software products through our direct sales force and
indirect channels. Our indirect channels consist of server systems vendors,
independent software vendors, value added resellers, web hosting services and
system integrators. We have derived, and expect to continue to derive, a
significant portion of our sales in both channels from customers that have
significant relationships with third-party system integrators. Our current
relationships with these system integrators typically are structured as
non-exclusive co-marketing and resale arrangements. In addition, we have entered
into a limited number of reseller arrangements in which our products are
embedded in the reseller's products, for which we receive a royalty from the
reseller. To date, revenue from these reseller arrangements has been
insignificant.
12
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RESULTS OF OPERATIONS
The following table sets forth financial data as a percentage of total
revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product 75.4% 79.6% 75.1% 80.0%
Services 24.6 20.4 24.9 20.0
-------- --------- -------- ---------
Total revenue 100.0 100.0 100.0 100.0
-------- --------- -------- ---------
Cost of revenue:
Product 1.2 0.8 1.1 0.9
Services 21.5 10.8 24.5 8.6
-------- --------- -------- ---------
Total cost of revenue 22.7 11.6 25.6 9.5
-------- --------- -------- ---------
Gross profit* 77.3 88.4 74.4 90.5
-------- --------- -------- ---------
Operating expenses:
Research and development 54.9 62.6 65.0 68.0
Sales and marketing 116.1 100.4 138.7 112.6
General and administrative 23.4 33.7 30.0 36.9
Stock-based compensation 62.9 63.8 82.9 53.3
-------- --------- -------- ---------
Total operating expenses 257.3 260.5 316.6 270.8
-------- --------- -------- ---------
Loss from operations (180.0) (172.1) (242.2) (180.3)
Interest and other income (expense), net 16.9 0.3 6.3 (1.8)
-------- ------- -------- ----------
Net loss (163.1)% (171.8)% (235.9)% (182.1)%
========= ========== ========= ==========
</TABLE>
*Excludes stock-based compensation.
REVENUE
Our total revenue was $6.1 million for the three months ended September 30,
2000 and $2.9 million for the three months ended September 30, 1999. Our total
revenue was $14.5 million for the nine months ended September 30, 2000 and $6.5
million for the nine months ended September 30, 1999. Total revenue was
comprised of sales of software products and related service fees from
implementation, consulting, training and support.
Product revenue was $4.6 million or 75.4% of total revenue for the three
months ended September 30, 2000 and $2.3 million or 79.6% of total revenue for
the three months ended September 30, 1999. Product revenue was $10.9 million or
75.1% of total revenue for the nine months ended September 30, 2000 and $5.2
million or 80.0% of total revenue for the nine months ended September 30, 1999.
Services revenue was $1.5 million or 24.6% of total revenue for the three months
ended September 30, 2000 and $590,000 or 20.4% of total revenue for the three
months ended September 30, 1999. Services revenue was $3.6 million or 24.9% of
total revenue for the nine months ended September 30, 2000 and $1.3 million or
20.0% of total revenue for the nine months ended September 30, 1999. The
increases in our revenue were due to new product releases, increased investment
in our sales and marketing organizations, the establishment of additional
distribution partners and increases in sales to and payments from existing
customers.
Revenue is recognized when there is persuasive evidence of an arrangement
for a fixed and determinable fee that is probable of collection and when
delivery and installation has occurred. We generally recognize revenue under the
residual method as prescribed by Statement of Position No. 97-2 "Software
Revenue Recognition" and Statement of Position No. 98-9 "Modification of SOP No.
97-2 with Respect for Certain Transactions" whereby revenue is allocated to each
undelivered element based upon the fair value of each element when sold
separately and the residual amount is then allocated to the delivered element.
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We have also entered into a limited number of contracts that involve
significant implementation or customization essential to the functionality of
our product. Product and services revenue under such arrangements is recognized
under the percentage-of-completion method using labor hours incurred as the
measure of progress towards completion. We classify revenue from these
arrangements as product and services revenue, respectively, based upon the
estimated fair value of each element. Provisions for estimated contract losses
are recognized in the period in which the loss becomes probable and can be
reasonably estimated.
Product revenue from existing reseller arrangements is recognized when
reported by the reseller upon re-licensing of our software to end-users. Our
agreements with our customers and resellers do not contain product return
rights.
For arrangements with extended payment terms, revenue is recognized at the
earlier of when the payment is due or when the cash is received.
We also derive revenue from providing access to our products for a
specified period of time. Revenue is recognized on such arrangements as the
license fees become due and payable.
Services revenue consists of professional services and maintenance fees.
Professional services primarily consist of software installation and
integration, consulting and training. Professional services revenue is
recognized as such services are performed. Services revenue from maintenance
agreements, which include services such as technical product support and
unspecified product upgrades, are recognized ratably over the term of the
agreement, generally one year.
One customer, Charles Schwab & Co. accounted for 33% and 22% of our total
revenue during the three months ended September 30, 2000 and 1999, respectively.
Charles Schwab & Co. also accounted for 21% and 11% of our total revenue during
the nine months ended September 30, 2000 and 1999, respectively.
COST OF REVENUE
Cost of revenue was $1.4 million or 22.7% of total revenue for the three
months ended September 30, 2000 and $336,000 or 11.6% of total revenue for the
three months ended September 30, 1999. Cost of revenue was $3.7 million or 25.6%
of total revenue for the nine months ended September 30, 2000 and $614,000 or
9.5% for the nine months ended September 30, 2000. Substantially all of the
increased cost of revenue came from increased cost of services, which resulted
from the hiring of additional employees necessary to provide technical support,
training and consulting. From September 30, 1999 to September 30, 2000,
professional services personnel increased from 6 to 30. Our cost of product
revenue includes expenses incurred to manufacture, package and distribute
software products and related documentation. Our cost of services revenue
includes salaries and related expenses for our implementation, consulting
support, and training organizations and an allocation of facilities and
communications expenses. We believe that our cost of services revenue will
continue to increase as we continue to invest in our professional services
organization.
OPERATING EXPENSES
Research and Development
Research and development expenses increased to $3.4 million or 54.9% of
total revenue for the three months ended September 30, 2000 from $1.8 million or
62.6% of total revenue for the three months ended September 30, 1999. Research
and development expenses increased to $9.4 million or 65.0% for the nine months
ended September 30, 2000 from $4.4 million or 68.0% for the nine months ended
September 30, 1999. Substantially all of the increase in research and
development expenses was related to an increase in the number of software
engineers and other technical staff, as well as to costs attributable to
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consultants retained because of the lag between our need for engineering
personnel and our ability to hire full-time employees. Research and development
personnel grew from 44 to 77 from September 30, 1999 to September 30, 2000. We
believe that research and development expenses will continue to increase as we
continue to invest in developing new products, applications, and product
enhancements.
Sales and Marketing
Sales and marketing expenses increased to $7.1 million or 116.1% of total
revenue for the three months ended September 30, 2000 from $2.9 million or
100.4% of total revenue for the three months ended September 30, 1999. Sales and
marketing expenses increased to $20.1 million or 138.7% of total revenue for the
nine months ended September 30, 2000 from $7.3 million or 112.7% of total
revenue for the nine months ended September 30, 1999. Approximately 70% of the
increase in sales and marketing expenses was due to personnel-related expenses,
recruiting fees and travel expenses. Sales and marketing personnel increased
from 42 at September 30, 1999 to 107 at September 30, 2000. An additional 17% of
the increase related to increased spending for marketing activities, including
trade shows, advertising and other promotional expenses. The remaining increase
was attributable to related facility and equipment costs. We believe that sales
and marketing expenses will continue to increase as we continue to expand our
sales and marketing staff.
General and Administrative
General and administrative expenses increased to $1.4 million or 23.4% of
total revenue for the three months ended September 30, 2000 from $976,000 or
33.7% of total revenue for the three months ended September 30, 1999. General
and administrative expenses increased to $4.3 million or 30.0% of total revenue
for the nine months ended September 30, 2000 from $2.4 million or 36.9% of total
revenue for the nine months ended September 30, 1999. The increase in general
and administrative expenses is primarily attributable to increased salaries for
executive, finance and administrative personnel, recruiting and other consulting
costs, costs incurred for office and facilities expenses and additional
administrative expenses required for public companies such as directors' and
officers' insurance and filing fees. From September 30, 1999 to September 30,
2000, general and administrative personnel increased from 20 to 36. The decrease
in general and administrative expenses as a percentage of total revenue results
from total revenue increasing at a higher rate than general and administrative
expenses. We believe that general and administrative expenses will increase in
absolute dollars as we continue to expand our operations.
Stock-based Compensation
Stock-based compensation consists of amortization of unearned stock-based
compensation in connection with certain stock option grants to employees at
exercise prices below the deemed fair market value of our common stock. We
recorded aggregate deferred compensation of $11.6 million in the nine months
ended September 30, 2000. We are amortizing this amount over the four-year
vesting period of the granted options. Accordingly, our results from operations
will include stock-based compensation expense at least through 2003. Of the
deferred compensation, $3.9 million or 62.9% of total revenue was amortized
during the three months ended September 30, 2000 and $1.8 million or 63.8% of
total revenue during the three months ended September 30, 1999. During the nine
months ended September 30, 2000, $12.0 million or 82.9% of total revenue was
amortized and $3.5 million or 53.3% of total revenue was amortized during the
nine months ended September 30, 1999.
INTEREST AND OTHER INCOME (EXPENSE), NET
For the three months ended September 30, 2000, we earned interest income of
approximately $1.3 million compared to $205,000 for the three months ended
September 30, 1999. These interest income amounts were partially offset by
interest expense of $209,000 for the three months ended September 30, 2000 and
$197,000 for the three months ended September 30, 1999. For the nine months
ended September 30, 2000, we earned interest income of approximately $1.5
million compared to $305,000 for the nine months ended September 30, 1999. These
interest income amounts were offset by interest expense of $582,000 for the nine
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months ended September 30, 2000 and $421,000 for the nine months ended September
30, 1999. The increases in interest income were due to higher cash balances from
the proceeds of our sales of preferred stock in March and July 2000 and our
initial public offering in August 2000. Interest expense increased primarily as
a result of additional borrowings under our equipment lines of credit.
LIQUIDITY AND CAPITAL RESOURCES
We funded our operations through September 30, 2000 primarily through
private placements of equity securities, an initial public offering of our
common stock and, to a lesser extent, revenue, subordinated debt and lines of
credit.
Net cash used in operating activities during the nine months ended
September 30, 2000 was $18.0 million and was attributable to a net loss of $21.4
million before stock based compensation charges of $12.0 million and charges for
stock issued for services of $712,000. Cash provided by operating activities
resulted from an increase in accounts payable of $1.3 million and accrued
liabilities of $893,000, deferred revenue of $1.9 million as well as increased
depreciation and amortization. These increases were partially offset by
increases in accounts receivable of $1.5 million and other assets of $1.1
million.
Net cash used in investing activities during the nine months ended
September 30, 2000 was $18.2 million and resulted from the purchases of $14.9
million in investments and purchases of property and equipment of $3.3 million.
Net cash provided by financing activities totaled $126.3 million and
resulted primarily from the sale of Series E and Series F preferred stock at a
price of $19.43 per share for total proceeds of approximately $37 million, sale
of our common stock in an initial public offering at a price of $21.00 per share
for approximately $88.2 million (net of issuance costs) and proceeds from the
exercise of stock options.
Upon the completion of our initial public offering, we recorded a charge to
additional paid in capital of $6.8 million representing the fair value of the
beneficial conversion feature of the Series F preferred stock.
As of September 30, 2000, our principal sources of liquidity included
$117.0 million of cash, cash equivalents and investments. We believe that our
current cash balances and cash flow from operations, if any, will be sufficient
to meet our working capital and capital expenditure requirements for at least
the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB No. 133". SFAS 137 deferred the effective date of SFAS 133 until
the first quarter of the fiscal year beginning after June 15, 2000. We will
adopt SFAS 133 in the quarter ending March 31, 2001. We have not engaged in
hedging activities or invested in derivative instruments and accordingly, do not
believe the implementation of SFAS 133 will have a material effect on our
financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees", the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 was effective July 1, 2000, but certain
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conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. FIN 44 has not had a material impact on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We have
complied with the guidance in SAB 101.
RISK FACTORS
This report contains forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this report. In addition to
the other information in this report, the following risk factors should be
considered carefully in evaluating our business and us.
WE ONLY BEGAN SUBSTANTIVE OPERATIONS IN APRIL 1996 AND, AS A RESULT, IT IS
DIFFICULT TO FORECAST OUR FUTURE OPERATING RESULTS.
We were incorporated in July 1995 and had no substantive operations until
April 1996. As a result, we have a limited operating history that makes it
difficult to forecast our future operating results. In addition, the revenue and
income potential of our business and market are unproven. Risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in new and rapidly evolving markets such as ours, include our
ability to:
- Successfully develop, commercialize and achieve significant market
acceptance of our current and next generation of products
- Develop and maintain strong relationships with server system vendors,
independent software vendors, application service providers, web
hosting services, value-added resellers and systems integrators
- Expand our domestic and international sales efforts
- Continue to attract and retain qualified personnel, particularly in the
areas of sales, marketing and engineering
- Manage growing operations
WE HAVE A HISTORY OF LOSSES, EXPECT TO CONTINUE TO INCUR SIGNIFICANT OPERATING
EXPENSES AND LOSSES IN THE FUTURE, AND MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY.
We have experienced operating losses in each quarterly and annual period
since our inception in 1995, and we expect to continue to incur significant
operating expenses and losses for the foreseeable future. We cannot predict when
we will be profitable, if at all. We may never achieve future revenue growth or
achieve or sustain profitability. If we do achieve profitability in any period,
we cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis. If we continue to incur net losses and never attain
profitability, our stock price will suffer.
We intend to substantially increase our operating expenses, particularly
expenses relating to expanding our sales and marketing activities and our direct
sales force, adding to the number of relationships within our indirect
distribution channels and increasing levels of research and development. As a
result, we will need to generate significant additional revenue to achieve and
maintain profitability in the future. Moreover, failure to achieve and sustain
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significant increases in our quarterly net sales could cause us to curtail
planned increases in our operating expenses, which would adversely impact our
ability to grow our business.
THE PLANNED EXPANSION OF OUR DIRECT SALES FORCE WILL INVOLVE SIGNIFICANT EXPENSE
TO US, AND MAY NOT SUCCEED.
During 2000, we have and expect to continue to, substantially increase the
number of our direct sales personnel to both support and develop leads for our
indirect distribution channels and increase the direct sale of our products.
This expansion will significantly increase personnel costs and related
expenditures. We do not expect new sales personnel to be productive immediately,
and we cannot assure you that costs of this expansion will not exceed the
revenue generated by the new sales personnel. We also cannot assure you that we
will be successful in hiring our target number of sales personnel.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND MAY BE SUBJECT
TO SEASONALITY, WHICH MAY CAUSE OUR STOCK PRICE TO FALL.
Our quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future, which makes it difficult for us
to predict our future operating results. Factors that could cause our operating
results to fluctuate include:
- Changes in the mix of products and services we sell
- The timing of the development and release of enhanced versions of
Central Dispatch, Commander, Global Dispatch, Enterprise Service
Console and Resonate Managed Services, as well as future product
enhancements and new products
- Deferrals of customer orders in anticipation of product enhancements or
new products
- Announcement or market acceptance of new products or product enhancements
offered by our competitors
- The mix of channels through which we sell our products
- The timing and amount of orders from companies who sell our products
through our indirect distribution channel
- The size and timing of large transactions may yield revenue
fluctuations that are inconsistent with prior or subsequent periods
- General economic conditions specific to the Internet services management
industry
Because of these factors, we believe that period-to-period comparisons of
our results of operations are not meaningful and should not be relied upon as an
indicator of our future performance. Our operating results will likely be below
the expectations of public market analysts and investors in some future quarter
or quarters. If this occurs, the price of our common stock will probably
decline.
A delay in anticipated sales beyond the end of a particular quarter may
harm our results of operations for that quarter. Furthermore, we base our
decisions regarding our operating expenses on anticipated revenue trends, and
our expense levels are relatively fixed. Consequently, if revenue levels fall
below our expectations, we may suffer unexpected losses because only a small
portion of our expenses varies with our revenue.
We expect to experience seasonality in the sales of our software products.
For example, we expect that sales may decline during summer months, particularly
in Europe, thereby adversely affecting sales during our third quarter. We also
anticipate that sales may be lower in our first fiscal quarter due to patterns
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in the capital budgeting and purchasing cycles of our current and prospective
customers. These seasonal variations in our sales may lead to fluctuations in
our quarterly operating results. Furthermore, it is difficult for us to evaluate
the degree to which this seasonality may affect our business because our growth
may have largely overshadowed this seasonality in recent periods.
IF WE FAIL TO SUCCESSFULLY EDUCATE POTENTIAL CUSTOMERS REGARDING THE BENEFITS OF
OUR INTERNET SERVICES MANAGEMENT SOLUTIONS, OUR ABILITY TO SELL OUR PRODUCTS AND
GROW OUR BUSINESS WILL BE SEVERELY LIMITED.
Our future success depends on widespread commercial acceptance of our
products. The market for Internet services management solutions is relatively
new and rapidly evolving. If we are unable to educate our potential customers,
and the market in general, of the advantages of our software based Internet
services management solutions over hardware based server load balancing products
and network system management products, our ability to sell our products will be
severely limited. Rather than utilizing comprehensive Internet services
management solutions, most web data center administrators manage their services
by adding servers and interconnecting a variety of single function systems and
traffic management tools. In addition, our competitors offer a wide variety of
hardware or software products that purport to serve the needs addressed by our
products. Our ability to increase revenue in the future depends on the extent to
which our potential customers recognize the value of our integrated Internet
services management solutions. The acceptance of our products and services may
also be hindered by:
- The reluctance of our prospective customers to replace or supplement
their current networking products, which may be supplied by more
established vendors, with our products
- The emergence of new technologies or industry standards, which could cause
our products to be less competitive or obsolete
In addition, because the market for Internet services management solutions
is in an early stage of development, we cannot accurately assess the size of the
market, and we have limited insight into trends that may emerge and affect our
business. For example, we may have difficulty in predicting customer needs,
developing products that could address those needs and establishing a
distribution strategy for these products.
IF OUR CENTRAL DISPATCH, COMMANDER, GLOBAL DISPATCH, ENTERPRISE SERVICE CONSOLE
OR RESONATE MANAGED SERVICES PRODUCTS OR OTHER NEW PRODUCTS, PRODUCT
ENHANCEMENTS OR SERVICES FAIL TO ACHIEVE CUSTOMER ACCEPTANCE, OUR GROWTH AND
REVENUE WILL BE LIMITED.
Rapid technological change, frequent new product introductions and
enhancements, changes in customer demands and evolving industry standards
characterize our industry. Our existing products will be rendered less
competitive or obsolete if we fail to introduce new products or product
enhancements that anticipate the features and functionality that customers
demand or ensure that they interoperate with current and emerging networking
technologies. The success of our products will depend on factors including:
- Their ability to meet customer needs and expectations regarding features
and performance
- Our ability to accurately anticipate industry trends and changes in
technology standards
- Timely completion and introduction of new product designs and features
Further, because the market is new for products that facilitate the
efficient processing of data and transactions across computer networks,
potential customers in this market may be confused or uncertain about the
relative merits of these products or which product to adopt, if any. Confusion
and uncertainty in the marketplace may inhibit customers from purchasing our
products, which could limit our growth and revenue.
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OUR SALES OF CENTRAL DISPATCH GENERATED APPROXIMATELY 74% OF OUR PRODUCT REVENUE
IN THE FIRST NINE MONTHS OF 2000, AND A DECLINE IN OUR SALES, IN ABSOLUTE
DOLLARS, OF CENTRAL DISPATCH COULD MATERIALLY HARM OUR RESULTS OF OPERATIONS.
In the first nine months of 2000, we derived approximately 74% of our
product revenue from sales of our Central Dispatch product, and we expect to
derive a significant portion of our revenue from sales of Central Dispatch for
at least the next two years. Our ability to sell Central Dispatch depends upon
its ability to solve critical network performance and availability problems of
our customers. If Central Dispatch is unable to solve these problems for our
customers, our ability to maintain our existing customer base and to obtain new
customers for Central Dispatch will be adversely impacted, which would result in
a substantial loss of revenue or an inability to grow our revenue.
OUR ABILITY TO GROW RESONATE MANAGED SERVICES WILL DEPEND UPON THE WILLINGNESS
OF CUSTOMERS TO OUTSOURCE INTERNET MANAGEMENT SERVICES.
We only recently introduced Resonate Managed Services, and we have derived
almost no revenue from Resonate Managed Services. Potential customers may be
unwilling to outsource monitoring and service level control of their eBusiness
applications and the infrastructure that supports them. For example, potential
customers may be reluctant to give our professional services engineers the
ability to adjust configuration of their infrastructure. There is also a risk
that our customers may wish to purchase our underlying software products to
perform the services themselves rather than contract with us to provide our
functionality as a service. Furthermore, it is difficult for us to evaluate the
extent to which potential customers will be willing to outsource these functions
due to the limited time period during which we have been offering Resonate
Managed Services. Should this occur, our ability to grow our business may be
harmed.
OUR ABILITY TO GROW OUR BUSINESS DEPENDS UPON INCREASED DEMAND FOR OUR PRODUCTS
FROM CORPORATE ENTERPRISES AND THE EXTENT TO WHICH OUR PRODUCTS CAN ACCOMMODATE
THE NEEDS OF CORPORATE ENTERPRISES.
We cannot assure you that corporate enterprises, who typically operate in
more complicated information technology environments, will widely adopt Internet
services management solutions to facilitate their data and transaction
processing needs. Our ability to grow our business will depend upon the extent
to which corporate enterprises adopt Internet services management solutions.
Moreover, if corporate enterprises require significantly different product
features for our Internet services management solutions, whether as a result of
choosing to outsource some or all of their applications to applications service
providers or otherwise, we will be required to enhance or modify our products in
this manner. As a result, we could incur delays in introducing enhanced or
modified versions of our products, delays in capturing enterprise customers and
significant expense. Any of these alternatives will limit our ability to grow
our business and could result in higher net losses.
WE DERIVE SUBSTANTIALLY ALL OF OUR REVENUE THROUGH THE SALE OF UPFRONT LICENSES
OF OUR SOFTWARE PRODUCTS, AND ALTERNATIVE BUSINESS MODELS EMPLOYED BY
COMPETITION COULD ERODE OUR PRODUCT PRICING.
If alternative business methods of delivering the capabilities of our
software products are developed by competition, they may substantially erode the
price which we can charge for our products. These alternative methods include
bundling these capabilities through a subscription model by application service
providers.
OUR MARKETS ARE HIGHLY COMPETITIVE, OUR CUSTOMERS MAY CHOOSE TO PURCHASE OUR
COMPETITORS PRODUCTS, AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPETE
EFFECTIVELY.
Our markets are new, rapidly evolving and highly competitive, and we expect
competition to persist and intensify in the future. Our principal competitors
for our Central Dispatch and Global Dispatch products include several companies
offering hardware-based server load balancing such as Alteon Web Systems (Nortel
Networks), Arrowpoint Communications (Cisco Systems), Cisco Systems, F5
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Networks, Foundry Networks and Microsoft. These competitors have significantly
greater financial, technical, marketing, service and other resources than we do.
In the future, increased competition for our Commander and Enterprise
Service Console products may come from providers of systems management products,
including Tivoli Systems, BMC Software and others, and from providers of network
management products, such as Micromuse and Visual Networks. As these providers
enhance their products to meet the needs and requirements of Internet deployed
applications and services, potential customers may choose their products over
our solutions.
We expect to continue to face additional competition as new participants
enter the traffic or systems management markets. In addition, other large
companies with significant resources, brand recognition and sales channels may
form alliances with or acquire competing traffic management solutions and emerge
as significant competitors. Potential competitors may bundle their products or
incorporate a load balancing or traffic management component into existing
products in a manner that discourages users from purchasing our products. In
addition, our competitors may choose to significantly reduce their prices and we
may be forced to match their price reductions in order to remain competitive.
Price reductions could significantly lower our revenue or increase our operating
losses.
Our competitors may respond more quickly to emerging technologies than we
do. We may lose customers to competitors if we are not able to respond to
requests for additional features in a timely fashion. We may not be able to
maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.
OUR SALES CYCLE IS LENGTHY AND UNPREDICTABLE, INVOLVING SIGNIFICANT EXPENSE AND
EFFORT BY US IN ADVANCE OF PRODUCT ORDERS, AND MAY CAUSE OUR OPERATING RESULTS
TO FLUCTUATE, WHICH COULD RESULT IN VOLATILITY IN OUR STOCK PRICE.
The typical sales cycle of our Internet services management products can be
lengthy and unpredictable and involves significant capital investment decisions
by prospective customers, as well as education of potential customers regarding
the benefits of our software-based solutions. The sales cycle for our products
has ranged from one to three months for sales to smaller customers to up to one
year or more for sales to large, established enterprises. As we increasingly
target enterprise customers, we expect our average sales cycle to lengthen. If
sales forecasted from specific customers for a particular quarter are not
realized in that quarter, we may be unable to compensate for the revenue
shortfall causing our operating results to vary significantly from quarter to
quarter. A significant variation in our quarterly results could result in
volatility in our stock price. Customers frequently begin by evaluating our
products on a limited basis before deciding to purchase them. Generally,
customers consider a wide range of issues before committing to purchase our
products, including product benefits, ability to interoperate with their
networking equipment and product reliability. While potential customers are
evaluating a purchase of our products, we may incur substantial sales and
marketing expenses and expend significant management effort. The result of
making these expenditures with no corresponding revenue in any given quarter
could further exacerbate our quarterly fluctuations and our stock price
volatility.
WE RELY ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF THIRD PARTIES TO IMPLEMENT
AND PROMOTE OUR SOFTWARE PLATFORM, AND IF THESE RELATIONSHIPS FAIL, OUR REVENUE
OR OUR ABILITY TO GROW OUR REVENUE MAY DECREASE.
We depend upon our relationships with Hewlett-Packard, IBM and Sun
Microsystems to help distribute and market our products. Although we have
developed distribution and marketing relations with these three companies and a
limited number of other server system vendors, independent software vendors,
application service providers, value-added resellers, systems integrators and
web hosting services, we cannot control the amount or timing of resources that
these third parties devote to our business. We cannot assure you that the third
parties who currently market our products will do so effectively, and we may not
be able to maintain our existing relationships with these third parties. In
addition, our arrangements with third parties typically do not restrict them
from working with our competitors. In the event one or more of these third
parties were to acquire or significantly increase their relationships with our
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competitors, their incentive to continue to devote their resources to selling
our products could decline and our revenue could suffer accordingly. If any of
our relationships is terminated, we may not be able to develop or maintain
substitute marketing and distribution relationships.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, OUR
ABILITY TO SUSTAIN OR INCREASE OUR SALES WILL BE HARMED.
In order to increase the sales of our products and services, we need to
increase both our direct and indirect sales channels. If we are unable to
increase both our direct and indirect sales channels, our ability to increase
revenue could be seriously harmed. In North America, we currently sell our
products directly and through companies with whom we have established indirect
sales channel relationships. Our sales and distribution strategy depends
principally on:
- Developing and expanding our indirect sales and distribution channels
by establishing relationships with leading server system vendors,
independent software vendors, application service providers, web
hosting services, value-added resellers and systems integrators
- Developing and expanding our direct sales organization by hiring
additional personnel
Outside North America, we derive a significant portion of our revenue
through our indirect sales channels. To achieve broader distribution of our
products, we expect to continue to invest in the development of indirect sales
channels. If we fail to develop and maintain relationships with significant
server system vendors, independent software vendors, application service
providers, web hosting services, value-added resellers and systems integrators,
or if these third parties are not successful in their sales efforts or if we
fail to expand our direct sales organization, sales of our products and services
may decrease or fail to increase.
OUR EXPANSION INTO INTERNATIONAL MARKETS MAY NOT SUCCEED AND WILL EXPOSE US TO
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND RESULT IN HIGHER PERSONNEL
COSTS.
We intend to expand into international markets. We have only limited
experience in marketing, selling and supporting our products internationally.
Prior to 1998, we had no revenue from sales to customers located outside North
America. Sales to customers located outside North America represented 8% of our
revenue for the nine months ended September 30, 2000.
In order to increase our international sales, we intend to expand the
number of relationships with third parties who sell our products internationally
and develop a direct international sales presence. We may incur higher personnel
costs establishing international offices and by hiring international sales
staff, which may not result in an increase in our revenue. We may not be able to
maintain our operating margins for international sales due to the higher costs
of these sales.
Our continued growth will require us to develop our international
operations in European and Asian countries. If we are unable to expand our
international operations successfully, and in a timely manner, our business and
results of operations may be seriously harmed. Such expansion may be more
difficult or take longer than we anticipate, and we may not be able to
successfully market, sell, deliver and support our products internationally. Our
international operations could also be affected by a number of risks and
uncertainties, including:
- The difficulties and significant costs of staffing and managing foreign
operations
- Unexpected changes in regulatory requirements
- Legal uncertainties regarding liability, export and import restrictions,
tariffs and other trade barriers
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- Reduced protection of intellectual property in other countries
- Longer collection cycles and increased difficulty in collecting delinquent
or unpaid accounts
- Fluctuations in the value of the U.S. dollar relative to other currencies
- Potentially adverse tax consequences
- Political and economic instability
Any of these factors could impair our ability to expand our international
operations into these markets or to generate significant revenue from those
markets in which we operate.
WE MAY NOT BE ABLE TO ATTRACT, TRAIN OR RETAIN QUALIFIED ENGINEERING, SALES,
MARKETING, PROFESSIONAL SERVICES AND CUSTOMER SUPPORT PERSONNEL BECAUSE THESE
PERSONNEL ARE LIMITED IN NUMBER AND IN HIGH DEMAND.
Our future success will depend in large part on our ability to hire and
retain a significant number of qualified personnel, particularly in engineering,
sales, marketing, professional services and customer support. Competition for
qualified personnel is intense, especially in Northern California where we are
headquartered, and we may not be able to hire the quality and number of
personnel we are targeting. Our inability to hire and retain qualified personnel
may harm our results of operations and our ability to maintain or increase
market share.
We currently have a small professional services and customer support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. The installation of Internet traffic
management solutions, the integration of these solutions into existing networks
and the ongoing support can be complex. Accordingly, we need highly trained
professional services and customer support personnel. Hiring professional
services and customer support personnel is very difficult in our industry due to
the limited number of qualified candidates available.
Our ability to attract and retain qualified personnel may be even more
difficult because potential employees may perceive the value of our future stock
option grants offered to them to be less valuable than stock option grants
offered by other companies that are not yet public. Our inability to attract,
train or retain the number of highly qualified engineering, sales, marketing,
professional services and customer support personnel that our business needs may
seriously harm our business and results of operations.
OUR INTELLECTUAL PROPERTY COULD BE USED BY OTHERS WITHOUT OUR CONSENT BECAUSE
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. In addition, other
parties may breach confidentiality agreements or other protective contracts we
have entered into, and we may not be able to enforce our rights in the event of
these breaches. Any actions taken by us to enforce our intellectual property
rights could result in significant expense to us and the diversion of management
time and other resources.
In September 2000, we filed a lawsuit for patent infringement against
Alteon Websystems, which has been acquired by Nortel Networks. This action could
require us to expend significant financial resources to protect our intellectual
property, and may consume valuable management time.
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Monitoring use of our products is difficult and we cannot be certain that
the steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT, SYSTEMS AND
RESOURCES, AND WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH.
Since the introduction of our product line, we have experienced a period of
rapid growth and expansion that has placed, and continues to place, a
significant strain on all of our management, systems and resources. We have
increased the number of our employees from 42 at December 31, 1997 to 251 at
September 30, 2000. We expect our headcount to continue to grow substantially.
We expect our growth to continue to strain our management, operational and
financial resources. For example, we may not be able to install adequate
financial control systems in an efficient and timely manner, and our current or
planned information systems, procedures and controls may be inadequate to
support our future operations. The difficulties associated with installing and
implementing new systems, procedures and controls may place a significant burden
on our management and our internal resources. If we are unable to manage our
growth effectively, our business and results of operations may be seriously
harmed.
WE DEPEND ON OUR KEY PERSONNEL AND LOSS OF ANY KEY PERSONNEL MAY HARM OUR
BUSINESS AND RESULTS OF OPERATIONS.
Our success depends to a significant degree upon the continued
contributions of our key management, product development, sales and marketing
and finance personnel, many of whom would be difficult to replace. In
particular, we rely on our President and Chief Executive Officer, Ken Schroeder.
If we were to lose the services of Mr. Schroeder, our business and results of
operations could be harmed. We do not maintain employment agreements or key
person life insurance for any of our key personnel.
THE DEVELOPMENT OF NEW OPERATING SYSTEMS OR THE EMERGENCE OF NEW NETWORK
STANDARDS COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE OR REQUIRE US TO REDESIGN
OUR PRODUCTS.
Our products operate on Solaris, Windows NT, AIX, Linux and HP/UX operating
systems, and features of our products are dependent upon the network standards
used by a customer. If new operating systems are developed or new network
standards emerge, our failure to modify our products in a timely or cost
effective manner could limit our potential customer base, which would adversely
affect our ability to increase our revenue. Furthermore, we will need to modify
our products or develop new versions of our products as new versions of
operating systems are developed. If we fail to continue to develop new products
to respond to changes in computer networks and operating systems, our ability to
grow our business will suffer.
UNDETECTED SOFTWARE ERRORS IN OUR PRODUCTS COULD HARM OUR REPUTATION AND CAUSE
US TO INCUR SIGNIFICANT WARRANTY AND REPAIR COSTS.
Software products frequently contain undetected errors when first
introduced or as new versions are released. We have experienced these errors in
the past in connection with new products and product upgrades. We expect that
these errors will be found from time to time in new or enhanced products after
commencement of commercial shipments. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems.
BECAUSE OUR PRODUCTS COULD INTERFERE WITH THE OPERATIONS OF OUR CUSTOMERS' OTHER
SOFTWARE APPLICATIONS, WE MAY BE SUBJECT TO POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS BY THESE CUSTOMERS, WHICH MAY BE COSTLY AND MAY NOT BE
ADEQUATELY COVERED BY INSURANCE.
Our products are integrated with our customers' networks and software
applications. The sale and support of our products may entail the risk of
product liability or warranty claims. Any of these claims, even if not
meritorious, could result in costly litigation or divert management's attention
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and resources. Although we carry general liability insurance, our current
insurance coverage would likely be insufficient to protect us from all liability
that may be imposed under these types of claims. A material product liability
claim may seriously harm our results of operations.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE AND ROYALTY ARRANGEMENTS.
Our industry is characterized by the existence of a large number of patents
and frequent litigation based on allegations of patent infringement and the
violation of other intellectual property rights. We may be subject to legal
proceedings and claims for alleged infringement by us or our licensees of third
party proprietary rights, such as patents, trademarks or copyrights, from time
to time in the ordinary course of business. Any claims relating to the
infringement of third party proprietary rights, even if not meritorious, could
result in costly litigation, divert management's attention and resources, or
require us to enter into royalty or license agreements that are not advantageous
to us. In addition, parties making these claims may be able to obtain an
injunction, which could prevent us from selling our products in the United
States or abroad. Any of these results could harm our business. We may
increasingly be subject to infringement claims as the number of products and
competitors in our industry grows and functionalities of products overlap.
Former employers of our current and future employees may assert that our
employees have improperly disclosed confidential or proprietary information to
us.
BECAUSE WE DERIVE OUR REVENUE PRIMARILY FROM COMPANIES THAT USE THE INTERNET AND
INTERNET-BASED TECHNOLOGIES TO CONDUCT BUSINESS, A GENERAL DECLINE IN THE
INTERNET SECTOR COULD SIGNIFICANTLY HURT OUR OPERATIONS.
Our software products and services are designed for customers that use the
Internet and Internet-based technologies to conduct business. While growth of
electronic business has been rapid, some companies within the Internet sector
have experienced a slowdown beginning in the second quarter of 2000. Slowdowns
in the Internet sector could adversely affect the ability of some of our
customers to timely fulfill their payment obligations to us. During the nine
months ended September 30, 2000, we wrote off accounts receivable of
approximately $130,000 as a result of the insolvency of two of our customers. To
the extent we are required to write off more accounts receivable, our results of
operations will be harmed.
OUR PRODUCTS INCORPORATE THE JAVA RUN TIME ENVIRONMENT, WHICH WE LICENSE FROM
SUN MICROSYSTEMS, AND OUR PRODUCT SHIPMENTS COULD BE DELAYED IF THAT SOFTWARE IS
NO LONGER AVAILABLE TO US.
Our products incorporate the Java run time environment, which we license
from Sun Microsystems. This third party software may not continue to be
available to us on commercially reasonable terms. If we cannot maintain our
license to Sun's Java run time environment, shipments of our products could be
delayed until we could develop or license software to replace the functionality
provided by this license and integrate that software into our products. Delays
in product shipments could harm our revenue.
A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS BECAUSE WE DO NOT HAVE A
SEPARATE GEOGRAPHICALLY LOCATED BACKUP SYSTEM.
We currently do not have fully redundant systems for our service at an
alternate site. A disaster could severely damage our ability to deliver Resonate
Managed Services. Resonate Managed Services depend upon our ability to maintain
and protect our computer systems, all of which are located in our principal
headquarters in Sunnyvale, California. Sunnyvale exists on or near a known
earthquake fault zone. Although our facility which hosts our computer systems,
is designed to be fault tolerant, the system is vulnerable to damage from fire,
floods, earthquakes, power loss, telecommunications failures, and similar
events. Although we maintain general business insurance against fires, floods
and some general business interruptions, there can be no assurance that the
amount of coverage will be adequate in any particular case.
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WE MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE AVAILABLE ON TERMS
FAVORABLE TO US, IF AT ALL.
We believe that our cash from operations and our recent initial public
offering will be sufficient to meet our working capital and capital expenditure
needs for at least the next twelve months. The estimate of the time period in
which our cash resources will be sufficient to meet our working capital and
capital expenditure needs is a forward looking statement that involves risks and
uncertainties. Our actual funding requirements may differ materially from this
as a result of a number of factors, including our development and introductions
of new products and expansion in the number of our personnel. We may need to
raise additional funds prior to the end of the next twelve months or at a later
date. We cannot assure you that any additional financing we may need will be
available on terms favorable to us, if at all.
Further, if we issue additional equity securities, stockholders may
experience dilution, and the new equity securities may have rights, preferences
or privileges senior to those of existing holders of our common stock. If we
cannot raise funds on acceptable terms, we may not be able to develop new
products or enhance our existing products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES AND 5% STOCKHOLDERS ARE
ABLE TO EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS REQUIRING STOCKHOLDER
APPROVAL.
Upon the completion of our initial public offering in August 2000, our
executive officers, directors and their affiliates and 5% stockholders
beneficially owned, in the aggregate, approximately 57.1% of our outstanding
common stock. As a result, these stockholders are able to exercise significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, which may have
the effect of delaying or preventing a third party from acquiring control over
us even if our other stockholders believe that it is desirable.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
The market price of our common stock may fluctuate significantly in
response to a number of factors such as changes in accounting rules and
regulations, market trends and company performance, some of which are beyond our
control. In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Regardless
of its outcome, securities litigation may result in substantial costs and divert
management's attention and resources, which could harm our business and results
of operations.
A SIGNIFICANT PORTION OF OUR TOTAL OUTSTANDING SHARES IS RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THE
EXPIRATION AND RESTRICTIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. In addition, such sales could create the
perception to the public of difficulties or problems with our products. As a
result, these sales might also make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS, CAUSE US TO
INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
We may acquire businesses, products or technologies that we believe may
complement our current product offerings, augment our market coverage or enhance
our technical capabilities, or that may otherwise offer growth opportunities.
While we have no current agreements with respect to any acquisitions, we may
acquire businesses, products or technologies in the future. We may not be able
to successfully integrate any businesses, products, technologies, or personnel
that we might acquire in the future, and our failure to do so could harm our
business. Furthermore, we may issue equity securities to pay for any future
acquisitions which could be dilutive to our existing stockholders.
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WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM OUR RECENT INITIAL PUBLIC
OFFERING AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
The net proceeds from our initial public offering, which closed in August
2000, are not allocated for specific uses other than working capital and general
corporate purposes. Thus, our management has broad discretion over how these
proceeds are used and could spend most of these proceeds in ways with which our
stockholders may not agree. We cannot assure you that the proceeds will be
invested to yield a favorable return.
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 which 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 members of our board of directors or act by written consent without a
meeting. In addition, our board of directors have staggered terms which makes it
difficult to remove them all at once. The acquiror would also be required to
provide advance notice of its proposal to remove directors at an annual meeting.
The acquiror also 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 which
would significantly dilute the ownership of a hostile acquiror. In addition,
Section 203 of the Delaware General Corporations 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 to some stockholders.
Our board of directors could choose not to negotiate with an acquiror that
it does not feel is in the strategic interests of Resonate. If the acquiror was
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition by the anti-takeover measures, our stockholders
could lose the opportunity to sell their shares at a favorable price.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To date, all of our recognized revenue has been denominated in U.S. dollars
and primarily from customers in the United States, and our exposure to foreign
currency exchange rate changes has been immaterial. We expect, however, that an
increasing percentage of our future product and services revenue may come from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of some currencies in
relation to the U.S. dollar. Although we will continue to monitor our exposure
to currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, we cannot
assure you that exchange rate fluctuations will not adversely affect our
financial results in the future.
We maintain an investment portfolio of various issuers, types and
maturities. Our investment portfolio consists of both fixed and variable rate
financial instruments. These securities are classified as available-for-sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses, if any, reported in accumulated other comprehensive
income (loss), net of taxes. At any time, a sharp rise in interest rates could
seriously harm the fair value of our investment portfolio. Conversely, declines
in interest rates could seriously harm interest earnings of our investment
portfolio. Currently, we do not hedge these interest rate exposures.
As of September 30, 2000, we had total short-term debt outstanding of $1.1
million and long-term debt outstanding of $1.6 million, which bear interest
rates that are tied to the prime rate. Therefore, we are subject to exposure to
interest rate risk for these borrowings based on fluctuations in the prime rate.
Based upon the outstanding indebtedness under these arrangements, an increase in
the prime rate of 0.5% would cause a corresponding increase in our annual
interest expense of approximately $5,367.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 12, 2000, we filed a complaint for patent infringement against
Alteon Web Systems, Inc. in the United States District Court, Northern District
of California. We believe Alteon infringes United States Letters Patent No.
5,774,660, entitled "World-Wide Web Server With Delayed Resource-Binding For
Resource-Based Load Balancing On A Distributed Resource Multi-Node Network,"
which was issued to us on June 30, 1998. Alteon served its answer to our
complaint in October 2000, in which Alteon denied our allegations and
counterclaimed that our patent is invalid. In October 2000, Alteon was acquired
by Nortel Networks Corporation. An initial case management conference, at which
scheduling and other procedural matters will be set has been scheduled by the
court for January 2001.
We are also involved in disputes in the normal course of business. We don't
believe that the outcome of any of these disputes will have a material effect on
our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, we issued and sold an
aggregate of 127,566 shares of its Common Stock as a result of the exercise of
options under the Registrant's 1996 Stock Option Plan, for gross proceeds of
approximately $116,000. These purchases and sales were exempt from registration
under the Securities Act of 1933, as amended, by virtue of Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule. The recipients in such transactions represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us.
On July 6, 2000, we issued 1,389,603 shares of its Series F Preferred Stock
to three strategic investors for $19.43 per share for an aggregate of $27
million. These sales were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering. The 1,389,603 shares of our
Series F Preferred Stock were converted into 1,607,142 share of common stock
upon the closing of our initial public offering on August 8, 2000.
On August 8, 2000, we closed our initial public offering of 4,600,000
shares of its Common Stock (including the shares issued as a result of the
exercise of the underwriters' overallotment option) at a price per share to the
public of $21.00, pursuant to a registration statement on Form S-1 (File No.
333-31730) filed with the Securities and Exchange Commission and declared
effective on August 2, 2000. The net proceeds provided to us, as a result of
this sale, net of the underwriting discounts and other offering costs, were
approximately $88.2 million. Goldman Sachs & Co., Chase H&Q, Dain Raucher
Wessels and Wit SoundView were the managing underwriters of the initial public
offering.
We have not yet used any funds from the initial public offering. We expect
to use the net proceeds from the initial public offering to develop products and
support activities, to expand selling and marketing infrastructure including
capital expenditures and for working capital purposes. We may also use a portion
of the net proceeds from the offering to acquire or invest in businesses,
technologies or products that are complementary to our business. We currently
have no commitments or agreements with respect to any acquisitions or
investments. We have not determined the amounts we plan to spend on any of the
uses described above or the timing of these expenditures. Pending our use of the
net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period from July 1, 2000 through September 30, 2000, we
submitted several matters to our security holders for action by written consent.
The following is a brief description of the matters voted upon, and a statement
of the number of votes cast for the resolution and number of abstentions. As the
matters were approved by action by written consent, no votes were cast against
the resolution. There were no broker non-votes with respect to any matter.
To approve the Restated Certificate of Incorporation, to take effect immediately
after the closing of the our initial public offering.
FOR ABSTAIN
--- -------
Common Stock: 6,863,188 1,663,720
Preferred Stock: 12,458,790 1,072,773
To approve the Restated Bylaws, to take effect immediately after the closing of
the our initial public offering.
FOR ABSTAIN
--- -------
Common Stock: 6,863,188 1,663,720
Preferred Stock: 12,458,790 1,072,773
To approve the reincorporation of Resonate Inc., a California corporation,
into the State of Delaware through a merger with and into Resonate Inc., a
Delaware corporation.
FOR ABSTAIN
--- -------
Common Stock: 6,863,188 1,663,720
Preferred Stock: 12,458,790 1,072,773
To approve the 2000 Stock Plan, to take effect immediately after the closing of
our initial public offering.
FOR ABSTAIN
--- -------
Common Stock: 6,863,188 1,663,720
Preferred Stock: 12,458,790 1,072,773
To approve the 2000 Employee Stock Purchase Plan, to take effect immediately
after the closing of the our initial public offering.
FOR ABSTAIN
--- -------
Common Stock: 6,863,188 1,663,720
Preferred Stock: 12,458,790 1,072,773
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Restated Certificate of Incorporation.
3.2* Bylaws.
4.1* Form of Specimen Certificate.
10.1* Form of Indemnification Agreement between Resonate Inc. and
its directors and officers.
10.2* 1996 Stock Plan and form of agreement thereunder.
10.3* 2000 Stock Plan and form of agreement thereunder.
10.4* 2000 Employee Stock Purchase Plan and form of agreement
thereunder.
10.5* Lease in Sunnyvale, California.
10.6* Java License from Sun Microsystems, Inc.
27.1 Financial Data Schedule.
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*Previously filed as an exhibit to the Registration Statement filed on
Form S-1 on August 1, 2000 (File No. 333-31730).
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESONATE INC.
Date: November 10, 2000 /s/Kenneth Schroeder
-------------------------------------
Kenneth Schroeder
President and Chief Executive Officer
/s/Robert C. Hausmann
-------------------------------------
Robert C. Hausmann
Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1* Restated Certificate of Incorporation.
3.2* Bylaws.
4.1* Form of Specimen Certificate.
10.1* Form of Indemnification Agreement between Resonate Inc. and
its directors and officers.
10.2* 1996 Stock Plan and form of agreement thereunder.
10.3* 2000 Stock Plan and form of agreement thereunder.
10.4* 2000 Employee Stock Purchase Plan and form of agreement
thereunder.
10.5* Lease in Sunnyvale, California.
10.6* Java License from Sun Microsystems, Inc.
27.1 Financial Data Schedules.
*Previously filed as an exhibit to the Registration Statement
filed on Form S-1 on August 1, 2000 (File No. 333-31730).
33
