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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-26789
BROADBASE SOFTWARE, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0417081
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
172 CONSTITUTION DRIVE (650) 614-8300
MENLO PARK, CA 94025 (THE REGISTRANT'S TELEPHONE NUMBER)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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AS OF
FEBRUARY 29, 2000
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Aggregate market value of the voting and nonvoting common
equity held by non-affiliates of the Registrant, based
on the closing sale price of such stock*............... $2,439,591,493
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Number of shares of common stock outstanding............. 23,055,469
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* Shares of Common Stock held by each executive, director and 5% or greater
shareholder have been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference in Part III.
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BROADBASE SOFTWARE, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 54
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 55
Signatures.................................................. 58
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We make many statements in this report, such as statements regarding our
plans, objectives, expectations and intentions and others, that are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. We may identify these statements by the
use of words such as "believe," "expect," "anticipate," "intend," "plan' and
similar expressions. These forward-looking statements involve several 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 report. These
forward-looking statements speak only as of the date of this report, 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 report.
PART 1
ITEM 1. BUSINESS
We develop and market 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.
RECENT EVENTS
Secondary Offering. On February 18, 2000, we completed a secondary public
offering of 3,450,000 shares of our common stock, of which 1,950,000 shares were
sold by us and 1,500,000 were sold by our stockholders. This public offering
resulted in net proceeds to us of approximately $175.1 million.
Acquisition of Rubric, Inc. On February 1, 2000, we acquired privately-held
Rubric, a leading provider of e-marketing automation software, for approximately
3.6 million shares of our common stock, which includes approximately $600,000
shares issuable upon the exercise of outstanding Rubric options and warrants.
Rubric's product, eMA, automates the planning, execution and measurement of
marketing campaigns across the Internet and traditional channels. Rubric had
total revenue of approximately $3.4 million in 1999, and at December 31, 1999,
Rubric had an accumulated deficit of approximately $29.3 million.
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The acquisition will be accounted for as a purchase, and 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. We expect to charge the remainder of the purchase price,
approximately $10.1 million, to operations in the first quarter of 2000 as
acquired in-process research and development. Also, we expect to incur
merger-related costs of approximately $4.0 million, of which $1.0 million were
included in our 1999 results of operations.
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 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.
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 marketing campaigns by generating
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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 "Additional Factors That Might Affect Future Results -- 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:
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APPLICATION DESCRIPTION
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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)
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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
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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
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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
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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)
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E-Procurement - Analyzes buying behavior throughout the company to help
(anticipated to be released it negotiate better volume discounts
in 2000)
- Quantifies external interactions with existing suppliers
including price/performance scoring
- Analyzes supplier performance
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eMA - Streamlines the planning of marketing campaigns
- Automates execution of multi-channel campaigns
- Measures campaign effectiveness
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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 "Additional Factors That Might Affect Future Results -- 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
to postpone introduction of new applications or versions, or not to introduce
them at all.
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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,
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
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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
- 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.
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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 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.
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INTERNET AND
COMMUNICATION SERVICES MANUFACTURING ENERGY INDUSTRIES
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Allied Riser Communications Anderson Windows Bonneville Power
Ashford.com Baxter IV Systems Boston Edison
BizBuyer.com Bell & Howell Chevron
CMP Media Boeing Commercial Airplanes Enbridge Consumer First
Done.com Group Idaho Power
Driveway.com Canon Computer Los Alamos National Labs
InsWeb Eastman Kodak New Century Energy
Mercata Honda Omaha Public Power
MVX.com Rockwell Automation Seattle City Power
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
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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.
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TECHNOLOGY INTERNET
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BEA Systems DiTech.com
Cisco Systems Internet Appliance Network
Citrix LoanCity.com
Hewlett-Packard MSHOW.com
Merant Outpost.com
N.E.T. PeopleFirst.com
Rainmaker Systems
Sierra Atlantic
Sybase
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Hewlett-Packard represented 26% of Rubric's net revenue in 1999.
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.
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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.
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.
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<PAGE> 12
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 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.
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<PAGE> 13
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.
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 "Additional Factors That Might Affect Future Results -- 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.
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<PAGE> 14
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
"Additional Factors That Might Affect Future Results -- 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 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 "Additional
Factors That Might Affect Future Results -- 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.
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<PAGE> 15
EMPLOYEES
As of December 31, 1999, we had a total of 131 full-time employees,
including 50 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.
ITEM 2. PROPERTIES
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. We believe that we have adequate space for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are not aware of any material legal proceedings as of December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1999.
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PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
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
</TABLE>
HOLDERS
As of February 29, 2000, there were approximately 253 holders of record of
our common stock.
DIVIDENDS
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.
RECENT SALES OF UNREGISTERED SECURITIES
We did not issue any unregistered securities during the quarter ended
December 31, 1999. Previous issuances were reported in our quarterly report on
Form 10-Q for the quarter ended September 30, 1999.
USE OF PROCEEDS
In connection with our initial public offering, the Securities and Exchange
Commission declared effective our registration statement on Form S-1 (File No.
333-82251) on September 21, 1999. We registered a total of 4,600,000 shares of
our common stock, with an aggregate registered offering price of $64.4 million.
All of the shares were registered for offer and sale by Broadbase. The offering
commenced on September 21, 1999 and all 4,600,000 shares of common stock being
offered by us were sold for the aggregate registered offering price through a
syndicate of underwriters managed by Deutsche Bank Securities Inc., Dain
Rauscher Incorporated, Thomas Weisel Partners LLC and E*OFFERING Corp. The sale
of 4,000,000 of these shares closed on September 27, 1999 and the sale of the
remaining 600,000 of these shares closed on October 18, 1999.
We paid to the underwriters underwriting discounts and commissions totaling
approximately $4.5 million in connection with our initial public offering. In
addition, we incurred expenses of approximately $2.1 million in connection with
the offering, which when added to underwriting discounts and commissions paid by
us amounts to total expenses of approximately $6.6 million. Therefore, the net
offering proceeds to Broadbase (after deducting underwriting discounts and
commissions and estimated offering expenses) were approximately $57.8 million.
No offering expenses were paid directly or indirectly to any of our directors or
officers or their associates, holders of 10% or more of any class of our equity
securities or to any other our affiliates.
As of December 31, 1999, we had invested all of the approximately $57.8
million net proceeds from our initial public offering in short term, interest
bearing securities. No payments from these proceeds were made to any of our
directors or officers or their associates, holders of 10% or more of any class
of our equity securities or to any other our affiliates.
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<PAGE> 17
ITEM 6. SELECTED 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 report. 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 are included
elsewhere in this report. 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 report.
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 28, 1995 YEARS ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, -----------------------------
1996 1997 1998 1999
----------------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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
Amortization of core and developed
technology................................ -- -- -- --
------- ------- -------- --------
Total cost of revenue................ -- -- 967 4,047
------- ------- -------- --------
Gross margin................................... -- -- 2,472 6,395
Operating expenses:
Sales and marketing.......................... 130 2,851 7,888 15,092
Research and development..................... 928 1,980 3,738 6,024
General and administrative................... 215 744 1,165 2,011
Amortization of intangibles and goodwill..... -- -- -- --
Amortization of deferred stock
compensation.............................. -- -- 1,133 6,403
Merger expenses.............................. -- -- -- 1,000
------- ------- -------- --------
Total operating expenses............. 1,273 5,575 13,924 30,530
------- ------- -------- --------
Loss from operations........................... (1,273) (5,575) (11,452) (24,135)
Interest income................................ 30 154 335 1,454
Interest expense............................... (29) (66) (226) (889)
======= ======= ======== ========
Net loss....................................... $(1,272) $(5,487) $(11,343) $(23,570)
======= ======= ======== ========
Basic and diluted net loss per share........... $ (4.30) $ (6.19) $ (8.85) $ (3.74)
======= ======= ======== ========
Weighted-average shares used in computing basic
and diluted net loss per share............... 296 887 1,281 6,296
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,153 $13,990 $76,642
Working capital............................................. 61 8,801 69,362
Total assets................................................ 2,113 17,173 84,770
Long-term debt and capital lease obligations, net of current
portion................................................... 916 9,360 333
Stockholders' equity (net capital deficiency)............... (75) 1,226 73,206
</TABLE>
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ITEM 7.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 the financial
statements and notes included under Item 8 of this report. This discussion
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. We may identify these
statements by the use of words such as "believe," "expect," "anticipate,"
"intend," "plan" and similar expressions. These forward-looking statements
involve several 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 report. These forward-looking statements speak only as of the
date of this report, 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 report.
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.
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
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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
approximately $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 approximately $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. The actual allocation of the purchase price may differ from
our preliminary estimates after valuations and other procedures to be performed
after the closing of the acquisition.
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 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
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<PAGE> 20
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.
Operating Expenses
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.
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
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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.
Additionally, in the first quarter of 2000 we expect to incur other merger
related costs of approximately $2.0 million.
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 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through a
combination of private and public sales of debt and equity securities and
equipment and other financing arrangements. 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 net proceeds of $175.1 million from the
issuance of an additional 1.95 million shares of common stock in our secondary
public offering in February 2000, will be sufficient to 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 we raise additional funds by issuing 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.
Operating Activities. 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.
Investing Activities. 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.
Financing Activities. 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.
Commitments. 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.
YEAR 2000
In many of our recent filings with the Commission, we discussed the nature
and progress of our plans to become year 2000 compliant. In late 1999, we
completed our remediation and testing of systems. As a result
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of those planning and implementation efforts, we experienced no significant
disruptions in mission critical information technology systems and other
internal operating systems. Costs directly associated with our year 2000
compliance efforts were not material, amounting to less than $20,000. We are not
aware of any material problems with our software products or internal operating
systems resulting from year 2000 issues, and we have not received notice of any
material year 2000 compliance issues from our external vendors. However, it
remains possible that year 2000 problems associated with our products or systems
may still arise or that we could receive notice of year 2000 problems that have
arisen with our products.
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.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information in
this report before investing in our common stock. The risks described below are
not the only ones we face. Additional risks that we are aware of or that we
currently believe are immaterial may become important factors that affect our
business. If any of the following risks occur, or if others occur, our business,
operating results and financial condition could be seriously harmed. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.
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.
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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.
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
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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 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.
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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.
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.
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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 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.
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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.
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
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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 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.
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<PAGE> 30
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 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;
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<PAGE> 31
- 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 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 our
initial and secondary public offerings 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
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<PAGE> 32
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.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
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. The number of shares of common stock available for sale in
the public market is limited by restrictions under federal securities laws and
under agreements that our stockholders have entered into with the underwriters
of our initial and secondary public offerings and with us. The 4,600,000 shares
sold in our initial public offering and the 3,450,000 shares sold by us and our
stockholders in our secondary public offering are freely tradeable without
restriction or further registration under the Securities Act, unless those
shares are purchased by any of our affiliates. The remaining 14,978,656 shares
of common stock (based on shares outstanding as of December 31, 1999, together
with shares that we issued in connection with our acquisition of Rubric) will be
eligible for sale in the public market approximately 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 May 15, 2000;
- 3,670,757 shares will become eligible for sale beginning March 31, 2000
(the expiration date of certain lock-up agreements related to our
secondary public offering);
- 5,682,083 shares will become eligible for sale beginning May 16, 2000
(the expiration date of the remaining lock-up agreements related to our
secondary public offering);
- 2,557,191 shares will become eligible for sale on subsequent dates after
May 16, 2000, 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).
In addition, either Deutsche Bank Securities Inc. or Goldman, Sachs & Co., or
both, may, in their sole discretion, release all or any portion of the common
stock from the restrictions of the lock-up agreements at any time.
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 market price of our common stock could decline, and is likely to be highly
volatile, due to several factors, such as:
- 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.
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.
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<PAGE> 33
Sales of a substantial number of shares of our common stock in the future
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.
OUR OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS HAVE SIGNIFICANT CONTROL OVER US,
WHICH COULD DELAY OR PREVENT A CHANGE OF CONTROL.
Our executive officers, directors and major stockholders have significant
control over us, as they beneficially own an aggregate of approximately 41.3% of
our outstanding common stock as of February 15, 2000. 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.
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 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.
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<PAGE> 34
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our recent secondary
public offering in similar investment grade and highly liquid investments.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 36
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 37
Consolidated Statements of Operations Years Ended December
31, 1997, 1998 and 1999................................... 38
Consolidated Statements of Cash Flows Years Ended December
31, 1997, 1998 and 1999................................... 39
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) Years Ended December 31, 1997, 1998 and
1999...................................................... 40
Notes to Consolidated Financial Statements.................. 41
</TABLE>
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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.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 11, 2000
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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.
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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.
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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.
39
<PAGE> 40
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
40
<PAGE> 41
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 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
41
<PAGE> 42
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 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
42
<PAGE> 43
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
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.
43
<PAGE> 44
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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
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>
44
<PAGE> 45
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
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.
45
<PAGE> 46
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
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
46
<PAGE> 47
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 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.
47
<PAGE> 48
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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.
A summary of activity under stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED-
SHARES AVAILABLE 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>
48
<PAGE> 49
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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. 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 EMPLOYEE STOCK
STOCK OPTIONS PURCHASE
-------------------- 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.
49
<PAGE> 50
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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>
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.
50
<PAGE> 51
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.
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
51
<PAGE> 52
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
10. SUBSEQUENT EVENTS (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.
52
<PAGE> 53
BROADBASE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Completion of Acquisition of Rubric, Inc.
On February 1, 2000, the Company completed the acquisition of Rubric, Inc.,
as discussed in Note 9, in exchange for the issuance of approximately 2,992,000
of its common stock and the issuance of options and warrants to purchase an
additional approximately 608,000 shares of Broadbase common stock.
Secondary Stock Offering.
On February 18, 2000, the Company completed a secondary public offering of
3,450,000 shares of its common stock of which 1,950,000 shares were sold by the
Company and 1,500,000 were sold by its stockholders. This public offering
resulted in net proceeds to the Company of approximately $175.1 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
53
<PAGE> 54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers. The information regarding our directors
required by this item, which will be set forth in the section titled "Proposal
No. 1 -- Election of Directors" in our definitive proxy statement for our 2000
annual stockholders' meeting, is incorporated into this report by reference. The
information regarding executive officers required by this item, which will be
set forth in the section titled "Executive Officers" in our definitive proxy
statement for our 2000 annual stockholders' meeting, is incorporated into this
report by reference.
Promoters and Control Persons. We are not aware of any involvement by our
promoters and control persons in any of the legal proceedings of the type
required to be disclosed as of December 31, 1999.
Compliance with Section 16(a) of the Exchange Act. The information required
by this item, which will be set forth in the section titled "Section 16(a)
Beneficial Ownership Reporting Compliance" in our definitive proxy statement for
our 2000 annual stockholders' meeting, is incorporated into this report by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item, which will be set forth in the
sections titled "Proposal No. 1 -- Election of Directors -- Director
Compensation," "Executive Compensation" and "Employment Agreements" in our
definitive proxy statement for our 2000 annual stockholders' meeting, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item, which will be set forth in the
section titled "Security Ownership of Certain Beneficial Owners and Management"
in our definitive proxy statement for our 2000 annual stockholders' meeting, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item, which will be set forth in the
section titled "Related Party Transactions" in our definitive proxy statement
for our 2000 annual stockholders' meeting, is incorporated herein by reference.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. See Index to Financial Statements at Item 8 on
page 35 of this report.
2. Financial Statement Schedules.
See Schedule II -- Valuation and Qualifying Accounts on page 59 of
this report. Other schedules have been omitted either because they are not
required to be included, or because the information required is already
included in the financial statements or related notes included under Item 8
of this report.
3. Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.01 Agreement and Plan of Reorganization, dated December 9,
1999, between the Registrant, a wholly-owned subsidiary of
the Registrant and Rubric, Inc.*
3.01 Certificate of Incorporation, as filed with the Delaware
Secretary of State on June 28, 1999.*
3.02 Certificate of Amendment of Certificate of Incorporation, as
filed with the Delaware Secretary of State on July 30, 1999
(incorporated by reference to Exhibit 3.04 to the
Registrant's registration statement on Form S-1 (File No.
333-82251), originally filed with the Commission on July 2,
1999, as subsequently amended).
3.03 Certificate of Designation, as filed with the Delaware
Secretary of State on September 10, 1999 (incorporated by
reference to Exhibit 3.03 to the Registrant's registration
statement on Form S-1 (File No. 333-82251), originally filed
with the Commission on July 2, 1999, as subsequently
amended).
3.04 Certificate of Retirement, as filed with the Delaware
Secretary of State on November 3, 1999 (incorporated by
reference to Exhibit 3.05 to the Registrant's registration
statement on Form S-1 (File No. 333-82251), originally filed
with the Commission on July 2, 1999, as subsequently
amended).
3.05 Bylaws, as adopted on June 28, 1999 (incorporated by
reference to Exhibit 3.02 to the Registrant's registration
statement on Form S-1 (File No. 333-82251), originally filed
with the Commission on July 2, 1999, as subsequently
amended).
4.01 Form of Specimen Certificate for the Registrant's common
stock.*
4.02 Fourth Amended and Restated Investors' Rights Agreement,
dated June 30, 1999.*
4.03 Series E Rights Agreement, dated June 30, 1999.*
10.01 Form of Indemnity Agreement between the Registrant and each
of its directors and executive officers.*
10.02 Broadbase Software, Inc. 1996 Equity Incentive Plan and
related forms of agreements.*
10.03 Broadbase Software, Inc. 1999 Equity Incentive Plan and
related forms of agreements.*
10.04 Broadbase Software, Inc. 1999 Employee Stock Purchase Plan
and related forms of agreements.*
10.05 Rubric, Inc. 1997 Stock Option Plan* and related forms of
agreements (see Exhibit 10.08).
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.06 Broadbase Software, Inc. Non-Plan Stock Option Agreement
between us and Greg Martin dated January 4, 2000
(incorporated into this report by reference to Exhibit 4.12
to the Registrant's registration statement on Form S-8 (File
No. 333-32120) filed with the Commission on March 10, 2000).
10.07 Broadbase Software, Inc. Non-Plan Stock Option Agreement
between us and Rusty Thomas dated January 4, 2000
(incorporated into this report by reference to Exhibit 4.13
to the Registrant's registration statement on Form S-8 (File
No. 333-32120) filed with the Commission on March 10, 2000).
10.08 Rubric, Inc. Stock Option Agreement between Rubric and Paul
Salsgiver, dated December 8, 1999 (incorporated into this
report by reference to Exhibit 4.14 to the Registrant's
registration statement on Form S-8 (File No. 333-32120)
filed with the Commission on March 10, 2000).
10.09 Offer letter to Chuck Bay dated January 18, 1998
(incorporated into this report by reference to Exhibit 10.08
to the Registrant's registration statement on Form S-1 (File
No. 333-82251), originally filed with the Commission on July
2, 1999, as subsequently amended).
10.10 Offer letter to Brian Kelly dated November 10, 1998
(incorporated into this report by reference to Exhibit 10.06
to the Registrant's registration statement on Form S-1 (File
No. 333-82251), originally filed with the Commission on July
2, 1999, as subsequently amended).
10.11 Offer letter to Thomas Doyle dated April 12, 1999
(incorporated into this report by reference to Exhibit 10.07
to the Registrant's registration statement on Form S-1 (File
No. 333-82251), originally filed with the Commission on July
2, 1999, as subsequently amended).
10.12 Separation Agreement between the Registrant and Bruce
Armstrong dated April 14, 1999 (incorporated into this
report by reference to Exhibit 10.09 to the Registrant's
registration statement on Form S-1 (File No. 333-82251),
originally filed with the Commission on July 2, 1999, as
subsequently amended).
10.13 Amendment no Note and Stock Pledge Agreement between the
Registrant and Mark Kremer dated December 2, 1999
(incorporated into this report by reference to Exhibit 10.11
to the Registrant's registration statement on Form S-1 (File
No. 333-95125), originally filed with the Commission on
January 21, 2000, as subsequently amended).
10.14 Employment Agreement between the Registrant and Chris Maeda
dated December 9, 1999 (incorporated into this report by
reference to Exhibit 10.13 to the Registrant's registration
statement on Form S-1 (File No. 333-95125), originally filed
with the Commission on January 21, 2000, as subsequently
amended).
10.15 Offer letter to Rusty Thomas dated January 4, 2000
(incorporated into this report by reference to Exhibit 10.14
to the Registrant's registration statement on Form S-1 (File
No. 333-95125), originally filed with the Commission on
January 21, 2000, as subsequently amended).
10.16 Sublease between the Registrant and SaRonix dated June 1,
1998 (incorporated into this report by reference to Exhibit
10.05 to the Registrant's registration statement on Form S-1
(File No. 333-82251), originally filed with the Commission
on July 2, 1999, as subsequently amended).
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.17 Broadbase Partner Agreement between the Registrant and Indux
International, Inc. dated June 2, 1998, as amended
(incorporated into this report by reference to Exhibit 10.09
to the Registrant's registration statement on Form S-1 (File
No. 333-82251), originally filed with the Commission on July
2, 1999, as subsequently amended).
21.01 List of subsidiaries of the Registrant.**
23.01 Consent of Ernst & Young LLP, Independent Auditors.
24.01 Power of Attorney (see page 58 of this report).
27.01 Financial Data Schedule.**
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of the same number to the
Registrant's registration statement on Form S-1 (File No. 333-82251),
originally filed with the Commission on July 2, 1999, as subsequently
amended.
** Incorporated by reference to the exhibit of the same number to the
Registrant's registration statement on Form S-1 (File No. 333-95125),
originally filed with the Commission on January 21, 2000, as subsequently
amended.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the quarter ended December
31, 1999.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 13th day of
March, 2000.
BROADBASE SOFTWARE, INC.
By: /s/ CHUCK BAY
------------------------------------
Chuck Bay
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chuck Bay and Rusty Thomas, jointly and
severally, his attorney in fact, each with the full power of substitution, for
such person, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might do or could do in person hereby ratifying
and confirming all that each of said attorneys-in-fact and agents, or his
substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <C> <S>
PRINCIPAL EXECUTIVE OFFICER:
/s/ CHUCK BAY Chief Executive Officer, March 13, 2000
- ----------------------------------------------------- President and a Director
Chuck Bay
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ RUSTY THOMAS Executive Vice President and March 13, 2000
- ----------------------------------------------------- Chief Financial Officer
Rusty Thomas
DIRECTORS:
/s/ MARK KREMER Chairman of the Board March 13, 2000
- ----------------------------------------------------- of Directors
Mark Kremer
/s/ KEVIN HARVEY Director March 13, 2000
- -----------------------------------------------------
Kevin Harvey
/s/ PAUL LEVY Director March 13, 2000
- -----------------------------------------------------
Paul Levy
/s/ NANCY SCHOENDORF Director March 13, 2000
- -----------------------------------------------------
Nancy Schoendorf
</TABLE>
58
<PAGE> 59
BROADBASE SOFTWARE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
AMOUNTS
BALANCE CHARGED TO
AT REVENUE, WRITE-OFFS BALANCE
BEGINNING COSTS OR AND AT END
DESCRIPTION OF PERIOD EXPENSES RECOVERIES OF PERIOD
----------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended December 31, 1997................ $ -- $ -- $-- $ --
Year Ended December 31, 1998................ $ -- $50,000 $-- $50,000
Year Ended December 31, 1999................ $50,000 $ -- $-- $50,000
</TABLE>
This schedule should be read in conjunction with our financial statements
and related notes included under Item 8 of this report.
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
23.01 Consent of Ernst & Young LLP, Independent Auditors.
24.01 Power of Attorney (see page 58 of this report).
</TABLE>
60
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-87815 and 333-32120) pertaining to the Broadbase Software,
Inc. 1996 Equity Incentive Plan, 1999 Equity Incentive Plan, and 1999 Employee
Stock Purchase Plan; Options and purchase rights issued under the Rubric, Inc.
1997 Stock Option Plan and assumed by the Registrant in connection with its
acquisition of Rubric, Options granted pursuant to stock option agreements
entered into outside of the Rubric 1997 Stock Option Plan, the Broadbase
Software, Inc. 1999 Equity Incentive Plan, the Broadbase Software, Inc. 1999
Employee Stock Purchase Plan, and Options granted pursuant to stock option
agreements entered into outside of the Broadbase Software, Inc. 1999 Equity
Incentive Plan of our report dated January 11, 2000, with respect to the
consolidated financial statements and schedule of Broadbase Software, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
San Jose, California
March 13, 2000
