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Filed pursuant to Rule 424(b)(4)
Registration No. 333-95125
3,000,000 Shares
BROADBASE SOFTWARE, INC.
[BROADBASE LOGO]
Common Stock
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Broadbase is offering 1,500,000 of the shares to be sold in the offering.
The selling stockholders identified in this prospectus are offering an
additional 1,500,000 shares. Broadbase will not receive any of the proceeds from
the sale of shares being sold by the selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"BBSW". The last reported sale price of the common stock on February 14, 2000
was $96.31 per share.
See "Risk Factors" beginning on page 5 to read about factors you should
consider before buying shares of the common stock.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Per Share Total
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Initial price to public..................................... $95.00 $285,000,000
Underwriting discount....................................... $ 4.75 $ 14,250,000
Proceeds, before expenses, to Broadbase..................... $90.25 $135,375,000
Proceeds, before expenses, to the selling stockholders...... $90.25 $135,375,000
</TABLE>
To the extent that the underwriters sell more than 3,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
450,000 shares from Broadbase at the initial price to public less the
underwriting discount.
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The underwriters expect to deliver the shares against payment in New York,
New York on February 18, 2000.
GOLDMAN, SACHS & CO.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
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Prospectus dated February 15, 2000.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 5
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND INDUSTRY DATA......... 17
USE OF PROCEEDS........................ 18
DIVIDEND POLICY........................ 18
PRICE RANGE OF COMMON STOCK............ 18
CAPITALIZATION......................... 19
DILUTION............................... 20
SELECTED CONSOLIDATED FINANCIAL DATA... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 24
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BUSINESS............................... 32
MANAGEMENT............................. 50
RELATED PARTY TRANSACTIONS............. 61
PRINCIPAL AND SELLING STOCKHOLDERS..... 63
DESCRIPTION OF CAPITAL STOCK........... 66
SHARES ELIGIBLE FOR FUTURE SALE........ 69
LEGAL MATTERS.......................... 71
EXPERTS................................ 71
WHERE YOU CAN FIND ADDITIONAL
INFORMATION.......................... 72
INDEX TO THE FINANCIAL STATEMENTS...... F-1
UNDERWRITING........................... U-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. This prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of the factors set forth under "Risk
Factors" and elsewhere in this prospectus.
OUR BUSINESS
Broadbase develops and markets software that integrates and analyzes
customer information from Internet and traditional business channels, enabling
businesses to improve their customer acquisition, retention and profitability.
Our software integrates information from numerous points of customer
interaction, or touch points, by pulling information from multiple data sources
and transforming it into a standard format that can be analyzed. Our software
then analyzes this reformatted information to provide a comprehensive
understanding of the customer lifecycle from initial identification through
acquisition and retention. Our products then allow businesses to translate this
analysis into specific actions such as targeting profitable customers,
personalizing customer interactions and identifying opportunities to sell
complementary or higher-end products and services. In addition, with our recent
acquisition of Rubric, Inc., we now offer Rubric's eMA (eMarketing Automation)
application, which enables businesses to act on this analysis through automated
marketing campaigns over the Internet and traditional channels. By integrating,
analyzing and acting on valuable customer information, our products enable
businesses to build long-lasting and profitable customer relationships.
The Internet is emerging as an important channel for businesses to interact
with their customers. As a result, traditional "bricks and mortar" companies are
adapting many of their business activities to the Internet. In addition, a new
class of Internet-only companies is rapidly emerging. Together, these companies
represent a new category of enterprise called the e-business. The rise of the
Internet as a new business channel has led to a dramatic increase in the number
of ways that businesses interact with their customers. Today, these include not
only traditional storefronts, catalogs and call centers, but also websites,
e-mail marketing campaigns and online customer service. The Internet has also
created a highly competitive environment for businesses, where customers can
easily switch among alternative product and service offerings. To maintain
customer loyalty in this environment, e-businesses need to develop a complete
understanding of individual customers to maximize the effectiveness of every
customer interaction.
Broadbase software addresses this need. Our software consists of a suite of
applications that are built on Foundation, our software platform that provides a
wide range of analytic capabilities. Our software integrates information that
has traditionally been isolated in separate systems designed to support specific
types of customer interactions, such as customer service and Internet-based
sales. It provides decision-makers in sales, marketing, customer service and
e-commerce business functions with a more comprehensive view of the customer.
Each application provides these decision-makers with analysis of customer
information that is specifically designed for their particular business
function. Our solutions can generally be deployed in less than 30 days, allowing
our customers to quickly capture revenue opportunities and achieve rapid return
on investment. To date, over 150 end user customers have licensed our products
from us and our distributors and resellers. Traditional "bricks and mortar"
customers include Aon Service Corporation, Boeing, Canon Computer, Chevron,
HealthSystem Minnesota, Hewlett-Packard, Honda, Inprise, Polaris Service, Telia
AB and Xerox. Internet-only customers include BizBuyer.com, CMP Media, InsWeb,
Onvia.com and Pets.com. Each of the foregoing end user customers has licensed
products and purchased services totaling at least $300,000.
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ACQUISITION OF RUBRIC
On February 1, 2000, we acquired privately-held Rubric, a leading provider
of e-marketing software applications. Rubric's product, eMA, automates the
planning, execution and measurement of marketing campaigns. It streamlines
campaign planning by automating the process of requesting, reviewing, approving
and launching campaigns. The software enables the identification of prospect and
customer segments that can be targeted with personalized messages and offers.
eMA then automates the execution of Internet and traditional marketing campaigns
by generating personalized e-mail and web pages, personalized letters and faxes,
and lists for direct mail and call center campaigns. It can manage their
campaigns concurrently over a number of different channels. In addition, eMA can
also automate other areas of customer interaction, such as customer service. The
software also provides a communications system that facilitates personalized,
targeted and interactive communications across the Internet and traditional
channels over an extended period of time. Following execution of the marketing
campaign, eMA's measurement capabilities allow users to close the loop by
tracking campaign results, costs and revenue. By enabling users to more
effectively generate leads and build customer relationships, eMA is designed to
generate revenue, reduce marketing costs and improve marketing effectiveness. We
believe that the combination of eMA and our existing products will allow
businesses to both analyze their customer data and to plan, manage and execute
marketing campaigns based on this analysis.
Rubric's customers include BEA Systems, Cisco Systems, Citrix, DiTech.com,
Hewlett-Packard, Internet Appliance Network, LoanCity.com, MERANT, MSHOW.com,
N.E.T., Outpost.com, PeopleFirst.com, Rainmaker Systems, Sierra Atlantic and
Sybase. Each of these end users has licensed products and purchase services
totaling at least $100,000. Rubric had total revenue of approximately $343,000
in 1998 and approximately $3.4 million in 1999, and at December 31, 1999, Rubric
had an accumulated deficit of approximately $29.3 million. Rubric grew from 38
employees at December 31, 1998 to 78 employees at December 31, 1999.
In connection with this acquisition, we issued approximately 3.0 million
shares of our common stock in exchange for all outstanding shares of Rubric
capital stock, and converted all outstanding options and warrants to acquire
Rubric capital stock into options and warrants to purchase approximately 600,000
shares of our common stock. We intend to account for the acquisition as a
purchase, and the merger is intended to qualify as a tax-free reorganization.
OUR BUSINESS HAS RISKS
We introduced Foundation in the fourth quarter of 1997, and began offering
our analytic applications in the third quarter of 1998. In May 1999, we expanded
our suite by introducing our first applications designed for e-business. We
expect that our future growth will depend significantly on revenue from licenses
of these new applications. We have incurred net losses in each period since our
inception and as of December 31, 1999 we had accumulated net losses of
approximately $41.7 million. We have not achieved profitability and we expect to
continue to incur losses for the foreseeable future. Our business is subject to
risks, and our market is subject to rapid technological change and intense
competition. In addition, our acquisition of Rubric involves risks, including
the possibility that costs or difficulties related to the integration of our
businesses or products could be greater than expected.
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THE OFFERING
Common stock offered by
Broadbase.......................... 1,500,000 shares
Common stock offered by the selling
stockholders..................... 1,500,000 shares
Common stock to be outstanding
after this offering................ 22,542,151 shares
Use of proceeds.................... General corporate purposes, including
working capital. See "Use of Proceeds".
Nasdaq National Market symbol...... BBSW
The number of shares of our common stock that will be outstanding after
this offering is based on the shares outstanding on December 31, 1999 and the
2,992,064 shares that we issued in exchange for all outstanding shares of Rubric
capital stock in connection with our acquisition of Rubric, and excludes:
- 607,728 shares reserved for issuance pursuant to the exercise of options
and warrants to purchase Rubric capital stock that were converted into
options and warrants to purchase our common stock;
- 3,195,489 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $10.12 per share;
- 2,764,695 shares available for issuance under our 1999 Equity Incentive
Plan as of December 31, 1999 which amount was increased by 902,504 shares
on January 1, 2000; and
- 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan as of December 31, 1999 which amount was increased by
180,500 shares on January 1, 2000.
As of February 1, 2000, we had granted additional options to purchase an
aggregate of 2,667,591 shares of common stock at a weighted average price of
$86.41 per share under our 1999 Equity Incentive Plan, and options to purchase
300,000 shares of common stock at an exercise price of $54.00 per share outside
of our employee benefit plans.
CORPORATE INFORMATION
We incorporated in California in November 1995 under the name BroadBase
Information Systems, Inc., and reincorporated in Delaware in September 1999
under our current name. Our principal executive offices are located at 172
Constitution Drive, Menlo Park, California 94025. Our telephone number is (650)
614-8300.
Broadbase, Foundation, Rubric and eMA are our trademarks. This prospectus
also contains trademarks and trade names of other companies.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
PERIOD FROM YEARS ENDED YEAR ENDED
NOVEMBER 28, 1995 DECEMBER 31, DECEMBER 31, 1999
(INCEPTION) TO ------------------ ----------------------
DECEMBER 31, 1996 1997 1998 ACTUAL PRO FORMA
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Net revenue...................... $ -- $ -- $ 3,439 $ 10,442 $ 13,872
Gross margin..................... -- -- 2,472 6,395 6,437
Loss from operations............. (1,273) (5,575) (11,452) (24,135) (106,582)
Net loss......................... $(1,272) $(5,487) $(11,343) $(23,570) $(106,233)
Basic and diluted net loss per
share.......................... $ (4.30) $ (6.19) $ (8.85) $ (3.74) $ (11.44)
Weighted-average common
shares -- basic and diluted.... 296 887 1,281 6,296 9,287
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<CAPTION>
DECEMBER 31, 1999
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PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
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(UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $76,642 $ 76,852 $211,377
Working capital........................................... 69,362 60,025 194,550
Total assets.............................................. 84,770 449,280 583,805
Long-term debt and capital lease obligations, net of
current portion......................................... 333 548 548
Stockholders' equity...................................... $73,206 $426,093 $560,618
</TABLE>
The unaudited pro forma information reflects our recent acquisition of
Rubric. The unaudited pro forma combined statement of operations data is derived
from our audited statement of operations data and audited statement of
operations data of Rubric, for the year ended December 31, 1999, giving effect
to the acquisition as if it had occurred on January 1, 1999. The unaudited pro
forma combined balance sheet data is derived from our audited balance sheet data
and the audited balance sheet data of Rubric as of December 31, 1999, giving
effect to the acquisition as if it had occurred on December 31, 1999. The
unaudited pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the transaction had been consummated at the dates
indicated, nor is it necessarily indicative of the future operating results or
financial position of the combined companies.
The unaudited pro forma as adjusted balance sheet data above reflects the
receipt of the net proceeds from the sale of the 1,500,000 shares of common
stock offered by Broadbase at the initial price to public of $95.00 per share
after deducting the underwriting discounts and commissions and estimated
offering expenses.
Unless otherwise indicated, all information in this prospectus (1) assumes
that the underwriters will not exercise their over-allotment option to purchase
additional shares in this offering, (2) does not give effect to the recently
announced two-for-one split of our common stock that is planned to occur after
this offering, and (3) does not include approximately 3.0 million shares of our
common stock that we issued in connection with our acquisition of Rubric.
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RISK FACTORS
Before you invest in our common stock, you should carefully consider the
risks described below, together with all of the other information included in
this prospectus.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
We are still in the early stages of our development. Our revenue and income
potential is unproven and depends on emerging, rapidly changing markets and on
acceptance of products that we have only recently introduced. Because our
operating history is limited and our product offerings are evolving, it is
difficult to evaluate our business and our future prospects.
We incorporated in November 1995, and from that date through December 1997
were in the development stage, conducting research and developing our initial
products. We have only recently begun licensing our products and deriving
revenue. In the fourth quarter of 1997, we introduced our first product,
Foundation, which was designed to enable organizations to build and manage
datamarts -- a system for storing, retrieving and managing data for a specific
business function or department -- to analyze their customer information. In the
third quarter of 1998, we began offering applications designed to operate with
Foundation to provide analysis for customer relationship management. In May
1999, we introduced applications designed for Internet sales channels, Internet
marketing and other customer-focused e-business applications, and we also
released new versions of existing applications. Because we have only recently
introduced our products, it is difficult to predict whether our products will
continue to be accepted by the market and the level of revenues we can expect to
derive from sales of our products.
Rubric was also in the early stages of its development and had licensed its
eMA product to a limited number of customers. It is difficult to predict the
effect our recent acquisition of Rubric will have on our business.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE
We incurred net losses and losses from operations for each period from our
inception through the end of 1999. As of December 31, 1999, we had accumulated
net losses of approximately $41.7 million, which represented 300% of our
cumulative revenue as of that date. As of December 31, 1999, Rubric had
accumulated net losses of approximately $29.3 million. We have not achieved
profitability and we expect to continue to incur substantial operating losses
for the foreseeable future. We expect to incur increasing sales and marketing,
research and development and general and administrative expenses. As a result,
we will need to significantly increase our revenue to achieve profitability.
Although our revenue grew significantly in 1999, our growth may not continue at
the current rate or at all.
WE EXPECT OUR QUARTERLY REVENUE AND OPERATING RESULTS TO FLUCTUATE
Our revenue and operating results are likely to vary significantly from
quarter to quarter. The factors that affect our quarterly operating results
include:
- the demand for our products, particularly our e-business applications;
- the size and timing of customer orders for our products and our
professional services;
- increased expenses for sales and marketing, product development and
administration;
- changes in the level of sales of professional services as compared to
product licenses;
- changes in the mix of our domestic and international sales; and
- changes in general economic and market conditions.
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Our quarterly revenue increased 314% from the fourth quarter of 1998 to the
fourth quarter of 1999. We do not believe that these rates of growth are
indicative of the growth in revenues, if any, that we can expect in the future.
Accordingly, we believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely on these comparisons as an
indication of our future performance. Our operating results may fall below the
expectations of investors. In this event, the market price of our common stock
would likely fall.
OUR OPERATING EXPENSES ARE INCREASING AND WE WOULD NOT BE ABLE TO REDUCE THEM
QUICKLY, WHICH COULD RESULT IN LOWER THAN EXPECTED OPERATING RESULTS IF WE DO
NOT ACHIEVE EXPECTED REVENUE LEVELS
We plan to significantly increase our operating expenses as we expand our
sales, marketing, research and development, professional services, customer
support and administrative groups. These expenses will be incurred before we
generate any revenues from this increased spending. If we do not significantly
increase revenues as a result of these efforts, we will not achieve
profitability. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. As a result, we would not
be able to reduce spending quickly if our revenue were lower than we had
projected. Our ability to accurately forecast our quarterly revenue is limited
because of our limited operating history, the rapidly evolving nature of our
market and the sales cycle for our products, which can be long and
unpredictable. If our revenue falls below our expectations in any quarter, or if
we increase our spending ahead of our revenue growth, our operating results
would be lower than expected.
THE UNPREDICTABLE TIMING OF OUR SALES AND IMPLEMENTATION CYCLE MAKES IT
DIFFICULT TO FORECAST OUR OPERATING RESULTS
Our products can have a long and unpredictable sales cycle. Consequently,
we face difficulty predicting the quarter in which sales to expected customers
will occur. This contributes to the uncertainty of our future operating results.
Potential customers often require time to weigh the costs and benefits of our
products compared to those of in-house development and integration efforts. As a
result, our sales cycle has typically ranged from approximately two to four
months, although it can take longer, particularly for sales to traditional
"bricks and mortar" companies.
In a typical application license transaction, a portion of the
implementation of our products is performed by our professional services group,
which connects our products to the customer's systems and data sources. Upon
completion of that connection, no significant obligations remain with respect to
implementation, and we recognize the revenue related to that license. The actual
connection process can often be completed in approximately two to four weeks.
However, the timing of the commencement and completion of this connection
process is subject to factors that may be beyond our control, as this process
requires access to the customer's facilities and coordination with the
customer's personnel after delivery of the software. As a result, we typically
do not recognize the license revenue from an application license until one to
three months after our product is shipped to the customer. Uncertainty as to
when our product can be connected at the customer's facilities makes it more
difficult to forecast our operating results and can result in significant
variability in our period to period results.
OUR ACQUISITION OF RUBRIC MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL, TECHNOLOGY AND
OPERATIONS
We may not realize the benefits from our acquisition of Rubric to the
extent that we anticipate, or at all. We may not be able to successfully
assimilate the additional personnel, operations, acquired technology and
products into our business. In particular, we will need to assimilate and retain
key professional services, engineering and marketing personnel. Other key Rubric
personnel may decide not to continue to work for us. The integration of Rubric
into our operations will be a complex, time consuming and expensive process and
may disrupt our operations if it is not completed efficiently or in a timely
manner. Among the challenges we may face in this regard are demonstrating to
customers
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and suppliers that the acquisition will not result in adverse changes in client
service standards or dilution or distraction to our business focus, retaining
key personnel in the transition and ensuring that Rubric's eMA product can be
successfully integrated with our products. Neither we nor Rubric has experience
in integrating operations on a scale similar to this acquisition, and the
difficulties of integrating our businesses could be larger than we anticipate.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses.
OUR PROFITABILITY WILL BE DELAYED AND THEREAFTER REDUCED AS A RESULT OF
ACCOUNTING CHARGES RELATING TO THE ACQUISITION OF RUBRIC
We will account for the Rubric acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of Rubric will be
allocated to the assets acquired and liabilities assumed from Rubric. As a
result, we expect to record a charge to operations upon consummation of the
transaction related to acquired in-process research and development of
approximately $10.1 million. Also, we expect to record approximately $360.9
million of intangible assets and goodwill on our balance sheet which will result
in amortization expense of $72.9 million for 2000, $72.6 million for 2001, $72.6
million for 2002, $71.4 million for 2003, and $71.4 million for 2004. These
charges will delay and thereafter reduce our profitability.
WE NEED TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL IN A
COMPETITIVE EMPLOYMENT MARKET
Our success depends on our ability to attract, train and retain qualified,
experienced employees. There is substantial competition for experienced
management, engineering, sales and marketing personnel, particularly in the
market segment in which we compete. If we are unable to retain our existing key
personnel, or to attract, train and retain additional qualified personnel, we
may experience inadequate levels of staffing to develop and sell our products
and perform services for our customers.
The market price of our common stock has increased substantially since our
initial public offering in September 1999. We have relied historically on our
ability to attract employees using equity incentives, and any perception by
potential and existing employees that our equity incentives are less attractive
could adversely affect our ability to attract and retain qualified employees.
We believe that our success will depend on the continued services of our
executive officers. These employees serve "at-will" and may elect to pursue
other opportunities at any time. The loss of any of our executive officers could
harm our business. Several of our executive officers joined us only recently and
have had a limited time to work together. For example, our Chief Financial
Officer joined us in January 2000. In addition, we intend to recruit and hire a
new Executive Vice President of Marketing to oversee our marketing operations.
We cannot assure you that our new executive officers will be able to work
effectively together to manage our growth and continuing operations. If we are
unable to expand our sales and marketing organizations in a timely manner, our
growth could be limited.
OUR GROWTH DEPENDS ON MARKET ACCEPTANCE OF OUR APPLICATIONS DESIGNED FOR
INTERNET-BASED SYSTEMS AND RUBRIC'S EMA PRODUCT
We first introduced applications designed for Internet-based systems in May
1999, and Rubric first introduced its eMA product in May 1998. We expect that
our future growth will depend significantly on revenue from licenses of these
applications, eMA and related services. There are significant risks inherent in
introducing these new products. Market acceptance of these new products will
depend on the growth of the market for e-business solutions. This growth may not
occur. We cannot assure you that our new e-business applications or eMA will
meet customer performance expectations. If they do not meet customer
expectations or the market for these products fails to develop or develops more
slowly than we expect, our business would be harmed.
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OUR BUSINESS WILL SUFFER IF WE DO NOT INCREASE MARKET AWARENESS OF OUR PRODUCTS
BY SIGNIFICANTLY EXPANDING OUR SALES CAPABILITIES
We sell our products primarily through our direct sales force. We must
significantly expand our direct sales operations to increase market awareness of
our products and increase revenue. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts. As a result, our ability to increase our direct sales operation
will depend on our ability to recruit, train and retain top sales people with
advanced sales skills and technical knowledge. There is a shortage of sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry.
The introduction of our new e-business applications has required us to hire
new sales personnel with the skills required to sell these products. As a
result, most of our current direct sales force has been with us for a relatively
short period. During 1999, we added 12 direct sales representatives to our
direct sales force, which represents 52.2% of our total direct sales
representatives and 24.0% of our total sales personnel as of December 31, 1999.
New sales personnel require training and take time to achieve full productivity.
If we are unable to hire or retain qualified sales personnel, or if newly hired
personnel fail to develop the necessary skills or reach productivity more slowly
than anticipated, our business could be harmed.
WE ARE DEPENDENT ON MARKETING, TECHNOLOGY AND DISTRIBUTION RELATIONSHIPS THAT
MAY GENERALLY BE TERMINATED AT ANY TIME, AND IF OUR CURRENT AND FUTURE
RELATIONSHIPS ARE NOT SUCCESSFUL, OUR GROWTH MAY BE LIMITED
We rely on marketing and technology relationships with a variety of
companies which, in part, generate leads for the sale of our products. These
marketing and technology relationships include relationships with:
- system integrators and consulting firms;
- vendors of e-commerce and Internet software;
- vendors of software designed for customer relationship management or for
management of organizations' operational information;
- vendors of key technology and platforms;
- demographic data providers; and
- an application service provider and an Internet hoster.
If we cannot maintain successful marketing and technology relationships or
cannot enter into additional marketing and technology relationships, we may have
difficulty expanding the sales of our products and our growth may be limited.
While these companies do not sell or distribute our products, we believe that
many of our direct sales are the result of leads generated by vendors of
e-business and enterprise applications that work with our products. Our
marketing and technology relationships are generally not documented in writing,
or are governed by agreements that can be terminated by either party with little
or no prior notice. Some of these agreements specify that payments are to be
made by us to these companies for providing us with qualifying customer leads.
The generation of leads to date by these companies has not generally satisfied
the specified criteria and therefore payments for leads have been immaterial in
amount.
In addition, we have distribution relationships with companies located in
the United States, Japan and the Netherlands that distribute or resell our
products -- our indirect sales channel. Sales through our indirect sales channel
accounted for approximately 28.7% of our total revenue for 1998 and 35.3% for
1999. Sales of our products to Indus, which integrates Foundation into certain
of its enterprise solutions for the energy and utility industries, represented
18.4% of our total revenue in 1998 and 11.2% in 1999. Substantially all of our
sales in Japan have been made through distributors. If we
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cannot maintain successful relationships with our indirect sales channel, we may
have difficulty expanding the sales of our products and our growth may be
limited.
Companies with which we have a marketing, technology or distribution
relationship may promote products of several different companies, including, in
some cases, products that compete with our products. These companies may not
devote adequate resources to selling our products. We may not be able to
maintain these relationships and enter into additional relationships that will
provide timely and cost-effective customer support and service.
CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES GROUP, WHICH ASSISTS OUR CUSTOMERS WITH THE
IMPLEMENTATION OF OUR PRODUCTS
We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation of our products and to educate
third-party systems integrators in the use of our products. As a result, we plan
to increase the number of professional services personnel to meet these needs.
New professional services personnel will require training and take time to reach
full productivity. We may not be able to attract or retain a sufficient number
of highly qualified professional services personnel. Competition for qualified
professional services personnel with the appropriate knowledge is intense. We
are in a new market and there is a limited number of people who have the
necessary skills. To meet our customers' needs for professional services, we may
also need to use more costly third-party consultants to supplement our own
professional services group. In addition, we could experience delays in
recognizing revenue if our professional services group falls behind schedule in
connecting our products to customers' systems and data sources.
WE MAY BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO NOT DEVELOP NEW PRODUCTS AND
ENHANCEMENTS
If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we may be unable to attract new customers. For example, we are
developing new applications as well as new versions of a number of our existing
applications, which are scheduled for release in 2000. In particular, we are
currently developing an enhanced version of eMA, which we plan to introduce in
the first half of 2000. The actual features and introduction date of this new
version could differ materially from those anticipated as a result of a number
of factors, many of which are beyond our control. We may not be successful in
developing and marketing these applications and new versions, or other product
enhancements and new products that respond to technological advances and market
changes, on a timely or cost-effective basis. In addition, even if these
products are developed and released, they may not achieve market acceptance. We
have in the past experienced delays in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of our new releases may cause
customers to forego purchases of our products.
MARKET ACCEPTANCE OF OUR PRODUCTS MAY SUFFER IF WE ARE UNABLE TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY
Rapidly changing technology and operating system standards may impede
market acceptance of our products. Our new applications have been designed based
upon currently prevailing Internet technology. If new Internet technologies
emerge that are incompatible with our applications, our key products may become
obsolete and our existing and potential customers may seek alternatives to our
products. We may not be able to quickly adapt our products to any new Internet
technology.
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<PAGE> 12
Additionally, we have designed our products to work with databases such as
Oracle and Microsoft SQL Server. Any changes to those databases, or increasing
popularity of other databases, could require us to modify our products, and
could cause us to delay releasing future products and enhancements. Furthermore,
software adapters are necessary to integrate our products with other systems and
data sources used by our customers. We must develop and update these adapters to
reflect changes to these systems and data sources in order to maintain the
functionality provided by our products. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, databases, customer relationship
management software, web servers and other enterprise and Internet-based
applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase and
deployment of our products.
WE ARE DEPENDENT ON THE ACCEPTANCE AND USE OF THE WINDOWS NT OPERATING SYSTEM
Our products currently run only on the Windows NT operating system. Any
change to this operating system could require us to modify our products and
could cause us to delay product releases. Any decline in the market acceptance
of the Windows NT operating system for any reason, including as a result of
errors or delayed introduction of enhancement or upgrades, could seriously harm
us. If potential customers do not want to use the Windows NT operating system,
we will need to develop products that run on other operating systems such as
UNIX. eMA currently runs on Windows NT and on UNIX operating systems from
Hewlett-Packard and Sun Microsystems.
The development of new products in response to these risks would require us
to commit a substantial investment of resources, and we may not be able to
successfully develop or introduce such products on a timely or cost-effective
basis, or at all, which could lead potential customers to choose alternatives to
our products.
FAILURE TO LICENSE NECESSARY THIRD PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES
We license third party software which we incorporate into our products.
Additionally, Rubric relies on web application server technology licensed from
BEA Systems. These licenses may not continue to be available on commercially
reasonable terms or at all. The loss of any such license could result in delays
or reductions of our applications until equivalent software is identified,
licensed and integrated or developed by us.
WE FACE INTENSE COMPETITION WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Our competitors vary in size and in the scope and breadth of
products and services offered.
In addition, we face potential competition from vendors of other enterprise
applications as they expand the functionality of their product offerings,
including companies that design software for decision support, management of
customer relationships or of organizations' operational information, as well as
vendors of database applications. Accordingly, it is possible that new
competitors may emerge and acquire our market share.
Some of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have wider name recognition and more extensive
customer bases that they could leverage, thereby gaining market share to our
detriment. They may be able to undertake more extensive promotional activities,
adopt more aggressive pricing strategies, and
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<PAGE> 13
offer purchasers more attractive terms than we can. Our competitors may develop
products that are superior to ours or that achieve greater market acceptance. In
addition, current and potential competitors may establish cooperative
relationships among themselves or with third parties to enhance their products
to address customer needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND LITIGATION REGARDING OUR
INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS
Our intellectual property is important to our business. Our intellectual
property includes our proprietary technology, our trade secrets, copyrights in
our software products, including Foundation and our applications, and our
trademarks. Our copyrights are important to the protection of our software, and
our trademarks are important to the protection of our company and product names.
These copyrights and trademarks discourage unauthorized use of our software and
our company and product names and provide us with a way to enforce our rights in
the event that this unauthorized use occurs. We have no patents, although
patents may become increasingly important in software and e-business
applications. Unauthorized use or misappropriation of our intellectual property
could seriously harm our business. Third parties may infringe upon our
intellectual property rights, and we may be unable to detect this unauthorized
use or effectively enforce our rights. In addition, any legal action that we may
bring to protect our intellectual property rights could be expensive and
distract management from day-to-day operations.
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. In addition, in the
future, we may receive communications from other parties asserting that our
intellectual property infringes their proprietary rights. If we become liable to
any other third party for infringing its intellectual property rights, we could
be required to pay substantial damage awards and to develop non-infringing
technology, obtain licenses or cease selling the applications that contain the
infringing intellectual property. We could have to redesign our products, which
could be costly and time-consuming and could substantially delay product
shipments, assuming that a redesign is feasible. We may be unable to develop
non-infringing technology or obtain licenses on commercially reasonable terms,
if at all. Litigation is subject to inherent uncertainties and any of these
results in connection with a lawsuit could seriously harm our business.
Furthermore, we could incur substantial costs in defending against any
intellectual property litigation, and these costs could increase significantly
if any dispute were to go to trial. Our defense of any litigation, regardless of
the merits of the complaint, will likely be time-consuming, costly and a
distraction for our management personnel. Publicity related to any intellectual
property litigation could also harm the sale of our products.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY IN MARKET ACCEPTANCE FOR
OUR PRODUCTS
Our software products are internally complex and may contain defects,
especially when they are first introduced or when new versions are released. In
the past we have discovered software errors in some of our products after their
introduction. If we are not able to detect and correct errors in products or
releases before commencing commercial shipments, we may experience loss of
revenue or delays in market acceptance for our products. We continue to evaluate
our products for errors following the commencement of commercial shipments and
receive information from customers regarding errors they detect, as well as
requests for future enhancements to our products. Our license agreements with
our customers typically contain provisions designed to limit our exposure to
potential product liability claims. However, all domestic and international
jurisdictions may not enforce these limitations. We may encounter product
liability claims in the future. Product liability claims brought
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<PAGE> 14
against us could divert the attention of management and key personnel, could be
expensive to defend and may result in adverse settlements and judgments.
BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH
We intend to expand our international operations, but we may face
significant barriers to this expansion. Our failure to manage our international
operations effectively could limit the future growth of our business.
International sales represented approximately 5.1% of our total revenue for the
year ended December 31, 1998 and 23.2% of our total revenue in 1999,
substantially all of which consisted of sales to customers in Canada, Europe and
Japan. We conduct our international sales primarily through direct sales offices
in Germany, the Netherlands and the United Kingdom, through our Canadian
subsidiary and through distributors in Japan. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources.
Our international operations face numerous risks. Our products must be
localized -- customized to meet local user needs -- in order to be sold in
particular foreign countries. Developing local versions of our products for
foreign markets is difficult and can take longer than we anticipate. We
currently have limited experience in localizing products and in testing whether
these localized products will be accepted in the targeted countries. For
example, we are currently marketing localized products only in Germany and
Japan. We cannot assure you that our localization efforts will be successful. In
addition, we have only a limited history of marketing, selling and supporting
our products and services internationally. As a result, we must hire and train
experienced personnel to staff and manage our foreign operations. However, we
may experience difficulties in recruiting and training an international staff.
We must also be able to enter into strategic relationships with companies in
international markets, particularly in Japan where all of our sales have been
made through distributors. If we are not able to maintain successful strategic
relationships internationally or recruit additional companies to enter into
strategic relationships, our future growth could be limited.
We also face certain other risks inherent in conducting business
internationally, such as:
- difficulties and costs of staffing and managing international operations;
- language and cultural differences;
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates;
- legal and governmental regulatory requirements;
- trade barriers; and
- potentially adverse tax consequences.
Any of these factors could seriously harm our international operations and,
consequently, our business.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We have not engaged in any foreign exchange
hedging transactions, and we are therefore subject to foreign currency risk.
WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH, INCLUDING
EXPANSION OF OUR MANAGEMENT SYSTEMS, COULD ADVERSELY AFFECT OUR BUSINESS
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Our total number of
full-time employees grew from 75 at December 31, 1998 to 131 at December 31,
1999, and we anticipate further significant increases in the number of
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<PAGE> 15
our employees. In addition, Rubric grew from 38 employees as of December 31,
1998 to 78 employees as of December 31, 1999. Our growth has placed significant
demands on management as well as on our administrative, operational and
financial resources and controls. We expect our future growth to cause similar,
and perhaps increased, strain on our systems and controls. In particular, we
need to implement several new information systems. If we cannot effectively
establish and improve our processes, we may not be able to manage our growth
successfully or sustain and manage the growth rates we have experienced in the
past.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS
SIMILAR TO THOSE THAT WE CURRENTLY FACE IN CONNECTION WITH OUR ACQUISITION OF
RUBRIC
If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
acquire another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our acquisition of Rubric.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which could be
dilutive to us or our existing stockholders. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH
We expect that our cash on hand, cash equivalents and proceeds from this
offering will be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. However, we may need to raise additional
funds to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. We cannot assure you that we
would be able to obtain additional financing on favorable terms, if at all. If
we issue additional equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise
necessary additional funds on acceptable terms, we may not be able to develop or
enhance our products, fund expansion, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements.
SOME OF OUR EXISTING INVESTORS MAY ASSERT CLAIMS AGAINST US FOR FAILING TO SELL
THEM SHARES IN OUR INITIAL PUBLIC OFFERING
In connection with our private financing in June 1999, we granted rights to
purchase up to 238,306 shares in our initial public offering to many of these
investors, subject to compliance with applicable laws, including federal
securities laws. Because the offering of the rights started privately in June
1999, the issuance of these shares could not be registered in connection with
our initial public offering or on any other registration statement. Although we
offered to sell the shares to these investors in a separate private placement at
the initial public offering price, only some of these investors accepted this
offer as to 45,063 shares. We believe that we have fulfilled our obligations
under the agreement, but it is possible that the investors who did not accept
this offer could claim that we breached the agreement by failing to sell them
the shares in the initial public offering. If they were successful in their
claims, we could be obligated to pay damages, which could equal the amount of
any increase in the market value of our common stock.
RISKS RELATED TO OUR INDUSTRY
WE DEPEND ON THE GROWTH IN THE USE OF THE INTERNET FOR OUR BUSINESS
Our future success depends heavily on the increased acceptance and use of
the Internet for business. Although the Internet is experiencing rapid growth in
the number of users and traffic, this
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<PAGE> 16
growth is a recent phenomenon and may not continue. Furthermore, despite this
growth in usage, the use of the Internet for business transactions is relatively
new. If use of the Internet for business does not continue to increase or
increases more slowly than expected, our business would be seriously harmed.
Consumers and businesses may reject the Internet as a viable commercial medium,
or be slow to adopt it, for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
concerns about the security of transactions and confidential information and
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased governmental regulation, could cause the Internet to lose
its viability as a commercial medium. If these or any other factors cause use of
the Internet for business to slow or decline, our business would be harmed. Even
if the required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our products to changing or emerging technologies.
INCREASING GOVERNMENTAL REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR
OUR PRODUCTS
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, such as user privacy,
taxation of goods and services provided over the Internet, pricing, content and
quality of products and services. Legislation could dampen the growth in
Internet usage and decrease or limit its acceptance as a communications and
commercial medium. If enacted, these laws and regulations could limit the market
for our products. In addition, existing laws could be applied to the Internet,
including consumer privacy laws. Legislation or application of existing laws
could expose companies involved in electronic commerce, or e-commerce, to
increased liability, which could limit the growth of e-commerce generally.
GOVERNMENT REGULATION OF THE COLLECTION AND USE OF PERSONAL DATA COULD REDUCE
DEMAND FOR OUR PRODUCTS
Our products connect to and analyze data from various applications,
including Internet applications, that enable businesses to capture and use
information about their customers. Government regulation which limits our
customers' use of this information could reduce the demand for our products. A
number of jurisdictions have adopted, or are considering adopting, laws that
restrict the use of customer information from Internet applications. The
European Union has required that its member states adopt legislation that
imposes restrictions on the collection and use of personal data, and that limits
the transfer of personally-identifiable data to countries that do not impose
equivalent restrictions. In the United States, the Children's Online Privacy
Protection Act was enacted in October 1998. This legislation directs the Federal
Trade Commission to regulate the collection of data from children on commercial
websites. In addition, the Federal Trade Commission has begun investigations
into the privacy practices of businesses that collect information on the
Internet. These and other privacy-related initiatives could reduce demand for
some of the Internet applications with which our products operate, and could
restrict the use of our products in some e-commerce applications. This could
reduce demand for our products.
POTENTIAL YEAR 2000 PROBLEMS MAY INVOLVE SIGNIFICANT TIME AND EXPENSE AND MAY
REDUCE OUR FUTURE SALES
If our technology or technology developed by third parties which is
incorporated into our products or which interacts with our products, is not year
2000 compliant, our business could be seriously harmed. The year 2000 problem
exists because many currently installed computer systems and software products
electronically store dates using only the last two digits of the calendar year.
As a result, these systems may not be able to distinguish whether "00" means
1900 or 2000, which may cause system failures or erroneous results. In addition,
currently installed computer systems and
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<PAGE> 17
software products may not properly recognize the date February 29, 2000. Year
2000 problems could subject us to liability claims and disrupt our operations
and customers' purchasing patterns, any of which could harm our business.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Readiness" for more information about our
potential year 2000 problems and the measures that we have taken to address
these problems.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS AND TO
SECURITIES LITIGATION
Our common stock has traded in a public market only since September 1999.
The public offering price may not be indicative of the prices that will prevail
in the public market after this offering, and the market price of the common
stock could fall below the public offering price. The value of your investment
in Broadbase could decline due to the impact of any of the following factors
upon the market price of our common stock:
- variations in our actual and anticipated operating results;
- changes in our earnings estimates by analysts;
- our failure to meet analysts' performance expectations; and
- the volume of trading in our common stock.
In addition, stock markets, particularly the Nasdaq National Market, have
experienced extreme price and volume fluctuations, and the market prices of
securities of technology companies, particularly Internet-related companies,
have been highly volatile. These fluctuations have often been unrelated to the
operating performance of such companies. Fluctuations such as these may affect
the market price of our common stock. Substantial sales of our common stock
could also cause our stock price to decline. As a result, investors may not be
able to resell their shares at or above the public offering price.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in their stock price. This
type of litigation could result in substantial costs and could divert our
management's attention and resources.
OUR OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL HAVE SIGNIFICANT CONTROL
OVER US, WHICH COULD DELAY OR PREVENT A CHANGE OF CONTROL
Our executive officers, directors and major stockholders will have
significant control over us following completion of this offering as they will
beneficially own an aggregate of approximately 41.3% of our outstanding common
stock at that time. This could limit the ability of our other stockholders to
influence matters requiring approval by our stockholders, including the election
of directors and the approval of mergers or similar transactions.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT THE SALE OF
OUR COMPANY AND DIMINISH THE VOTING RIGHTS OF THE HOLDERS OF OUR COMMON STOCK
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. For example, we have a classified board
of directors. In addition, our stockholders are unable to act by written consent
or to fill any vacancy on the board of directors. In addition, our stockholders
cannot call special meetings of stockholders for any purpose, including to
remove any director or the entire board of directors without cause. We will also
be subject to the provisions of Section 203 of the Delaware General Corporation
Law regulating corporate takeovers. These provisions could also limit the price
that investors might be willing to pay in the future for shares of our common
stock.
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<PAGE> 18
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING, AND OUR
INVESTMENT OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN
Our management has broad discretion as to how to spend the proceeds from
this offering and may spend these proceeds in ways with which our stockholders
may not agree. Pending any such uses, we plan to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing securities. These
investments may not yield a favorable return.
FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES
TO DECLINE
Our common stock began trading on the Nasdaq National Market on September
22, 1999; however, to date there have been a limited number of shares trading in
the public market. This offering will result in additional shares of our common
stock being available on the open market. In addition, our current stockholders
hold a substantial number of shares, which they will be able to sell in the
public market in the near future. Sales of a substantial number of shares of our
common stock in this offering and thereafter could cause our stock price to
fall. In addition, the sale of shares by our stockholders could impair our
ability to raise capital through the sale of additional stock. See
"Underwriting" and "Shares Eligible for Future Sale".
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
The public offering price is substantially higher than the pro forma net
book value per share of the outstanding common stock, after giving effect to our
acquisition of Rubric. If you purchase shares of our common stock, you will
incur immediate and substantial dilution in the amount of $86.14 per share,
based on the initial price to public of $95.00 per share. If the holders of
outstanding options exercise those options, you will experience further
dilution.
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<PAGE> 19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA
We make many statements in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere that are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements relate to our future
plans, objectives, expectations and intentions. We may identify these statements
by the use of words such as "believe", "expect", "anticipate", "intend" and
"plan" and similar expressions. These forward-looking statements involve a
number of risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those we discuss in "Risk Factors" and elsewhere in
this prospectus. These forward-looking statements speak only as of the date of
this prospectus, and we caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business that are addressed in this prospectus.
This prospectus contains estimates of market growth related to the
Internet. These estimates have been included in studies published by Forrester
Research, a market research firm. These estimates assume that certain events,
trends and activities will occur. If Forrester Research is wrong about any of
their assumptions, then their market estimates may also be wrong.
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<PAGE> 20
USE OF PROCEEDS
We will not receive any proceeds from the shares sold by the selling
stockholders in this offering. We estimate that we will receive net proceeds
from the sale of the 1,500,000 shares of common stock offered by us of
approximately $134,525,000, or $175,137,500 if the underwriters exercise their
over-allotment option in full, based on the initial price to public of $95.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses. We intend to use the net proceeds from this
offering primarily for general corporate purposes, including working capital. We
may also use a portion of the net proceeds from this offering to acquire or
invest in businesses, technologies or services that are complementary to our
business. We have no present plans or commitments with respect to any
transactions of this type.
We have not identified any specific uses for the net proceeds from this
offering, and we will have discretion over their use and investment. Pending use
of the net proceeds, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities. See "Risk
Factors -- We have broad discretion to use the proceeds from this offering, and
our investment of these proceeds may not yield a favorable return".
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our capital
stock. We intend to retain any future earnings to finance future growth and do
not anticipate paying any cash dividends in the future. In addition, the terms
of our credit facility with Silicon Valley Bank restrict our ability to pay cash
dividends.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "BBSW" since September 22, 1999. The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
Third Quarter (from September 22, 1999)................... $ 29.19 $15.50
Fourth Quarter............................................ 142.75 15.94
Fiscal Year Ending December 31, 2000
First Quarter (through February 14, 2000)................. 114.94 80.06
</TABLE>
On February 14, 2000, the last reported sale price on the Nasdaq National
Market for our common stock was $96.31 per share. As of December 31, 1999, there
were approximately 179 holders of record of our common stock.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect our acquisition of Rubric as if it had
occurred on December 31, 1999; and
- on a pro forma as adjusted basis to reflect the application of the net
proceeds from the sale of
1,500,000 shares of common stock offered by us in this offering, based
upon the initial price to public of $95.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Long-term liabilities, less current portion................. $ 333 $ 548 $ 548
Stockholders' equity:
Preferred stock, par value $0.001 per share; 5,000,000
shares authorized and none designated.................. -- --
Common stock, par value $0.001 per share; 90,000,000
shares authorized, 18,050,087 shares issued and
outstanding, actual; 21,042,151 shares issued and
outstanding, pro forma; 22,542,151 shares issued and
outstanding, pro forma as adjusted..................... 17 21 23
Additional paid-in capital................................ 124,297 487,238 621,761
Deferred stock compensation............................... (8,710) (8,710) (8,710)
Notes receivable from stockholders........................ (693) (693) (693)
Accumulated other comprehensive loss...................... (33) (33) (33)
Accumulated deficit....................................... (41,672) (51,730) (51,730)
-------- -------- --------
Total stockholders' equity............................. 73,206 426,093 560,618
-------- -------- --------
Total capitalization.............................. $ 73,539 $426,641 $561,166
======== ======== ========
</TABLE>
The outstanding share information shown in the table above excludes:
- 3,195,489 shares of common stock issuable upon the exercise of
outstanding stock options as of December 31, 1999, at a weighted-average
per share exercise price of $10.12;
- 2,764,695 shares of common stock available for issuance under our 1999
Equity Incentive Plan as of December 31, 1999, which were increased by
902,504 shares on January 1, 2000;
- 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan as of December 31, 1999, which were increased by 180,500
shares on January 1, 2000; and
- 607,728 shares reserved for issuance pursuant to the exercise of options
and warrants to purchase Rubric capital stock that were converted into
options and warrants to purchase our common stock.
See "Management -- Employee Benefit Plans" for more information about our
stock plans.
As of February 1, 2000, we had granted additional options to purchase an
aggregate of 2,667,591 shares of common stock at a weighted average exercise
price of $86.41 per share under our 1999 Equity Incentive Plan and options to
purchase 300,000 shares of common stock at an exercise price of $54.00 per share
outside of our employee benefit plans.
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $65.2
million, or $3.10 per share of common stock. Our pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities after giving effect to our acquisition of Rubric as if it was
completed on December 31, 1999, divided by 21,042,151 shares, which reflects
shares of common stock outstanding as of December 31, 1999 and the shares that
we issued in connection with our acquisition of Rubric. After giving effect to
the receipt of the net proceeds from the sale of 1,500,000 shares of our common
stock by us at the initial price to public of $95.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses, our pro forma net tangible book value as of December 31, 1999 would
have been approximately $199.7 million, or $8.86 per share. This represents an
immediate increase in pro forma net tangible book value of $5.76 per share to
existing stockholders and an immediate dilution of $86.14 per share to new
investors purchasing shares at the initial price to public. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial price to public per share........................... $ 95.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $3.10
Increase per share attributable to new investors.......... 5.76
-----
Pro forma net tangible book value per share after
offering.................................................. 8.86
-------
Dilution per share to new investors......................... $ 86.14
=======
</TABLE>
If the underwriters exercise the over-allotment option in full, the pro
forma net tangible book value per share after this offering would be $10.45 per
share, representing an increase in net tangible book value per share to existing
stockholders of $7.35 and dilution in pro forma net tangible book value of
$84.55 to investors purchasing common stock in this offering.
The above discussion and table assumes no exercise of any stock options
outstanding as of December 31, 1999. As of December 31, 1999, there were options
outstanding to purchase a total of 3,195,489 shares of our common stock with a
weighted-average exercise price of $10.12 per share. If any of these options are
exercised, there will be further dilution to new public investors. Please see
Note 4 of Notes to Financial Statements for more information about these
options.
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere in this prospectus. The consolidated
statement of operations data for each of the years ended December 31, 1997, 1998
and 1999 and the consolidated balance sheet data at December 31, 1998 and 1999,
are derived from our consolidated financial statements that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere in this
prospectus. The consolidated statement of operations data for the period from
November 28, 1995 (inception) to December 31, 1996 and the consolidated balance
sheet data at December 31, 1997 are derived from our audited consolidated
financial statements not included in this prospectus. Historical results are not
necessarily indicative of future results.
The unaudited pro forma information reflects our recent acquisition of
Rubric, and has been derived from the Broadbase unaudited pro forma combined
condensed financial statements included elsewhere in this prospectus. The
unaudited pro forma combined condensed statement of operations data is derived
from our statement of operations data combined with the statement of operations
data of Rubric for the year ended December 31, 1999, giving effect to the
acquisition as if it had occurred on January 1, 1999. The unaudited pro forma
combined condensed balance sheet data presents our balance sheet data combined
with the balance sheet data of Rubric, as of December 31, 1999, giving effect to
the acquisition as if it had occurred on December 31, 1999. The unaudited pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the transaction had been consummated at the dates indicated,
nor is it necessarily indicative of the future operating results or financial
position of the combined company.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 28, 1995 YEARS ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31, 1999
DECEMBER 31, ------------------ ----------------------
1996 1997 1998 ACTUAL PRO FORMA
----------------- ------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
License.............................................. $ -- $ -- $ 2,996 $ 7,689 $ 9,557
Maintenance and professional services................ -- -- 443 2,753 4,315
------- ------- -------- -------- ---------
Total net revenue............................. -- -- 3,439 10,442 13,872
Cost of revenue:
License.............................................. -- -- 713 1,437 1,715
Maintenance and professional services................ -- -- 254 2,610 4,133
Amortization of core and developed technology........ -- -- -- -- 1,587
------- ------- -------- -------- ---------
Total cost of revenue......................... -- -- 967 4,047 7,435
------- ------- -------- -------- ---------
Gross margin........................................... -- -- 2,472 6,395 6,437
Operating expenses:
Sales and marketing.................................. 130 2,851 7,888 15,092 20,141
Research and development............................. 928 1,980 3,738 6,024 9,868
General and administrative........................... 215 744 1,165 2,011 4,288
Amortization of intangibles and goodwill............. -- -- -- -- 71,319
Amortization of deferred stock compensation.......... -- -- 1,133 6,403 6,403
Merger expenses...................................... -- -- -- 1,000 1,000
------- ------- -------- -------- ---------
Total operating expenses...................... 1,273 5,575 13,924 30,530 113,019
------- ------- -------- -------- ---------
Loss from operations................................... (1,273) (5,575) (11,452) (24,135) (106,582)
Interest income........................................ 30 154 335 1,454 1,586
Interest expense....................................... (29) (66) (226) (889) (1,237)
------- ------- -------- -------- ---------
Net loss............................................... $(1,272) $(5,487) $(11,343) $(23,570) $(106,233)
======= ======= ======== ======== =========
Basic and diluted net loss per share................... $ (4.30) $ (6.19) $ (8.85) $ (3.74) $ (11.44)
======= ======= ======== ======== =========
Weighted-average shares used in computing basic and
diluted net loss per share........................... 296 887 1,281 6,296 9,287
======= ======= ======== ======== =========
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1999
----------------- ----------------------
1997 1998 ACTUAL PRO FORMA
------ ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,153 $13,990 $76,642 $ 76,852
Working capital............................................. 61 8,801 69,362 60,025
Total assets................................................ 2,113 17,173 84,770 449,280
Long-term debt and capital lease obligations, net of current
portion................................................... 916 9,360 333 548
Stockholders' equity (net capital deficiency)............... (75) 1,226 73,206 426,093
</TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain consolidated statement of operations
data for each of the eight quarters beginning with the quarter ended March 31,
1998 through the quarter ended December 31, 1999, including such amounts
expressed as a percentage of total net revenue. This quarterly information is
unaudited, but has been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflects all
adjustments, consisting only of normal recurring adjustments necessary for a
fair representation of the information for the periods presented. This statement
of operations data should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus. Operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
License.............................. $ 482 $ 867 $ 888 $ 759 $ 1,126 $ 1,567
Maintenance and professional
services........................... -- 98 104 241 360 486
------- ------- ------- ------- ------- -------
Total net revenue.............. 482 965 992 1,000 1,486 2,053
Cost of revenue:
License.............................. 210 156 180 167 260 168
Maintenance and professional
services........................... -- 83 84 87 391 541
------- ------- ------- ------- ------- -------
Total cost of revenue.......... 210 239 264 254 651 709
------- ------- ------- ------- ------- -------
Gross margin.......................... 272 726 728 746 835 1,344
Operating expenses:
Sales and marketing.................. 1,595 2,046 1,975 2,272 2,656 3,839
Research and development............. 742 923 1,030 1,043 1,188 1,612
General and administrative........... 219 303 315 328 494 438
Amortization of deferred stock
compensation....................... 62 266 374 431 925 1,547
Merger expenses...................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total operating expenses....... 2,618 3,538 3,694 4,074 5,263 7,436
------- ------- ------- ------- ------- -------
Loss from operations.................. (2,346) (2,812) (2,966) (3,328) (4,428) (6,092)
Interest income....................... 53 105 94 83 113 81
Interest expense...................... (60) (40) (47) (79) (260) (301)
------- ------- ------- ------- ------- -------
Net loss.............................. $(2,353) $(2,747) $(2,919) $(3,324) $(4,575) $(6,312)
======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
License.............................. $ 2,114 $ 2,882
Maintenance and professional
services........................... 650 1,257
------- -------
Total net revenue.............. 2,764 4,139
Cost of revenue:
License.............................. 482 527
Maintenance and professional
services........................... 750 928
------- -------
Total cost of revenue.......... 1,232 1,455
------- -------
Gross margin.......................... 1,532 2,684
Operating expenses:
Sales and marketing.................. 4,062 4,535
Research and development............. 1,587 1,637
General and administrative........... 498 581
Amortization of deferred stock
compensation....................... 1,976 1,955
Merger expenses...................... -- 1,000
------- -------
Total operating expenses....... 8,123 9,708
------- -------
Loss from operations.................. (6,591) (7,024)
Interest income....................... 237 1,023
Interest expense...................... (275) (53)
------- -------
Net loss.............................. $(6,629) $(6,054)
======= =======
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
PERCENT OF TOTAL NET REVENUE
Net revenue:
License.............................. 100.0% 89.8% 89.5% 75.9% 75.8% 76.3%
Maintenance and professional
services........................... -- 10.2 10.5 24.1 24.2 23.7
------- ------- ------- ------- ------- -------
Total net revenue.............. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License.............................. 43.6 16.2 18.1 16.7 17.5 8.2
Maintenance and professional
services........................... -- 8.6 8.5 8.7 26.3 26.4
------- ------- ------- ------- ------- -------
Total cost of revenue.......... 43.6 24.8 26.6 25.4 43.8 34.5
------- ------- ------- ------- ------- -------
Gross margin.......................... 56.4 75.2 73.4 74.6 56.2 65.5
Operating expenses:
Sales and marketing.................. 330.9 212.0 199.1 227.2 178.7 187.0
Research and development............. 153.9 95.6 103.8 104.3 79.9 78.5
General and administrative........... 45.4 31.4 31.8 32.8 33.2 21.3
Amortization of deferred stock
compensation....................... 12.9 27.6 37.7 43.1 62.2 75.4
Merger expenses...................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total operating expenses....... 543.1 366.6 372.4 407.4 354.0 362.2
------- ------- ------- ------- ------- -------
Loss from operations.................. (486.7) (291.4) (299.0) (332.8) (297.8) (296.7)
Interest income....................... 11.0 10.9 9.5 8.3 7.6 3.9
Interest expense...................... (12.5) (4.1) (4.7) (7.9) (17.5) (14.7)
------- ------- ------- ------- ------- -------
Net loss.............................. (488.2)% (284.6)% (294.2)% (332.4)% (307.7)% (307.5)%
======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
<S> <C> <C>
PERCENT OF TOTAL NET REVENUE
Net revenue:
License.............................. 76.5% 69.6%
Maintenance and professional
services........................... 23.5 30.4
------ ------
Total net revenue.............. 100.0 100.0
Cost of revenue:
License.............................. 17.4 12.7
Maintenance and professional
services........................... 27.1 22.4
------ ------
Total cost of revenue.......... 44.6 35.2
------ ------
Gross margin.......................... 55.4 64.9
Operating expenses:
Sales and marketing.................. 147.0 109.6
Research and development............. 57.4 39.6
General and administrative........... 18.0 14.0
Amortization of deferred stock
compensation....................... 71.5 47.2
Merger expenses...................... -- 24.2
------ ------
Total operating expenses....... 293.9 234.5
------ ------
Loss from operations.................. (238.5) (169.7)
Interest income....................... 8.6 24.7
Interest expense...................... (9.9) (1.3)
------ ------
Net loss.............................. (239.8)% (146.3)%
====== ======
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including but not
limited to those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We incorporated in November 1995 and from that date through December 1997
were in the development stage, conducting research and developing our initial
products. In the fourth quarter of 1997, we introduced Foundation. This software
product was originally designed to enable organizations to build and manage
datamarts for their customer information. In the third quarter of 1998, we began
offering applications, built on Foundation, which provide analysis for customer
relationship management. In May 1999 we expanded our suite by introducing new
applications designed for Internet sales channels, Internet marketing and other
customer-focused e-business applications, as well as new versions of our
existing applications. Throughout these periods, we expanded our organization by
hiring personnel in key areas, particularly marketing, sales and research and
development. We have grown from a total of 41 full-time employees at December
31, 1997 to 75 full-time employees at December 31, 1998 and 131 full-time
employees at December 31, 1999.
Our revenue comes principally from licenses of our software products, with
the balance coming from maintenance and professional services. We adopted the
provisions of Statement of Position ("SOP") No. 97-2 Software Revenue
Recognition, as amended by SOP No. 98-4, Deferral of the Effective Date of
Certain Provisions of SOP No. 97-2. Under SOP No. 97-2 we recognize license
revenue when persuasive evidence of an agreement exists, delivery of the product
has occurred, no significant company obligations with regard to installation or
implementation of the software remain, the fee is fixed or determinable and
collectibility is probable. In a typical application license transaction, our
professional services group connects our product to the customer's systems and
data sources. Upon completion of that connection, no significant obligations
remain with respect to implementation, and we recognize the revenue related to
that license. The actual connection process can often be completed in two to
four weeks. However, the timing of the commencement and completion of this
process is subject to factors that may be beyond our control, as this process
requires access to the customer's facilities and coordination with the
customer's personnel following delivery of the software. As a result, we
typically do not recognize the license revenue from an application license until
one to three months after our product is shipped to the customer. License
revenue generated by distributors and other resellers is recognized upon receipt
of a reseller report of sale and our shipment of the licensed software.
Maintenance and support revenue associated with new product licenses and
maintenance revenue resulting from renewed maintenance contracts are deferred
and recognized ratably over the contract period. Professional services revenue
is recognized when services are performed.
Currently, businesses that license our products generally license one or
more of our applications, together with Foundation and adapters to interface
with the customers' existing data sources. Customers generally receive
nonexclusive, perpetual licenses to use our products for a specified number of
servers and named users. After the initial license, they may purchase licenses
for additional servers and users as needed. In addition, customers often
purchase professional services from us, including training services, although
they may use other consulting organizations. Customers that license our products
also usually purchase maintenance contracts, which provide software upgrades and
technical support over a stated term, typically 12 months.
24
<PAGE> 27
We sell our products through our direct sales force and through indirect
sales channels. Direct sales are made by our direct sales force in North
America, Germany, the United Kingdom and the Netherlands. Our indirect sales
channels include software application vendors, resellers and distributors
located in the United States, Japan and the Netherlands. Sales through indirect
sales channels accounted for approximately 28.7% of our total net revenue for
1998 and 35.3% of our total net revenue for 1999. Although a significant portion
of our revenue to date has been generated by our indirect sales channels, we
intend to continue increasing the size of our direct sales force, both in the
United States and internationally.
Revenue from customers outside the United States represented 5.1% of our
total net revenue for 1998 and 23.2% of our total revenue for 1999. We intend to
continue to expand our international operations and commit significant
management time and financial resources to developing our direct and indirect
international sales channels. International revenue may not, however, increase
as a percentage of total net revenue.
We have experienced substantial net losses since our inception due to the
significant costs incurred to develop our technology and products and to recruit
and train personnel for our engineering, sales, marketing, professional services
and administration departments. As of December 31, 1999, we had an accumulated
deficit of $41.7 million. We expect to continue to incur substantial operating
losses for the foreseeable future.
ACQUISITION OF RUBRIC
On February 1, 2000, we acquired privately-held Rubric, a leading provider
of e-marketing software. Rubric's product, eMA, automates the planning,
execution and measurement of marketing campaigns. In connection with this
acquisition, we issued approximately 3.0 million shares of our common stock in
exchange for all outstanding shares of Rubric capital stock, and converted all
outstanding options and warrants to acquire Rubric capital stock into options
and warrants to purchase approximately 600,000 shares of our common stock. The
merger is intended to qualify as a tax-free reorganization.
Rubric was incorporated in Delaware in September 1997, and introduced its
eMA product in May 1998. Rubric had total revenue of $343,000 in 1998 and $3.4
million in 1999. Rubric's cost of revenues increased from $318,000 in 1998 to
$2.4 million in 1999, and its operating expenses increased from $6.3 million in
1998 to $22.9 million in 1999. As of December 31, 1999, Rubric had accumulated
net losses of $29.3 million. Rubric grew from 38 employees at December 31, 1998
to 78 employees at December 31, 1999.
We will account for the Rubric acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of Rubric will be
allocated to the assets acquired and liabilities assumed from Rubric. As a
result we expect to record a charge to operations upon consummation of the
transaction related to acquired in-process research and development of
approximately $10.1 million. Also, we expect to incur merger-related costs of up
to $4.0 million, of which $1.0 million were included in our 1999 results of
operations. In addition, we expect to record approximately $360.9 million of
intangible assets and goodwill on our balance sheet, which will result in
amortization expense of $72.9 million for 2000, $72.6 million for 2001, $72.6
million for 2002, $71.4 million for 2003, and $71.4 million for 2004. These
charges will delay and thereafter reduce our profitability.
RESULTS OF OPERATIONS
NET REVENUE
License. We began licensing our products in the first quarter of 1998. We
had no license revenue in 1997. License revenue increased from $3.0 million in
1998 to $7.7 million in 1999. This
25
<PAGE> 28
increase is attributable to increases in the number of customers licensing our
products, and the increase in the average revenue per license transaction. The
increase in customers reflects the expansion of our direct sales force and our
indirect sales channels, and the increase in the average revenue per license
transaction results from our customers' licensing our applications together with
Foundation. In addition, both the increase in number of customers and the
average revenue per license transaction reflects our introductions of new
e-business applications. We intend to continue to expand both our direct and
indirect sales channels in 2000.
Maintenance and professional services. We first began recognizing
maintenance revenue in the second quarter of 1998 for maintenance contracts sold
at the end of the first quarter of 1998. Professional services revenue was first
recognized in the second quarter of 1998. Maintenance and professional services
revenue increased from $443,000 in 1998 to $2.8 million in 1999 which reflects
the expansion of our installed base of customers.
COST OF REVENUE
Cost of licenses. The cost of licenses consists primarily of royalties
payable to third parties as well as the cost of product manuals, media,
packaging and shipping. The cost of licenses increased from $713,000 in 1998 to
$1.4 million in 1999. This increase is primarily the result of increased license
revenue. Our cost of licenses as a percentage of license revenue has fluctuated
significantly from year to year and from quarter to quarter. These fluctuations
are due primarily to changes in the mix of products sold, since different
products require royalty payments at different rates.
Cost of maintenance and professional services. The cost of maintenance and
professional services consists primarily of personnel costs associated with
providing maintenance and support services, consulting services and training
services. We began incurring costs associated with maintenance and support in
the second quarter of 1998 when support periods for our customers began. We
recorded no cost of maintenance and professional services in 1997. The cost of
maintenance and professional services increased from $254,000 in 1998 to $2.6
million in 1999. This increase is primarily the result of an increase in our
professional services personnel from three at December 31, 1998 to 14 at
December 31, 1999. We plan to continue expanding our professional services group
and, accordingly, expect the dollar amount of our cost of maintenance and
professional services to increase.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, bonuses, commissions, travel and promotional expenses as
well as the facilities cost for the various domestic and international field
sales offices. Sales and marketing expenses increased from $2.9 million in 1997
to $7.9 million in 1998 and to $15.1 million in 1999. These increases in sales
and marketing expenses resulted primarily from higher salary, recruiting,
benefits, travel and facilities costs associated with the hiring of additional
sales and marketing personnel and the expansion of our international sales
organization. Full time sales and marketing personnel grew from 17 at December
31, 1997 to 35 at December 31, 1998 and to 56 at December 31, 1999. We plan to
continue expanding our sales and marketing organization, and expect our sales
and marketing expense to increase.
Research and development. Research and development expenses consist
primarily of salaries for development personnel and related costs associated
with the development of new products, the enhancement of existing products,
localization, quality assurance and testing. Research and development expenses
increased from $2.0 million in 1997 to $3.7 million in 1998 and to $6.0 million
in 1999. These increases in research and development expenses were due to the
hiring of additional personnel and to other expenses associated with the
development and localization of new products. Full time research and development
personnel grew from 18 at December 31, 1997 to 26 at December 31, 1998 and to 45
at December 31, 1999. We plan to continue expanding our research and development
organization, and expect our research and development expense to increase.
26
<PAGE> 29
General and administrative. General and administrative expenses consist
primarily of salaries of executive, financial, human resource and information
services personnel as well as outside professional fees. General and
administrative expenses increased from $744,000 in 1997 to $1.2 million in 1998
and to $2.0 million in 1999. These increases in general and administrative
expenses were primarily due to increased staffing required to support our
expanded operations in the United States and abroad and, to a lesser extent,
increased costs of outside professional services and costs to implement
additional management information systems. Our full time general and
administrative personnel grew from four at December 31, 1997 to 10 at December
31, 1998 and to 15 at December 31, 1999.
Amortization of deferred stock compensation. We recorded deferred stock
compensation of $3.5 million in 1998 and $12.8 million in 1999, representing the
difference between the exercise prices of options granted to acquire
approximately 2.1 million shares of our common stock during 1998 and 1999 and
the deemed fair value for financial reporting purposes of our common stock on
the grant dates. We are amortizing our deferred stock compensation using a
graded vesting method over the vesting periods of the options. We amortized
deferred compensation expense of approximately $1.1 million during 1998 and $6.4
million during 1999. This compensation expense relates to options awarded to
individuals in all operating expense categories. In addition, on January 4,
2000, we granted options to acquire 300,000 shares of our common stock at an
exercise price per share that was less than the fair market value on the date of
grant, and we will record related deferred stock compensation of approximately
$12.0 million. The amortization of deferred compensation will be approximately
$12.4 million for 2000, $5.0 million for 2001, $2.5 million for 2002 and
$800,000 for 2003.
Merger expenses. Pursuant to our agreement to acquire Rubric, which we
entered into on December 9, 1999, we loaned Rubric $1.0 million in December 1999
under a note which is payable on June 9, 2000. The loan bears interest at a rate
of 8.5% per annum. The purpose of the loan was to fund Rubric's working capital
requirements until the completion of the acquisition. This amount has been
expensed in full on our statement of operations as a direct expense of the
merger. In January 2000, we loaned an additional $1.0 million to Rubric under
this note. These amounts will be expensed in full in the first quarter of 2000.
Interest income. Interest income consists of interest earned on our cash
and cash equivalents. Interest income for 1997 was $154,000, representing
interest earned on the cash proceeds of our Series A and Series B preferred
stock financings. Interest income increased to $335,000 in 1998, due primarily
to the investment of the proceeds of our Series C preferred stock financing. The
increase in interest income in 1999 to $1.5 million is due to higher invested
cash balances in 1999, primarily as a result of the investment of proceeds
received from the sale of $8.3 million and $1.2 million of Series D convertible
debentures in December 1998 and April 1999, respectively, the proceeds received
from the sale of $20.0 million of Series E preferred stock in June 1999 and the
proceeds from the sale of $57.8 million of our common stock in our initial
public offering in September and October 1999.
Interest expense. Interest expense consists primarily of interest on our
notes payable, bank line of credit and convertible debentures. Interest expense
was $66,000 in 1997 due to $300,000 in borrowings in 1997 under notes from a
financial institution. Interest expense was $226,000 in 1998 due to $1.0 million
in additional borrowing in 1998 under a bank line of credit. Interest expense
increased to $889,000 in 1999 due primarily to interest payments on $8.3 million
of convertible debentures issued in December 1998 and $1.2 million of
convertible debentures issued in April 1999. These debentures were converted to
common stock upon the closing of our initial public offering in September 1999.
Income taxes. There was no federal income tax provision in any period
presented due to our net operating losses. We had deferred tax assets of $6.5
million as of December 31, 1998 and $13.2 million as of December 31, 1999.
Realization of deferred tax assets is dependent on future
27
<PAGE> 30
earnings, if any, the timing and amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax assets as of
December 31, 1998 and 1999, has been established to reflect these uncertainties.
Our deferred tax assets primarily relate to net operating loss and tax credit
carryforwards. As of December 31, 1999, we had federal net operating loss
carryforwards of $29.1 million and state net operating loss carryforwards of
$13.6 million. We also had federal and state research and development tax credit
carryforwards of $500,000 and $300,000, respectively. The net operating loss and
tax credit carryforwards will expire at various dates beginning in 2004, if not
utilized. Utilization of the net operating loss and tax credit carryforwards may
be subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating loss and tax
credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.8 million in 1997, $6.1
million in 1998 and $13.7 million in 1999. In each period, net cash used in
operating activities resulted from our net loss, offset by non-cash charges
including depreciation and amortization of deferred stock compensation, and
increases in current liabilities, especially deferred revenue in 1998 and
accrued expenses in 1999. Deferred revenue consists primarily of prepayments of
licenses from distributors and OEM's and prepayment of maintenance fees which
are recognized ratably over the related support period.
Our investing activities used cash of $661,000 in 1997, $1.4 million in
1998 and $2.7 million in 1999. Net cash used in investing activities in these
periods was primarily the result of capital expenditures for computer and
communications equipment, purchased software, office equipment, furniture,
fixtures and leasehold improvements and in 1999 the restriction of $580,000 of
cash used to secure a letter of credit on a facilities lease.
Our financing activities provided cash of $1.1 million in 1997, $20.4
million in 1998 and $79.0 million in 1999. In 1997, financing activities
provided cash primarily from issuance of $1.0 million of long-term debt. In
1998, financing activities provided cash of $11.9 million from the issuance of
preferred stock, $8.3 million from the issuance of convertible debentures and
$1.0 million from borrowings under our bank credit facility. This was offset in
part by long-term debt repayment of $380,000 and a $400,000 loan to an officer
and stockholder. In 1999, our financing activities provided cash primarily from
the issuance of $20.0 million of preferred stock, the issuance of $1.2 million
of convertible debentures, and $57.8 million from the issuance of common stock
in our initial public offering in September 1999.
In July 1998, we entered into a loan and security agreement with Silicon
Valley Bank, providing an accounts receivable line of credit of up to $2.0
million and an equipment line of credit of up to $1.0 million. The accounts
receivable line of credit expired on December 31, 1999, and no borrowings were
outstanding under this facility in 1999. Borrowings under the equipment line of
credit are due in equal monthly installments of principal, plus accrued
interest, beginning in January 1999 and ending in December 2001. Borrowings
under the equipment line of credit bear interest at the bank's prime lending
rate plus 0.5%. As of December 31, 1999, $667,000 was outstanding under the
equipment line of credit and these borrowings accrued interest at a rate of 9%.
Borrowings under this agreement are secured by certain assets of Broadbase. The
agreement contains covenants requiring that we satisfy certain financial ratios
and maintain a minimum tangible net worth. The agreement also prohibits us from
paying cash dividends. As of December 31, 1998 and December 31, 1999, we were in
compliance with these covenants. In addition, as of December 31, 1999, we had
outstanding indebtedness under two separate notes payable to a financial
institution aggregating $415,000, at a weighted-average interest rate of 14.5%
per year.
As of December 31, 1999, we had $76.6 million of cash and cash equivalents.
We believe that cash and cash equivalents on hand, together with the proceeds
from this offering, will be sufficient to
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fund our operations, including working capital and capital equipment purchase
requirements for at least the next 12 months. However, we may need to raise
additional funds in future periods through public or private financing, or other
arrangements to fund our operations and potential acquisitions, if any, over a
long-term basis until we achieve profitability, if ever. We cannot be certain
that we would be able to obtain additional financing on favorable terms, if at
all. Failure to raise capital when needed could seriously harm our business and
results of operations. If additional funds are raised through the issuance of
equity securities, the percentage of ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our exposure to market risk for changes in interest rates relates primarily
to our long-term debt obligations. We primarily use proceeds from these debt
obligations to support general corporate requirements including capital
expenditures and working capital needs. We have interest rate exposure on
borrowings under our equipment line of credit which bear interest at variable
rates based on the prime interest rate. We have no interest rate exposure on our
notes payable to a financial institution, as the interest rate on this
obligation is fixed.
The table below presents principal amounts by year of maturity and related
weighted-average interest rates for our debt obligations as of December 31,
1999.
<TABLE>
<CAPTION>
FAIR
2000 2001 THEREAFTER TOTAL VALUE
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Notes payable
Fixed rate amounts............... $415,000 -- -- $415,000 $415,000
Average rate..................... 14.50% --
Line of credit
Variable rate amounts............ $334,000 $333,000 -- $667,000 $667,000
Average rate..................... 9.00% 9.00%
</TABLE>
We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment grade, highly
liquid investments, consisting of money market instruments and bank certificates
of deposit. We anticipate investing our net proceeds from this offering in
similar investment grade and highly liquid investments pending their use as
described in this prospectus.
We are exposed to market risk from fluctuations in foreign currency
exchange rates. We manage exposure to variability in foreign currency exchange
rates primarily through the use of natural hedges, as both liabilities and
assets are denominated in the local currency. However, different durations in
our funding obligations and assets may expose us to the risk of foreign exchange
rate fluctuations. We have not entered into any derivative instrument
transactions to manage this risk. Based on our overall foreign currency rate
exposure at December 31, 1999, we do not believe that a hypothetical 10% change
in foreign currency rates would materially adversely affect our financial
position.
YEAR 2000 READINESS
Many currently installed computer systems and software products
electronically store dates using only the last two digits of the calendar year.
As a result, these systems may not be able to distinguish whether "00" means
1900 or 2000, which may cause system failures or erroneous results. In addition,
currently installed computer systems and software products may not properly
recognize the date February 29, 2000. These problems collectively are referred
to as the "year 2000 issue".
State of readiness. We have completed our assessment of the potential
overall impact of the impending century change on our business. Based on our
current assessment, we believe current and
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prior versions of our software products are year 2000 compliant. By year 2000
compliant, we mean that the use or occurrence of dates on or after January 1,
2000, including February 29, 2000, will not materially affect the performance of
our software products or the ability of our products to correctly create, store,
process and output data involving dates, provided that all other products, such
as hardware and software used with our products, are also year 2000 compliant.
However, our products are generally integrated into, and process data extracted
from, other enterprise systems involving sophisticated hardware and complex
software products that we cannot adequately evaluate for year 2000 compliance.
We may face claims based on year 2000 problems in other companies' products, or
issues arising from the integration of multiple products within an overall
system even if our products are otherwise year 2000 compliant.
Utilizing a combination of an external consulting firm and our information
systems department personnel, we have completed an assessment of our internal
management information systems and other computer systems' readiness for year
2000 issues. As part of this effort, we have communicated with the external
vendors that supply us with our software and information systems and with our
significant suppliers to determine their products' and organization's year 2000
compliance. We received a written response from a small percentage of the
external vendors and significant suppliers that were contacted indicating that
their systems are year 2000 compliant. Those who have not responded have
statements on their web sites indicating that their systems are year 2000
compliant with respect to the passing of January 1, 2000. As of the date of this
prospectus, we had not received notice of any material Year 2000 compliance
issues from our external vendors.
The results of these readiness assessment initiatives indicated that, with
the exception of our accounting system and software on a few of the computers
used by our sales representatives to demonstrate our products, all of our
internal information technology systems and other internal operating systems
were year 2000 compliant. For those internal systems that we identified as non-
compliant, we implemented the necessary upgrades.
Costs. To date, costs directly associated with our year 2000 compliance
efforts have not been material, amounting to less than $20,000. These costs
consist of fees paid to an external consulting firm assisting us with our year
2000 readiness assessment initiatives as well as costs incurred for consultants
to assist in our remediation efforts. In addition, we have incurred expenses in
amounts that are not material associated with our salaried employees who have
devoted some of their time to our year 2000 assessment and remediation efforts.
We do not expect the total cost of year 2000 problems to be material to our
business.
Risks. As of the date of this prospectus, we were not aware of any year
2000 compliance problems relating to our products that would seriously harm our
business. We may discover year 2000 compliance problems in our products that
will require substantial revision and could subject us to liability claims. Our
products operate in complex network environments and directly or indirectly
interact with a number of other hardware and software systems that we cannot
adequately evaluate for year 2000 compliance. In addition, technology developed
by others and incorporated in our products could have year 2000 problems. We may
face claims based on year 2000 problems in other companies' products, or issues
arising from the integration of multiple products within an overall system even
if our products are otherwise year 2000 compliant. Our failure to fix or replace
our internally developed proprietary software or third-party software, hardware
or services on a timely basis could result in lost revenue, increased operating
costs, the loss of customers and other business interruptions, any of which
could seriously harm our business. Moreover, our failure to adequately address
year 2000 compliance issues in our internally developed proprietary software
could result in claims of mismanagement, misrepresentation or breach of contract
and related litigation, which could be costly and time-consuming to defend.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
not be year 2000 compliant. The failure of
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these entities to be year 2000 compliant could result in a systemic failure
beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our customers, decrease the use of the Internet or prevent users from accessing
websites.
Although we have not been a party to any litigation or arbitration
proceeding involving our products related to year 2000 compliance issues, we may
in the future be required to defend our products or services in these
proceedings, or to negotiate resolutions of claims based on year 2000 issues.
Defending and resolving year 2000-related disputes, regardless of the merits of
these disputes, and any liability we have for year 2000-related damages,
including consequential damages, could be expensive and could seriously harm our
business.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
companies to capitalize certain qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. We were required to adopt SOP 98-1 effective
January 1, 1999. The adoption of SOP 98-1 did not have a material impact on our
consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 was effective beginning on January 1, 1999
and requires that start-up costs capitalized prior to January 1, 1999, be
written off, and any future start-up costs be expensed as incurred. The adoption
of SOP 98-5 did not have a material impact on our consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. We will be required to adopt
FAS 133 for our fiscal year ending December 31, 2001. However, because we do not
utilize derivative financial instruments, we do not believe the impact of FAS
133 will be material to our consolidated financial position or results of
operations.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 requires use of the "residual method" for recognition of revenue when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement. We will be required to
comply with the provisions of SOP 98-9 for transactions entered into beginning
January 1, 2000. The adoption of SOP 98-9 is not expected to have a material
impact on our financial position or operating results. However, SOP 98-9 may
require more revenue to be deferred for certain types of transactions.
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BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements.
Broadbase develops and markets software that integrates and analyzes
customer information from Internet and traditional business channels, enabling
businesses to improve their customer acquisition, retention and profitability.
Our software integrates information from numerous points of customer
interaction, or touch points, by pulling information from multiple data sources
and transforming it into a standard format that can be analyzed. Our software
then analyzes this reformatted information to provide a comprehensive
understanding of the customer lifecycle from initial identification through
acquisition and retention. Our products then allow businesses to translate this
analysis into specific actions such as targeting profitable customers,
personalizing customer interactions and identifying opportunities to sell
complementary or higher-end products and services. In addition, with our recent
acquisition of Rubric, we offer Rubric's eMA (eMarketing Automation)
application, which enables businesses to act on this analysis through automated
marketing campaigns over the Internet and traditional channels. By integrating,
analyzing and acting on valuable customer information, our products enable
businesses to build long-lasting and profitable customer relationships.
Our software consists of a suite of applications that are built on
Foundation, our software platform that provides comprehensive analytic
capabilities. Our software integrates information that has traditionally been
isolated in separate systems designed to support specific types of customer
interactions, such as customer service and Internet-based sales. It provides
decision-makers in sales, marketing, customer service and e-commerce business
functions with a more comprehensive view of the customer. Each application
provides these decision-makers with analysis of customer information that is
specifically designed for their particular business function. Our solutions can
generally be deployed in less than 30 days, allowing our customers to quickly
capture revenue opportunities and achieve rapid return on investment. To date,
over 150 end user customers have licensed our products from us and our
distributors and resellers. Traditional "bricks and mortar" customers include
Aon Service Corporation, Boeing, Canon Computer, Chevron, HealthSystem
Minnesota, Hewlett-Packard, Honda, Inprise, Polaris Service, Telia AB and Xerox.
Internet-only customers include BizBuyer.com, CMP Media, InsWeb, Onvia.com and
Pets.com. Each of the foregoing end user customers has licensed products and
purchased services totaling at least $300,000.
On February 1, 2000, we acquired privately-held Rubric, a leading provider
of e-marketing automation software. Rubric's product, eMA, automates the
planning, execution and measurement of marketing campaigns across the Internet
and traditional channels.
INDUSTRY BACKGROUND
The recent emergence and acceptance of the Internet as a medium for
commerce is fundamentally changing the way companies communicate, obtain
information, purchase goods and transact business with their customers. The
Internet offers a number of compelling benefits that are causing increasing
numbers of companies to transact business online, including opportunities to
increase revenue, reduce operating costs and improve customer retention. As a
result, the Internet has become an important new channel for both traditional
"bricks and mortar" and Internet-only businesses to interact with and market and
sell to customers. Both types of companies are adapting many of their business
activities for the Internet, defining a new category of enterprise called the
e-business. Forrester Research estimates that the number of U.S. companies with
5,000 or more employees using the Internet as a channel for e-commerce will
increase from 20% in 1998 to 92% in 2002. Across companies of all sizes,
Forrester Research estimates that online business-to-business and
business-to-consumer transactions will grow from $127 billion in 1999 to over
$1.4 trillion in 2003.
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This rise of the Internet as a primary business channel has created a
highly competitive environment with low barriers to entry for new competitors
and insignificant switching costs for customers. Because customers have a
growing number of easily accessible choices both on and off the Internet,
e-businesses face a constant battle for customer loyalty. For example,
travelers, once limited to traditional travel agents, can now also choose among
numerous online providers at the click of a mouse. In this rapid paced Internet
environment, existing enterprise applications that automate processes and reduce
costs are no longer sufficient to build long lasting and profitable customer
relationships. In order to create these relationships, e-businesses must target,
convert and retain customers by differentiating their products and services to
meet each customer's individual requirements.
PROLIFERATION OF CUSTOMER TOUCH POINTS
As a result of this competitive environment, enterprises need to develop
customer-focused business models founded on a comprehensive understanding of
individual customer relationships. Traditionally, businesses have managed these
relationships by functional departments, such as marketing, sales and customer
support, and customer information has been isolated within these departments. In
contrast, e-businesses must integrate customer information across functional
departments to maximize the value of the entire customer lifecycle, from initial
identification through acquisition and retention. E-businesses need to analyze
and act on customer information gathered from all sources, including direct
sales organizations, storefronts, catalogs and websites. By using real time and
historic customer intelligence to personalize business relationships, successful
e-businesses can maximize loyalty and profitability throughout the customer
lifecycle.
With the emergence of the Internet as a primary business channel, the
number of points of customer interaction, or touch points, has increased
dramatically. Internet sales systems, online customer service solutions, website
logs and e-mail management systems have multiplied the massive amounts of
customer interaction data already generated by conventional front office systems
such as sales force automation systems, telesales and customer support call
centers, marketing automation systems, and customer and field service
applications. In addition, traditional back office systems such as billing,
manufacturing and human resource systems, capture large volumes of important
customer and operational data. This increase in data sources makes the challenge
of integrating and analyzing the information generated throughout the customer
lifecycle more difficult. The sheer volume and variety of customer data creates
a competitive opportunity for businesses that can effectively integrate, analyze
and act on this information.
NEED FOR COMPREHENSIVE E-BUSINESS SOLUTIONS
Traditionally, businesses tried to analyze this valuable data by piecing
together generic technologies -- point tools -- that address narrow and discrete
analytical needs. These point tools include data extraction tools to access
data, online analytical processing tools to analyze and model data, data mining
technologies to identify patterns in data, and report generators to present the
information. Piecing together these point tools to create a patchwork system
typically requires significant custom programming and takes a long time to
complete. In addition, these patchwork systems are very difficult and costly to
maintain. Because patchwork systems are inflexible and costly to maintain, they
are poorly suited to the rapidly changing business and technology requirements
of e-businesses.
Moreover, patchwork systems and point tools cannot provide e-businesses
with a comprehensive understanding of the entire customer lifecycle. Instead,
they generally offer limited analysis based on a single element of a customer's
interaction with a business, focusing on a single channel, customer touch point
or period of time. For example, today's website monitoring tools completely
ignore historical customer activity across other channels, such as call centers
or traditional storefronts. As a
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result, these tools would not indicate that a customer used the Internet to
gather information about a product, purchased the product at a physical store
and later contacted customer support.
Finally, patchwork systems and point tools do not enable e-businesses to
act quickly on data generated by customer interactions. These tools were not
designed for specific functions such as e-commerce or customer service, or their
unique underlying business processes. Because the data and reports generated by
point tools cannot be quickly translated into concrete actions, they cannot
unleash one of the most powerful potentials of e-business -- the ability to
personalize customer interactions and differentiate product offerings in real
time.
Both multi-channel "bricks and mortar" and Internet-only businesses require
solutions that integrate, analyze and act on information from all customer touch
points. These analytic solutions must create a comprehensive view of the
customer lifecycle by integrating information from e-commerce and Internet-based
systems, front office systems, back office applications and external information
sources. They also must provide business users in different functional areas
with packaged applications that analyze this information using industry
benchmarks, business logic and guided decision-making capabilities. In addition,
e-businesses require solutions that enable them to move quickly from analysis to
action, creating and enhancing customer relationships both online and offline.
Finally, both "bricks and mortar" and Internet-only business can realize
significant benefits from using this analysis to automate the planning,
execution and measurement of marketing campaigns.
OUR SOLUTION
Our software solution consists of two components: the Foundation software
platform and our suite of analytic applications. Foundation is a robust and
extensible software platform that integrates and analyzes customer interactions
and operational data from multiple sources. Our applications provide
decision-makers within various business functions with analysis of this
information to improve customer targeting, acquisition, conversion and
retention. These applications are designed for the specific and changing
analytic needs of decision makers in e-commerce, online publishing and
advertising, marketing, sales and customer service functions. Our solutions are
designed to enable businesses to target customer segments, personalize marketing
promotions and campaigns, differentiate product and service offerings and
leverage operational resources, resulting in more loyal and profitable
customers.
We believe our solutions represent an innovative and comprehensive approach
to analyzing and optimizing e-business customer interactions by providing the
following benefits:
UNDERSTAND THE ENTIRE CUSTOMER LIFECYCLE
Our software integrates information from multiple customer touch points to
provide a comprehensive view of the entire customer lifecycle, from initial
identification through acquisition and retention. Foundation transforms,
cleanses, loads and integrates large volumes of customer and operational data,
such as previous purchases, responses to promotions and service requests. Our
applications then use this integrated information to deliver analysis that is
designed to address the needs of specific business departments. In addition,
with our recent acquisition of Rubric, our combined solution will enable
businesses to act upon this analysis through automated marketing campaigns over
the Internet and traditional customer touch points throughout the customer
lifecycle.
IMPROVE CUSTOMER ACQUISITION, CONVERSION AND RETENTION RATES
E-businesses that deploy our solutions use analysis of the entire customer
lifecycle to target, personalize and differentiate all aspects of online and
offline customer interactions -- moving beyond the simple automation of customer
transactions. For instance, businesses use our solutions to increase customer
acquisition by targeting higher value customers, to improve conversion rates by
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personalizing web content and advertising, and to enhance customer retention by
streamlining customer service bottlenecks. In doing so, our solutions enable
e-businesses to use both the Internet and traditional business channels to build
profitable, long-lasting customer relationships.
IDENTIFY AND TARGET MOST PROFITABLE CUSTOMERS
Our software enables e-businesses to identify their most profitable
customers and to tailor promotions and marketing campaigns, sales efforts,
product offerings and customer service based on individual buying habits and
demographics. In doing so, it allows companies to maintain and enhance the value
of their most profitable customers as well as to increase the profitability of
other customer segments.
RESPOND RAPIDLY TO OPPORTUNITIES AND RISKS
Our software allows business decision makers to respond rapidly and
effectively to new opportunities and risks by providing timely information,
measuring results against industry targets and suggesting actions. These
capabilities help close the loop between a customer interaction and the business
response -- that is, they help the business react to information generated from
previous customer interactions. Examples of these capabilities include utilizing
prior customer behavior to personalize web content or identifying opportunities
to sell complementary products, or "cross-sell", and to sell higher-end
products, or "up-sell". In addition, our solutions incorporate business logic to
monitor performance, identify exceptions and alert users to key events such as
ineffective promotions or service backlogs.
ACHIEVE FAST RETURN ON INVESTMENT THROUGH RAPID IMPLEMENTATION
Because our software can generally be deployed in less than 30 days,
businesses can rapidly begin to realize the increased revenue resulting from
personalized customer interactions, without suffering the delays associated with
the creation of in-house patchwork systems and consulting services-based
approaches. In addition, our packaged adapters for integration with Internet and
enterprise systems, and our pre-built applications, support rapid implementation
with a lower investment than applications developed in-house.
REDUCE TOTAL COST OF OWNERSHIP
Our software requires fewer resources than the development and
implementation of alternatives such as in-house patchwork systems and consulting
services-based approaches. In addition, our applications are specifically
designed to be easily used by business decision makers, minimizing training and
support costs. Finally, because we offer an open platform, businesses can easily
adapt and extend our open modular solutions to meet their changing business and
technical requirements with minimal additional investment.
CASE STUDIES
The following case studies illustrate the use of our software by an
Internet-only company as well as a traditional "bricks and mortar" business.
Mercata is an Internet-only company that has licensed our new e-business
applications. Plymouth Rock is a traditional "bricks and mortar" company whose
use of our products is representative of how many companies use our products to
improve customer acquisition, retention and profitability. The revenues we have
derived from both Mercata and Plymouth Rock together represent less than 5% of
our total revenues to date. We continue to provide software upgrades and
technical support to both Mercata and Plymouth Rock under maintenance agreements
we have with these companies.
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MERCATA
Mercata is a web-based retailer that offers an online group buying system
through which groups of buyers can exercise volume purchasing power and drive
prices lower. As its e-commerce activity increases, Mercata must analyze and
optimize content, promotions and specific group purchases, as well as improve
customer targeting.
Mercata has implemented our software to analyze the traffic and buying
habits of its users by integrating our product with BroadVision, which is
Mercata's e-commerce system. By analyzing their users' habits, Mercata can
discover trends and patterns, such as how often consumers make offers and how
much they raise their offers. In addition, our software analyzes the optimal
product mix, price and length of each group purchase. Mercata uses this
information to customize and personalize its content to attract new users and
retain current ones. Our software enables Mercata to understand and determine
the growing purchasing leverage of Mercata's e-consumer community.
PLYMOUTH ROCK
The Plymouth Rock Company is a property, casualty and auto insurance
company headquartered in New England. Since the state of Massachusetts sets
automobile insurance rates and prohibits insurers from denying coverage to any
driver, Plymouth faces the challenge of providing coverage to high risk drivers
while minimizing costs and claims.
Plymouth selected our software to help it reduce insurance claim expenses.
By generating an enterprise-wide, customer-focused view of Plymouth's lines of
business, and by analyzing data about customers' insurance claims, Plymouth can
target low risk customers. In addition, Plymouth is incorporating sales to low
risk customers as a compensation criterion for its agents, and will automate
this process by integrating our software and its payroll applications. Our
software is currently used by more than 100 employees at Plymouth and over 150
of its external insurance agents.
OUR STRATEGY
Our objective is to be the leading provider of customer-focused e-business
solutions. To achieve this objective, we have adopted the following strategies:
EXPAND OUR PRODUCT OFFERINGS
Our underlying product architecture enables us to develop new products and
enhancements rapidly. We will continue to invest significantly in research and
development to expand our product offerings in the e-business analytic solutions
market. We utilize a customer-driven development cycle, focused on identifying
current and future e-business requirements, through frequent customer meetings
and customer programs. We will also continue to expand our product offerings to
include enhanced customer interaction capabilities such as those provided by the
eMA product line, which will allow us to offer additional execution
functionality to act upon the analysis provided by our current product line. We
intend to continue to work closely with other application, technology and system
integration companies to identify other opportunities to expand our product
offerings.
TARGET MULTI-CHANNEL COMPANIES AND INTERNET-ONLY BUSINESSES
We believe that both traditional multi-channel companies and emerging,
Internet-only businesses need our integrated e-business solutions. We also
believe that both categories of businesses will continue to invest heavily in
e-business solutions, such as ours, in order to differentiate their product and
service offerings, leverage the Internet as a primary business channel and
develop lasting relationships with their customers. Accordingly, we will
continue to target both multi-channel companies and Internet-only businesses.
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BROADEN PRODUCT ADOPTION THROUGH MARKETING AND TECHNOLOGY RELATIONSHIPS
We believe that marketing and technology relationships with a strong
network of companies will broaden our product adoption, increase our market
presence and enhance our ability to deliver complete solutions to our customers.
Our marketing and technology relationships with these companies provide value to
both parties. For example, our marketing and technology relationships with
application vendors enhance the value of their products by allowing their
customers to access, analyze and act upon the data within these products. We
plan to continue to invest in jointly integrating, marketing and selling our
solutions and services with these companies, and to form new relationships with
additional e-commerce software vendors. We also intend to continue to build
relationships with major systems integrators and consulting service providers.
EXPAND PROFESSIONAL SERVICES CAPABILITIES
We believe that our professional services group is important to ensure our
customers' success and to drive increased sales. Our professional services group
assists businesses in developing innovative ways to implement our solution,
leading to increased adoption of our products. We plan to continue to expand our
professional services group.
EXTEND OUR GLOBAL PRESENCE
We believe that there will continue to be significant international
opportunities for our solutions. We currently have offices in Germany, Japan,
the Netherlands and the United Kingdom, a Canadian subsidiary and distributors
in Japan. We plan to continue to invest in our sales infrastructure in order to
support a growing global sales force in both the United States and in
international markets, particularly Asia-Pacific and Europe.
BROADBASE PRODUCTS AND SERVICES
OVERVIEW
Our suite of e-business software solutions is designed to provide business
decision-makers in sales, marketing, customer service and e-commerce with
analysis of customer information that is specifically designed for their
business function. This suite is built on Foundation, our software platform that
provides comprehensive analytic capabilities. We introduced Foundation in the
fourth quarter of 1997, and began offering our analytic applications designed
for specific business functions in the third quarter of 1998. In May 1999, we
expanded our suite by introducing new applications designed for e-business, as
well as new versions of our existing applications. Our applications may be
licensed individually or in any combination. Many of our customers license our
"e-business suite", which consists of our E-Commerce, E-Marketing and
E-Personalize applications. A license for any one or more of our applications
also includes a license for Foundation and adapters to interface with the
customers' existing data sources.
Each application incorporates its own data model and business logic. The
data models organize the relevant data through Foundation into consistent
formats that can support dynamic and interactive analysis. The business logic
used in each application then analyzes this data using the rules that typically
govern the decision making process within each specific business function. It
can identify risks and opportunities and suggest actions for specific processes.
For example, our E-Personalize application organizes profiles of website
visitors, analyzes the content of the website, links information about visitors
and content and suggests types of content or products that should be presented
to the customer. Organizations can customize the data models and business logic
to support their specific and changing needs.
Foundation is the software platform upon which each of our analytic
applications is built. It enables the applications to extract data from multiple
sources, transform this data into a consistent format and
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store this data in widely used databases such as Microsoft SQL Server and
Oracle. This data can include both real time and historic data from sources such
as:
- Internet-based or e-commerce systems, including websites, e-mail and
online services;
- front-office customer relationship management applications including
sales, marketing and customer support systems;
- back-office enterprise resource planning applications including finance,
manufacturing and human resources; and
- sources of demographic data.
Foundation's analytic engine provides the capabilities that allow our
analytic applications to perform complex analysis.
Our software incorporates a browser-based interface that enables business
users to take advantage of all of its capabilities with minimal training. This
intuitive interface guides business users through the analysis process, while
providing sophisticated users with more extensive functionality.
The following graphic illustrates the architecture of our software:
[GRAPHICS]
With our recent acquisition of Rubric, we now offer Rubric's eMA
application. This product automates the planning, execution and measurement of
marketing campaigns. It streamlines campaign planning by automating the process
of requesting, reviewing, approving and launching campaigns. The software
enables the identification of prospect and customer segments that can be
targeted with personalized messages and offers. eMA then automates the execution
of Internet and traditional
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<PAGE> 41
marketing campaigns by generating personalized e-mail and web pages,
personalized letters and faxes, and lists for direct mail and call center
campaigns. It can manage their campaigns concurrently over a number of different
channels. In addition, eMA can also automate other areas of customer
interaction, such as customer service. The software also provides a
communications system that facilitates personalized, targeted and interactive
communications across the Internet and traditional channels over an extended
period of time. Following execution of the marketing campaign, eMA's measurement
capabilities allow users to close the loop by tracking campaign results, costs
and revenue. By enabling users to more effectively generate leads and build
customer relationships, eMA is designed to generate revenue, reduce marketing
costs and improve marketing effectiveness. We believe the combination of eMA and
our existing products will allow businesses to both analyze their customer data
and then plan, manage and execute marketing campaigns based on this analysis.
Rubric introduced eMA in the second quarter of 1998. eMA currently
interoperates with our current software in two stages. First, data from eMA is
loaded into our software for analysis of customer segments. For example, lists
of customers developed with analysis by our E-Marketing application can then be
extracted by eMA to develop and execute marketing campaigns. Our software can
then analyze the results of these campaigns.
We are currently developing an enhanced version of eMA, which we plan to
introduce in the first half of 2000. This new version is expected to provide
increased integration with our applications. In addition, we anticipate that it
will include a new user interface designed to simplify campaign management.
Finally, we expect this new version of eMA to offer several new features,
including enhanced personalization functions for improved e-mail content,
support for multi-offer campaigns with pre-built processes for automated
follow-up, and an automated opt-in/opt-out function that allows recipients of
information to choose whether to receive follow-up information. The actual
features and introduction date of this new version could differ materially from
those anticipated as a result of a number of factors, many of which are beyond
our control. See "Risk Factors -- We may be unable to attract new customers if
we do not develop new products and enhancements". Even if development is
completed when anticipated, we may decide, in our sole discretion, to postpone
introduction of the new version, or not to introduce it at all.
APPLICATIONS
Each application is designed specifically to address critical business
functions. These applications analyze, measure and evaluate information from
numerous customer touch points by extracting the information, reformatting it,
performing various calculations and identifying customer patterns that are
useful for each specific business function. For example, the E-Marketing
application collects and analyzes customer information extracted from a
company's order processing system, its website and external demographic data
sources. It then performs calculations on the information to identify patterns
and trends, such as historical purchasing patterns of customers, and uses this
analysis to provide information, such as identifying customers that are likely
to purchase a particular product. The marketing organization can use this
information to tailor its marketing campaigns to those customers most likely to
purchase the product.
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Our applications consist of the following:
<TABLE>
<S> <C> <C>
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION
<S> <C> <C>
-------------------------------------------------------------------------------------------------
Customer Service - Analyzes service costs and case queues
- Measures workforce readiness and service level management
- Prioritizes support cases and recommends resource
allocation
- Analyzes online customer service activity as compared to
call center workloads (not included in current version;
anticipated in next release)
-------------------------------
Sales - Measures profitability and bookings, billings and backlog
- Analyzes sales leads, pipeline, forecasting accuracy and
competitive wins/losses
- Evaluates the productivity of sales representatives and
distribution channels
-------------------------------
E-Marketing - Recommends cross-selling and up-selling opportunities
- Analyzes return on investment of campaigns and promotions
- Profiles customers and generates lists for campaign
management
-------------------------------
E-Commerce - Analyzes customer purchasing behavior and online shopping
processes, profitability of specific distribution channels
and order fulfillment
- Analyzes the performance of website content and identifies
impact of content changes
- Measures commerce website statistics and online user
activity
-------------------------------
E-Personalize - Analyzes business rules for personalization of web
content, product and service offerings
- Features personalization engine that creates content
personalization rules based on usage patterns, user
interests and demographics
- Also will provide input of rules into e-commerce systems,
such as BroadVision, to "close the loop" by enabling these
systems to personalize the customer's experience based on
analysis of prior interactions (not included in current
version; anticipated in next release)
-------------------------------
E-Procurement - Analyzes buying behavior throughout the company to help it
(anticipated to be released negotiate better volume discounts
in 2000) - Quantifies external interactions with existing suppliers
including price/performance scoring
- Analyzes supplier performance
-------------------------------
eMA - Streamlines the planning of marketing campaigns
- Automates execution of multi-channel campaigns
- Measures campaign effectiveness
-------------------------------
</TABLE>
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Our Customer Service, Sales and E-Marketing applications were first
released in July 1998, and the most recent versions of each were released in May
1999. Our E-Commerce and our E-Personalize applications were first released in
May 1999. We anticipate releasing our E-Procurement application and enhancements
to several of our existing applications in 2000. Actual features and release
dates for new applications and versions could differ materially from those
projected as a result of a variety of factors, many of which are beyond our
control. See "Risk Factors -- We may be unable to attract new customers if we do
not develop new products and enhancements".
Our applications provide analysis of a wide range of customer trends and
patterns. The analytic capabilities of each application are based on the
business logic that is used by a specific business function, such as e-commerce,
customer support, sales and marketing. In developing this logic, we survey the
major decision points faced by executives in the functional area and in many
cases retain industry consultants in the relevant fields to provide further
input on the analysis requirements of the business function. We believe that we
have gained significant internal expertise in the critical decision processes of
executives in these functional areas, and in the data and analysis needed to
support these decisions. The members of our research and development
organization who have developed this expertise identify the types of analysis
that can be effectively provided using our technology and that are needed by the
business function. We then develop and refine the models and calculations
necessary to provide this analysis. In addition, each application incorporates a
specific data model designed to support this analysis using data from multiple
alternative third party information systems. These data models are sets of
specifications and functions used by the applications to perform functions such
as eliminating the data that is not useful for the specific analysis and
transforming the data into uniform tables. We have developed a knowledge base
about the typical sources of data that can be used for the desired analysis and
draw on this knowledge base to design the data models used by our applications.
In addition to the standard analytic and data integration capabilities provided
by our applications, organizations can customize the business logic and data
models to support their specific and changing needs.
The following examples illustrate how our applications integrate and
analyze data:
Customer Service. One of the functions provided by the Customer Service
application is analysis of service costs. To analyze service costs, this
application accesses data from an organization's customer support systems,
including such case history data as the customer's name, the support
representatives that handled the case, the date and time the case was opened and
closed and, if available, entries of time spent on the case. In addition, the
application extracts data about the relevant support representatives'
compensation history from the organization's human resources system. The
Customer Service application then calculates the total time spent on each case
for each customer and the hourly cost of each representative involved in the
case. The application multiplies this cost by the total number of hours spent
supporting each customer case to determine the cost for each case. It then
aggregates the total costs for each case and sorts this aggregated data to
provide such information as the total cost to support an individual customer or
product, high or low support costs, costs by region, costs by support
representative, and trends by day, week or month. Our customers can customize
the application to provide additional functions or incorporate other data
sources. For example, the application can be customized to incorporate into the
calculation of the cost of each case information from the customer's financial
systems about the indirect and fixed costs of customer support, such as
administrative overhead and computer systems.
Sales. The process for making a sale often starts with the generation of a
lead by the marketing department. The sales department may not know the quality
of that lead, the cost to generate that lead, how that lead turns into a sale
and how many leads are needed in order to attain a given revenue goal. To
determine how many leads a company or division needs to meet its sales goals,
and how much they need to spend to generate those leads, our Sales application
performs lead analysis. Our Sales application extracts lead source and company
profile information from the organization's marketing automation system. In
addition, it extracts data such as lead qualification and closure rates,
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historical transaction size information and current sales goals from the
organization's sales force automation system. The application then uses this
data to project the number of leads expected to be required to meet the sales
goal. It can perform further calculations using lead generation cost data to
create projected budgets to support this lead generation process.
E-Commerce. Our E-Commerce application analyzes a number of types of data
about website content, user activity and online purchasing behavior. For
example, it uses information from a company's Internet infrastructure systems to
identify the registered visitors to the website who look at a specific piece of
content over a specific period. It then obtains data about product sales on a
customer to customer basis from the transaction database in the company's
e-commerce system. This data includes the type and amount of products purchased,
the date of the purchase and the amount paid. Our E-Commerce application then
correlates the two sets of data to identify and count the visitors who both
viewed the content and purchased the product, and calculates a "look-to-buy"
ratio - the percentage of people who viewed a product on the website and who
actually purchased it. The application then develops a more detailed analysis
that uses data from the company's web logs to correlate actual visitor sessions
with purchases and to provide information about whether visitors purchased the
product immediately after viewing the content or in a later visit.
E-Personalize. Our E-Personalize application aggregates a range of website
data, including website usage patterns from web logs, user interest data
gathered from on-line surveys, and demographic data from the user registration
database or the third party demographic databases used by the customer. We are
developing analytic capabilities for this application that would then estimate
the likelihood that a website visitor would purchase specific products, by
aggregating historical usage patterns for groups of users and calculating the
percentage of times a product is purchased by each customer group. The group
with the highest ratio of product purchases would be identified as the most
likely to purchase a product. For example, if a retailer is interested in
determining the group that is most likely to purchase blue shirts, the
application would be able to determine that this group consisted of males over
the age of 30. It would then be able to create a rule that males over the age of
30 who visit the website should be shown blue shirts. The application would then
be able to input this rule into application systems such as Broadvision to
enable these systems to personalize the customer's experience.
FOUNDATION
Our applications are built on Foundation, a comprehensive software platform
that provides analytic capabilities. Foundation has the following features:
Adapters for internal and external enterprise systems. Foundation features
adaptable and robust data extraction, transformation and loading capabilities
that extract and transform data from key data sources and load that data into
our applications. The extraction, transformation and loading layer includes
adapters for integration with key enterprise systems and sources. Using
adapters, Foundation integrates with:
- e-commerce systems such as those offered by Art Technology Group,
Allaire, BroadVision, InterWorld, Kana, Microsoft, Open Market and
Vignette;
- customer relationship management systems such as those offered by Aurum,
Baan, Clarify, Genesys, ONYX, Oracle, Pivotal, Saratoga Systems, Scopus,
Siebel and Vantive;
- enterprise resource planning applications that manage and integrate data
from business operations, such as those offered by Baan, JD Edwards,
Oracle, PeopleSoft and SAP;
- custom, legacy and homegrown applications and systems;
- demographic and other data from external providers such as Acxiom and Dun
& Bradstreet; and
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- leading data warehouses, or enterprise-wide systems that store, retrieve
and manage data such as those offered by IBM, Informix/Red Brick, NCR,
Oracle and Sybase.
The extraction, transformation and loading layer also provides businesses with
the flexibility to integrate other data sources and systems as their
requirements change.
Open, scalable architecture. Foundation runs on leading databases, such as
Microsoft SQL Server and Oracle. Foundation is composed of industry standard SQL
and Java components and utilizes the Microsoft Data Warehouse Framework,
including SQL Server's OLAP Services and the Microsoft Metadata Repository. Our
applications operate on Windows NT and access data stored on both Windows NT and
UNIX platforms.
Application server and analytic engine. Foundation features a powerful
analytic engine, with capabilities including hybrid online analytical
processing, data mining, statistical analysis and ad hoc analysis. In addition,
Foundation contains an extendable library of reusable application components,
such as profitability calculations, that facilitate the management and
customization of analytical applications.
Information delivery server. Foundation supports a completely
Internet-based, publish-and-subscribe information delivery model with security
features for individuals or groups of users. In addition, alerts and triggers
can be set to automatically deliver information only when and where needed.
Integrated graphical application management. Foundation features an
integrated graphical management environment for complete system administration
and management of both Foundation and our applications.
SERVICE OFFERINGS
Our professional services group helps businesses define, design and
implement e-business analysis solutions. Our customers benefit from the
accumulated expertise of our professional services group including its
experience in developing, deploying and implementing analytic applications,
enterprise applications and data warehouses. In addition, our professional
services group has built expertise in key functional areas including e-commerce,
customer relationship management and direct marketing. Moreover, our
professional services group has specific expertise in the systems with which our
solution is integrated and assists in the development of our adapters. We
generally charge for our services on a time and materials basis and provide them
worldwide through offices in the United States, Germany, Netherlands and United
Kingdom, through distributors in Japan and through our Canadian subsidiary. Our
professional services include:
- project planning and management;
- system implementation;
- software integration;
- user training; and
- ongoing customer support.
In a typical application license transaction, our professional services
group connects our products to the customer's systems and data sources. The
actual connection process can often be completed in approximately two to four
weeks.
The goals of our professional services group are to rapidly deliver
solution value and meet the specific business needs of our customers. We will
continue to work closely with our network of systems integration partners and
expand our training capabilities both in the United States and
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internationally. We believe that our professional services group can assist
businesses in developing innovative ways to implement our solutions, leading to
increased product adoption.
CUSTOMERS
To date, over 150 end user customers have licensed our products from us and
from our indirect sales channel, which includes our distributors and companies
that sell our products as part of an integrated solution with their own
offerings. These end user customers include both traditional "bricks and mortar"
companies and Internet-only companies. The following table represents all end
user customers as of December 31, 1999 to whom we had licensed products or sold
services totaling at least $100,000. This list does not include end users which
license our products under an agreement with another party.
<TABLE>
<S> <C> <C>
INTERNET AND MANUFACTURING ENERGY INDUSTRIES
COMMUNICATION SERVICES Anderson Windows Bonneville Power
Allied Riser Communications Baxter IV Systems Boston Edison
Ashford.com Bell & Howell Chevron
BizBuyer.com Boeing Commercial Airplanes Enbridge Consumer First
CMP Media Group Idaho Power
Done.com Canon Computer Los Alamos National Labs
Driveway.com Eastman Kodak New Century Energy
InsWeb Honda Omaha Public Power
Mercata Rockwell Automation Seattle City Power
MVX.com
NTT FINANCIAL SERVICES OTHER
Onvia.com Aon Service Corporation DSC Logistics
Pets.com Automatic Data Processing HealthSystem Minnesota
RealNames Corporation Fidelity Investments National TechTeam
WebTV/Microsoft Plymouth Rock Assurance Shikishima Baking Company
TECHNOLOGY Putnam Investments Telia AB
Hewlett-Packard The Sharper Image
Inprise Tokai
Kana Communications United Airlines
Mercury Interactive
Polaris Service
Rational Software
Vantive
Xerox
</TABLE>
Hewlett-Packard represented 10.1% of our net revenue in 1998 and 3.2% in
1999.
In addition, the following table represents Rubric's customers as of
December 31, 1999, to whom Rubric had licensed products or sold services
totaling at least $100,000.
<TABLE>
<S> <C>
TECHNOLOGY INTERNET
DiTech.com
BEA Systems Internet Appliance Network
Cisco Systems LoanCity.com
Citrix MSHOW.com
Hewlett-Packard Outpost.com
Merant PeopleFirst.com
N.E.T.
Rainmaker Systems
Sierra Atlantic
Sybase
</TABLE>
Hewlett-Packard represented 26% of Rubric's net revenue in 1999.
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LICENSING
Currently, businesses that license our products generally license one or
more of our applications, together with Foundation and adapters to interface
with their existing data sources. Customers generally receive nonexclusive,
perpetual licenses to use our products for a specified number of servers and
named concurrent users. After the initial license, they may purchase licenses
for additional servers and users as needed. In addition, customers often
purchase professional services from us, including training services, although
they may use other consulting organizations. Customers that license our products
also usually purchase maintenance contracts, which provide software upgrades and
technical support over a stated term, typically 12 months.
MARKETING AND TECHNOLOGY RELATIONSHIPS
We establish marketing and technology relationships to assist in the
marketing, selling and implementation of our solutions, as well as to increase
the interoperability of our solutions with our partners' complementary products.
TYPES OF RELATIONSHIPS
We have six types of marketing and technology relationships:
SYSTEM INTEGRATORS AND CONSULTING FIRMS
To ensure the successful implementation of our solutions, we have
established relationships with a number of leading system integrators and
consulting firms. These firms implement our products, provide related business
consulting, and often assist us in our sales process. In the United States, we
have relationships with Andersen Consulting, Cambridge Technology Partners,
Condor/DST, Ernst & Young, Renaissance Worldwide and US Web/CKS. In addition, we
have relationships with Internet-focused professional services firms and
regional system integrators. As a result of our acquisition of Rubric, we now
have integrator relationships with Breakaway Solutions, Dialogos and Tessera.
E-COMMERCE AND INTERNET SOFTWARE VENDORS
To enhance our software, and to identify potential customers, we have
formed relationships with leading vendors of e-commerce and Internet solutions,
such as Art Technology Group, BroadVision, Calico, Kana and Vignette. We jointly
integrate, market and sell our complementary solutions with BroadVision. We also
have been featured at BroadVision's user group meetings, internal sales meetings
and on their website. We are engaged in joint marketing and integration of our
solutions with Kana's e-mail management solution, and we have recently entered
into an agreement for the joint marketing of our solutions with Calico's
e-commerce solution.
FRONT AND BACK OFFICE SOFTWARE VENDORS
To enable our solutions to integrate data from as many customer touch
points as possible, and to target the installed customer base of these
applications, we have formed relationships with leading enterprise applications
vendors. We currently have marketing and technology relationships with Clarify,
Genesys, ONYX, Saratoga Systems and Vantive. These software vendors highlight
Broadbase's applications in their sales cycle, at their user group meetings or
on their websites. For each of these vendors, Broadbase provides adapters that
enable integration between our complementary systems. In addition, Rubric has a
reseller relationship with Hewlett-Packard as a component of Hewlett-Packard's
front office software offering.
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TECHNOLOGY AND PLATFORM VENDORS
To ensure that our products are based on industry standards and to take
advantage of new and emerging technologies, we have formed relationships with
key technology and platform vendors. As part of our relationship with Microsoft,
we have joined the Microsoft Data Warehouse Alliance, whose members support the
Microsoft Data Warehouse Framework. In addition, we support Windows NT, Internet
Information Server and Office 2000.
DEMOGRAPHIC DATA PROVIDERS
To provide more effective customer and marketing analysis, our solutions
allow businesses to integrate external demographic data with their customer
data. We have entered into joint marketing agreements with Acxiom and Dun &
Bradstreet and are integrating our products with their products to enable our
customers to access and analyze the demographic data of these companies.
APPLICATION SERVICE PROVIDER AND INTERNET HOSTER
To enable our solutions to be rapidly implemented by companies that host
their web commerce applications, we have formed a relationship with an
application service provider (ASP), USinternetworking. ASP's host and manage
software applications for companies that do not want to install and manage
software on their own systems. USinternetworking resells Broadbase applications
to provide analysis for their e-commerce clients. In addition, Rubric has a
marketing relationship with Exodus Communications.
TERMS OF AGREEMENTS
Our marketing and technology relationships are generally not documented in
writing, or are governed by agreements that can be terminated by either party
with little or no notice. These agreements generally provide for the parties to
cooperate to make joint press releases, do joint marketing and where appropriate
to integrate their products or make them compatible with each other. These
agreements may also specify that payments are to be made by us to these
companies for providing us with qualifying customer leads. The generation of
leads to date by these companies has not generally satisfied the specified
criteria and therefore payments for leads have been immaterial in amount.
SALES AND MARKETING
We license our software through both our direct sales force and indirect
sales channels. As of December 31, 1999, our sales group consisted of 50
employees, in 10 locations -- six offices in the United States and four offices
internationally, which are located in Germany, Japan, the Netherlands and the
United Kingdom. Our direct sales force consists of sales representatives as well
as sales personnel who provide pre-sales technical support and other support
personnel. We plan to expand our direct sales force significantly. In addition,
we intend to recruit and hire a new Executive Vice President of Marketing to
oversee our marketing operations. Our corporate sales organization is
responsible for collecting inbound leads, performing initial qualification and
introducing each prospective customer to a direct sales representative. We sell
to companies at the departmental level, targeting directors and executives in
e-commerce, sales, marketing, customer service and information technology.
Our indirect sales channel includes companies such as Baan, Datamedica,
Genesys, Indus, and USinternetworking, which sell our products as part of an
integrated solution with their own offerings. Indus selected Foundation as the
platform on which to build its Indus Knowledge Warehouse solution, which it
licenses to its customers in the utility and energy industries. Indus
represented 18.4% of our
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revenue in 1998 and 11.2% of our revenue in 1999. Baan selected Foundation as
the platform on which to build its Enterprise Decision Manager decision support
suite. USinternetworking, an application service provider, resells our
applications. We also have distributors in Japan, which include Beacon
Information Technology, Compaq Computer K.K., Oki Electric Industry, Sharp
System Products and Teijin Systems Technology.
Our distribution relationships are generally governed by agreements that
can be terminated by either party with little or no prior notice. These
agreements generally grant nonexclusive licenses to distribute our products, are
not subject to minimum purchase requirements and provide for certain discounts
on the purchase prices of our products. We entered into our distribution
agreement with Indus, which contains similar provisions, on June 2, 1998. This
agreement is effective until June 30, 2001 and will automatically renew for
additional one year terms unless it is terminated earlier by either party with
30 days written notice prior to the date of the automatic renewal.
We focus our marketing efforts on sales lead generation, sales support,
creating market awareness of our solutions and establishing strategic
relationships. Our marketing activities include direct mail and e-mail
campaigns, press relations and industry analyst briefings, speaking engagements,
attendance at partners' user group meetings and industry trade shows, and
participation in sales and marketing programs of companies with whom we have
marketing relationships.
INTERNATIONAL OPERATIONS
International sales represented approximately 5.1% of our total net revenue
in 1998 and 23.2% of our total net revenue in 1999. Approximately 17.3% of our
total net revenue in 1999 consisted of sales to customers in Japan. We first
recognized revenue from international sales in the last quarter of 1998. We
currently conduct our international sales primarily through direct sales offices
in Germany, the Netherlands and the United Kingdom, through our Canadian
subsidiary and through distributors in Japan. Our products are sold
internationally both individually and as part of integrated solutions with the
product offerings of certain companies, such as Baan. Our relationships with our
Japanese distributors are generally governed by agreements that are similar to
those described under "Sales and Marketing" above. The end user companies that
license our products internationally span many industries. We believe that there
will continue to be significant international opportunities for our integrated
e-business solutions. As a result, we intend to expand our international
operations and to continue to invest in our sales infrastructure in order to
support a growing global sales force in international markets, particularly
Asia-Pacific and Europe.
The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. In particular, we must develop local versions of our
products for foreign markets and must recruit and train an international staff.
Currently, we have only limited experience in localizing our products and in
marketing, selling and supporting our products and services overseas.
RESEARCH AND DEVELOPMENT
Our research and development organization is comprised of separate groups
responsible for core product development, application development and product
strategy and management. The core product development group is responsible for
ongoing development of Foundation. Our application development group is
responsible for developing new applications and enhancing existing applications.
Our product strategy and management group is responsible for prioritizing
customer requirements and defining the resources and timelines necessary to
deliver products. Our current research and development efforts are focused on
the development of additional applications and other enhancements that extend
the e-business functionality of our solutions.
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Our research and development expenditures were $2.0 million in 1997, $3.7
million in 1998 and $6.0 million in 1999. We expect that we will continue to
commit significant resources to research and development in the future. The
market for our products and services is characterized by rapid technological
change, frequent new product introductions and enhancements, evolving industry
standards, and rapidly changing customer requirements. Our future success will
depend in part on our ability to anticipate changes, enhance our current
products, develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of our customers.
See "Risk Factors -- We may be unable to attract new customers if we do not
develop new products and enhancements".
COMPETITION
Our competitors vary in company size, and in the scope and breadth of their
products and services. We have three primary sources of competition:
- providers of consulting services-based analysis solutions, such as
E.piphany;
- vendors of point technologies that provide website analysis such as
Accrue, Andromedia, which was recently acquired by Macromedia, Net
Perceptions and Personify; and
- in-house development efforts by potential customers using traditional and
generic decision support tools.
The addition of Rubric's eMA product line introduces new competitors,
including the following:
- vendors of online marketing automation software such as MarketFirst and
Annuncio;
- providers of outsourced e-mail marketing services such as Digital Impact
and Responsys.com; and
- campaign management software vendors such as Exchange Applications and
Prime Response.
In addition, we face potential competition from vendors of other enterprise
applications as they expand the functionality of their product offerings. These
vendors may include Oracle, SAP, Siebel, other vendors of software designed for
decision support or management of customer relationships or of organizations'
operational information. They also may include vendors of database applications.
Principal competitive factors include:
- quality, breadth and depth of application offerings;
- product robustness and extensibility;
- openness of technology architecture;
- ease of deployment and maintenance;
- quality of services and customer support; and
- price.
Although we believe that our solutions compete favorably with respect to
these factors, our market is new and rapidly evolving. We may not be able to
maintain our competitive position against current and potential competitors. See
"Risk Factors -- We face intense competition which could make it difficult to
acquire and retain customers".
We face the same sources of competition and the same competitors both
domestically and internationally. However, we face additional challenges in
selling our products and services
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internationally in that we must develop local versions of our products for
foreign markets and must recruit and train an international staff.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret and copyright law and contractual restrictions to
protect the proprietary aspects of our technology. We have no patents. We seek
to protect our source code for our software, documentation and other written
materials under trade secret and copyright laws. We license our software under
signed license agreements, which impose restrictions on the licensee's ability
to utilize the software. Finally, we seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. Our
success and ability to compete are also dependent on our ability to operate
without infringing upon the proprietary rights of others. See "Risk
Factors -- We depend on our intellectual property, and litigation regarding our
intellectual property could harm our business".
We currently rely on software that we have licensed from a number of
suppliers. These licenses may not continue to be available to us on commercially
reasonable terms or at all. If these licenses cease to be available, we believe
we could license equivalent software on commercially reasonable terms. In the
future, we expect to license other third party technologies to enhance our
products, meet evolving customer needs or adapt to changing technology
standards. Failure to license, or the loss of any license of necessary
technologies could result in delays or reductions of shipments of our products
until equivalent software is identified, licensed and integrated or developed by
us.
EMPLOYEES
As of December 31, 1999, we had a total of 131 full-time employees,
including 56 in sales and six in marketing, 45 in research and development, 16
in administrative, eight in professional services and six in customer support,
and Rubric had a total of 78 employees. Our future success will depend in part
on our ability to attract, train, retain, integrate and motivate highly
qualified sales, technical and management personnel, for whom competition is
intense. From time to time we also employ independent contractors to support our
services, product development, sales and marketing departments. Our employees
are not represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
FACILITIES
Our principal office occupies approximately 66,000 square feet in Menlo
Park, California under leases that expire on July 31, 2002 and April 30, 2007.
In addition, we also lease sales and support offices in the United States in the
metropolitan areas of Atlanta, Chicago, Dallas, New York and Oakland, and
internationally in the metropolitan areas of Amsterdam, Frankfurt, London and
Tokyo. In addition, Rubric's principal office occupies approximately 20,000
square feet in San Mateo, California under a lease that expires in November
2000.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows the name, age and position of each of our
executive officers and directors as of February 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chuck Bay....................... 42 Chief Executive Officer, President and Director
Rusty Thomas.................... 39 Executive Vice President and Chief Financial Officer
Thomas Doyle.................... 49 Executive Vice President of Sales
Brian Kelly..................... 34 Executive Vice President of Products
Chris Maeda..................... 33 Executive Vice President of Engineering
Greg Martin..................... 35 Senior Vice President, Consulting and Customer Advocacy
Eric Willgohs................... 34 General Counsel, Vice President Legal and Secretary
Mark Kremer..................... 43 Chairman of the Board of Directors
Kevin Harvey.................... 35 Director
Paul Levy....................... 44 Director
Nancy Schoendorf................ 44 Director
</TABLE>
CHUCK BAY joined Broadbase in January 1998 and currently serves as Chief
Executive Officer, President and as a member of our board of directors. Mr. Bay
previously served as our Chief Financial Officer, General Counsel and Executive
Vice President of Operations. From July 1997 to January 1998, Mr. Bay served as
Chief Financial Officer and General Counsel for Reasoning, Inc., a software
company. From January 1995 to August 1997, Mr. Bay served as Chief Financial
Officer and General Counsel, for Pure Atria Software, Inc., a software company.
From April 1994 to January 1995, Mr. Bay served as President and Chief Financial
Officer of Software Alliance Corporation, a software company. Mr. Bay holds a
B.S. degree in business administration from Illinois State University and a J.D.
degree from the University of Illinois.
RUSTY THOMAS joined Broadbase in January 2000 as Executive Vice President
and Chief Financial Officer. From June 1982 to July 1995 and from April 1998 to
January 2000, Mr. Thomas held various positions in the high technology practice
of KPMG LLP, including 8 years as a partner in the Silicon Valley office and
most recently as an Industry Leader for Electronics and Software segments. From
July 1995 to April 1998, Mr. Thomas served as a Vice President in the finance
department of Rubbermaid Inc., a consumer products company. Mr. Thomas holds a
B.S. degree in business administration from Creighton University.
THOMAS DOYLE joined Broadbase in April 1999 as Executive Vice President of
Sales. From October 1996 to April 1999, Mr. Doyle served as Senior Vice
President of Worldwide Sales at Reasoning, Inc. From May 1984 to September 1996,
Mr. Doyle held various sales and sales management positions at Tandem Computers,
a computer manufacturer. Mr. Doyle holds a B.S. degree in finance from the
University of Missouri.
BRIAN KELLY joined Broadbase in December 1998 and currently serves as
Executive Vice President of Products. Mr. Kelly previously served as our
Executive Vice President of Applications and Engineering. From June 1998 to
December 1998, Mr. Kelly served as Director of Product Strategy, Analytic
Applications at PeopleSoft, Inc., a software company. From June 1996 to June
1998, Mr. Kelly served as Vice President of Product Strategy at Intrepid
Systems, Inc., a software company. From December 1992 to June 1996, Mr. Kelly
was President of Kelly Information Systems, a software company. Mr. Kelly holds
a B.S. degree in computer science from the University of Cincinnati.
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<PAGE> 53
CHRIS MAEDA joined Broadbase in February 2000 as Executive Vice President
of Engineering. Dr. Maeda was a co-founder of Rubric and served as Rubric's
Chief Technology Officer from March 1997 to January 2000. From May 1995 to
February 1997, Dr. Maeda held various positions at the Xerox Palo Alto Research
Center. Dr. Maeda holds a B.S. degree in computer science from the Massachusetts
Institute of Technology, and M.S. and Ph.D. degrees in computer science from
Carnegie Mellon University.
GREG MARTIN joined Broadbase in January 2000 as Senior Vice President,
Consulting and Customer Advocacy. From December 1988 to January 2000, Mr. Martin
held various positions in the high technology practice of KPMG LLP, including
partner and Industry Leader for Customer Relationship and eBusiness Solution
Integration. Mr. Martin holds a B.S. degree in chemistry from the State
University of New York.
ERIC WILLGOHS joined Broadbase in July 1999 and currently serves as General
Counsel, Vice President Legal and Secretary. From September 1997 to July 1999,
Mr. Willgohs held various positions with Reasoning, Inc., most recently as
General Counsel. From July 1993 to July 1997, Mr. Willgohs held various
positions with Pure Atria Software, Inc., most recently as Associate General
Counsel. From October 1993 to December 1995, Mr. Willgohs also served as
Corporate Counsel, Intellectual Property, for StarSight Telecast, Inc., an
interactive television company. Mr. Willgohs holds a B.S. degree in electrical
engineering from Vanderbilt University and a J.D. degree from Stanford
University.
MARK KREMER is the founder of Broadbase and has served as Chairman of the
Board of Directors since our inception in November 1995. Mr. Kremer previously
served as our Chief Executive Officer from our inception until January 2000, and
as our President from our inception until October 1999. From January 1994 to
November 1995, Mr. Kremer served as a Director of Product Development for Oracle
Corporation, a software company. Mr. Kremer holds a B.S. degree in computer
engineering from the Technion Israel Institute of Technology.
KEVIN HARVEY has served as a member of our board of directors since January
1996. Mr. Harvey has been a managing member of Benchmark Capital, a venture
capital firm, since it was founded in January 1995. Mr. Harvey is also a
director of Red Hat Software, a developer and provider of open source software
and services, Ashford.com, an Internet retailer, and several privately held
companies. Mr. Harvey holds a B.S.E.E. degree from Rice University.
PAUL LEVY has served as a member of our board of directors since May 1999.
In 1981, Mr. Levy co-founded Rational Software Corporation, a software company,
and he currently serves as its Chairman of the Board of Directors. From 1981 to
April 1999, Mr. Levy served as Chairman of the Board of Directors and Chief
Executive Officer of Rational Software Corporation. Mr. Levy also serves as a
director of Genesys Telecommunications Laboratories, Inc. Mr. Levy holds a B.S.
degree from the United States Air Force Academy and an M.S. degree in
engineering from Stanford University.
NANCY SCHOENDORF has served as a member of our board of directors since
February 1997. Ms. Schoendorf has been a General Partner of Mohr, Davidow
Ventures, a venture capital firm, since 1994 and a Managing Partner since 1997.
Ms. Schoendorf currently serves as a director of Actuate Software Corporation
and several privately held companies. Ms. Schoendorf holds a B.S. degree in
computer science and mathematics from Iowa State University and an M.B.A. degree
from Santa Clara University.
Our board of directors is currently comprised of five directors. Directors
are elected by the stockholders at each annual meeting of stockholders and serve
for one year or until their successors are duly elected and qualified. However,
our certificate of incorporation and bylaws provide that our board of directors
is divided into three classes as nearly equal in size as possible with staggered
three-year terms. The term of office of our Class I directors will expire at the
annual meeting of stockholders to be held in 2000; the term of office of our
Class II directors will expire at the annual
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<PAGE> 54
meeting of stockholders to be held in 2001; and the term of office of our Class
III directors will expire at the annual meeting of stockholders to be held in
2002. At each annual meeting of stockholders, beginning with the 2000 annual
meeting, the successors to the directors whose terms will then expire will be
elected to serve from the time of their election and qualification until the
third annual meeting following their election or until their successors have
been duly elected and qualified, or until their earlier resignation or removal.
Mr. Harvey is a Class I director; Mr. Bay and Ms. Schoendorf are Class II
directors; and Mr. Kremer and Mr. Levy are Class III directors. The
classification of our board of directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of Broadbase.
BOARD COMMITTEES
Our board of directors has a compensation committee and an audit committee.
Compensation committee. The current members of our compensation committee
are Mr. Levy and Mr. Harvey. The compensation committee reviews and makes
recommendations to our board of directors concerning salaries and incentive
compensation for our officers and employees. The compensation committee also
administers our 1999 Equity Incentive Plan and 1999 Employee Stock Purchase
Plan.
Audit committee. The current members of our audit committee are Mr. Levy
and Ms. Schoendorf. Our audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board of
directors regarding the selection of independent auditors and reviews the
results and scope of the audit and other services provided by our independent
auditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee has at any time since our
formation been an officer or employee of Broadbase. None of our executive
officers currently serves, or in the past has served, as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses in
attending board and committee meetings.
In September 1999, Kevin Harvey, Paul Levy and Nancy Schoendorf each
received an option to purchase 10,000 shares of our common stock under our 1999
Equity Incentive Plan at an exercise price of $14.00 per share, our initial
public offering price. In addition, each non-employee director who becomes a
member of our board of directors and who has not previously received shares or
options in Broadbase will be granted an option to purchase 10,000 shares of our
common stock under the 1999 Equity Incentive Plan. Immediately following each
annual meeting of our stockholders, each non-employee director will
automatically be granted an additional option to purchase 10,000 shares under
that plan if the director has served continuously as a member of our board of
directors since the date of the director's initial grant. Each option will have
an exercise price equal to the fair market value of our common stock on the date
of grant and will have a ten-year term. Each of these options will be
immediately exercisable and fully vested.
In May 1999, we granted to Paul Levy, one of our directors, an option to
purchase 96,750 shares of common stock at an exercise price of $0.73 per share.
Mr. Levy exercised this option in full in May 1999. We have a right to
repurchase shares issued upon exercise of this option upon termination of Mr.
Levy's membership on our board of directors. This repurchase right lapsed as to
19,350 shares in November 1999 and lapses as to 2,577 shares each month
thereafter. In the event of a change of control of 50% or
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more of our outstanding stock, and if Mr. Levy is not invited to serve on the
board of the combined company, then any unvested shares will vest immediately.
EXECUTIVE COMPENSATION
The following table shows all compensation awarded to, earned by or paid
for services rendered to Broadbase in all capacities during 1999 by our chief
executive officer and our four other most highly compensated executive officers
who earned at least $100,000 in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS(1) OPTIONS
---------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Mark Kremer.................................... 1999 $205,000 $ 45,000 200,000
Chairman of the Board of Directors(2) 1998 205,000 25,000 --
Chuck Bay...................................... 1999 150,000 60,000 200,000
President and Chief Executive Officer(3) 1998 143,269 40,000 259,000
Brian Kelly.................................... 1999 150,000 30,000 250,000
Executive Vice President of Products(4) 1998 12,500 -- --
Thomas Doyle................................... 1999 225,000(6) 500,000(7) 240,000
Executive Vice President of Sales(5) 1998 -- -- --
</TABLE>
- -------------------------
(1) Represents bonus earned for the fiscal year listed.
(2) Mr. Kremer served as President until October 1999 and as Chief Executive
Officer until January 2000.
(3) Mr. Bay became President in October 1999 and Chief Executive Officer and a
director in January 2000.
(4) Mr. Kelly joined Broadbase in December 1998 as Executive Vice President of
Applications and Engineering and became Executive Vice President of Products
in January 2000.
(5) Mr. Doyle was hired as Executive Vice President of Sales in April 1999 and
is compensated at an annual rate of $225,000 with a targeted commission of
$100,000.
(6) Includes commissions of $75,000.
(7) Includes a signing bonus of $500,000.
Rusty Thomas was hired as Executive Vice President and Chief Financial
Officer in January 2000 and is compensated at an annual rate of $200,000 with
bonuses of up to $50,000 per year. Greg Martin was hired as Senior Vice
President, Consulting and Customer Advocacy in January 2000 and is compensated
at an annual rate of $200,000 with bonuses of up to $40,000 per year.
OPTION GRANTS IN 1999
The following table shows information about each stock option grant during
1999 to the executive officers named in the Summary Compensation Table above.
All options included in the following table have a term of ten years,
subject to earlier termination in the event the optionee's service with us
terminates. For a description of the terms of each of the options listed below,
see "-- Employment Agreements and Stock Option Grants". All options were granted
at an exercise price equal to the fair market value of our common stock, as
determined by
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our board of directors on the date of grant. The percent of total options
granted is based on an aggregate of 3,330,350 options granted by us to our
employees, directors and consultants in 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SHARES TOTAL OPTIONS DEEMED FAIR PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE MARKET VALUE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE ON DATE OF EXPIRATION ------------------------------------
NAME GRANTED IN 1999 PER SHARE GRANT DATE 0% 5% 10%
---- ---------- ------------- --------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chuck Bay............ 200,000 6.0% $26.94 $26.94 10/12/09 -- $3,388,484 $8,587,084
Mark Kremer.......... 200,000 6.0 26.94 26.94 10/12/09 -- 3,388,484 8,587,084
Brian Kelly.......... 135,000 4.0 0.73 6.81 1/18/09 $ 820,800 1,398,974 2,286,007
95,000 2.8 0.73 7.93 5/27/09 684,000 1,157,778 1,884,646
20,000 0.6 0.73 7.93 5/27/09 144,000 243,743 396,768
Thomas Doyle......... 240,000 7.2 0.73 7.65 4/30/09 1,660,800 2,815,451 4,586,911
</TABLE>
The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation in the table above are required by rules of the Securities and
Exchange Commission based on the fair market value or deemed fair market value
of the common stock used by us for accounting purposes, as applicable, and do
not represent our estimates or projections of our future stock prices. Actual
gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.
In January 2000, we granted options to purchase 450,000 shares to Chuck
Bay, options to purchase 150,000 shares to Thomas Doyle and options to purchase
50,000 shares to Brian Kelly. These options each have an exercise price of
$83.375 per share, expire on January 20, 2010, and vest monthly over four years,
beginning February 20, 2000. See "Employment Agreements and Stock Option Grants"
for information regarding those option grants and option grants made to Rusty
Thomas in January 2000.
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
The following table provides information concerning stock option exercises
by each of the executive officers named in the Summary Compensation Table above
who exercised options during the fiscal year ended December 31, 1999 and
information concerning unexercised options held by these officers at the end of
1999. The value realized represents the difference between the deemed fair value
of the common stock used by us for accounting purposes and the exercise price of
the option. The value of unexercised in-the-money options is based on the
closing price on December 31, 1999 of $112.50 per share, minus the exercise
price, multiplied by the number of shares issued upon exercise of the option. We
have a right to repurchase the shares issued upon exercise of these options upon
termination of the optionee's employment. Our right to repurchase the shares
lapses over a four-year period from the date of grant.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Chuck Bay............ 86,000 $546,960 8,333 191,667 $ 712,992 $16,399,508
Brian Kelly.......... 135,000 858,600 100,000 15,000 11,177,000 1,676,550
</TABLE>
EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
We adopted our 1996 Equity Incentive Plan in April 1996, and we terminated
this plan in September 1999. As of December 31, 1999, there were outstanding
options to purchase a total of 2,289,206 shares of common stock under this plan.
No further options will be granted under this plan. Shares reserved under our
1996 Equity Incentive Plan that had not been issued and were not subject
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<PAGE> 57
to outstanding options as of the date of termination of this plan, and shares
subject to options which had become unexercisable, became available for issuance
under our 1999 Equity Incentive Plan. However, the termination of this plan did
not affect outstanding options, which will remain outstanding until they are
exercised or until they terminate or expire.
1999 EQUITY INCENTIVE PLAN
We adopted our 1999 Equity Incentive Plan in September 1999. As of January
1, 2000, there were 4,577,057 shares authorized for issuance under this plan,
which number includes shares added upon the termination of our 1996 Equity
Incentive Plan and an automatic increase of 902,504 shares, or 5% of our total
shares outstanding, on January 1, 2000. On each subsequent January 1, the number
of shares authorized and reserved for issuance under this plan will be increased
automatically by an amount of shares equal to 5% of our total outstanding shares
as of the immediately preceding December 31. The following shares will also
become available for issuance under our 1999 Equity Incentive Plan:
- shares subject to issuance upon exercise of an option granted under our
1999 Equity Incentive Plan that cease to be subject to that option for
any reason other than exercise of the option;
- shares issued pursuant to the exercise of an option granted under our
1999 Equity Incentive Plan that are subsequently forfeited or repurchased
by us at the original purchase price;
- shares subject to awards granted pursuant to restricted stock purchase
agreements under our 1999 Equity Incentive Plan that are subsequently
forfeited or repurchased by us at the original issue price; and
- shares subject to stock bonuses granted under our 1999 Equity Incentive
Plan that terminate without shares being issued.
Our 1999 Equity Incentive Plan will terminate in 2009, unless sooner
terminated in accordance with the terms of the plan.
Our 1999 Equity Incentive Plan authorizes the award of options, restricted
stock awards and stock bonuses. Our non-employee directors are entitled to
receive automatic annual grants of fully vested options to purchase 10,000
shares of our common stock, as described under "Management -- Director
Compensation". Additionally, our non-employee directors are eligible to receive
discretionary awards under our 1999 Equity Incentive Plan. Our 1999 Equity
Incentive Plan is administered by the compensation committee of our board of
directors, which currently consists of Mr. Harvey and Ms. Schoendorf, both of
whom are "non-employee directors" under applicable federal securities laws and
"outside directors" as defined under applicable federal tax laws. The committee
has the authority to construe and interpret this plan and any agreement made
thereunder, grant awards and make all other determinations necessary or
advisable for the administration of this plan.
Our 1999 Equity Incentive Plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees. Nonqualified stock options, and all other awards other than incentive
stock options, may be granted to employees, officers, directors, consultants,
independent contractors and advisors of Broadbase or any parent or subsidiary of
Broadbase. However, consultants, independent contractors and advisors are only
eligible to receive awards if they render bona fide services not in connection
with the offer and sale of securities in a capital-raising transaction. The
exercise price of incentive stock options must be at least equal to the fair
market value of our common stock on the date of grant. The exercise price of
incentive stock options granted to 10% stockholders must be at least equal to
110% of that value. The exercise price of nonqualified stock options must be at
least equal to 85% of the fair market value of the our common stock on the date
of grant.
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<PAGE> 58
The maximum term of options granted under our 1999 Equity Incentive Plan is
ten years. Awards other than nonqualified stock options granted under this plan
may not be transferred in any manner other than by will or by the laws of
descent and distribution and may be exercised during the lifetime of the
optionee only by the optionee. The plan allows exceptions to this restriction
with respect to awards that are nonqualified stock options. Options granted
under our 1999 Equity Incentive Plan generally expire three months after the
termination of the optionee's service to Broadbase or a parent or subsidiary of
Broadbase. In the event of a "change in control" transaction, outstanding awards
may be assumed or substituted by the successor corporation. The compensation
committee may also accelerate the vesting of awards upon a change of control
transaction.
1999 EMPLOYEE STOCK PURCHASE PLAN
We adopted our 1999 Employee Stock Purchase Plan in September 1999. There
are currently 680,500 shares authorized for issuance under this plan, which
number includes an automatic increase of 180,500 shares, or 1% of our total
outstanding shares, on January 1, 2000. On each subsequent January 1, the number
of shares authorized and reserved for issuance under this plan will be increased
automatically by an amount of shares equal to 1% of our total outstanding shares
as of the immediately preceding December 31. Our 1999 Employee Stock Purchase
Plan is administered by our compensation committee.
Employees generally become eligible to participate in our 1999 Employee
Stock Purchase Plan if they are employed 10 days before the beginning of the
applicable offering period and they are customarily employed by us or a parent
or any subsidiary that we designate for more than 20 hours per week and more
than five months in a calendar year. Employees are not eligible to participate
in our 1999 Employee Stock Purchase Plan if they are 5% stockholders, or would
become 5% stockholders as a result of their participation in this plan.
Under our 1999 Employee Stock Purchase Plan, eligible employees are able to
acquire shares of our common stock through payroll deductions. Eligible
employees may select a rate of payroll deduction between 2% and 10% of their
cash compensation and are subject to certain maximum purchase limitations.
Participation in this plan ends automatically upon termination of employment for
any reason.
Offering periods under our 1999 Employee Stock Purchase Plan generally last
two years and consist of four six-month purchase periods. The first offering
period and purchase period began on September 22, 1999. Offering periods and
purchase periods thereafter begin on each January 1 and July 1. In addition, an
offering period and purchase period will begin 15 days after the completion of
our acquisition of Rubric.
The purchase price for common stock purchased under our 1999 Employee Stock
Purchase Plan is 85% of the lesser of the fair market value of our common stock
on the first day of the applicable offering period or the last day of each
purchase period. Our compensation committee has the authority to change the
duration of offering periods. Our 1999 Employee Stock Purchase Plan is intended
to qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. The plan will terminate in 2009, unless it is terminated
earlier pursuant to its terms.
RUBRIC STOCK OPTIONS
In connection with our acquisition of Rubric, we assumed all options to
purchase Rubric common stock outstanding as of the closing of the acquisition
and converted these into options to purchase approximately 600,000 shares of our
common stock.
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401(k) PLAN
We sponsor a defined contribution plan intended to qualify under Section
401(k) of the Internal Revenue Code. All employees are generally eligible to
participate and may enter the 401(k) plan as of the first day of each month.
Participants may make pre-tax contributions to the plan of up to 20% of their
eligible pay, subject to a statutorily prescribed annual limit. Participants are
fully vested in their contributions and the investment earnings. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
EMPLOYMENT AGREEMENTS AND STOCK OPTION GRANTS
In January 2000, we executed an offer letter to Rusty Thomas, our Executive
Vice President and Chief Financial Officer. This offer letter established Mr.
Thomas' annual base salary at $200,000 and provides for bonuses of up to $50,000
per year. Under this offer letter, Mr. Thomas was granted an option to purchase
175,000 shares of common stock at an exercise price of $54.00 per share, which
price is $40.00 less than the closing price of our common stock on Mr. Thomas'
starting date. This option will vest as to 10,937 shares in April 2000, and as
to 3,646 shares each month thereafter. In the event of a change of control after
which Mr. Thomas is not offered the same position, this option will vest as to
50% of the unvested shares. The offer letter also provides for a loan of
$250,000, to be repayable in full within two weeks if Mr. Thomas terminates his
employment with us within the first three months of his employment, and
otherwise to be secured by the shares of common stock underlying the above
option. We will provide Mr. Thomas with the same health, holiday, vacation,
401(k) and other benefits that are available to all of our employees. Mr.
Thomas' employment is considered an "at-will" agreement. We or Mr. Thomas may
terminate the employment relationship at any time for any reason.
In January, 2000, we executed an offer letter to Greg Martin, our Senior
Vice President, Consulting and Customer Advocacy. This offer letter established
Mr. Martin's annual base salary at $200,000 and provides for bonuses of up to
$40,000 a year. Under this offer letter, Mr. Martin was granted an option to
purchase 125,000 shares of common stock at an exercise price of $54.00 per
share, which price is $40 less than the closing price of our common stock on Mr.
Martin's starting date. This option will vest and become exercisable as to 7,812
share in April, 2000, and as to 2,604 shares each month thereafter. The offer
letter also provides for a loan of $200,000 to be repayable in full within two
weeks if Mr. Martin terminates his employment with us within the first three
months of employment, and otherwise to be secured by the shares of common stock
underlying the above option. We will provide Mr. Martin with the same health,
holiday, vacation and other benefits that are available to all of our employees.
Mr. Martin's employment is considered an "at will" agreement. We or Mr. Martin
may terminate the employment relationship at any time.
In December 1999, we entered into an employment agreement with Chris Maeda,
to become our Executive Vice President of Engineering upon the completion of our
acquisition of Rubric. This agreement established Mr. Maeda's annual base salary
at not less than $150,000 and provides for bonuses of up to $30,000 per year. In
addition, under the agreement, Mr. Maeda was granted an option to purchase
105,000 shares of Broadbase common stock at an exercise price of $88.25 per
share immediately after the acquisition. This stock option will vest as to 12.5%
of the shares in August 2000, and as to 2.1% of the shares each month
thereafter. In addition, if Mr. Maeda's employment with us is terminated for
other than cause, as defined in the agreement, he will receive three months'
base salary in a lump sum payment. The agreement also imposes non-competition
restrictions on Mr. Maeda for a period of at least twelve months following the
merger. We will provide Mr. Maeda with the same health, holiday, vacation and
other benefits that are available to all of our employees. Mr. Maeda's
employment is considered an "at-will" agreement. We or Mr. Maeda may terminate
the employment relationship at any time for any reason.
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In July 1999, we executed an offer letter to Eric Willgohs, our General
Counsel, Vice President Legal and Secretary. This offer letter established Mr.
Willgohs' annual base salary at $120,000 and provides for bonuses of up to
$30,000 a year. Under this offer letter, Mr. Willgohs was granted an option to
purchase 60,000 shares of common stock at an exercise price of $4.56 per share.
This option was immediately exercisable in full, and Mr. Willgohs exercised this
option in part. We have a right to repurchase the shares issued upon exercise of
this option upon termination of Mr. Willgohs' employment. The repurchase right
lapses and the remaining option vests as to 7,500 shares in January, 2000, and
will lapse or vest, as applicable, as to 1,250 shares each month thereafter. In
the event of a change of control of Broadbase and Mr. Willgohs' involuntary
termination, the repurchase right will lapse and the option will vest as to 50%
of the unvested shares. On January 20, 2000, we granted Mr. Willgohs an option
to purchase an additional 10,000 shares of common stock at an exercise price of
$83.375 per share. This option vests as to 208 shares each month over four
years. We will provide Mr. Willgohs with the same health, holiday, vacation and
other benefits that are available to all of our employees. Mr. Willgohs'
employment is considered an "at will" agreement. We or Mr. Willgohs may
terminate the employment relationship at any time.
In April 1999, we executed an offer letter to Thomas Doyle, our Executive
Vice President of Sales. This offer letter established Mr. Doyle's annual base
salary at $225,000 and a commission of $100,000, which can increase or decrease
if sales are above or below an established sales target. In addition, the offer
letter provides for a sign-on bonus of $250,000 to be paid on his first day of
employment and an additional bonus of $250,000 payable on July 1, 1999. Each
bonus is subject to repayment if he voluntarily terminates his employment less
than 18 months after the payment of that bonus. Under this offer letter, Mr.
Doyle was granted an option to purchase 240,000 shares of common stock at an
exercise price of $0.73 per share. This option is immediately exercisable in
full. This option vested as to 30,000 shares in October 1999, and vests as to
5,000 shares each month thereafter. In the event of a change of control of
Broadbase and Mr. Doyle's involuntary termination, this repurchase right will
lapse as to 50% of the shares still subject to the repurchase right. In January
2000, we granted Mr. Doyle an option to purchase an additional 150,000 shares of
common stock at an exercise price of $83.375 per share. This option vests as to
3,125 shares each month over four years. We will provide Mr. Doyle with the same
health, holiday, vacation and other benefits that are available to all of our
employees. Mr. Doyle's employment is considered an "at-will" agreement. We or
Mr. Doyle may terminate the employment relationship at any time for any reason.
In November 1998, we executed an offer letter to Brian Kelly, Executive
Vice President of Products. This offer letter established Mr. Kelly's annual
base salary at $150,000 and provides for bonuses of up to $30,000 a year. Under
this offer letter, Mr. Kelly was granted an option to purchase 135,000 shares of
common stock at an exercise price of $0.73 per share. This option was
immediately exercisable, and Mr. Kelly exercised this option, in full. We have a
right to repurchase the shares upon termination of Mr. Kelly's employment at the
original purchase price of $0.73 per share. This repurchase right lapsed as to
16,875 shares in May 1999, and lapses as to 2,812 shares each month thereafter.
In addition, the agreement provided for the grant of an option to purchase an
additional 20,000 shares to Mr. Kelly under certain circumstances. On May 27,
1999, Mr. Kelly was granted this option to purchase 20,000 shares of common
stock and an additional option to purchase 95,000 shares of common stock, each
at an exercise price of $0.73 per share. The option to purchase 95,000 shares is
immediately exercisable in full. These options vested as to 26,250 shares on
June 1, 1999 and vest as to 4,374 shares each month thereafter. In the event of
a change of control and Mr. Kelly's involuntary termination, the option to
purchase 20,000 shares will vest as to 50% of the unvested shares. In January
2000, we granted Mr. Kelly an option to purchase an additional 50,000 shares of
common stock at an exercise price of $83.375 per share. This option vests as to
1,041 shares each month over four years. We will provide Mr. Kelly with the same
health, holiday, vacation and other benefits that are available to all of our
employees. Mr. Kelly's employment is considered an "at-will" agreement. We or
Mr. Kelly may terminate the employment relationship at any time for any reason.
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<PAGE> 61
In January 1998, we executed an offer letter to Chuck Bay, our President
and Chief Executive Officer. This offer letter established Mr. Bay's annual base
salary at $150,000 and provides for bonuses of up to $40,000 a year. Under this
offer letter, Mr. Bay was granted an option to purchase 173,000 shares of common
stock at an exercise price of $0.25 per share. This option was immediately
exercisable, and Mr. Bay exercised this option, in full. We have a right to
repurchase the shares upon termination of Mr. Bay's employment at the original
purchase price of $0.25 per share. This repurchase right lapsed as to 21,625
shares in July 1998, and lapses as to 3,604 shares each month thereafter. In the
event of a change of control, this repurchase right will lapse as to 50% of the
shares still subject to the repurchase right. In December 1998, we granted Mr.
Bay an option to purchase 86,000 shares of common stock at an exercise price of
$0.73 per share. This option was immediately exercisable, and Mr. Bay exercised
this option, in full. We have a right to repurchase the shares upon termination
of Mr. Bay's employment at the original purchase price of $0.73 per share. This
repurchase right lapses as to 1,791 shares each month over four years. In the
event of a change of control, this repurchase right will lapse as to 50% of the
shares still subject to the repurchase right. In October, 1999, we granted Mr.
Bay an option to purchase 200,000 shares of common stock at an exercise price of
$26.9375 per share. This option vests as to 4,166 shares each month over four
years. In the event of a change of control, this option will vest as to 50% of
the unvested shares. In January 2000, we granted Mr. Bay an option to purchase
450,000 shares of common stock at an exercise price of $83.375 per share. This
option vests as to 9,375 shares each month over four years. In the event of a
change of control, after which Mr. Bay is not offered one of several specified
executive positions, this option will vest as to 50% of the unvested shares. We
will provide Mr. Bay with the same health, holiday, vacation, 401(k) and other
benefits that are available to all of our employees. Mr. Bay's employment is
considered an "at-will" agreement. We or Mr. Bay may terminate the employment
relationship at any time for any reason.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation, as amended, limits the liability of our
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a director of a corporation will not be personally liable for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Delaware law regarding unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware law, our bylaws provide that:
- we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law, provided that each indemnified officer
and director acted in good faith and in a manner that the officer or
director reasonably believed to be in or not opposed to Broadbase's best
interests;
- we may indemnify our other employees and agents; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
In addition to the indemnification required in our certificate of
incorporation and bylaws, we have entered into indemnification agreements with
each of our directors and executive officers. We also have obtained directors'
and officers' insurance to cover our directors, officers and some of our
employees for certain liabilities. We believe that these indemnification
provisions and agreements and this insurance are necessary to attract and retain
qualified directors and officers.
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The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers as required by these indemnification provisions.
We, the selling stockholders and the underwriters have entered into an
underwriting agreement pursuant to which we and the selling stockholders have
agreed to indemnify the underwriters, and the underwriters have agreed to
indemnify us, our directors and executive officers, and the selling
stockholders, against certain liabilities, including liabilities arising under
the Securities Act. Likewise, pursuant to our Fourth Amended and Restated
Investors' Rights Agreement, selling stockholders exercising rights pursuant to
that agreement have agreed to indemnify us, our directors and our officers who
sign the registration statement against certain liabilities, including
liabilities arising under the Securities Act.
Presently, there is no pending litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
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RELATED PARTY TRANSACTIONS
Other than the transactions described in "Management" and the transactions
described below, since January 1, 1997, there has not been nor is there
currently proposed any transaction or series of similar transactions to which we
were or will be a party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock or any member of his or her immediate family had or will
have a direct or indirect material interest.
TRANSACTIONS WITH PROMOTER
On November 30, 1995, in connection with the formation and initial
financing of Broadbase, Mark Kremer purchased 1,282,500 shares of our common
stock for an aggregate purchase price of $2,565. Mr. Kremer is Chairman of the
Board of Directors, served as our President until October 1999 and as our Chief
Executive Officer until January 2000, and may be considered to be a promoter of
Broadbase.
PREFERRED STOCK FINANCINGS IN WHICH 5% STOCKHOLDERS PARTICIPATED
In December 1996 and March 1997, we sold a total of 1,923,223 shares of
Series B preferred stock at a purchase price of $2.683 per share. In February
and April 1998, we sold a total of 2,166,055 shares of Series C preferred stock
at a purchase price of $5.54 per share. In June 1999, we sold a total of
2,188,812 shares of Series E preferred stock at a purchase price of $9.1325 per
share. In connection with the Series E preferred stock financing in June 1999,
we entered into an agreement with the investors in that financing that gave
certain of the investors rights to purchase, at the initial public offering
price, up to 238,306 shares of our common stock, subject to compliance with
applicable laws. In connection with this agreement, some of these investors
purchased 45,063 shares of common stock at the initial public offering price in
a separate private placement.
Purchasers of our preferred stock include, among others, the following
holders of more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
STOCKHOLDER PURCHASED PURCHASED PURCHASED
----------- --------------- --------------- ---------------
<S> <C> <C> <C>
Entities affiliated with Benchmark Capital........ 559,070 526,173 109,500
Entities affiliated with Mohr, Davidow Ventures... 1,304,510 286,101 --
Entities affiliated with Accel Partners........... -- 902,527 27,375
Entities affiliated with Charter Growth Capital... -- -- 218,999
</TABLE>
Our director Kevin Harvey is a Managing Member of the general partner of
Benchmark Capital Partners, and our director Nancy Schoendorf is a managing
partner of Mohr, Davidow Ventures.
DEBENTURE FINANCINGS IN WHICH 5% STOCKHOLDERS PARTICIPATED
In December 1998 and April 1999, we sold debentures in the aggregate
principal amount of $8,000,000 to Charter Growth Capital and certain of its
affiliated funds. These debentures were converted into 1,103,448 shares of our
common stock upon the closing of our initial public offering in September 1999.
None of our executive officers, directors or other holders of more than 5% of
our outstanding common stock purchased any of the debentures.
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<PAGE> 64
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
Mark Kremer. In April 1998, we lent $400,000 to Mark Kremer, currently the
Chairman of the Board of Directors of Broadbase, secured by a pledge of all
shares of Mr. Kremer's Broadbase common stock. The loan accrues interest at an
annual rate of 5.51%. In November 1999, we agreed to release all but 200,000 of
the originally pledged shares securing this loan. Pursuant to this amendment,
the loan will become due ten days after the closing date of this offering. As of
December 31, 1999, the total amount outstanding, including accrued interest, was
$436,854.
Chuck Bay. In February 1998 and March 1999, Chuck Bay, currently our Chief
Executive Officer, President and a member of our board of directors, executed
promissory notes in the principal amounts of $43,250 and $62,780 in connection
with the exercise of stock options. These notes are secured by a pledge of Mr.
Bay's Broadbase common stock, bear interest at annual rates of 8.5% and 7.5%,
respectively, and are payable on or before March 19, 2000. As of December 31,
1999, the total amount outstanding, including accrued interest, was $116,536.
Brian Kelly. In March 1999, Brian Kelly, our Executive Vice President of
Products, executed a promissory note in the principal amount of $98,550 in
connection with the exercise of a stock option. This note is secured by a pledge
of Mr. Kelly's Broadbase common stock, bears interest at an annual rate of 7.5%
and is payable on or before March 19, 2000. As of December 31, 1999, the total
amount outstanding, including accrued interest, was $104,336.
Eric Willgohs. In July 1999, Eric Willgohs, our General Counsel, Vice
President Legal and Secretary, executed a promissory note in the principal
amount of $68,400 in connection with the exercise of a stock option. This note
is secured by a pledge of Mr. Willgohs' Broadbase common stock, bears interest
at an annual rate of 7.5% and is payable on or before March 27, 2000. As of
December 31, 1999, the total amount outstanding, including accrued interest, was
$70,566.
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<PAGE> 65
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of December 31, 1999 (as well as shares issued in connection
with our acquisition of Rubric), and as adjusted to reflect the sale of the
common stock in this offering, by:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors;
- each executive officer listed in the Summary Compensation Table;
- all executive officers and directors as a group; and
- each selling stockholder.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated above, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Percentage ownership is based on 18,050,087 shares outstanding
as of December 31, 1999, adjusted to include the 2,992,064 shares that we issued
in connection with our acquisition of Rubric. Shares of common stock subject to
options exercisable on or before February 29, 2000 (within 60 days of December
31, 1999), are deemed to be outstanding and to be beneficially owned by the
person holding the options for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless indicated above, the
address for each director and executive officer listed below is Broadbase
Software, Inc., 172 Constitution Drive, Menlo Park, CA 94025.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BEFORE BENEFICIALLY OWNED AFTER
THIS OFFERING SHARES TO BE THIS OFFERING
-------------------------- SOLD IN ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE THIS OFFERING NUMBER PERCENTAGE
------------------------ ----------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS, DIRECTORS AND
EXECUTIVE OFFICERS
Kevin Harvey(1).................................. 3,454,742 16.4% 0 3,454,742 15.3%
c/o Benchmark Capital
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Nancy Schoendorf(2).............................. 1,600,611 7.6 0 1,600,611 7.1
c/o Mohr, Davidow Ventures
2775 Sand Hill Road, Suite 240
Menlo Park, CA 94025
Entities affiliated with Charter Growth
Capital(3)..................................... 1,350,051 6.4 0 1,350,051 6.0
525 University Avenue, Suite 1500
Palo Alto, CA 94301
Entities affiliated with Accel Partners(4)....... 929,902 4.4 0 929,902 4.1
428 University Avenue
Palo Alto, CA 94301
Mark Kremer(5)................................... 1,239,166 5.9 71,125 1,168,041 5.2
Chuck Bay(6)..................................... 285,041 1.4 0 285,041 1.3
Brian Kelly(7)................................... 236,041 1.1 0 236,041 1.0
Paul Levy(8)..................................... 106,750 * 0 106,750 *
Thomas Doyle(9).................................. 43,125 * 0 43,125 *
All eleven directors and executive officers as a
group(10)...................................... 7,208,614 33.8% 71,125 7,137,489 31.3%
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED BEFORE THIS OWNED AFTER THIS
OFFERING SHARES TO BE OFFERING
-------------------- SOLD IN --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE THIS OFFERING NUMBER PERCENTAGE
------------------------ ------- ---------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS(11)
Craig Adamski....................................... 4,151 * 831 3,320 *
Sher Barber......................................... 16,277 * 14,114 2,163 *
Cambridge Technology Capital Fund I L.P............. 151,754 * 131,581 20,173 *
Kyle Faulkner....................................... 3,593 * 1,731 1,862 *
Christopher Greendale............................... 21,940 * 20,266 1,674 *
Karen Hoffert....................................... 1,031 * 497 534 *
John D. Irwin....................................... 21,756 * 9,852 11,904 *
David K. Izuka...................................... 32,141 * 15,483 16,658 *
Sean Kendall........................................ 2,062 * 993 1,069 *
Christopher King.................................... 4,673 * 963 3,710 *
Matthew MacKenzie................................... 412 * 357 55 *
Ikuo Maeda.......................................... 17,534 * 5,068 12,466 *
Emeric Joseph McDonald and Amerindo Technology
Growth Fund II(12)................................ 90,476 * 78,449 12,843 *
Menlo Ventures(13).................................. 505,846 2.4 431,637 71,348 *
RRE Ventures(14).................................... 135,714 * 117,674 18,040 *
Paul Salsgiver...................................... 74,263 * 24,085 50,178 *
Saperstein Family Trust............................. 32,141 * 15,483 16,658 *
Stewart Schuster and Brentwood Venture
Capital(15)....................................... 582,099 2.8 280,400 301,699 1.3
Susan Shay.......................................... 1,031 * 894 137 *
Edward and Cathy Steger............................. 4,125 * 994 3,131 *
TL Ventures(16)..................................... 316,667 * 274,572 42,095 *
WSGR Profit Sharing Plan fbo Steven E. Bochner...... 3,403 * 2,951 452 *
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Represents 3,063,891 shares of common stock held of record by Benchmark
Capital Partners, L.P. and 380,851 shares held by Benchmark Founders' Fund,
L.P. Mr. Harvey, a director of Broadbase, is a Managing Member of Benchmark
Capital Management Co., LLC, the general partner of Benchmark Capital
Partners, L.P. and Benchmark Founders' Fund, L.P. Mr. Harvey disclaims
beneficial ownership of shares held by Benchmark except to the extent of
his pecuniary interest arising from his interest in Benchmark Capital. Also
includes an option which will be exercisable as to 10,000 shares within 60
days of December 31, 1999.
(2) Represents 1,524,126 shares of common stock held of record by Mohr, Davidow
Ventures IV, L.P., and 66,485 shares held by MDV IV Entrepreneurs' Network
Fund, L.P. Ms. Schoendorf, a director of Broadbase, is a general partner of
Mohr, Davidow Ventures. Ms. Schoendorf disclaims beneficial ownership of
shares held by Mohr, Davidow Ventures except to the extent of her pecuniary
interest arising from her interest in Mohr, Davidow Ventures. Also includes
an option which will be exercisable as to 10,000 shares within 60 days of
December 31, 1999.
(3) Includes 810,345 shares of common stock held of record by Charter Growth
Capital Co-Investment Fund, 275,862 shares held by Charter Growth Capital,
L.P. and 17,241 shares held by CGC Investors, L.L.C.
(4) Includes 729,974 shares of common stock held of record by Accel V L.P.,
96,710 shares held by Accel Internet/Strategic Technology Fund L.P., 44,635
shares held by Accel Investors '97 L.P., 38,125 shares held by Accel
Keiretsu V L.P., and 20,458 shares held by Ellmore C. Patterson Partners.
(5) Includes 70,000 shares held by the Mark Kremer 1999 Annuity Trust, of which
Mr. Kremer is trustee, 70,000 shares held by the Anat Kremer 1999 Annuity
Trust, of which Mr. Kremer and his wife are trustees, and an option which
will be exercisable as to 16,666 shares within 60 days of December 31,
1999. Does not include 60,000 shares held by a trust for the benefit of Mr.
Kremer's children, of which neither he nor his wife are trustees. Mr.
Kremer is the Chairman of the Board of Directors of Broadbase.
(6) Includes 90,104 shares subject to a repurchase right that lapses at a rate
of 3,604 shares per month until January 2002, 64,500 shares subject to a
repurchase right that lapses as to 1,791 shares per month until December
2002 and options which will be exercisable as to 26,041 shares within 60
days of December 31, 1999. Mr. Bay is our Chief Executive Officer,
President and a director.
(7) Includes 101,250 shares that are subject to a repurchase right that lapses
as to 3,825 shares per month until November 2002, and options which will be
exercisable as to 101,041 shares within 60 days of December 31, 1999. Mr.
Kelly is our Executive Vice President of Products.
(8) Includes 74,820 shares subject to a repurchase right that lapsed as to
12,093 shares in November 1999 and lapses as to 2,015 shares per month
until April 2003, and an option which will be exercisable as to 10,000
shares within 60 days of December 31, 1999. Mr. Levy is a director of
Broadbase.
(9) Represents options which will be exercisable within 60 days of December 31,
1999. Mr. Doyle is our Executive Vice President of Sales.
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<PAGE> 67
(10) Includes options which will be exercisable as to an aggregate of 262,706
shares within 60 days of December 31, 1999, an aggregate of 330,674 shares
subject to repurchase rights, and 18,230 shares being held in escrow in
connection with our acquisition of Rubric.
(11) Each of the selling stockholders other than Mark Kremer is a stockholder of
Rubric who received shares of our common stock in connection with our
acquisition of Rubric or pursuant to the exercise of options received in
connection with the acquisition. In connection with the acquisition,
approximately 10% of the shares issued to each former Rubric stockholder,
including the selling stockholders other than Mark Kremer listed above, are
being held in escrow for a period of one year after the acquisition.
(12) Represents 72,381 shares held by Amerindo Technology Growth Fund II, of
which 62,759 shares are being sold in this offering, and 18,095 shares held
by Mr. McDonald, of which 15,690 shares are being sold in this offering.
Mr. McDonald is affiliated with Amerindo Technology Growth Fund II.
(13) Represents 21,525 shares held by Menlo Entrepreneurs Fund VII L.P., of
which 18,367 shares are being sold in this offering, and 484,321 shares
held by Menlo Venture VII L.P., of which 413,270 shares are being sold in
this offering.
(14) Represents 48,187 shares held by RRE Investors Fund L.P., of which 41,782
shares are being sold in this offering, and 87,527 shares held by RRE
Investors L.P., of which 75,892 shares are being sold in this offering.
(15) Represents 22,763 shares held by Brentwood Affiliates Fund L.P., of which
10,965 shares are being sold in this offering, 546,315 shares held by
Brentwood Associates VII L.P., of which 263,162 shares are being sold in
this offering, and 13,021 shares held by Mr. Schuster, of which 6,273
shares are being sold in this offering. Mr. Schuster is a venture partner
of Brentwood Venture Capital.
(16) Represents 8,325 shares held by TL Ventures III Interfund L.P., of which
7,219 shares are being sold in this offering, 254,971 shares held by TL
Ventures III L.P., of which 221,077 shares are being sold in this offering,
and 53,371 shares held by TL Ventures III Offshore L.P., of which 46,276
shares are being sold in this offering.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 90,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share. As of December 31, 1999 there were outstanding 18,050,087
shares of common stock held of record by approximately 179 stockholders and
options to purchase 3,195,489 shares of common stock.
COMMON STOCK
Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board of directors may from time to time
determine.
Voting rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Broadbase, the holders of common stock are entitled to share
ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to our certificate of incorporation, our board of directors is
authorized, subject to the limits imposed by Delaware law, to issue preferred
stock in one or more series, to establish from time to time the number of shares
to be included in each series and to fix the rights, preferences and privileges
of the shares of each wholly unissued series and any of its qualifications,
limitations or restrictions. Our board of directors can also increase or
decrease the number of shares of any series, but not below the number of shares
of any series then outstanding, without any further vote or action by the
stockholders.
Our board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of Broadbase and may
adversely affect the market price of the common stock and the voting and other
rights of the holders of common stock. We have no current plan to issue any
shares of preferred stock.
REGISTRATION RIGHTS
After this offering, the holders of 11,220,630 shares of common stock will
have the right to require us to register their shares with the Securities and
Exchange Commission so that those shares may be publicly resold or to include
their shares in any registration statement we file.
Demand registration rights. Beginning March 20, 2000, the holders of at
least 30% of the shares having registration rights have the right to demand that
we file a registration statement so that they can publicly sell their shares, so
long as the value of the securities to be sold in that registration exceeds
$7,500,000. In addition, if we are eligible to file a registration statement on
Form S-3, the
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<PAGE> 69
holders of at least 20% of the shares having registration rights have the right
to demand that we file a registration statement on Form S-3, so long as the
amount of securities to be sold in that registration exceeds $500,000.
Piggyback registration rights. If we register any securities for public
sale, these stockholders will have the right to include their shares in the
registration statement. The underwriters of any underwritten offering will have
the right to limit the number of shares to be included in that registration
statement.
Expenses of registration. We generally will pay all of the expenses
relating to any demand or piggyback registration.
Expiration of registration rights. The registration rights described above
will expire on September 27, 2004, or earlier with respect to a particular
stockholder if (1) that holder owns less than 1% of our outstanding securities,
(2) that holder can resell all of its securities in a three-month period under
Rule 144 of the Securities Act and (3) we are subject to the reporting
requirements of the Securities Exchange Act of 1934.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law, our certificate of incorporation and
bylaws described below may have the effect of delaying, deferring or
discouraging another person from acquiring control of our company.
DELAWARE LAW
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations from engaging, under limited circumstances, in a "business
combination", which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder", or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of such stockholder, for three years following the
date that stockholder becomes an interested stockholder unless:
- the transaction is approved by the board prior to the date the interested
stockholder attained that status;
- upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or subsequent to such date the business combination is approved by the
board and authorized at an annual or special meeting of stockholders by
at least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
This provision could prohibit or delay mergers or other takeover or
change-in-control attempts and, accordingly, may discourage attempts to acquire
us.
CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws provide for the division of our
board of directors into three classes as nearly equal in size as reasonably
possible with staggered three-year terms. Our stockholders are unable to fill
any vacancy on our board of directors. Any action required or permitted to be
taken by our stockholders at an annual meeting or a special meeting of the
stockholders may only be taken if it is properly brought before that meeting and
may not be taken by written consent. Our stockholders are limited in their
ability to remove any director or the entire board of directors without cause.
Our bylaws provide that special meetings of the stockholders may be called at
any time by the board of directors, and must be called upon the request of the
chairman of the board of directors, the chief executive officer, the president,
stockholders that are entitled to cast not less than
67
<PAGE> 70
a majority of the total number of votes entitled to be cast by all stockholders
at that special meeting, or by a majority of the members of the board of
directors. These provisions of our certificate of incorporation and bylaws are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and to discourage transactions that may
involve an actual or threatened change of control of Broadbase. These provisions
are designed to reduce the vulnerability of Broadbase to an unsolicited
acquisition proposal and, accordingly, could discourage potential acquisition
proposals and could delay or prevent a change in control of Broadbase. These
provisions are also intended to discourage tactics that may be used in proxy
fights but could have the effect of discouraging others from making tender
offers for our shares and, consequently, might also inhibit fluctuations in the
market price of our shares that could result from actual or rumored takeover
attempts. These changes may also have the effect of preventing changes in our
management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation. The address of our transfer agent and registrar is 1745
Gardena Avenue, Glendale, California 91204-2991, and its telephone number at
this location is (818) 502-1404.
LISTING
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "BBSW".
68
<PAGE> 71
SHARES ELIGIBLE FOR FUTURE SALE
Prior to our initial public offering in September 1999, our common stock
was not traded on a public market. Future sales of substantial amounts of common
stock, including shares issued upon exercise of outstanding options, in the
public market after this offering could adversely affect the prevailing market
price of our common stock and could impair our ability to raise equity capital
in the future. In addition, sales of substantial amounts of our common stock in
the public market after the restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 22,542,151
shares of common stock, based on shares outstanding at December 31, 1999,
including the shares of common stock that we issued in connection with our
acquisition of Rubric and assuming no exercises of outstanding options. In
addition, 36,505 of the shares being sold by the selling stockholders in this
offering were issued pursuant to recent option exercises. Of these amounts, the
3,000,000 shares being sold by us and the selling stockholders in this offering
will be, and the 4,600,000 shares that were sold in our initial public offering
are, freely tradable in the public market without restriction or further
registration under the Securities Act, unless those shares are purchased by any
of our affiliates. An affiliate of Broadbase is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, Broadbase. The remaining 14,978,656 shares of
common stock held by existing stockholders are subject to various resale
restrictions. Securities restricted under the Securities Act may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 under the Securities
Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be available
for sale in the public market as follows:
- 2,593,586 shares will be eligible for sale beginning March 20, 2000 (the
expiration date of the lock-up agreements related to our initial public
offering);
- 175,862 shares will become eligible for sale on various dates after March
20, 2000 and before the date 90 days after the date of this prospectus;
- 3,670,757 shares will become eligible for sale upon expiration of lock-up
agreements related to this offering, which are described below, beginning
45 days after the date of this prospectus;
- 5,682,083 shares will become eligible for sale upon expiration of the
lock-up agreements related to this offering, which are described below,
beginning 91 days after the date of this prospectus;
- 2,557,191 shares will become eligible for sale on subsequent dates after
90 days after the date of this prospectus, subject in most cases to
volume limitations; and
- 299,177 shares will become eligible for sale upon release from escrow
beginning February 1, 2001 (or later, if claims are made and contested).
CONTRACTUAL RESTRICTIONS
Lock-up Agreements. As part of this offering, all of our executive
officers and directors and the selling stockholders have agreed not to transfer
or dispose of, directly or indirectly, any of our common stock or securities
convertible into or exchangeable for shares of common stock for a period of 90
days beginning on the date of this prospectus, subject to limited exceptions in
the lock-up agreements. In addition, certain of our significant stockholders
have executed agreements with the underwriters that they will not, without the
prior written consent of Goldman, Sachs & Co., transfer or dispose of, directly
or indirectly, any of our common stock for a period of 45 days after the date of
this prospectus with respect to all of the shares held by these significant
stockholders and 90 days
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<PAGE> 72
after the date of this prospectus with respect to 50% of the shares held by
these stockholders. In connection with our initial public offering, all of our
executive officers, directors and substantially all of our securityholders
agreed not to transfer or dispose of, directly or indirectly, any of our common
stock obtained by these persons prior to our initial public offering, or
securities convertible into or exchangeable for shares of common stock, until
March 20, 2000. Goldman, Sachs & Co. may release the shares subject to the
lock-up agreements related to this offering, and Deutsche Bank Securities Inc.,
in some instances together with us, may release the shares subject to the
initial public offering lock-up agreements in whole or in part at any time with
or without notice.
Escrow Agreement. Of the shares that we issued in connection with our
acquisition of Rubric, 299,177 of the shares, or approximately 10%, are being
held in escrow for a period of one year following the acquisition for the
purpose of providing a fund against which we may seek indemnification from
former Rubric stockholders for any breaches of representations, warranties or
covenants under our merger agreement with Rubric.
SECURITIES LAW RESTRICTIONS
Rule 144. In general, under Rule 144, stockholders of Broadbase that have
beneficially owned their shares for at least one year, but less than two years,
and affiliates of Broadbase that have beneficially owned their shares for any
period of more than one year, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, equal to
approximately 225,421 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of sale with the SEC.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except one of our affiliates, is
entitled to sell those shares without complying with the volume limitation or
the manner of sale, public information or notice provisions of Rule 144.
Rule 701. In general, under Rule 701 of the Securities Act, any of our
employees, officers, directors, consultants or advisors who purchased shares
from us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell those shares in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period
contained in Rule 144. However, all shares issued pursuant to Rule 701 are
subject to lock-up agreements and will only become eligible for sale at the
earlier of the expiration of such agreements or obtaining the prior written
consent of Deutsche Bank Securities Inc. or Goldman, Sachs & Co., as applicable.
REGISTRATION RIGHTS
Beginning March 20, 2000, the holders of 11,220,630 shares of our common
stock, or their transferees, will be entitled to rights to register their shares
under the Securities Act. See "Description of Capital Stock -- Registration
Rights". After registration, these shares could be sold without restriction
under the Securities Act.
70
<PAGE> 73
STOCK OPTIONS
On September 27, 1999, we filed a registration statement on Form S-8 under
the Securities Act covering approximately 6.5 million shares, constituting all
shares of common stock subject to outstanding options or reserved for issuance
under our 1996 Equity Incentive Plan, our 1999 Equity Incentive Plan and our
1999 Employee Stock Option Plan as of that date. The registration statement was
effective upon filing. Accordingly, shares registered under the registration
statement will, subject to Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the
initial public offering lock-up agreements expire. We intend to file another
registration statement on Form S-8 to register shares of common stock to be
reserved for issuance upon the exercise of options and warrants to purchase
shares of Rubric capital stock that will convert into options and warrants that
we issued in connection with our acquisition of Rubric.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus.
Investment partnerships comprised of certain partners of Fenwick & West LLP own
32,379 shares of our common stock. Morrison & Foerster LLP, Irvine, California,
will pass upon certain legal matters in connection with this offering for the
underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for each of
the three years in the period ended December 31, 1999, as set forth in their
report. We have included our consolidated financial statements and schedule in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of Rubric, Inc. as of December 31, 1998 and 1999
and for the period from inception, September 24, 1997, through December 31, 1997
and each of the two years in the period ended December 31, 1999 included in this
prospectus have been so included in reliance on the report, which contains an
explanatory paragraph relating to Rubric's ability to continue as a going
concern as described in Note 1 to the financial statements, of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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<PAGE> 74
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule filed as part of the registration statement. For further information
with respect to us and our common stock, we refer you to the registration
statement and the exhibits and schedule filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, we refer
you to the copy of the contract or document that has been filed. Each statement
in this prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit. The registration statement,
including exhibits and schedule, may be inspected without charge at the
principal office of the Securities and Exchange Commission in Washington, D.C.,
and copies of all or any part of it may be obtained from that office after
payment of fees prescribed by the Securities and Exchange Commission.
We file quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
public reference facilities of the SEC in Washington, D.C. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission at
http://www.sec.gov.
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<PAGE> 75
BROADBASE SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets
As of December 31, 1998 and 1999.......................... F-3
Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999.............. F-4
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)
Years Ended December 31, 1997, 1998 and 1999.............. F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Pro Forma Combined Condensed Financial
Statements................................................ F-21
</TABLE>
F-1
<PAGE> 76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Broadbase Software, Inc.
We have audited the accompanying consolidated balance sheets of Broadbase
Software, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, cash flows, and stockholders' equity (net capital
deficiency) for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Broadbase
Software, Inc. at December 31, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
January 11, 2000
F-2
<PAGE> 77
BROADBASE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 13,990 $ 76,642
Accounts receivable, net of allowances of $50,000 at
December 31, 1998 and 1999.............................. 1,072 2,712
Prepaid expenses and other current assets................. 326 1,239
-------- --------
Total current assets............................... 15,388 80,593
Property and equipment, net................................. 1,610 2,868
Restricted cash............................................. -- 633
Other assets................................................ 175 676
-------- --------
Total assets....................................... $ 17,173 $ 84,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 395 $ 559
Accrued compensation...................................... 922 2,919
Accrued expenses.......................................... 1,142 2,341
Current portion of capital lease obligations.............. 30 --
Current portion of bank line of credit and notes
payable................................................. 768 749
Deferred revenue.......................................... 3,330 4,663
-------- --------
Total current liabilities.......................... 6,587 11,231
Bank line of credit and notes payable....................... 1,110 333
Convertible debentures...................................... 8,250 --
-------- --------
Total liabilities.................................. 15,947 11,564
Commitments and contingencies
Stockholders' equity:
Preferred stock: par value $0.001 per share; 5,000,000
shares authorized and none designated................... -- --
Convertible preferred stock: par value $0.001 per share;
15,154,046 shares authorized and issuable in series in
1998:
Series A: 2,398,000 shares designated, 2,384,999 shares
issued and outstanding at December 31, 1998 and none at
December 31, 1999...................................... 2 --
Series B: 2,000,000 shares designated, 1,923,223 shares
issued and outstanding at December 31, 1998 and none at
December 31, 1999...................................... 2 --
Series C: 2,166,065 shares designated, 2,166,055 shares
issued and outstanding at December 31, 1998 and none at
December 31, 1999...................................... 2 --
Common stock: par value $0.001 per share; 90,000,000
shares authorized; 2,707,300 and 18,050,087 shares
issued and outstanding at December 31, 1998 and 1999,
respectively............................................ 2 17
Additional paid-in capital................................ 22,171 124,297
Deferred stock compensation............................... (2,338) (8,710)
Notes receivable from stockholders........................ (476) (693)
Accumulated other comprehensive loss...................... (37) (33)
Accumulated deficit....................................... (18,102) (41,672)
-------- --------
Total stockholders' equity......................... 1,226 73,206
-------- --------
Total liabilities and stockholders' equity......... $ 17,173 $ 84,770
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
BROADBASE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1997 1998 1999
------- -------- ------------
<S> <C> <C> <C>
Net revenue:
License............................................... $ -- $ 2,996 $ 7,689
Maintenance and professional services................. -- 443 2,753
------- -------- --------
Total net revenue............................. -- 3,439 10,442
Cost of revenue:
License............................................... -- 713 1,437
Maintenance and professional services................. -- 254 2,610
------- -------- --------
Total cost of revenue......................... -- 967 4,047
------- -------- --------
Gross margin............................................ -- 2,472 6,395
Operating expenses:
Sales and marketing................................... 2,851 7,888 15,092
Research and development.............................. 1,980 3,738 6,024
General and administrative............................ 744 1,165 2,011
Amortization of deferred stock compensation........... -- 1,133 6,403
Merger expenses....................................... -- -- 1,000
------- -------- --------
Total operating expenses...................... 5,575 13,924 30,530
------- -------- --------
Loss from operations.................................... (5,575) (11,452) (24,135)
Interest income......................................... 154 335 1,454
Interest expense........................................ (66) (226) (889)
------- -------- --------
Net loss................................................ $(5,487) $(11,343) $(23,570)
======= ======== ========
Basic and diluted net loss per share.................... $ (6.19) $ (8.85) $ (3.74)
======= ======== ========
Weighted-average shares used in computing basic and
diluted net loss per share............................ 887 1,281 6,296
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
BROADBASE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(5,487) $(11,343) $(23,570)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 149 507 961
Write-off of note receivable from stockholder......... -- -- 7
Amortization of deferred stock compensation........... -- 1,133 6,403
Value of common stock issued to non-employees......... -- -- 404
Changes in balance sheet items:
Accounts receivable................................... -- (1,072) (1,640)
Prepaid expenses and other current assets............. (212) (243) (913)
Accounts payable...................................... 456 (91) 164
Accrued expenses...................................... 327 1,649 3,196
Deferred revenue...................................... -- 3,330 1,333
------- -------- --------
Net cash used in operating activities............... (4,767) (6,130) (13,655)
------- -------- --------
Investing activities:
Changes in other assets................................... -- -- 108
Change in restricted cash................................. -- -- (633)
Purchases of property and equipment....................... (661) (1,415) (2,178)
------- -------- --------
Net cash used in investing activities............... (661) (1,415) (2,703)
------- -------- --------
Financing activities:
Net proceeds from issuance of convertible preferred
stock................................................... 133 11,906 19,979
Proceeds from issuance of common stock upon exercise of
options................................................. 10 41 131
Net proceeds from issuance of common stock in initial
public offering......................................... -- -- 57,835
Net proceeds from issuance of common stock in private
placement............................................... -- -- 619
Proceeds from notes payable............................... 1,000 -- --
Payments to repurchase unvested common stock.............. -- -- (11)
Payments on stockholders' notes receivable................ 3 1 4
Issuance of notes receivable to stockholder............... -- (400) --
Payments on notes payable................................. (77) (347) (463)
Principal payments on capital lease obligations........... -- (32) (30)
Principal payments on equipment line of credit............ -- -- (333)
Borrowings on equipment line of credit.................... -- 1,000 --
Proceeds from issuance of convertible debt................ -- 8,250 1,275
------- -------- --------
Net cash provided by financing activities........... 1,069 20,419 79,006
Effect of foreign exchange rate changes on cash and cash
equivalents............................................. -- (37) 4
------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (4,359) 12,837 62,652
Cash and cash equivalents:
Beginning of period....................................... 5,512 1,153 13,990
------- -------- --------
End of period............................................. $ 1,153 $ 13,990 $ 76,642
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 82 $ 227 $ 839
Supplemental schedule of noncash investing activity:
Purchase of equipment under capital leases................ $ 64 $ -- $ --
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
BROADBASE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
------------------- ------------------ PAID-IN STOCK FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ------ --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 4,248,579 $ 4 2,691,725 $ 2 $ 6,579 $ -- $ (47)
Issuance of Series B convertible
preferred stock at $2.68 per share
in March 1997 for cash, net of $27
issuance costs.................... 59,643 -- -- -- 133 -- --
Issuance of common stock upon
exercise of options............... -- -- 7,350 -- 10 -- --
Repurchase of common stock......... -- -- (206,250) -- (10) -- 10
Payments of notes receivable from
stockholders...................... -- -- -- -- -- -- 3
Comprehensive income (loss)........ -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Comprehensive loss................. -- -- -- -- -- -- --
---------- --- --------- --- -------- -------- -----
Balance at December 31, 1997....... 4,308,222 4 2,492,825 2 6,712 -- (34)
Issuance of Series C preferred
stock, at $5.54 per share in
February and March 1998 for cash,
net of $94 issuance costs......... 2,166,055 2 -- -- 11,904 -- --
Deferred stock compensation related
to certain options granted to
employees......................... -- -- -- -- 3,471 (3,471) --
Amortization of deferred stock
compensation...................... -- -- -- -- -- 1,133 --
Issuance of common stock upon
exercise of options............... -- -- 293,889 -- 87 -- (46)
Repurchase of common stock......... -- -- (79,414) -- (3) -- 3
Payments of notes receivable from
stockholders...................... -- -- -- -- -- -- 1
Note receivable from stockholder... -- -- -- -- -- -- (400)
Comprehensive income (loss)........ -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- --
Comprehensive loss................. -- -- -- -- -- -- --
---------- --- --------- --- -------- -------- -----
Balance at December 31, 1998....... 6,474,277 6 2,707,300 2 22,171 (2,338) (476)
Debentures converted into Series D
preferred stock in connection with
the Company's IPO................. 1,313,793 1 -- -- 9,524 -- --
Issuance of Series E preferred
stock, at $9.13 per share in June
1999 for cash, net of $10 of
issuance costs.................... 2,188,812 2 -- -- 19,977 -- --
Conversion of Series A, Series B,
Series C, Series D and Series E
preferred stock to common stock in
connection with the Company's
IPO............................... (9,976,882) (9) 9,976,882 9 -- -- --
Issuance of common stock in
connection with the Company's IPO,
net of issuance costs............. -- -- 4,600,000 5 57,830 -- --
Issuance of common stock in private
placement, net of issuance
costs............................. -- -- 45,063 -- 619 -- --
Issuance of common stock in
connection with license
agreement......................... -- -- 40,000 -- 400 -- --
Deferred stock compensation........ -- -- -- -- 12,775 (12,775) --
Amortization of deferred stock
compensation...................... -- -- -- -- -- 6,403 --
Issuance of common stock upon
exercise of options............... -- -- 791,370 1 1,013 -- (229)
Issuance of common stock upon
exercise of warrants.............. -- -- 36,764 -- 86 -- --
Repurchase of unvested common
stock............................. -- -- (147,292) -- (94) -- --
Notes receivable from
stockholder....................... -- -- -- -- (4) -- 12
Comprehensive income (loss)........ -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- --
Comprehensive loss................. -- -- -- -- -- -- --
---------- --- --------- --- -------- -------- -----
Balance at December 31, 1999....... -- $-- 18,050,087 $17 $124,297 $ (8,710) $(693)
---------- --- --------- --- -------- -------- -----
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
COMPREHENSIVE OTHER EQUITY
INCOME COMPREHENSIVE ACCUMULATED (NET CAPITAL
(LOSS) LOSS DEFICIT DEFICIENCY)
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996....... -- $ -- $ (1,272) $ 5,266
Issuance of Series B convertible
preferred stock at $2.68 per share
in March 1997 for cash, net of $27
issuance costs.................... -- -- -- 133
Issuance of common stock upon
exercise of options............... -- -- -- 10
Repurchase of common stock......... -- -- -- --
Payments of notes receivable from
stockholders...................... -- -- -- 3
Comprehensive income (loss)........ -- -- -- --
Net loss.......................... $ (5,487) -- $ (5,487) (5,487)
--------
Comprehensive loss................. $ (5,487) -- -- --
======== ---- -------- --------
Balance at December 31, 1997....... -- -- (6,759) (75)
Issuance of Series C preferred
stock, at $5.54 per share in
February and March 1998 for cash,
net of $94 issuance costs......... -- -- -- 11,906
Deferred stock compensation related
to certain options granted to
employees......................... -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- 1,133
Issuance of common stock upon
exercise of options............... -- -- -- 41
Repurchase of common stock......... -- -- -- --
Payments of notes receivable from
stockholders...................... -- -- -- 1
Note receivable from stockholder... -- -- -- (400)
Comprehensive income (loss)........ -- -- -- --
Net loss.......................... (11,343) -- (11,343) (11,343)
Foreign currency translation
adjustment...................... (37) (37) -- (37)
--------
Comprehensive loss................. $(11,380) -- -- --
======== ---- -------- --------
Balance at December 31, 1998....... (37) (18,102) 1,226
Debentures converted into Series D
preferred stock in connection with
the Company's IPO................. -- -- -- 9,525
Issuance of Series E preferred
stock, at $9.13 per share in June
1999 for cash, net of $10 of
issuance costs.................... -- -- -- 19,979
Conversion of Series A, Series B,
Series C, Series D and Series E
preferred stock to common stock in
connection with the Company's
IPO............................... -- -- -- --
Issuance of common stock in
connection with the Company's IPO,
net of issuance costs............. -- -- -- 57,835
Issuance of common stock in private
placement, net of issuance
costs............................. -- -- -- 619
Issuance of common stock in
connection with license
agreement......................... -- -- -- 400
Deferred stock compensation........ -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- 6,403
Issuance of common stock upon
exercise of options............... -- -- -- 785
Issuance of common stock upon
exercise of warrants.............. -- -- -- 86
Repurchase of unvested common
stock............................. -- -- -- (94)
Notes receivable from
stockholder....................... -- -- -- 8
Comprehensive income (loss)........ -- -- -- --
Net loss.......................... (23,570) -- (23,570) (23,570)
Foreign currency translation
adjustment...................... 4 4 -- 4
--------
Comprehensive loss................. $(23,566) -- -- --
======== ---- -------- --------
Balance at December 31, 1999....... $(33) $(41,672) $ 73,206
---- -------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadbase Software, Inc. (the "Company") was incorporated on November 28,
1995 and develops and markets software that integrates and analyzes customer
information from Internet and traditional business channels, enabling businesses
to improve their customer acquisition, retention, and profitability.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by Statement of Position 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"). The Company
derives revenue from the sale of software licenses, post-contract support
("maintenance"), and other professional services. Maintenance includes telephone
technical support, bug fixes and rights to upgrades and enhancements on a
when-and-if available basis. Professional services include training and basic
post-implementation consulting to meet specific customer needs.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant company
obligations with regard to installation or implementation of the software
remain, the fee is fixed or determinable and collectibility is probable. Revenue
on arrangements with customers that are not the ultimate end users (primarily
resellers) is recognized upon receipt of a reseller report of the sale and the
Company's shipment of the licensed software. Advance payments are recorded as
deferred revenue until the products are shipped, services are delivered or
obligations are met. The Company's products do not require significant
customization.
Revenue related to maintenance is recognized on a straight-line basis over
the period maintenance is provided and revenue allocable to professional
services is recognized as the services are performed.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 requires use of the "residual method" for recognition of revenue when
vendor-specific objective evidence exists for undelivered elements but
F-7
<PAGE> 82
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
does not exist for delivered elements of a software arrangement. The Company
will be required to comply with the provisions of SOP 98-9 for transactions
entered into beginning January 1, 2000. The adoption of SOP 98-9 is not expected
to have a material impact on the Company's financial position or operating
results. However, SOP 98-9 may require more revenue to be deferred for certain
types of transactions.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments that subject the Company to concentrations of credit
risk primarily consist of cash, cash equivalents and accounts receivable. The
Company maintains its cash and cash equivalents principally in domestic
financial institutions of high credit standing. The Company's accounts
receivables are derived primarily from sales of software products and services.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral.
A limited number of customers has accounted for a substantial portion of
the Company's revenues. The Company had no revenue for the year ended December
31, 1997. One customer accounted for 18% and 11%, of total revenue for the year
ended December 31, 1998 and 1999, respectively. Another customer accounted for
10% of total revenue for the year ended December 31, 1998. Sales of the
Company's products will vary as a result of fluctuations in market demand for
such products and technology. Further, the markets in which the Company competes
are characterized by rapid technological change and intense competition.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds. The Company considers all
highly liquid investments with an original maturity date of three months or less
to be cash equivalents. The fair value, based on quoted market prices, of the
cash equivalents is approximately equal to their carrying value at December 31,
1998 and 1999.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between the establishment of
technological feasibility and the point at which the product is ready for
general release have been insignificant. Accordingly, the Company has charged
all such costs to research and development expenses in the accompanying
statements of operations.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under FAS 109, deferred tax assets and liabilities are measured based on
differences between the financial reporting and tax bases of assets and
liabilities
F-8
<PAGE> 83
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and has adopted
the disclosure-only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
ADVERTISING EXPENSES
The Company expenses advertising costs in the period in which they are
incurred. Advertising expenses for 1997, 1998 and 1999, were approximately $0,
$57,000 and $187,000, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's wholly-owned foreign subsidiaries
are translated from their functional currencies at exchange rates in effect at
the balance sheet date, and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
reflected as a separate component of stockholders' equity (net capital
deficiency). Foreign currency transaction gains and losses, which have not been
material, are included in results of operations.
NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128") for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share has been computed using the weighted-average number of shares
of common stock outstanding during the period, less shares subject to
repurchase.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss................................................ $(5,487) $(11,343) $(23,570)
======= ======== ========
Basic and diluted shares:
Weighted-average shares of common stock outstanding..... 2,689 2,615 7,079
Less weighted-average shares subject to repurchase...... (1,802) (1,334) (783)
------- -------- --------
Weighted-average shares of common stock outstanding used
in computing basic and diluted net loss per share..... 887 1,281 6,296
------- -------- --------
Basic and diluted net loss per share.................... $ (6.19) $ (8.85) $ (3.74)
======= ======== ========
</TABLE>
If the Company had reported net income, diluted net income per share would
have included 661,914, 1,278,889 and 3,195,489 common equivalent shares related
to outstanding options and warrants to purchase common stock not included above
at December 31, 1997, 1998 and 1999, respectively. The common equivalent shares
from options and warrants would be determined on a weighted-average basis using
the treasury stock method.
F-9
<PAGE> 84
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
SEGMENT INFORMATION
The Company operates solely in one segment, the development and marketing
of customer-centric analytic software products. The Company did not have revenue
in the year ended December 31, 1997. For the years ended December 31, 1998 and
1999, revenue from sales to customers located outside of the United States was
approximately $175,000, and $2,419,000 respectively. This revenue was solely
from customers in Japan in 1998 and also included revenue of $611,000 from
customers in Europe and Canada in 1999.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful lives of
the assets, generally three to five years. Equipment held under capital leases
is amortized on a straight-line basis over the shorter of the lease term or the
lives of the respective assets, generally three to five years.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
Computer hardware and software.......................... $1,407 $ 3,232
Office furniture and fixtures........................... 881 1,234
------ -------
2,288 4,466
Less accumulated depreciation and amortization.......... (678) (1,598)
------ -------
$1,610 $ 2,868
====== =======
</TABLE>
As of December 31, 1999, property and equipment include amounts held under
capital leases of $63,941 and related accumulated amortization of $51,896.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
companies to capitalize certain qualifying computer software costs that are
incurred during the application development stage and amortize them over the
software's estimated useful life. The Company adopted SOP 98-1 effective January
1, 1999. The adoption of SOP 98-1 did not have a material affect on the
Company's consolidated financial position, results of operations, or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 is effective beginning on January 1, 1999,
and requires that start-up costs, capitalized prior to January 1, 1999, be
written off and any future start-up costs be expensed as incurred. The adoption
of SOP 98-5 did not have a material impact on the Company's financial position,
results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
F-10
<PAGE> 85
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
adopt FAS 133 for its year ending December 31, 2001. However, because the
Company does not currently utilize derivative financial instruments the Company
does not believe the impact of FAS 133 will be material to its financial
position, results of operations, or cash flows.
2. BANK LINE OF CREDIT AND NOTES PAYABLE
Notes payable and line of credit borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Notes payable.............................................. $ 878 $ 415
Bank line of credit........................................ 1,000 667
------ ------
1,878 1,082
Less current portion....................................... (768) (749)
------ ------
Noncurrent portion......................................... $1,110 $ 333
====== ======
</TABLE>
During 1996 and 1997, the Company secured financing under the terms of
$300,000 and $1,000,000 three-year notes payable, respectively. The notes bear
interest at a rate of 15% and 14%, respectively. Principal and interest
installments are payable monthly and the notes are secured by the tangible
assets of the Company. The full principal amount of notes payable outstanding,
$415,000, is due in 2000. The carrying value of these note obligations
approximates their fair value.
In connection with the issuance of the notes, the Company issued warrants
to purchase 12,537 and 24,227 shares of Series A and Series B preferred stock at
prices of $1.67 and $2.68 per share, respectively. At the date of grant, the
value ascribed to these warrants was immaterial for financial statement
purposes. In November 1999, the warrants were exercised in full.
In July 1998, the Company entered into a loan and security agreement with a
financial institution. The agreement provides for an accounts receivable line of
credit not to exceed $2,000,000 and an equipment line of credit not to exceed
$1,000,000. Borrowings under the accounts receivable line of credit bear
interest at the institution's prime lending rate (8.5% at December 31, 1999),
and any borrowings under the equipment line of credit bear interest at the
institution's prime lending rate plus 0.5% (9.0% at December 31, 1999). All
borrowings under this agreement are secured by certain assets of the Company. As
of December 31, 1999, the $2,000,000 line of credit expired, and $1,000,000, the
full amount available, had been borrowed under the equipment line of credit of
which $333,000 had been repaid during 1999. The equipment line of credit
borrowings are due in 36 equal monthly installments of principal, plus accrued
interest, beginning in January 1999 and ending in December 2001. The carrying
value of borrowings under the equipment line of credit approximates their fair
value. The agreement also includes terms requiring satisfaction of certain
financial ratios, and a minimum tangible net worth requirement, and restricts
the Company from paying cash dividends. The Company was in compliance with these
financial covenants at December 31, 1999.
3. COMMITMENTS
LEASES
The Company leases its principal office under a noncancelable operating
lease agreement that expires in July 2002.
F-11
<PAGE> 86
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
On December 23, 1999 the Company entered into a seven year noncancelable
operating lease agreement commencing May 1, 2000 for a new corporate
headquarters. In accordance with the terms of this agreement, the Company has
put $580,000 into a restricted cash account as a security deposit.
The gross rental payments under all operating leases were approximately
$114,000, $230,000 and $1,014,000 for the years ended December 31, 1997, 1998,
and 1999, respectively. Rental expense, net of reimbursements from sublessees,
was approximately $114,000, $73,000 and $679,000 in 1997, 1998 and 1999,
respectively.
As of December 31, 1999, minimum lease payments under all noncancelable
lease agreements were as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(IN THOUSANDS)
<S> <C>
Year ending December 31,
2000...................................................... $ 1,458
2001...................................................... 1,942
2002...................................................... 1,666
2003...................................................... 1,286
2004 and thereafter....................................... 4,664
-------
Total minimum lease payments................................ $11,016
=======
</TABLE>
Included in the above minimum operating lease payments are future
reimbursements from sublessees under noncancellable subleases, which amount to
$96,000 in 2000, and $0 for all other periods.
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consisted of the following at December 31,
1998:
<TABLE>
<CAPTION>
SHARES ISSUED AGGREGATE
SHARES AND LIQUIDATION
DESIGNATED OUTSTANDING PREFERENCE
---------- ------------- -----------
<S> <C> <C> <C>
Series A.................................. 2,398,000 2,384,999 $ 1,590,000
Series B.................................. 2,000,000 1,923,223 5,160,000
Series C.................................. 2,166,065 2,166,055 12,000,000
Series D.................................. 1,400,000 -- --
--------- --------- -----------
7,964,065 6,474,277 $18,750,000
</TABLE>
Each share of Series A, B, C and D preferred stock was convertible at any
time into common stock at the exchange rate in effect at the time of conversion,
currently one-for-one, and was subject to appropriate adjustment for common
stock splits, stock dividends, and similar transactions. Conversion was
automatic upon the closing of an initial public offering of common stock in
which the aggregate gross proceeds to the Company were at least $10,000,000 and
the offering price is at least $10.00 per share.
F-12
<PAGE> 87
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Each holder of Series A, B, C and D preferred stock was entitled to the
number of votes equal to the number of shares of common stock into which such
preferred stock was convertible.
Each holder of preferred stock was entitled to receive, when and as
declared by the Board of Directors, noncumulative dividends at the annual rate
of $0.05, $0.21, $0.44, and $0.58 per share of Series A, B, C and D preferred
stock, respectively, payable in preference and priority to any payment of any
dividend on common stock.
In the event of liquidation, the holders of preferred stock were entitled
to a liquidation preference equal to the original purchase price of their
preferred stock plus an amount equal to all accrued but unpaid dividends on such
shares.
SERIES E FINANCING
In June 1999, the Company issued 2,188,812 shares of its Series E
convertible preferred stock at $9.13 per share in exchange for net proceeds of
$20.0 million. The conversion rights, preferences and privileges of the Series E
shares were generally equivalent to those of the preceding A, B, C and D
preferred stock. Conversion of shares of Series E preferred stock were automatic
upon the closing of an initial public offering of common stock in which
aggregate gross proceeds to the Company were at least $10,000,000, and the
offering price was at least $10.00 per share.
Each holder of Series E preferred stock was entitled to receive, when and
as declared by the Board of Directors, noncumulative dividends, at the annual
rate of $0.73 per share.
INITIAL PUBLIC OFFERING
On September 21, 1999, the Company consummated its initial public offering
of common stock, in which it sold 4,000,000 shares of its common stock at a
price of $14.00 per share, raising $56.0 million in gross proceeds. Offering
proceeds to Broadbase, net of approximately $3.9 million in aggregate
underwriters discounts and commissions and $2.1 million in related offering
expenses, were approximately $50.0 million. Upon closing of the initial public
offering, all convertible debentures were converted into shares of Series D
convertible preferred stock and each outstanding share of the Company's Series
A, Series B, Series C, Series D, and Series E convertible preferred stock was
converted into one share of common stock, resulting in the issuance of 9,976,882
shares of common stock. In October, 1999, an additional 600,000 shares of common
stock were sold by the Company at a price of $14.00 per share pursuant to the
exercise of the underwriters' overallotment option, generating additional net
proceeds to the Company of approximately $7.8 million.
PRIVATE PLACEMENT
In connection with its Series E Preferred private financing in June 1999,
the Company granted rights to purchase up to 238,306 shares in its initial
public offering to many of these Series E investors, subject to compliance with
applicable laws, including federal securities laws. Some of these investors
accepted this offer and purchased 45,063 shares of the Company's common stock
resulting in net proceeds to the Company of approximately $619,000. The Company
believes that it has fulfilled its obligations under the agreement, but it is
possible that the investors who did not accept this offer could claim that the
Company breached the agreement by failing to sell them the shares in the initial
public offering. If they were successful in their claims, the Company could be
obligated to pay
F-13
<PAGE> 88
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
damages, which could equal the amount of any increase in the market value of the
Company's common stock.
SHARES SUBJECT TO REPURCHASE
In November 1995, 1,282,500 shares of common stock were issued to the
Company's founder at $0.002 per share in exchange for cash. These shares are
subject to certain transfer restrictions. These shares are also subject to
repurchase at the issuance price upon the occurrence of certain events,
including termination of employment. The Company's right of repurchase expires
over four years. At December 31, 1998 and 1999, 264,516 and 0 shares,
respectively, remained subject to repurchase.
Shares subject to repurchase pursuant to the exercise of stock options by
the Company totaled 890,393, 810,486 and 429,884 at December 31, 1997, 1998, and
1999, respectively.
STOCK OPTION PLANS
During 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Plan"). Under the Plan, up to 4,530,000 shares of the Company's common stock
may be granted to eligible participants. Under the Plan, options to purchase
common stock may be granted at no less than 85% of the fair value on the date of
the grant (110% of fair value in certain instances), as determined by the board
of directors. Options generally vest over a 48-month period and have a maximum
term of 10 years. This plan terminated in September 1999.
1999 EQUITY INCENTIVE PLAN
On July 2, 1999, the Board of Directors approved the adoption of the
Company's 1999 Equity Incentive Plan (the "1999 Incentive Plan"). A total of
3,500,000 shares of common stock were initially reserved for issuance under the
1999 Incentive Plan. Commencing on January 1, 2000, annual increases equal to 5%
of the outstanding shares on the preceding December 31 have been approved. The
number of shares authorized for issuance under the 1999 Incentive Plan was
increased to include shares reserved under the 1996 Equity Incentive Plan that
had not been issued and were not subject to outstanding options as of the date
of termination of the 1996 plan, and shares subject to options which had become
unexercisable. The types of awards that may be made under the 1999 Incentive
Plan are options to purchase shares of common stock, restricted stock and stock
bonuses. The exercise price for incentive stock options may not be less than
100% of the fair market value of the Company's common stock on the date of grant
(85% for nonstatutory options). In the event of a change in control of the
Company, an option or award under the 1999 Incentive Plan may be assumed or
substituted by the successor corporation. The Company's compensation committee
may also accelerate the vesting of awards upon a change of control transaction.
F-14
<PAGE> 89
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
A summary of activity under stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
SHARES AVAILABLE WEIGHTED-AVERAGE
FOR GRANT NUMBER OF SHARES EXERCISE PRICE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996................. 1,572,775 48,000 $ 0.03
Granted.................................... (694,000) 694,000 0.25
Exercised.................................. -- (7,350) 0.22
Canceled................................... 109,500 (109,500) 0.20
Repurchased................................ 206,250 -- 0.03
---------- ---------- ------
Balance at December 31, 1997................. 1,194,525 625,150 0.24
Authorized................................. 1,000,000 -- --
Granted.................................... (1,254,110) 1,254,110 0.47
Exercised.................................. -- (293,889) 0.33
Canceled................................... 343,246 (343,246) 0.43
Repurchased................................ 79,414 -- 0.03
---------- ---------- ------
Balance at December 31, 1998................. 1,363,075 1,242,125 0.40
Authorized................................. 4,000,000 -- --
Granted.................................... (3,397,265) 3,397,265 9.74
Exercised.................................. -- (791,370) 1.66
Canceled................................... 652,531 (652,531) 0.79
Repurchased................................ 146,354 -- 0.08
---------- ---------- ------
Balance at December 31, 1999................. 2,764,695 3,195,489 $10.12
========== ========== ======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AS OF 12/31/1999 LIFE PRICE AS OF 12/31/1999 PRICE
- ----------------------- ---------------- ----------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.03 - $ 0.25 222 7.48 $ 0.24 78 $ 0.24
$ 0.55 - $ 0.73 1,530 9.10 0.69 592 0.69
$ 4.56 - $14.00 567 9.62 5.06 251 5.69
$26.94 - $26.94 751 9.78 26.94 29 26.94
$64.88 - $64.88 125 9.88 64.88 2 64.88
--------------- ----- ---- ------ --- ------
$ 0.03 - $64.88 3,195 9.27 $10.12 952 $ 2.88
===== ==== ====== === ======
</TABLE>
1999 EMPLOYEE STOCK PURCHASE PLAN
On July 2, 1999, the Board of Directors approved the adoption of the
Company's 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"). A total
of 500,000 shares of common stock were reserved for issuance under the 1999
Purchase Plan, plus, commencing on January 1, 2000, annual increases equal to 1%
of the Company's outstanding common shares on the preceding December 31.
F-15
<PAGE> 90
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
The 1999 Purchase Plan permits eligible employees to acquire shares of the
Company's common stock through periodic payroll deductions of up to 10% of their
cash compensation, subject to certain maximum purchase limitations. Each
offering period will have a maximum duration of 24 months and will consist of
four six-month purchase periods. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of the Company's common
stock on the first day of the applicable offering period or the last day of each
respective purchase period. This initial offering period began on September 22,
1999. At December 31, 1999, 500,000 shares have been reserved for and remain
available for future issuance under the Plan.
STOCK BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its employee stock options (including shares
issued under the 1999 Purchase Plan, collectively called "options") granted
subsequent to June 30, 1995 under the fair value method of that statement. The
fair value of options granted during 1997 and 1998 reported below, has been
estimated at the date of grant using the minimum value method option pricing
model. The fair value of options granted in 1999, reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
EMPLOYEE PURCHASE
STOCK OPTIONS PLAN SHARES
-------------------- --------------
1997 1998 1999 1999
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Expected life (in years).............................. 4 4 4 1.75
Risk-free interest rate............................... 6.0% 6.0% 6.0% 6.0%
Volatility............................................ N/A N/A 0.60 0.60
Dividend yield........................................ 0% 0% 0% 0%
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1997 with an exercise price equal to fair value of the company's
stock on the date of grant was $0.06.
The following table summarizes information about weighted average fair
values and weighted average exercise prices of options granted in the years
ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
1998 1999
----------------------- -----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
AVERAGE EXERCISE AVERAGE EXERCISE
FAIR VALUE PRICE FAIR VALUE PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Exercise price equals fair value............ $0.10 $0.26 $16.34 $31.72
Deemed fair value exceeds exercise price.... $2.86 $0.57 $ 6.98 $ 1.64
</TABLE>
F-16
<PAGE> 91
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net loss........................................ $(5,496) $(11,702) $(54,405)
======= ======== ========
Pro forma basic and diluted net loss per share............ $ (6.20) $ (9.14) $ (8.64)
======= ======== ========
</TABLE>
Pro forma net loss represents the difference between compensation expense
recognized under APB 25 and the related expense using the fair value method of
SFAS No. 123 taking into account any additional tax effects of applying SFAS No.
123. The effects on pro forma disclosures of applying SFAS No. 123 for all years
presented are not likely to be representative of the effects on pro forma
disclosures of future years.
In connection with the grant of certain options to employees during the
years ended December 31, 1998 and 1999, the Company recorded deferred stock
compensation of approximately $3,471,000 and $12,775,000, respectively, based on
the difference between the exercise prices of those options at their respective
grant dates and the deemed fair value for accounting purposes of the shares of
common stock subject to such options. Such amounts are included as a reduction
of stockholders' equity and are being amortized on a graded vesting method. The
compensation expense of $1,133,000 and $6,403,000 during 1998 and 1999,
respectively, relate to options awarded to employees in all operating expense
categories, as well as employees in professional services. These amounts have
not been separately allocated between operating expense categories.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998 and 1999, the Company has reserved common shares for
issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Stock options:
Outstanding............................................. 1,242,125 3,195,489
Available for grant..................................... 1,363,075 2,764,695
Employee Stock Purchase Plan............................ -- 500,000
---------- ----------
2,605,200 6,460,184
========== ==========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which stipulates that all full-time employees
can elect to contribute to the 401(k) plan, subject to certain limitations, up
to 20% of their salary on a pre-tax basis. The Company has the option to provide
matching contributions but has not done so to date.
F-17
<PAGE> 92
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. INCOME TAXES
The Company's income tax provision (benefit) differs from the income tax
provision (benefit) determined by applying the U.S. federal statutory rate to
the net loss as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate.............. $(1,866) $(3,857) $(8,143)
Amortization of Deferred Compensation....................... -- -- 2,177
Valuation allowance for deferred tax assets................. 1,866 3,857 5,966
------- ------- -------
Tax provision (benefit)..................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 5,800 $ 10,700
Tax credit carryforwards.................................... 400 700
Deferred revenue............................................ 214 900
Capitalized research and development........................ -- 300
Other accruals and reserves not deductible for tax
purposes.................................................. 86 600
------- --------
Total gross deferred tax assets............................. 6,500 13,200
Less valuation allowance.................................... (6,500) (13,200)
------- --------
Net deferred tax assets........................... $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation allowance
in an amount equal to the net deferred tax assets as of December 31, 1998 and
1999 has been established to reflect these uncertainties. The valuation
allowance increased by $3,600,000 and $6,700,000 during the years ended December
31, 1998 and 1999, respectively.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $29,100,000 and $13,600,000, respectively.
The Company also had federal and state research and development tax credit
carryforwards of approximately $500,000 and $300,000, respectively. The net
operating loss and tax credit carryforwards will expire at various dates
beginning in 2004, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carryforwards before utilization.
F-18
<PAGE> 93
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. RELATED PARTY TRANSACTIONS
In April 1998, the Company provided a $400,000 loan to an officer, who is
also a stockholder, in exchange for a nonrecourse promissory note which is
secured by security interest in common stock. The loan is due on the earlier of,
April 2001, or ten days after the officer sells any common stock, and bears
interest annually at 5.51%.
8. LEGAL PROCEEDINGS
On July 21, 1999, Timeline, Inc. filed a complaint against the Company in
the United States District Court for the Western Division of Washington,
alleging infringement by the Company of U.S. Patent No. 5,802,511 held by
Timeline. The complaint alleged that the Company directly and indirectly
infringed Timeline's patent claims by making, using, selling and offering to
sell software products, both alone and in combination with third party software
products, and further alleged that the Company induced infringement of the
Timeline patent claims. Timeline requested permanent injunctions prohibiting the
Company from directly or indirectly infringing the Timeline patent, and sought
damages, exemplary damages, costs and attorneys' fees. Timeline further
disclosed to the Company patent claims of a related pending patent application
that Timeline expected to be issued and to be added to its claims. Based on the
Company's preliminary investigation of this matter, it did not believe its
products infringed any valid claims of the Timeline patent or of the pending
patent application, and that it had other meritorious defenses to all claims
made by Timeline. However, rather than pursue a course of protracted litigation,
the Company, on August 30, 1999, settled this matter by paying Timeline $250,000
and agreeing to issue Timeline 40,000 shares of its common stock for a license
to all of Timeline's patents and pending patent applications and a release of
any claims of past infringement by its products of any of Timeline's patents and
pending patent applications. The cost of the license is being amortized by the
Company over its estimated useful life of five years. All of Timeline's claims
against the Company have been dismissed with prejudice.
9. PENDING ACQUISITION OF RUBRIC, INC.
On December 9, 1999 the Company entered into a definitive agreement to
acquire all the outstanding capital stock of Rubric, Inc. ("Rubric") in exchange
for approximately 2,992,000 shares of its common stock and the issuance of
options and warrants to purchase an additional approximately 608,000 shares of
Broadbase common stock, in a transaction to be accounted for as a purchase
business combination. Consummation of the transaction, which is subject to
approval of the Rubric stockholders, is expected in February 2000.
In connection with signing of the definitive agreement, the Company has as
of December 31, 1999, loaned Rubric $1,000,000 under a note which is payable on
June 9, 2000, or immediately if the merger between Broadbase and Rubric is not
consummated. The note bears interest at a fixed rate per annum based on the
"Prime Rate" reported in the Wall Street Journal in effect on December 9, 1999.
The purpose of the loan is to fund Rubric's working capital requirements until
closing of the merger which is expected no later than February 2000. This amount
has been expensed in full on the accompanying statement of operations as a
direct expense of the merger.
F-19
<PAGE> 94
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. SUBSEQUENT EVENT (UNAUDITED)
DEFERRED COMPENSATION ON STOCK OPTION GRANTS
On January 4, 2000, in connection with the hiring of two new officers, the
Company granted an aggregate of 300,000 options to purchase shares of Broadbase
common stock at an exercise price of $54.00 per share. As a result of these
option grants, the Company will record approximately $12,000,000 of deferred
stock compensation, computed as the difference between the options' exercise
price and the fair market value of the Company's stock on the date of grant.
This amount will be recorded as a reduction of stockholder's equity and will be
amortized over the options' vesting term, four years, on a graded vesting
method.
F-20
<PAGE> 95
BROADBASE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
for Broadbase Software, Inc. ("Broadbase") consist of the Unaudited Pro Forma
Combined Condensed Statement of Operations for the year ended December 31, 1999
and the Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31,
1999. These pro forma financial statements give effect to Broadbase's pending
acquisition of Rubric, Inc. ("Rubric") in a business combination to be accounted
for as a purchase, which is expected to be consummated in February 2000. In
exchange for the acquisition of all of Rubric's outstanding capital stock,
Broadbase will issue Rubric stockholders approximately 2,992,000 shares of its
common stock and reserve approximately 608,000 additional shares for issuance
upon the exercise of stock options and warrants of Rubric which will be
converted into options and warrants to purchase shares of Broadbase stock.
The Unaudited Pro Forma Combined Condensed Statement of Operations combines
Broadbase's historical results of operations for the year ended December 31,
1999 with Rubric's historical results for the year ended December 31, 1999. The
Unaudited Pro Forma Combined Condensed Balance Sheet combines Broadbase's
historical balance sheet and Rubric's historical balance sheet at December 31,
1999. The pro forma financial statements are not necessarily indicative of what
the actual operating results or financial position would have been for the
combined company had the transaction taken place on January 1, 1999, and do not
purport to indicate the results of future operations.
BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements reflect the
Rubric acquisition accounted for using the purchase method of accounting and
have been prepared on the basis of assumptions described in the notes thereto
including assumptions related to the allocation of the amount of consideration
paid to the assets and liabilities of Rubric based upon preliminary estimates of
their fair value. The actual allocation of the consideration to be paid may
differ from those assumptions reflected in the pro forma financial statements
after valuations and other procedures to be performed after the closing of the
Rubric acquisition are completed.
In connection with the acquisition of Rubric, Broadbase expects to record a
charge to operations related to in-process research and development, currently
estimated to be $10.1 million. The Unaudited Pro Forma Combined Condensed
Balance Sheet includes the effect of this charge but the Unaudited Pro Forma
Combined Condensed Statement of Operations does not reflect this charge because
of its nonrecurring nature. The charge related to in-process research and
development will be reflected in Broadbase's consolidated financial statements
when the Rubric acquisition is consummated, which is expected to occur in
February 2000. In addition, Broadbase expects to incur costs of integration and
other merger-related costs estimated at $4.0 million, of which $1 million were
included in the results of operation of Broadbase for the year ended December
31, 1999. The pro forma financial statements do not include the estimated
remaining costs of integration of up to $3.0 million, as these costs will affect
future operations and do not qualify as liabilities in connection with a
purchase business combination under EITF 95-3, "Recognition of Liabilities in
Connection with A Purchase Business Combination".
The pro forma financial statements should be read in conjunction with the
related notes included in this document and the audited consolidated financial
statements and notes of Broadbase and the audited financial statements and notes
of Rubric included elsewhere in this prospectus.
F-21
<PAGE> 96
BROADBASE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
BROADBASE RUBRIC PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 76,642 $ 210 $ 76,852
Accounts receivable net............ 2,712 1,523 4,235
Prepaid expenses and other current
assets........................... 1,239 627 $ (289)(5) 1,577
-------- -------- -------- ---------
Total current assets............. 80,593 2,360 (289) 82,664
Property, plant and equipment......... 2,868 1,437 -- 4,305
Restricted cash....................... 633 -- -- 633
Intangibles and goodwill.............. -- -- 360,890(10) 360,890
Other assets.......................... 676 112 -- 788
-------- -------- -------- ---------
Total assets..................... $ 84,770 $ 3,909 $360,601 $ 449,280
======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 559 $ 619 $ -- $ 1,178
Accrued compensation............... 2,919 -- 2,919
Accrued expenses................... 2,341 1,383 9,001(1) 12,725
Current portion of capital lease
obligation....................... -- 67 -- 67
Current portion of bank line of
credit and notes payable......... 749 1,338 (1,000)(6) 1,087
Deferred revenue................... 4,663 997 (997)(9) 4,663
-------- -------- -------- ---------
Total current liabilities........ 11,231 4,404 7,004 22,639
Bank line of credit and notes
payable............................ 333 85 -- 418
Capital lease obligation, net of
current portion.................... -- 130 -- 130
-------- -------- -------- ---------
Total liabilities................ 11,564 4,619 7,004 23,187
Stockholders' equity:
Preferred stock....................... -- 13,765 (13,765)(3) --
Common stock.......................... 17 5 (1)(2) 21
Additional paid-in capital............ 124,297 30,450 332,491(2) 487,238
Deferred stock compensation........... (8,710) (15,669) 15,669(11) (8,710)
Notes receivable from stockholders.... (693) -- -- (693)
Accumulated other comprehensive
loss............................... (33) -- -- (33)
Accumulated deficit................... (41,672) (29,261) 19,203(7,12) (51,730)
-------- -------- -------- ---------
Total stockholders' equity....... 73,206 (710) 353,597 426,093
-------- -------- -------- ---------
Total liabilities and
stockholders'
equity........................ $ 84,770 $ 3,909 $360,601 $ 449,280
======== ======== ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
F-22
<PAGE> 97
BROADBASE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BROADBASE RUBRIC PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue:
License............................... $ 7,689 $ 1,868 $ 9,557
Maintenance and professional
services........................... 2,753 1,562 4,315
-------- -------- -------- ---------
Total net revenue.................. 10,442 3,430 13,872
Cost of revenue:
License............................... 1,437 278 1,715
Maintenance and professional
services........................... 2,610 2,089 $ (566)(4) 4,133
Amortization of core and developed
technology......................... -- -- 1,587(8) 1,587
-------- -------- -------- ---------
Total cost of revenue.............. 4,047 2,367 1,021 7,435
-------- -------- -------- ---------
Gross margin.......................... 6,395 1,063 (1,021) 6,437
Operating expenses:
Sales and marketing................... 15,092 7,677 (2,628)(4) 20,141
Research and development.............. 6,024 5,940 (2,096)(4) 9,868
General and administrative............ 2,011 9,256 (6,979)(4) 4,288
Amortization of intangibles and
goodwill........................... -- -- 71,319(8) 71,319
Amortization of deferred stock
compensation....................... 6,403 -- 6,403
Merger expenses....................... 1,000 -- 1,000
-------- -------- -------- ---------
Total operating expenses................ 30,530 22,873 59,616 113,019
-------- -------- -------- ---------
Loss from operations.................... (24,135) (21,810) (58,595) (106,582)
Interest income......................... 1,454 132 1,586
Interest expense........................ (889) (348) (1,237)
-------- -------- -------- ---------
Net loss................................ $(23,570) $(22,026) $(58,595) $(106,233)
======== ======== ======== =========
Basic and diluted net loss per share.... $ (3.74) $ (5.75) $ (11.44)
======== ======== =========
Weighted average shares used in
computing basic and diluted net loss
per share............................. 6,296 3,832 (841) 9,287
======== ======== ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
F-23
<PAGE> 98
BROADBASE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
1. BASIS OF PRO FORMA PRESENTATION
The pro forma financial statements give effect to Broadbase's pending
acquisition of Rubric, in a business combination to be accounted for as a
purchase, which is expected to be consummated in February 2000. Upon the
effective date of the acquisition, all the outstanding common and preferred
stock of Rubric will be converted into shares of Broadbase common stock, and all
outstanding stock options and warrants to purchase shares of Rubric common stock
will be converted into options and warrants to purchase shares of Broadbase
common stock. The aggregate Broadbase shares and options/warrants to be issued
to Rubric stockholders, option holders, and warrant holders will equal 3.6
million.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes and include assumptions relating to
the allocation of the consideration paid for the assets and liabilities of
Rubric based on preliminary estimates of their fair value. The actual allocation
of such consideration may differ from that reflected in the pro forma financial
statements after valuations and other procedures to be performed after the
closing of the Rubric acquisition have been completed. Broadbase does not expect
that the final allocation of the purchase price will differ materially from the
preliminary allocation. In the opinion of Broadbase's management, all
adjustments necessary to present fairly such pro forma financial statements have
been made based on the proposed terms and structure of the Rubric acquisition.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the year
ended December 31, 1999 gives effect to this transaction as if it had taken
place on January 1, 1999. The Unaudited Pro Forma Combined Condensed Balance
Sheet as of December 31, 1999 gives effect to the transaction as if it had taken
place on December 31, 1999.
The pro forma financial statements are not necessarily indicative of what
the actual financial results would have been had the transaction taken place on
January 1, 1999 and do not purport to indicate the results of future operations.
F-24
<PAGE> 99
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
Below is a table of the estimated acquisition consideration, purchase price
allocation and annual amortization of the intangible assets and goodwill
acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Estimated acquisition consideration:
Estimated value of securities to be issued:
Common stock.................................... $301,690
Stock options and warrants...................... 61,256
Acquisition costs.................................. 9,000
--------
Total estimated acquisition consideration..... $371,946
========
Purchase price allocation:
Tangible net assets acquired....................... $ 998
Intangible assets acquired:
Developed technology............................ 282 1 year $ 282
In-process research and development............. 10,058
Core technology................................. 6,523 5 years 1,305
Assembled workforce............................. 1,738 3 years 579
Tradename....................................... 773 5 years 155
OEM distribution contract....................... 2,027 3 years 676
Goodwill........................................ 349,547 5 years 69,909
--------
Total......................................... $371,946
========
</TABLE>
Broadbase anticipates issuing approximately 2,992,000 shares of its common
stock, valued at $100.83 per share, the average market price per share of
Broadbase common stock in a range of seven trading days before and after the
announcement date (December 9, 1999) of the acquisition. In addition, Broadbase
anticipates issuing approximately 608,000 options and warrants to purchase
shares of its common stock in exchange for all options and warrants to purchase
shares of Rubric common stock. The value of the options and warrants to be
issued by Broadbase was determined by estimating their fair value as of December
9, 1999 using the Black-Scholes option pricing model with the following weighted
average assumptions:
- risk free interest rate of 5.0%
- dividend yield of 0.0%
- expected life of 0.5 years for vested options and warrants
- expected life of 3.4 years for unvested options and warrants
- volatility factor for the expected market price of Broadbase common stock
of 0.60.
Tangible assets of Rubric acquired principally include cash and cash
equivalents, accounts receivable, fixed assets and other assets. Liabilities of
Rubric assumed principally include accounts payable, accrued liabilities,
capital lease obligations, and long term debt.
To determine the value of the developed technology, the expected future
cash flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the developed
technology, existing and future markets, and assessments of the stage of the
technology's life cycle. The analysis resulted in a valuation for developed
technology that had
F-25
<PAGE> 100
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
reached technological feasibility and therefore was capitalizable. The developed
technology will be amortized on a straight line basis over one year.
The value allocated to projects identified as in-process research and
development of the Rubric eMarketing Automation ("eMA") product release version
3.0 and 4.0 will be charged to expense during the first quarter of 2000 but has
not been reflected in the Broadbase Unaudited Pro Forma Combined Condensed
Statement of Operations as it is non-recurring in nature.
The write-off will be necessary because the acquired in-process research
and development has not yet reached technological feasibility and has no future
alternative uses. These products under development may not achieve commercial
viability. The nature of the efforts required to develop the purchased
in-process research and development into commercially viable products
principally relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including functions,
features and technical performance requirements.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to the products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products. These cash flows
were then discounted back to their net present value. The projected net cash
flows from the projects were based on management's estimates of revenues and
operating profits related to the projects.
To determine the revenue attributable to the in-process technology,
consideration was also given to the contribution of the existing technology
which will be utilized in the development of the in-process technology, referred
to as "core technology." The value allocated to the core technology was
determined by assigning a "leverage factor" of 25% to the estimated projected
net cash flows related to the products under development after analysis of both
the effort and work completed as well as the expected value of the in-process
technology. The projected net cash flows from the products assigned to core
technology using the leverage factor were then discounted back to their net
present value. The core technology is being amortized over its estimated useful
life of five years.
The value allocated to the assembled workforce is attributable to the
Rubric workforce in place after the acquisition which eliminates the need to
hire new replacement employees. The value was determined by estimating the cost
involved in assembling a new workforce including costs of salaries, benefits,
training and recruiting. The value of the assembled workforce will be amortized
on a straight-line basis over three years.
The value of the Rubric tradename was determined by considering, among
other factors, the assumption that in lieu of ownership of a the tradename, a
third party would be willing to pay a royalty in order to exploit the related
benefits of such tradename. Estimated royalties to be received over the next
five years were then discounted to their present value using an appropriate rate
of return.
The value of the OEM distribution contract was determined by computing the
present value of the estimated the net cash flows to be generated over the
remaining three year life of the agreement.
Goodwill is determined based on the residual difference between the amount
of consideration to be paid and the values assigned to identified tangible and
intangible assets. The goodwill will be amortized on a straight line basis over
five years.
F-26
<PAGE> 101
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
2. PRO FORMA NET LOSS PER SHARE
Pro forma basic and diluted net loss per share are based on the weighted
average number of shares of Broadbase common stock outstanding during the period
and the number of shares of Broadbase common stock to be issued in connection
with the Rubric acquisition. The following options have not been included in the
computation of pro forma diluted net loss per share because their effect would
be antidilutive.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
POTENTIAL COMMON SECURITIES 1999
--------------------------- --------------
(IN THOUSANDS)
<S> <C>
Broadbase options outstanding............................... 3,195
Options and warrants to be issued in connection with the
Rubric acquisition........................................ 608
-----
3,803
=====
</TABLE>
3. PRO FORMA ADJUSTMENTS
1. To reflect the accrual of direct acquisition costs arising from the
Rubric acquisition, including legal, banking, and accounting fees and employee
relocation costs ($9.0 million).
2. To eliminate Rubric's outstanding common stock ($5.4 million) and
reflect the issuance of approximately 2,992,000 shares of Broadbase' common
stock and approximately 608,000 options and warrants to purchase Broadbase
common stock in connection with the acquisition ($362.9 million).
3. To eliminate Rubric's outstanding convertible preferred stock ($13.8
million).
4. To eliminate Rubric's amortization of deferred stock compensation
expense ($12,269,000 in total, including $566,000 in cost of revenue, $2,628,000
in research and development, $2,096,000 in sales and marketing, and $6,979,000
in general and administrative expenses).
5. To eliminate deferred financing charges ($289,000) recorded on Rubric's
financial statements in connection with the issuance of warrants to purchase
Rubric common stock.
6. To eliminate intercompany note payable ($1,000,000) to Broadbase
recorded on Rubric's financial statements.
7. To eliminate Rubric's accumulated deficit ($29.34 million).
8. To record the amortization of acquired intangible assets and goodwill
($72.9 million).
9. To eliminate deferred revenue recorded on Rubric's financial statements
($997,000).
10. To record acquired intangible assets and goodwill.
11. To eliminate deferred stock compensation recorded on Rubric's financial
statements.
12. To record the in-process research and development charge ($10.1
million).
F-27
<PAGE> 102
RUBRIC, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-29
Balance Sheets.............................................. F-30
Statements of Operations.................................... F-31
Statements of Stockholders' Equity (Deficit)................ F-32
Statements of Cash Flows.................................... F-33
Notes to Financial Statements............................... F-34
</TABLE>
F-28
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Rubric, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Rubric, Inc. at
December 31, 1998 and 1999 and the results of its operations and its cash flows
for the years then ended and for the period from inception, September 24, 1997,
through December 31, 1997 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
since inception and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Notes 1 and 11. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 12, 2000
F-29
<PAGE> 104
RUBRIC, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,597,417 $ 210,114
Accounts receivable....................................... 299,428 1,522,824
Deferred financing cost, net.............................. -- 289,038
Prepaid expenses and other current assets................. 344,735 338,494
------------ -----------
Total current assets.............................. 8,241,580 2,360,470
------------ -----------
Property and equipment, net................................. 597,520 1,437,249
Other assets................................................ 41,270 111,825
------------ -----------
Total assets...................................... $ 8,880,370 $ 3,909,544
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 246,643 $ 619,418
Accrued liabilities....................................... 181,560 1,382,917
Deferred revenue.......................................... 132,333 996,955
Current portion of long-term debt......................... 305,446 1,338,187
Current portion of capital lease obligations.............. -- 67,099
------------ -----------
Total current liabilities......................... 865,982 4,404,576
Long-term debt, net of current portion...................... 308,782 84,547
Capital lease obligations, net of current portion........... -- 129,852
------------ -----------
Total liabilities................................. 1,174,764 4,618,975
------------ -----------
Commitments (Note 6)
Stockholders' equity (deficit):
Convertible Preferred Stock: $0.001 par value; 9,300,000
shares authorized; 8,996,930 shares issued and
outstanding at December 31, 1999 and 1998 (liquidation
value $13,825,000 at December 31, 1999)................ 13,765,398 13,765,398
Common Stock: $0.001 par value; 25,000,000 shares
authorized; 5,409,657 and 4,897,595 shares issued and
outstanding at December 31, 1999 and 1998.............. 4,888 5,400
Additional paid-in capital................................ 2,194,142 30,449,863
Deferred stock-based compensation......................... (1,023,262) (15,668,948)
Accumulated deficit....................................... (7,235,560) (29,261,144)
------------ -----------
Total stockholders' equity (deficit).............. 7,705,606 (709,431)
------------ -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 8,880,370 $ 3,909,544
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 105
RUBRIC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24,
1997, THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
NET REVENUES:
License............................................ $ -- $ 267,700 $ 1,868,431
Maintenance and professional services............ -- 75,767 1,561,576
----------- ----------- ------------
Total net revenues....................... -- 343,467 3,430,007
----------- ----------- ------------
COST OF NET REVENUES:
License.......................................... -- 25,238 278,036
Maintenance and professional services............ -- 292,823 2,088,588
----------- ----------- ------------
Total cost of net revenues............... -- 318,061 2,366,624
----------- ----------- ------------
Gross profit....................................... -- 25,406 1,063,383
OPERATING EXPENSES:
Research and development......................... 992,412 2,266,544 5,939,978
Sales and marketing.............................. 112,420 2,820,292 7,677,126
General and administrative....................... 159,299 1,191,057 9,255,914
----------- ----------- ------------
Total operating expenses................. 1,264,131 6,277,893 22,873,018
----------- ----------- ------------
Loss from operations............................... (1,264,131) (6,252,487) (21,809,635)
Interest income.................................... 50,372 257,071 132,045
Interest expense................................... -- (20,650) (347,994)
Other expense, net................................. (5,735) -- --
----------- ----------- ------------
Net loss........................................... $(1,219,494) $(6,016,066) $(22,025,584)
=========== =========== ============
Net loss per share -- basic and diluted............ $ (0.83) $ (2.21) $ (5.75)
=========== =========== ============
Shares used in per share calculation -- basic and
diluted.......................................... 1,470,408 2,719,818 3,832,396
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 106
RUBRIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
THE PERIOD FROM INCEPTION, SEPTEMBER 24, 1997, THROUGH DECEMBER 31, 1997,
AND THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
----------------------- ------------------ PAID-IN STOCK-BASED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- ----------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception....... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of Series A
Convertible Preferred
Stock, net................. 5,025,000 5,097,349 -- -- -- -- --
Issuance of Common Stock... -- -- 4,784,470 4,774 472,663 -- --
Net loss................... -- -- -- -- -- -- (1,219,494)
--------- ----------- --------- ------ ----------- ------------ ------------
Balance at December 31,
1997..................... 5,025,000 5,097,349 4,784,470 4,774 472,663 -- (1,219,494)
Issuance of Series A
Convertible Preferred
Stock, net............... 200,000 198,565 -- -- -- -- --
Issuance of Series B
Convertible Preferred
Stock, net............... 3,771,930 8,469,484 -- -- -- -- --
Exercise of common stock
options.................. -- -- 113,125 114 11,200 -- --
Deferred stock-based
compensation............. -- -- -- -- 1,663,310 (1,663,310) --
Amortization of deferred
stock-based
compensation............. -- -- -- -- -- 640,048 --
Value of options granted to
non employees............ -- -- -- -- 46,969 -- --
Net loss................... -- -- -- -- -- -- (6,016,066)
--------- ----------- --------- ------ ----------- ------------ ------------
Balance at December 31,
1998..................... 8,996,930 13,765,398 4,897,595 4,888 2,194,142 (1,023,262) (7,235,560)
Exercise of common stock
options.................. -- -- 512,062 512 66,431 -- --
Deferred stock-based
compensation............. -- -- -- -- 26,914,620 (26,914,620) --
Amortization of deferred
stock-based
compensation............. -- -- -- -- -- 12,268,934 --
Value of options granted to
non employees............ -- -- -- -- 696,595 -- --
Warrant issued in
connection with lease
agreement................ -- -- -- -- 578,075 -- --
Net loss................... -- -- -- -- -- -- (22,025,584)
--------- ----------- --------- ------ ----------- ------------ ------------
Balance at December 31,
1999..................... 8,996,930 $13,765,398 5,409,657 $5,400 $30,449,863 $(15,668,948) $(29,261,144)
========= =========== ========= ====== =========== ============ ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at inception....... $ --
Issuance of Series A
Convertible Preferred
Stock, net................. 5,097,349
Issuance of Common Stock... 477,437
Net loss................... (1,219,494)
------------
Balance at December 31,
1997..................... 4,355,292
Issuance of Series A
Convertible Preferred
Stock, net............... 198,565
Issuance of Series B
Convertible Preferred
Stock, net............... 8,469,484
Exercise of common stock
options.................. 11,314
Deferred stock-based
compensation............. --
Amortization of deferred
stock-based
compensation............. 640,048
Value of options granted to
non employees............ 46,969
Net loss................... (6,016,066)
------------
Balance at December 31,
1998..................... 7,705,606
Exercise of common stock
options.................. 66,943
Deferred stock-based
compensation............. --
Amortization of deferred
stock-based
compensation............. 12,268,934
Value of options granted to
non employees............ 696,595
Warrant issued in
connection with lease
agreement................ 578,075
Net loss................... (22,025,584)
------------
Balance at December 31,
1999..................... $ (709,431)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 107
RUBRIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24,
1997, THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(1,219,494) $(6,016,066) $(22,025,584)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of property and equipment.... 5,735 -- --
Depreciation and amortization................. 12,631 135,934 352,014
Amortization of deferred stock-based
compensation expense........................ -- 640,048 12,268,934
Value of options granted to non employees..... -- 46,969 696,595
Amortization of warrant issued in connection
with lease agreement........................ -- -- 289,037
Changes in current assets and liabilities:
Accounts receivable......................... -- (299,428) (1,223,396)
Prepaid expenses and other current assets... (13,285) (331,450) 6,241
Accounts payable............................ -- 246,643 372,775
Accrued liabilities......................... 84,795 96,765 1,201,357
Deferred revenue............................ -- 132,333 864,622
Changes in other long-term assets........... (35,391) (5,879) (70,555)
----------- ----------- ------------
Net cash used in operating activities.... (1,165,009) (5,354,131) (7,267,960)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (234,507) (517,313) (977,176)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A Convertible
Preferred Stock, net of issuance costs........ 5,097,349 198,565 --
Proceeds from issuance of Series B Convertible
Preferred Stock, net of issuance costs........ -- 8,469,484 --
Proceeds from issuance of Common Stock........... 477,437 11,314 66,943
Principal payments on capital lease obligation... -- -- (17,616)
Proceeds from debt............................... -- 614,228 1,113,950
Principal payments on debt....................... -- -- (305,444)
----------- ----------- ------------
Net cash provided by financing
activities............................. 5,574,786 9,293,591 857,833
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 4,175,270 3,422,147 (7,387,303)
Cash and cash equivalents at beginning of period... -- 4,175,270 7,597,417
----------- ----------- ------------
Cash and cash equivalents at end of period......... $ 4,175,270 $ 7,597,417 $ 210,114
=========== =========== ============
NON CASH ACTIVITIES:
Equipment acquired under capital lease........... $ -- $ -- $ 214,567
=========== =========== ============
Warrants issued in connection with lease
agreement..................................... $ -- $ -- $ 578,075
=========== =========== ============
Deferred stock-based compensation................ $ -- $ 1,663,310 $ 26,914,620
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 108
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Rubric, Inc. (the "Company" or "Rubric"), is a provider of Web based
eMarketing Automation ("eMA") software applications for Fortune 500 and
e-commerce companies. Rubric eMA enables the implementation of a closed loop
system to increase revenue, reduce marketing costs, increase marketing
efficiency, and measure marketing effectiveness. The Company was incorporated in
Delaware on September 24, 1997.
BASIS OF PRESENTATION
As of December 31, 1999, the Company has an accumulated deficit of
$29,261,144 and negative working capital. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management expects
to merge the Company (see Note 11) or to obtain additional working capital
financing and to achieve profitable operations from the sale of its products.
These financial statements have been prepared assuming that the Company will
continue as a going concern and do not include any adjustments that might result
from the outcome of this uncertainty.
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 reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted the provisions the AcSEC
Statement of Position 97-2 ("SOP 97-2"), Software Revenue Recognition, as
amended by AcSEC Statement of Position 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, and AcSEC Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions. SOP
97-2 proscribes the accounting for sales of the Company's software licenses,
annual software maintenance and technical support, and certain professional
services. Under SOP 97-2, license revenue is recognized upon delivery of the
software provided that (i) a license agreement has been executed with the
customer, (ii) the Company has no significant obligations remaining to the
customer, (iii) the fees for products are fixed and determinable, and (iv)
collection is considered probable. Maintenance revenues are recognized ratably
over the maintenance period, which is generally one year. Fees for professional
services are recognized as services are performed.
For sales contracts where the Company includes multiple elements (e.g.,
licenses, professional services including customer training and annual
maintenance), revenue from product licenses are recognized when delivery has
occurred, collection of receivable is probable, the fee is fixed and
determinable and vendor specific objective evidence exits to allocate the total
fee to all delivered and undelivered elements of the arrangement.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 1999 and 1998, virtually all of the Company's cash
was held in an interest bearing demand deposit money market
F-34
<PAGE> 109
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
account. The Company deposits cash and cash equivalents with high credit quality
financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company's accounts receivable are derived from the sale of its
software products and related services to customers in the United States. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1998 1999
---- ----
<S> <C> <C>
Company A................................................... 48% --
Company B................................................... 45% --
Company C................................................... -- 26%
</TABLE>
At December 31, 1998, company B accounted for 86% of total accounts
receivable. At December 31, 1999, company C, D and E accounted for 28%, 23% and
12% of total accounts receivable, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, cash equivalents, trade accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar terms,
the carrying value of its long-term debt approximates fair value.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established, material
software development costs are capitalized. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as coding and testing in accordance with detailed
program designs, and the general availability of such software, has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the related assets of
three to five years. Leasehold improvements and leased assets are amortized on a
straight line basis over the lesser of their estimated useful life or the lease
term. Gains and losses from the disposal of property and equipment are taken
into income in the year of disposition. Repairs and maintenance costs are
expensed as incurred.
F-35
<PAGE> 110
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statements and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the period from inception, September 24, 1997, through December 31,
1997 and the years ended December 31, 1998 and 1999 was $0, $1,106,301, and
$1,029,349, respectively.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving effect
to all dilutive potential common stock, including options, non vested common
stock and preferred shares. Options, non vested common stock and preferred
shares were not included in the computation of diluted net loss per share in the
periods reported because the effect would be antidilutive.
Antidilutive securities which are excluded in the diluted net loss per
share calculation for the periods:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24,
1997, THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1997 1998 1999
------------- ---------- ----------
<S> <C> <C> <C>
Non vested common stock........................... 3,314,063 1,726,074 897,559
Common stock options.............................. 617,094 1,664,501 2,924,881
Convertible Preferred Shares...................... 5,025,000 8,996,930 8,996,930
Common stock warrants............................. -- -- 43,860
--------- ---------- ----------
8,956,157 12,387,505 12,863,230
========= ========== ==========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
F-36
<PAGE> 111
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company has no comprehensive income
components other than its net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and hedging activities. SFAS No. 133, as amended, is effective for
all fiscal quarters beginning after June 15, 2000. As Rubric does not currently
engage in any such activity, the Company does not expect SFAS No. 133 to have
any effect on its financial condition or results of operations.
NOTE 2 -- SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24,
1997, THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1997 1998 1999
------------- --------- ---------
<S> <C> <C> <C>
Cash paid for income taxes............................ $ -- $ 800 $ 1,600
======= ======= =======
Cash paid for interest................................ $ -- $20,650 $58,957
======= ======= =======
</TABLE>
NOTE 3 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software........................... $ 569,550 $1,583,232
Furniture and fixtures.................................. 136,535 314,598
Leasehold improvements.................................. 40,000 40,000
--------- ----------
746,085 1,937,830
Less: Accumulated depreciation and amortization......... (148,565) (500,581)
--------- ----------
$ 597,520 $1,437,249
========= ==========
</TABLE>
Property and equipment includes $214,567 of computer equipment and
internal-use software under capital leases at December 31, 1999. Accumulated
amortization of assets under capital leases totaled $36,102 at December 31,
1999. Depreciation and amortization expense for the period from
F-37
<PAGE> 112
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
inception, September 24, 1997, through December 31, 1997 and for the years ended
December 31, 1998 and 1999 was $12,631, $135,934 and $352,014, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
ACCRUED LIABILITIES:
Accrued operating expenses................................. $116,373 $ 561,085
Payroll and related expenses............................. 48,427 648,391
Sales tax payable........................................ 11,550 50,149
Accrued royalties........................................ 5,210 123,292
-------- ----------
$181,560 $1,382,917
======== ==========
</TABLE>
NOTE 4 -- INCOME TAXES:
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards....................... $ 2,434,437 $ 6,240,141
Accruals and other................................... 112,559 121,959
Credits.............................................. 264,072 502,769
----------- -----------
2,811,068 6,864,869
Less: Valuation allowance.............................. (2,811,068) (6,864,869)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded.
Rubric's expected U.S. Federal statutory income tax rate differs from the
effective tax rate as follows:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24, YEAR ENDED
1997, THROUGH DECEMBER 31,
DECEMBER 31, ----------------
1997 1998 1999
------------- ------ ------
<S> <C> <C> <C>
"Expected" income benefit....................... (34.0)% (35.0)% (35.0)%
Net operating loss not benefited................ 34.0% 31.2% 15.2%
Non-deductible items............................ 0.0% 3.8% 19.8%
----- ------ ------
0.0% 0.0% 0.0%
===== ====== ======
</TABLE>
At December 31, 1999, the Company had approximately $15,770,000 of federal
and $15,272,000 of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts beginning in 2005. At
December 31, 1999, Rubric also had available research and development credit
carryforwards and other credit carry forwards of approximately $333,000 and
$170,000 to offset future federal and state taxable income, respectively. Under
the Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the
F-38
<PAGE> 113
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50%, as defined, over a three year
period.
NOTE 5 -- BORROWINGS:
Borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- -----------
<S> <C> <C>
Term loan, 7.75%......................................... $ 614,228 $ 422,734
Broadbase loan, 8.50%.................................... -- 1,000,000
Capital lease obligation, 7.50%.......................... -- 196,951
--------- -----------
614,228 1,619,685
Less: Current portion.................................... (305,446) (1,405,286)
--------- -----------
$ 308,782 $ 214,399
========= ===========
</TABLE>
TERM LOAN
At December 31, 1998 and 1999, the Company had $614,228 and $422,733,
respectively, outstanding and due under a term loan with Silicon Valley Bank.
The term loan was used primarily to finance the Company's purchases of equipment
and furniture during 1997 and early 1998, and all of the Company's assets serve
as collateral for the loan. The loan requires monthly interest and principal
payments and carries an interest rate of 7.75% per annum. Remaining monthly
principal payments due in 2000 and 2001 total $338,187 and $84,547,
respectively. The Company is not required to maintain any financial covenants
pursuant to this loan. In the event of default under the loan, the lender has
the right to accelerate and declare all amounts immediately due and payable and
to increase the interest rate by two percent per annum. Under this loan
agreement, the Company requires the lender's consent to (i) enter into any
transaction outside the ordinary course of business, (ii) sell or transfer any
collateral except in the ordinary course of business, (iii) pay or declare
dividends on the Company's stock, or (iv) redeem, retire, purchase or otherwise
acquire, directly or indirectly, in any one fiscal year greater than 5% of the
Company's outstanding stock.
BROADBASE LOAN
In connection with the pending acquisition of Rubric by Broadbase Software,
Inc. ("Broadbase") (see Note 11, "Merger"), the Company had as of December 31,
1999 a $1,000,000 note outstanding and due to Broadbase. The purpose of this
note was to satisfy Rubric's working capital requirements until closing of the
merger which is expected no later than February 15, 2000. The outstanding
principal balance of this note bears interest (computed on the basis of a
365-day year, actual days elapsed) at a fixed rate per annum determined by
Broadbase as the "Prime Rate" reported in the Wall Street Journal in effect on
the first day of the note, which was December 9, 1999. The outstanding balance
is due on June 9, 2000. However, in the event the merger between Rubric and
Broadbase is not consummated, then the note is immediately due.
CAPITAL LEASE OBLIGATION
At December 31, 1999, the Company had $196,951 outstanding and due under an
equipment lease financing line with Comdisco, Inc. The equipment lease line
provides for borrowings of up to $2,000,000; equipment purchased under the line
serves as collateral. The financing line expires in July 2000 and carries
interest at a rate of 7.5% per annum. The Company is not required to maintain
any financial covenants pursuant to this loan. In the event of default under the
lease line, the lessor has
F-39
<PAGE> 114
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the right to accelerate and declare all rents immediately due and payable.
Minimum payments due under the lease line are included in Note 6, "Commitments."
NOTE 6 -- COMMITMENTS:
PURCHASE COMMITMENTS
At December 31, 1999, the Company had approximately $285,000 in
noncancelable purchase commitments with suppliers.
LEASES
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through November 2000. Rent
expense for the period from inception, September 24, 1997, through December 31,
1997 and the years ended December 31, 1998 and 1999, was $37,404, $381,075, and
$608,369, respectively. The terms of the facility lease provide for rental
payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid.
The minimum lease payments under noncancelable operating and capital
leases, required under these leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
YEARS ENDED DECEMBER 31,
2000........................................................ $ 79,587 $818,625
2001...................................................... 79,587 --
2002...................................................... 59,354 --
-------- --------
Total minimum lease payments...................... 218,528 $818,625
========
Less: Amount representing interest.......................... (21,577)
--------
Present value of capital lease obligations.................. 196,951
Less: Current portion....................................... (67,099)
--------
Long-term portion of capital lease obligations.............. $129,852
--------
</TABLE>
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A.................................. 5,300,000 5,225,000 $ 5,225,000 $ 5,295,914
B.................................. 4,000,000 3,771,930 8,600,000 8,469,484
--------- --------- ----------- -----------
9,300,000 8,996,930 $13,825,000 $13,765,398
========= ========= =========== ===========
</TABLE>
The holders of Preferred Stock have various rights and preferences as
follows:
VOTING
Each share of Series A and B Convertible Preferred Stock has voting rights
equal to an equivalent number of shares of Common Stock into which each share is
convertible on the record date of the vote and may vote together as one class
with the Common Stock.
F-40
<PAGE> 115
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series A Preferred Stockholders, voting as a separate class, have the right
to elect two members of the Company's Board of Directors; Series B Preferred
Stockholders, voting as a separate class, have the right to elect one member of
the Company's Board of Directors; and Common Stockholders (excluding persons who
hold Common Stock pursuant the conversion of Preferred Stock), voting as a
separate class, have the right to elect two members of the Board of Director,
one of whom must be the Company's President and/or Chief Executive Officer and
the other of whom must be an independent/outside member. The final director is
nominated by the other five directors and elected by a vote amongst all
stockholders.
DIVIDENDS
Holders of Series A and B Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $0.08 and $0.18 per
share, respectively, when and if declared by the Board of Directors prior and in
preference to payment of any dividend (other than dividends payable solely in
Common Stock of the Company) with respect to Common Stock. No dividends on
Convertible Preferred Stock or Common Stock have been declared by the Board from
inception through December 31, 1999.
LIQUIDATION
In the event of any liquidation, dissolution, sale, merger, or winding up
of the Company, either voluntary or involuntary, the holders of Series A and B
Convertible Preferred Stock are entitled to receive an amount of $1.00 and $2.28
per share, respectively, plus any declared but unpaid dividends prior to and in
preference to any distribution to the holders of Common Stock. Should the
Company's legally available assets be insufficient to satisfy the liquidation
preferences, the funds will be distributed ratably among the holders of Series A
and B Convertible Preferred Stock. Any assets and funds remaining after
satisfaction of the liquidation preferences will be distributed ratably among
the holders of Common Stock.
CONVERSION
Each share of Series A and B Convertible Preferred Stock is convertible, at
the option of the holder, according to a conversion ratio, subject to adjustment
for dilution. Each share of Series A and B Convertible Preferred Stock
automatically converts into the number of shares of Common Stock into which such
shares are convertible at the then effective conversion ratio upon: (1) the
closing of a public offering of Common Stock at a per share price of at least
$5.39 per share with gross proceeds of at least $15,000,000 or (2) the consent
of the holders of at least 75% of Convertible Preferred Stock.
The conversion ratio as of December 31, 1999 was 1:1.
The Company has reserved 5,300,000 and 4,000,000 shares of Common Stock for
the conversion of Series A and B Convertible Preferred Stock, respectively.
NOTE 8 -- COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 25,000,000 shares of $0.001 par value Common Stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a four year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1999, there were 897,559 shares subject to repurchase.
F-41
<PAGE> 116
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS FOR COMMON STOCK
In connection with an equipment lease line, the Company issued warrants to
purchase 43,860 shares of Common Stock for $2.28 per share in July 1999. Such
warrants are outstanding at December 31, 1999 and expire on July 9, 2006. Using
the Black-Scholes pricing model, the Company determined that the fair value of
the warrants were $578,075 at the date of grant. The deferred financing cost of
$578,075 is being amortized over the term of the lease line.
NOTE 9 -- STOCK OPTION PLANS:
In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees. Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved 3,636,250
shares of Common Stock for issuance under the Plan. In addition to options
granted under the Plan, the Company granted an option during 1999 to a key
employee to purchase 360,000 shares of Common stock outside of the Plan; this
grant was approved by the Company's shareholders and board of directors (This
option is not included in the option tables presented below).
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% or greater shareholder
shall not be less than 110% of the estimated fair value of the shares on the
date of grant, respectively. Options are exercisable only upon vesting. To date,
options granted generally vest over four years.
During 1998 and 1999, the Company recorded $1,663,310 and $26,914,620,
respectively, of deferred stock compensation for the excess of the deemed fair
market value over the exercise price at the date of grant related to certain
options granted to employees and directors in those years. Such compensation
expense is being recognized over the period in which the underlying options
vest.
During 1998 and 1999 the Company recorded compensation expense of $46,969
and $696,595, respectively, for fair value of options to non-employees
calculated using the Black-Scholes pricing model.
<TABLE>
<CAPTION>
1997 1998 1999
------------------ -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January
1,............................. -- $ -- 617,094 $0.10 1,664,501 $0.14
Options granted.................. 617,094 $0.10 1,288,407 $0.15 2,145,708 $0.30
Options exercised................ -- $ -- (113,125) $0.10 (512,062) $0.13
Options canceled................. -- $ -- (127,875) $0.10 (733,266) $0.17
------- --------- ---------
Options outstanding at
December 31,................... 617,094 $0.10 1,664,501 $0.14 2,564,881 $0.27
------- --------- ---------
Options exercisable at
December 31,................... -- $ -- 84,914 $0.10 259,938 $0.17
======= ========= =========
</TABLE>
F-42
<PAGE> 117
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
DECEMBER 31, 1999
------------------------
WEIGHTED OPTIONS EXERCISABLE AT
AVERAGE DECEMBER 31, 1999
REMAINING -----------------------
EXERCISE NUMBER CONTRACTUAL NUMBER EXERCISE
PRICE OF SHARES LIFE OUTSTANDING PRICE
- ------------------------------------ --------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.10............................... 408,963 8.7 years 170,450 $0.10
$0.30............................... 2,155,918 9.5 years 89,488 $0.30
--------- -------
2,564,881 259,938
========= =======
</TABLE>
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
SEPTEMBER 24,
1997, THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported............................ $(1,219,494) $(6,016,066) $(22,025,584)
=========== =========== ============
Pro forma............................ $(1,219,580) $(6,041,249) $(22,044,822)
=========== =========== ============
Net loss per share:
As reported.......................... $ (0.83) $ (2.21) $ (5.75)
=========== =========== ============
Pro forma............................ $ (0.83) $ (2.22) $ (5.75)
=========== =========== ============
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions for
all periods presented: a weighted average expected option term of 10 years; a
risk free interest rate of 6%; and no expected dividends. The weighted average
fair value of options granted during the period from inception, September 24,
1997, through December 31, 1997, and the years ended December 31, 1998 and 1999
was $0.83, $1.10 and $11.47, respectively.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected volatility of the stock price.
Because the Company's stock based awards have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the opinion
of management, this model does not necessarily provide a reliable single measure
of the fair value of its stock-based awards.
NOTE 10 -- EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. As of December 31, 1999, the Company has made no contributions to the
plan since its inception.
F-43
<PAGE> 118
RUBRIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- MERGER:
On December 9, 1999, the Company entered into a definitive agreement to be
acquired by Broadbase Software, Inc. Under the terms of the definitive
agreement, Broadbase will issue approximately 2,992,000 shares of its common
stock to the stockholders of Rubric, and will assume options and warrants to
purchase Rubric Capital Stock and convert them into options and warrants to
purchase approximately 608,000 shares of Broadbase common stock, collectively
representing approximately 14.5% of the newly combined company formed by the
merger on a fully diluted basis. The transaction will be accounted for by
Broadbase as a purchase. The acquisition is subject to customary closing
conditions, including the approval of Rubric's stockholders, and is expected to
close in February 2000.
F-44
<PAGE> 119
UNDERWRITING
Broadbase, the selling stockholders and the underwriters for the offering
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Deutsche Bank Securities Inc., Dain Rauscher
Incorporated and Thomas Weisel Partners LLC are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ............................... 612,500
Deutsche Bank Securities Inc. ...................... 612,500
Dain Rauscher Incorporated.......................... 612,500
Thomas Weisel Partners LLC.......................... 612,500
FleetBoston Robertson Stephens Inc.................. 75,000
Chase Securities Inc. .............................. 75,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................ 75,000
Prudential Securities Incorporated.................. 75,000
The Seidler Companies Incorporated.................. 50,000
Sutro & Co. Incorporated............................ 50,000
Tucker Anthony Cleary Gull.......................... 50,000
U.S. Bancorp Piper Jaffray Inc. .................... 50,000
SoundView Technology Group, Inc. ................... 50,000
---------
Total..................................... 3,000,000
=========
</TABLE>
----------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 450,000
shares from Broadbase to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Broadbase and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the underwriter's option to purchase 450,000 additional shares.
<TABLE>
<CAPTION>
Paid by Broadbase No Exercise Full Exercise
----------------- ----------- -------------
<S> <C> <C>
Per Share............................................. $ 4.75 $ 4.75
Total................................................. $7,125,000 $9,262,500
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling Stockholders No Exercise Full Exercise
-------------------------------- ----------- -------------
<S> <C> <C>
Per Share............................................. $ 4.75 $ 4.75
Total................................................. $7,125,000 $7,125,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $2.85 per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a
U-1
<PAGE> 120
discount of up to $0.10 per share from the initial price to public. If all the
shares are not sold at the initial price to public, the representatives may
change the offering price and the other selling terms.
Broadbase, its executive officers and directors and the selling
stockholders have agreed not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing employee benefit
plans. In addition, certain of Broadbase's significant stockholders have
executed agreements with the underwriters that they will not, without the prior
written consent of Goldman, Sachs & Co., transfer or dispose of, directly or
indirectly, any of their common stock for a period of 45 days after the date of
this prospectus with respect to all of the shares held by these significant
stockholders and 90 days after the date of this prospectus with respect to 50%
of the shares held by these stockholders. In connection with Broadbase's initial
public offering, substantially all of its securityholders not participating in
this offering are restricted from transferring or disposing, directly or
indirectly, of any portion of the common stock obtained by these persons prior
to Broadbase's initial public offering or common stock issuable upon exercise of
options held by these persons, until March 20, 2000, without the prior written
consent of Deutsche Bank Securities Inc. See "Shares Eligible for Future Sale"
for a discussion of certain transfer restrictions.
In December 1998, DRW Investors LLC, an affiliate of Dain Rauscher
Incorporated, purchased debentures in the principal amount of $250,000, which
automatically converted into 34,482 shares of Series D preferred stock upon
completion of Broadbase's initial public offering at a conversion price of $7.25
per share. DRW Investors purchased these debentures on the same terms as the
other investors in this private placement.
In June 1999, Broadbase sold shares of its Series E preferred stock in a
private placement at a price of $9.1325 per share. In this private placement, BT
Investment Partners, Inc., an affiliate of Deutsche Bank Securities Inc.,
purchased 109,263 shares of Series E preferred stock for an aggregate purchase
price of $997,844. BT Investment Partners, Inc. purchased the Series E preferred
stock on the same terms as the other investors in the private placement. In
addition, three individuals associated with Thomas Weisel Partners LLC purchased
an aggregate of 6,570 shares of Series E preferred stock in the private
placement. Each of the shares of Series E preferred stock was automatically
converted into one share of common stock upon the consummation of Broadbase's
initial public offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 115 filed
public offerings of equity securities, of which 82 have been completed, and has
acted as a syndicate member in an additional 56 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
Broadbase or any of Broadbase's officers, directors or other controlling
persons, except with respect to its contractual relationship with Broadbase
pursuant to the underwriting agreement entered into in connection with this
offering.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
U-2
<PAGE> 121
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain underwriters and
selling group members, if any, that are market makers ("passive market makers")
in the common stock may make bids for or purchases of common stock in the Nasdaq
National Market until a stabilizing bid has been made. Rule 103 generally
provides that: (1) a passive market maker's net daily purchases of the common
stock may not exceed 30% of its average daily trading volume in such securities
for the two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the registration
statement of which this prospectus forms a part; (2) a passive market maker may
not effect transactions or display bids for common stock at a price that exceeds
the highest independent bid for the common stock by persons who are not passive
market makers; and (3) bids made by passive market makers must be identified as
such.
Broadbase estimates that the total expenses that it will incur in the
offering, excluding underwriting discounts and commissions, will be
approximately $850,000.
Broadbase and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Deutsche Bank Securities Inc. has provided financial advisory services to
Broadbase in the past, and acted as financial advisor to Broadbase in connection
with its proposed acquisition of Rubric, for which they have received, and
expect to receive, customary compensation.
U-3
<PAGE> 122
[Description of Graphics on Inside Front Cover]
At the center of this graphic is a circle labeled "Web Sites" which
contains the image of a computer screen. Arranged concentrically around this
circle is a series of six additional circles. The first circle, directly above
the "Web Sites" graphic, is labeled "E-Mail" and contains the image of an
envelope and a computer that is shaped in the form of a mailbox. Clockwise from
the "E-Mail" graphic, the second circle is labeled "Online Service" and
contains the image of a mouse sitting on a mouse pad. The third circle is
labeled "Direct Sales" and contains the image of a man in a suit holding a
briefcase. The fourth circle is labeled "Direct Mail" and contains the image of
three envelopes. The fifth circle is labeled "Call Centers" and contains the
image of an individual wearing headphones and facing a computer screen. The
sixth circle is labeled "Store Fronts" and contains the image of a store front.
Above this graphic, the text reads "You can touch your customers in many
ways..." Below this graphic the text reads "...Are you making the most of it?"
At the bottom right corner of the graphic is the Broadbase logo. Directly below
this graphic appears the Table of Contents.
<PAGE> 123
[Description of Graphics on Gatefold]
This graphic is entitled, "Analytic Applications and E-Marketing Automation for
E-Commerce." In the center of the page appears the Broadbase logo. Below the
logo and to the right is a column entitled "Personalize," followed by five
bullet points. The first point reads, "All customer interactions." The second
point reads, "Recommend cross-sells and up-sells." The third point reads,
"Adjust web content & offerings." The fourth point reads, "Differentiate
offerings." The fifth point reads, "Target profitable customers." To the right
of the circle, a double-headed arrow moves straight to the right of the circle
to a graphic of a cloud labeled, from top-to-bottom, "Internet," "Intranets" and
"Extranets." Forming a semi-circle outside the image of the cloud is a series of
circular graphics entitled "Business Areas" and labeled as follows: "Sales,"
"E-commerce," "Marketing" and "Customer Service." Above the cloud and the
circular graphics is a column entitled "Analyze," followed by three bullet
points. The first point reads, "With logic and best practices." The second point
reads, "For users in specific business areas." The third point reads, "Guided
decision-making & customer analysis." From the graphic of the cloud, an arrow
moves clockwise through the "Personalize" column to the lower left of the
Broadbase logo through a column titled "InterAct," followed by four bullet
points. The first bullet point reads, "With your customers for continuous
relationship E-marketing." The next bullet point reads, "Workflow powered
campaign planning and execution." The next bullet point reads "Multi-Channel
interaction via email, web, direct mail, phone and fax." The last bullet point
reads "Closed loop real time campaign measurement." The arrow travels up to a
series of circular graphics labeled "Customer Touch Points." In the center of
this series of graphics is a circle labeled "Web Sites" which contains the image
of a computer screen. Arranged concentrically around this circle is a series of
six additional circles. The first circle, directly above the "Web Sites"
graphic, is labeled "E-Mail" and contains the image of an envelope and a
computer that is shaped in the form of a mailbox. Clockwise from the "E-Mail"
graphic, the second circle is labeled "Online Service" and contains the image of
a mouse sitting on a mouse pad. The third circle is labeled "Direct Sales" and
contains the image of a man in a suit holding a briefcase. The fourth circle is
labeled "Direct Mail" and contains the image of three envelopes. The fifth
circle is labeled "Call Centers" and contains the image of an individual wearing
headphones and facing a computer screen. The sixth circle is labeled "Store
Fronts" and contains the image of a store front. Above the "Customer Touch
Points" graphic is a column entitled "Integrate," followed by three bullet
points. The first point reads, "Comprehensive customer data." The second point
reads "Historic and real time data." The third point reads, "From multiple
customer touch points." A double-headed arrow moves straight from the "Customer
Touch Points" graphic to the Broadbase logo. A second arrow moves clockwise
through the "Integrate" column from the "Customer Touch Points" graphic to the
space above the Broadbase logo. A third arrow moves clockwise from the head of
the second arrow through the "Analyze" column to the graphic of the cloud. On
the left edge of the gatefold, a rectangle runs from the top to the bottom of
the page with the heading, "Broadbase Customers," and a column of text reading
from top-to-bottom "Allied Riser Communications," "Anderson Windows,"
"Ashford.com," Aon Innovative Communications," "Automatic Data Processing,"
"Baxter IV Systems," "Bell & Howell," "BizByer.com," "Boeing Commercial
Airplanes Group," "Bonneville Power," "Boston Edison," "Canon Computer,"
"CHEVRON," "CMP Media," "Done.com," "Driveway.com," "DSC Logistics," "Eastman
Kodak," "Enbridge Consumer First," "Fidelity Investments," "HealthSystem
Minnesota," "Hewlett-Packard," "Honda," "Idaho Power," "InsWeb," "Inprise,"
"Kana Communications." To the right of the bottom of this rectangle is an
asterisk followed by the words "These customers represent all end user customers
to whom we had licensed products and sold services totalling at least $100,000
as of December 31, 1999." On the right edge of the gatefold, a rectangle runs
from the top to the bottom of the page with the heading "Broadbase Customers"
and a column which reads: "Los Alamos Natural Labs," "Mercata," "Mercury
Intracore," "MNX.com," "Natural Techteam", "New Century Energy," "NTT," "Omaha
Public Power," "Onvia.com," "Pets.com," "Plymouth Rock Assurance," "Polaris
Service," "Putnam Investments," "Rational Software," "Rockwell Automation,"
"Seattle City Power," "Shikishima Baking Company," "Telia AB," "Tokai," "The
Sharper Image," "United Airlines," "Vantive," "Xerox."
[Description of Graphics on Page 38]
Graphic depicts a three dimensional rectangle divided vertically from side to
side into four segments. The segments are labelled, from left to right,
"E-Commerce Systems," "Customer Relationship Management Systems," "Enterprise
Resource Planning Systems" and "Demographic Data." To the left of this
vertically-segmented rectangle are the words "Sources of Data." Extending across
the top of this rectangle is another three-dimensional rectangle, which is
divided horizontally from top to bottom into three segments. These segments are
labelled, from top to bottom, "Information Delivery Server," "Application Server
& Analytic Engine" and "Data Source Adapters." To the left of this
horizontally-segmented rectangle are the words "EPM/Foundation." On top of this
horizontally-segmented rectangle is a row of six cylinders arranged in a row.
These cylinders are labelled, from left to right, "Customer Service," "Sales,"
"E-Marketing," "E-Commerce," "E-Personalize" and "E-Procurement (anticipated).
To the left of the cylinder labelled "Customer Service" are the words "Broadbase
EPM Applications."
<PAGE> 124
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 5
Special Note Regarding
Forward-Looking Statements and
Industry Data...................... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Price Range of Common Stock.......... 18
Capitalization....................... 19
Dilution............................. 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................. 32
Management........................... 50
Related Party Transactions........... 61
Principal and Selling Stockholders... 63
Description of Capital Stock......... 66
Shares Eligible for Future Sale...... 69
Legal Matters........................ 71
Experts.............................. 71
Where You Can Find Additional
Information........................ 72
Index to the Financial Statements.... F-1
Underwriting......................... U-1
</TABLE>
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3,000,000 Shares
BROADBASE SOFTWARE, INC.
Common Stock
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[BROADBASE LOGO]
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GOLDMAN, SACHS & CO.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
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