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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________ .
Commission file number: 000-26789
BROADBASE SOFTWARE, INC.
(Exact name of the Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0417081
(State or other jurisdiction of incorporation or organization) (I.R.S. Employee Identification No.)
</TABLE>
181 Constitution Drive
Menlo Park, CA 94025
(Address of principal executive offices including zip code)
(650) 614-8300
(The Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of the Registrant's common stock outstanding as of October 31,
2000: 50,598,183
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BROADBASE SOFTWARE, INC.
FORM 10-Q
INDEX
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999........... 3
Condensed Consolidated Statements of Operations for the three months and nine months ended
September 30, 2000 and September 30, 1999................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and September 30, 1999................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 30
Item 2. Changes in Securities and Use of Proceeds................................................... 30
Item 3. Defaults upon Senior Securities............................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders......................................... 30
Item 5. Other Information........................................................................... 30
Item 6. Exhibits and Reports on Form 8-K............................................................ 31
Signatures.................................................................................. 32
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999(1)
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 138,861 $ 76,642
Short-term investments 71,367 --
Accounts receivable, net 14,154 2,712
Prepaid expenses and other current assets 5,608 1,239
--------- --------
Total current assets 229,990 80,593
Property and equipment, net 10,459 2,868
Restricted cash 2,473 633
Other assets 429,379 676
--------- --------
Total assets $ 672,301 $ 84,770
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,335 $ 559
Accrued compensation 4,311 2,919
Accrued expenses 12,255 2,341
Current portion of bank line of credit, notes payable and
capital lease obligations 294 749
Deferred revenue 11,036 4,663
--------- --------
Total current liabilities 31,231 11,231
Bank line of credit, notes payable and capital lease obligations 444 333
--------- --------
Total liabilities 31,675 11,564
Stockholders' equity:
Common stock 50 17
Additional paid-in capital 825,687 124,297
Deferred stock compensation (37,289) (8,710)
Notes receivable from stockholders (450) (693)
Accumulated other comprehensive loss (206) (33)
Accumulated deficit (147,166) (41,672)
--------- --------
Total stockholders' equity 640,626 73,206
--------- --------
Total liabilities and stockholders' equity $ 672,301 $ 84,770
========= ========
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statements as of that date.
3
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BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------
2000 1999 2000 1999
------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
License $ 10,409 $ 2,114 $ 22,169 $ 4,807
Professional services 2,658 382 6,039 775
Maintenance 1,253 268 2,806 731
-------- ------- -------- --------
Total net revenue 14,320 2,764 31,014 6,303
-------- ------- -------- --------
Cost of revenue:
License 734 482 2,775 910
Professional services (1) 4,406 556 8,633 1,217
Maintenance (2) 406 194 1,184 465
Amortization of acquired core and
developed technology 397 -- 1,058 --
-------- ------- -------- --------
Total cost of revenue 5,943 1,232 13,650 2,592
-------- ------- -------- --------
Gross margin 8,377 1,532 17,364 3,711
-------- ------- -------- --------
Operating expenses:
Sales and marketing (3) 9,065 4,062 24,989 10,557
Research and development (4) 4,894 1,587 11,118 4,387
General and administrative (5) 1,756 498 4,249 1,430
Amortization of deferred stock
compensation 5,534 1,976 13,437 4,448
Amortization of intangible assets
and goodwill 19,299 -- 49,039 --
Acquired in-process research and
development 2,843 -- 12,900 --
Merger expenses 6,048 -- 16,328 --
-------- ------- -------- --------
Total operating expenses 49,439 8,123 132,060 20,822
-------- ------- -------- --------
Loss from operations (41,062) (6,591) (114,696) (17,111)
Interest income 3,704 237 9,514 431
Interest expense (12) (275) (312) (836)
-------- ------- -------- --------
Net loss $(37,370) $(6,629) $(105,494) $(17,516)
======== ======= ========= ========
Basic and diluted net loss per share $ (0.78) $ (0.85) $ (2.37) $ (3.40)
======== ======== ======== ========
Weighted-average shares used in
computing basic and diluted net
loss per share 48,001 7,808 44,483 5,154
======== ======= ======== ========
</TABLE>
(1) Excludes $1,222, $3,080, $75 and $171 of amortization of deferred stock
compensation for the three and nine months ended September 30, 2000 and for the
three and nine months ended September 30, 1999, respectively.
(2) Excludes $38, $51, $5 and $7 of amortization of deferred stock compensation
for the three and nine months ended September 30, 2000 and for the three and
nine months ended September 30, 1999, respectively.
(3) Excludes $1,076, $2,807, $1,059 and $2,276 of amortization of deferred stock
compensation for the three and nine months ended September 30, 2000 and for the
three and nine months ended September 30, 1999, respectively.
(4) Excludes $1,635, $3,077, $489 and $1,235 of amortization of deferred stock
compensation for the three and nine months ended September 30, 2000 and for the
three and nine months ended September 30, 1999, respectively.
(5) Excludes $1,563, $4,422, $348 and $759 of amortization of deferred stock
compensation for the three and nine months ended September 30, 2000 and for the
three and nine months ended September 30, 1999, respectively.
See accompanying notes to the Condensed Consolidated Financial Statements.
4
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BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(105,494) $(17,516)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred stock compensation 13,437 4,448
Depreciation and amortization 1,718 710
Acquired in-process research and development 12,900 --
Amortization of acquired core and developed technology 1,058 --
Amortization of intangible assets and goodwill 49,039 --
Write-off of note receivable from stockholder -- 7
Common stock issued to consultants 403 227
Changes in balance sheet items:
Accounts receivable (9,436) (763)
Prepaid expenses and other current assets (4,043) (521)
Accounts payable (2,861) 377
Accrued expenses 4,381 3,760
Deferred revenue 5,876 1,104
Payment on license agreement -- (250)
--------- ---------
Net cash used in operating activities (33,022) (8,417)
INVESTING ACTIVITIES:
Purchase of short-term investments, net (71,367) --
Increase in restricted cash (1,840) --
Purchases of property and equipment (7,788) (1,065)
--------- --------
Net cash used in investing activities (80,995) (1,065)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock, net -- 19,979
Proceeds from issuance of common stock upon exercise of options 1,507 448
Proceeds from issuance of common stock in initial public offering,
net -- 50,561
Proceeds from issuance of common stock in private placement -- 631
Proceeds under employee stock purchase program 1,104 --
Proceeds from issuance of common stock in secondary public
offering, net 174,958 --
Payments to repurchase unvested common stock (50) (8)
Issuance of notes receivable to stockholders (450) --
Repayment of notes receivable from stockholders 693 --
Proceeds from issuance of convertible debt -- 1,275
Payments on notes payable (1,118) (306)
Principal payments on capital lease obligations (68) (19)
Principal payments on equipment line of credit (167) (250)
--------- --------
Net cash provided by financing activities 176,409 72,311
--------- --------
Effect of foreign exchange rate changes on cash and cash
equivalents (173) (35)
--------- --------
Net increase in cash and cash equivalents 62,219 62,794
Cash and cash equivalents:
Beginning of period 76,642 13,990
--------- --------
End of period $ 138,861 $ 76,784
========= ========
Supplemental schedule of non cash investing and financing activities:
Conversion of convertible debt into common stock $ -- $ 9,525
Issuance of common stock in connection with purchase
business combinations $ 481,485 $ --
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
5
<PAGE> 6
BROADBASE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Broadbase Software, Inc. (the "Company" or "Broadbase") was incorporated on
November 28, 1995 and develops and markets customer-focused analytic and
marketing automation software applications that analyze customer data from
multiple touch points, and use that information to execute marketing campaigns,
improve online merchandizing and content, increase site stickiness and
personalize customer interactions.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principals for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements included herein reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's financial
position, results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in the Company's Form 10-K filed with the Securities and
Exchange Commission (the "SEC") on March 13, 2000. Operating results for the
nine month period ended September 30, 2000 are not necessarily indicative of
results to be expected for the full fiscal year of 2000 or any future period.
In January 2000, the Company's Board of Directors approved a two-for-one
stock split of the Company's outstanding shares payable in the form of a
dividend of one additional share of the Company's common stock for every share
owned by stockholders. The stock split became effective on April 7, 2000. All
prior period share and per share data have been adjusted retroactively to
reflect this split.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Management determines the
appropriate classification of marketable securities at the time of purchase and
evaluates such designation as of each balance sheet date. As of September 30,
2000, all marketable debt securities are classified as held-to-maturity as the
Company has both the ability and intent to hold these securities to maturity;
therefore, these securities are recorded on the accompanying balance sheets at
amortized cost. Interest, dividends and realized gains and losses are included
in interest income.
The following is a summary of cash and held-to-maturity debt securities (in
thousands):
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<S> <C>
Cash equivalents:
Money market funds $ 4,420
Short-term taxable municipals 46,950
Demand notes 45,590
Commercial paper 36,477
--------
Total cash equivalents $133,437
========
Short-term investments
Corporate bonds $ 49,216
Government agencies 22,151
--------
Total short-term investments $ 71,367
========
</TABLE>
3. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (37,370) $ (6,629) $(105,494) $ (17,516)
Foreign currency translation loss (114) (34) (173) (35)
--------- --------- --------- ---------
Comprehensive loss $ (37,484) $ (6,663) $(105,667) $ (17,551)
========= ========= ========= =========
</TABLE>
6
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The accumulated other comprehensive loss at September 30, 2000 of $206,000
consisted entirely of the cumulative foreign currency translation loss.
4. NET LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS
128") which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive common shares outstanding during the period. Diluted net loss per
share, as presented, excludes potentially dilutive common shares outstanding for
all periods as the effect of the assumed exercise of stock options, warrants and
contingently issued shares is antidilutive due to the Company's net loss.
The following table sets forth the computation of net loss per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Basic and diluted net loss per share:
Net loss $ (37,370) $(6,629) $(105,494) $ (17,516)
Weighted-average shares of common
stock outstanding 48,570 9,042 45,234 6,932
Less weighted-average shares
subject to repurchase (569) (1,234) (751) (1,778)
--------- -------- -------- ---------
Weighted-average shares of common
stock outstanding used in
computing basic and diluted net
loss per share 48,001 7,808 44,483 5,154
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.78) $ (0.85) $ (2.37) $ (3.40)
========= ========= ========= =========
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-9
amends SOP 97-2, "Software Revenue Recognition", to require recognition of
revenue using the "residual method" when certain criteria are met. SOP 98-9 also
amends SOP 98-4, an earlier amendment to SOP 97-2, which extended the deferral
of the application of certain passages of SOP 97-2. The Company adopted the
provisions of SOP 98-9 as of January 1, 2000, which did not have a material
affect on our financial position, results of operations or cash flows.
In December 1999, the SEC issued SEC Staff Accounting Bulletin No 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements. In October 2000, the SEC issued a "Frequently Asked Questions"
document on SAB 101 to provide further definitive guidance on the implementation
of SAB 101. SAB 101 is effective for years beginning after December 15, 1999 and
is required to be adopted in the quarter ended December 31, 2000 retroactive to
the beginning of the year. SAB 101 is not expected to have a significant effect
on the Company's results of operations, financial position or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25". FIN 44 clarifies
certain elements of APB Opinion No. 25, including: the definition of employee
for purposes of applying APB Opinion No. 25, the criteria for determining
whether a plan qualifies as non-compensatory, the accounting consequences of
various modifications to the terms of a previously fixed stock option award, and
the accounting for an exchange of stock compensation in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that have occurred after either December 15, 1998 or January 12,
2000. The adoption of this interpretation did not have a material impact on the
Company's results of operations, financial position or cash flows in the three
and nine months ended September 30, 2000.
7
<PAGE> 8
6. 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 600,000 options to purchase shares of Broadbase
common stock at an exercise price of $27.00 per share. As a result of these
option grants, the Company recorded approximately $12.0 million 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 amortized to compensation expense over the options' vesting
term, four years, on a graded vesting method.
On May 3, 2000, in connection with the desired retention of employees whose
primary equity participation in the Company was at that time "out-of-the-money"
options, the Company granted an aggregate of 806,000 options to purchase shares
of Broadbase common stock at an exercise price of $1.00 per share. The Company
did not cancel or modify any outstanding stock options in connection with these
new option grants. As a result of these option grants, the Company recorded
approximately $12.3 million 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 amortized to
compensation expense over the options' vesting term, two to four years, on a
graded vesting method.
On July 7, 2000, in lieu of annual salary merit increases, the Company
granted to each then employee an option to purchase 500 shares of Broadbase
common stock at an exercise price of $1.00 per share, for an aggregate of
131,000 options. The Company did not cancel or modify any outstanding stock
options in connection with these new option grants. As a result of these option
grants, the Company recorded approximately $4.1 million 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 amortized to compensation expense over the options' vesting term, two
years, on a graded vesting method.
On September 20, 2000, in connection with the hiring of a new officer, the
Company granted an aggregate of 132,000 options to purchase shares of Broadbase
common stock at an exercise price of $1.00 per share. As a result of these
option grants, the Company recorded approximately $2.2 million 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 amortized to compensation expense over the options' vesting term, four
years, on a graded vesting method.
On August 23, 2000 and September 20, 2000, in connection with the desired
retention of specified employees, the Company granted an aggregate of 139,000
options to purchase shares of Broadbase common stock at an exercise price of
$1.00 per share. The Company did not cancel or modify any outstanding stock
options in connection with these new option grants. As a result of these option
grants, the Company recorded approximately $2.4 million 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 amortized to compensation expense over the options' vesting term, two
years, on a graded vesting method.
7. SECONDARY STOCK OFFERING
On February 18, 2000, the Company completed a secondary public offering of
6,900,000 shares of its common stock of which 3,900,000 shares were sold by the
Company and 3,000,000 were sold by its stockholders at a price of $47.50 per
share. Offering proceeds to the Company, net of aggregate underwriters discounts
and commissions and related offering expenses, were approximately $175.0
million.
8
<PAGE> 9
8. ACQUISITION OF RUBRIC, INC.
On February 1, 2000, the Company completed its acquisition of Rubric, Inc.
("Rubric"), a Delaware corporation, a leading provider of e-marketing software
applications. In connection with the acquisition, the Company issued
approximately 6.0 million shares of its common stock in exchange for all
outstanding shares of Rubric capital stock, and converted outstanding options
and warrants to acquire Rubric capital stock into options and warrants to
acquire approximately 1.2 million shares of the Company's common stock. Of the
shares issued, approximately 600,000 shares of the Company's common stock are
being held in escrow for a period of one year following the acquisition for the
purpose of providing a fund against which the Company may seek indemnification
from former Rubric stockholders for any breaches of representations, warranties
or covenants under the Merger Agreement.
The Company recorded this transaction using the purchase method of accounting
for business combinations. The purchase price of Rubric was allocated based on
fair value to the specific tangible and intangible assets acquired and
liabilities assumed from Rubric pursuant to an independent valuation. The total
purchase price for Rubric was $371.8 million, consisting of $301.7 million of
Broadbase common stock, $61.3 million of options to purchase Broadbase common
stock and $8.8 million of acquisition related costs consisting primarily of
direct transactions costs and involuntary termination benefits. As a result, the
Company recorded a charge to operations upon consummation of the transaction
related to acquired in-process research and development of approximately $10.1
million. Also, the Company has incurred merger-related costs of $14.8 as of
September 30, 2000 (including $3.5 million in the quarter ended September 30,
2000), of which $1.0 million were included in the Company's 1999 results of
operations. This amount included $2.0 million of payments to Rubric to fund its
working capital requirements prior to the closing of the merger, $2.2 million of
employee bonuses paid upon successful completion of the merger, $800,000 of
costs to announce the merger, and $9.8 million of costs associated with
combining the operations of the two companies, including $9.0 million for
assumed customer integration costs, $400,000 for severance and related costs and
$400,000 for write-off of redundant assets and other costs. In addition, the
Company recorded approximately $362.0 million of intangible assets and goodwill
on its balance sheet, which will result in amortization expense of approximately
$66.9 million for 2000, $72.7 million for 2001, $72.7 million for 2002, $72.1
million for 2003, $71.6 million for 2004 and $6.0 million for 2005. Accumulated
amortization of intangible assets and goodwill associated with the Rubric
acquisition, excluding the one-time write-off of acquired in-process research
and development, totaled approximately $48.6 million at September 30, 2000.
The following unaudited pro forma summarized results of operations have been
prepared assuming that the acquisition of Rubric had occurred at the beginning
of the periods presented. These results presented below are not necessarily
indicative of results of operations that would have occurred had the acquisition
actually been consummated as of the beginning of the periods presented, nor are
the results presented below necessarily indicative of results to be expected in
future periods. The pro forma information for the nine months ended September
30, 2000 excludes the impact of one-time charges for in-process research and
development costs of $10.1 million and merger related costs of approximately
$13.8 million.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue $ 31,300 $ 9,221
Net loss $(91,125) $(77,720)
Basic and diluted net loss per share $ (1.87) $ (6.98)
</TABLE>
9. ACQUISITION OF APERIO, INC.
On June 23, 2000, the Company completed its acquisition of Aperio, Inc.
("Aperio"), a Delaware corporation, a provider of e-commerce marketing
solutions. In connection with the acquisition, the Company issued approximately
561,000 shares of its common stock in exchange for all outstanding shares of
Aperio capital stock, and converted outstanding options to acquire Aperio
capital stock into options and warrants to acquire approximately 119,000 shares
of the Company's common stock. Approximately 56,000 of the shares of Broadbase
common stock are being held in escrow for a period of one year as collateral for
indemnity obligations of Aperio and its shareholders. In addition, several
employees of Aperio, including executive officers, became employees of
Broadbase.
The Company recorded this acquisition using the purchase method of accounting
for business combinations. The purchase price of Aperio was allocated based on
fair value to specific tangible and intangible assets acquired and liabilities
assumed from Aperio pursuant to an independent valuation. The total purchase
price for Aperio was $30.1 million, consisting of $23.8 million of Broadbase
common stock, $5.0 million of options to purchase Broadbase common stock, and
$1.3 million of acquisition related costs consisting primarily of direct
transaction expenses. As a result of the transaction, the Company recorded
approximately $28.8 million of intangible assets and goodwill on its balance
sheet, which will result in amortization expense of approximately $2.9 million
for 2000, $5.9 million for 2001, $5.9 million for 2002, $5.7 million for 2003,
$5.6 million for 2004 and $2.8 million for 2005. Accumulated
9
<PAGE> 10
amortization of intangible assets and goodwill associated with the Aperio
acquisition, excluding the one-time write-off of acquired in-process research
and development, totaled approximately $1.5 million at September 30, 2000.
10. ACQUISITION OF PANOPTICON, INC.
On September 15, 2000, the Company completed its acquisition of Panopticon,
Inc. ("Panopticon"), a California corporation, developers of a real-time
recommendation engine that produces context-sensitive, personalized
recommendations across web, wireless, e-mail and call center customer
interaction points. This engine extends Broadbase's analytic platform with the
ability to dynamically recommend and serve appropriate content or products in
real time. In connection with this acquisition, the Company issued approximately
2.66 million shares of common stock in exchange for all outstanding shares of
Panopticon capital stock, and converted outstanding options and warrants to
acquire Panopticon capital stock into options and warrants to purchase
approximately 519,860 shares of Broadbase common stock. Approximately 266,000 of
the shares of Broadbase common stock are being held in escrow for a period of
one year as collateral for indemnity obligations of Panopticon and its
shareholders. In addition, several employees of Panopticon, including executive
officers, became employees of Broadbase.
The Company recorded this transaction using the purchase method of accounting
for business combinations. The purchase price of Panopticon was allocated based
on fair value to the specific tangible and intangible assets acquired and
liabilities assumed from Panopticon pursuant to an independent valuation. The
total purchase price for Panopticon was $102.1 million, consisting of $85.4
million of Broadbase common stock, $15.9 million of options and warrants to
purchase Broadbase common stock and $0.8 million of acquisition related costs.
As a result the Company recorded a charge to operations upon consummation of the
transaction related to acquired in-process research and development of
approximately $2.8 million. Also, the Company has incurred merger-related costs
of $2.5 million as of September 30, 2000. This amount included approximately
$2.0 million of payments to Panopticon to fund its working capital requirements
prior to the closing of the merger, $300,000 of employee bonuses payable upon
successful completion of the merger, and approximately $200,000 of costs
associated with combining the operations of the two companies. In addition, the
Company recorded approximately $88.0 million of intangible assets and goodwill
on its balance sheet, which will result in amortization expense of approximately
$4.4 million for 2000, $17.7 million for 2001, $17.7 million for 2002, $17.6
million for 2003, $17.5 million for 2004 and $13.1 million for 2005. There was
no accumulated amortization of intangible assets and goodwill at September 30,
2000 related to the acquisition of Panopticon.
The following unaudited pro forma summarized results of operations have been
prepared assuming that the Panopticon acquisition had occurred at the beginning
of the periods presented. These results presented below are not necessarily
indicative of results of operations that would have occurred had the acquisition
actually been consummated as of the beginning of the periods presented, nor are
the results presented below necessarily indicative of results to be expected in
future periods. The pro forma information for the nine months ended September
30, 2000 excludes the impact of one-time charges for in-process research and
development costs of $2.8 million.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue $ 31,014 $ 6,304
Net loss $(122,004) $(35,651)
Basic and diluted net loss per share $ (2.60) $ (4.56)
</TABLE>
11. PENDING ACQUISITIONS
On August 16, 2000, Broadbase entered into a definitive agreement to acquire
privately-held Decisionism, Inc. ("Decisionism"), a leading provider of analytic
solutions for business-to-business digital marketplaces. Under the terms of the
agreement, the Company will issue approximately 475,000 shares of Broadbase
common stock in exchange for all securities of Decisionism outstanding as of the
date of the transaction. In addition, we have agreed to issue new Broadbase
options to purchase at least 224,704 shares of common stock to employees of
Decisionism that continue as employees of Broadbase. The transaction will be
recorded using the purchase method of accounting for business combinations.
Completion of this acquisition is expected in December 2000 and is subject to
obtaining all necessary stockholder and regulatory approvals and to other
customary closing conditions.
On September 18, 2000, Broadbase entered into a definitive agreement to
acquire privately-held Servicesoft, Inc. ("Servicesoft"), a leading provider of
intelligent e-service solutions. Under the terms of the agreement, the Company
will issue
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<PAGE> 11
approximately 29.0 million shares of Broadbase common stock in exchange for all
outstanding shares of Servicesoft capital stock, and will convert all
outstanding Servicesoft options and warrants into options and warrants to
purchase approximately 6.1 million shares of Broadbase common stock,
representing approximately 34.7% of the combined company on a fully diluted
basis based on capitalization of each company at September 30, 2000. The
transaction will be recorded using the purchase method of accounting for
business combinations. Completion of this acquisition is expected in December
2000 and is subject to obtaining all necessary stockholder and regulatory
approvals and to other customary closing conditions.
ITEM 2. 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 1 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 many 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 That May Affect Future Results" 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 sales, marketing and research and
development. We grew from a total of 41 full-time employees at December 31, 1997
to 75 full-time employees at December 31, 1998 to 131 full-time employees at
December 31, 1999. As of September 30, 2000 we had 329 full-time employees and
intend to hire a significant number of employees in the future. This expansion
places significant demands on our management and operational resources. To
manage this rapid growth, we are investing in and implementing scaleable
operational systems, procedures and controls.
Our revenue comes principally from licenses of our software products, with
the balance coming from maintenance and professional services. Under the
provisions of SOP No. 97-2, "Software Revenue Recognition", and its amendments,
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.
Professional services revenue is recognized when services are performed.
Maintenance revenue associated with new product licenses and maintenance revenue
resulting from renewed maintenance contracts are deferred and recognized ratably
over the contract period, usually one year.
Currently, businesses that license our products generally license one or more
Broadbase 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 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,
when and if available, 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, Japan, Germany, the United Kingdom and the Netherlands. Our indirect
sales channels include software application vendors, resellers and distributors
located in the United States, Japan and the Netherlands. Sales through indirect
sales
11
<PAGE> 12
channels accounted for approximately 36.4% and 13.3% of our total net revenue
for the nine months ended September 30, 1999 and 2000, respectively.
Revenue from customers outside North America represented 24.1% and 19.1% of
our total net revenue for the nine months ended September 30, 1999 and 2000,
respectively. 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, to recruit
and train personnel for our engineering, sales, marketing, professional services
and administration departments and the costs associated with our acquisitions.
As of September 30, 2000, we had an accumulated deficit of $147.2 million. We
expect to continue to incur substantial losses for the foreseeable future.
RECENT EVENTS
On February 1, 2000, we acquired privately-held Rubric, Inc. Rubric's product
automates the planning, execution and measurement of marketing campaigns. In
connection with this acquisition, we issued approximately 6.0 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 1.2 million shares of
our common stock. This transaction was recorded using the purchase method of
accounting for business combinations.
On February 18, 2000, we completed a secondary public offering of 6,900,000
shares of our common stock, of which 3,900,000 shares were sold by Broadbase and
3,000,000 were sold by our stockholders at a price of $47.50 per share. Offering
proceeds to Broadbase, net of aggregate underwriters discounts and commissions
and related offering expenses, were approximately $175.0 million.
On June 23, 2000, we acquired privately-held Aperio, Inc. Aperio assists
Fortune 100 and other companies in increasing the effectiveness of their direct
marketing investments by delivering customized customer relationship management
solutions. In connection with this acquisition, we issued approximately 561,000
shares of our common stock in exchange for all outstanding shares of Aperio
capital stock, and converted all outstanding options and warrants to acquire
Aperio capital stock into options and warrants to purchase approximately 119,000
shares of our common stock. This transaction was recorded using the purchase
method of accounting for business combinations.
On August 16, 2000, we entered into a definitive agreement to acquire
privately-held Decisionism, Inc., a leading provider of analytic solutions for
business-to-business digital marketplaces. Under the terms of the agreement, we
will issue approximately 475,000 shares of Broadbase common stock in exchange
for all securities of Decisionism outstanding as of the date of the transaction.
In addition, we have agreed to issue new Broadbase options to purchase at least
224,704 shares of common stock to employees of Decisionism that continue as
employees of Broadbase. The transaction will be recorded using the purchase
method of accounting for business combinations. Completion of this acquisition
is expected in December 2000 and is subject to obtaining all necessary
stockholder approvals and to other customary closing conditions.
On September 15, 2000, we acquired privately-held Panopticon, Inc.,
developers of a real-time recommendation engine that produces context-sensitive,
personalized recommendations across web, wireless, e-mail and call center
customer interaction points. This engine extends Broadbase's analytic platform
with the ability to dynamically recommend and serve appropriate content or
products in real time. In connection with this acquisition, we issued
approximately 2.7 million shares of Broadbase common stock in exchange for all
outstanding shares of Panopticon capital stock, and converted all outstanding
Panopticon options and warrants into options and warrants to purchase
approximately 519,860 shares of Broadbase common stock. This transaction was
recorded using the purchase method of accounting for business combinations.
On September 18, 2000, we entered into a definitive agreement to acquire
privately-held Servicesoft, Inc., a leading provider of intelligent e-service
solutions. Under the terms of the agreement, we will issue approximately 29.0
million shares of Broadbase common stock in exchange for all outstanding shares
of Servicesoft capital stock and will convert all outstanding Servicesoft
options and warrants into options and warrants to purchase approximately 6.1
million shares of Broadbase common stock, representing approximately 34.7% of
the combined company on a fully diluted basis based on capitalization of each
company at September 30, 2000. The transaction will be recorded using the
purchase method of accounting business combinations. Completion of this
acquisition is expected in December 2000 and is subject to obtaining all
necessary stockholder and regulatory approvals and to other customary closing
conditions.
12
<PAGE> 13
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
2000 1999 2000 1999
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue:
License $ 10,409 $ 2,114 $ 22,169 $ 4,807
Professional services 2,658 382 6,039 765
Maintenance 1,253 268 2,806 731
-------- ------- -------- --------
Total net revenue 14,320 2,764 31,014 6,303
-------- ------- -------- --------
Cost of revenue:
License 734 482 2,775 910
Professional services 4,406 556 8,633 1,217
Maintenance 406 194 1,184 465
Amortization of acquired core and developed
technology 397 -- 1,058 --
-------- ------- -------- --------
Total cost of revenue 5,943 1,232 13,650 2,592
-------- ------- -------- --------
Gross margin 8,377 1,532 17,364 3,711
-------- ------- -------- --------
Operating expenses:
Sales and marketing 9,065 4,062 24,989 10,557
Research and development 4,894 1,587 11,118 4,387
General and administrative 1,756 498 4,249 1,430
Amortization of deferred stock compensation 5,534 1,976 13,437 4,448
Amortization of intangible assets and goodwill 19,299 -- 49,039 --
Acquired in-process research and development 2,843 -- 12,900 --
Merger expenses 6,048 -- 16,328 --
-------- ------- -------- --------
Total operating expenses 49,439 8,123 132,060 20,822
-------- ------- -------- --------
Loss from operations (41,062) (6,591) (114,696) (17,111)
Interest income 3,704 237 9,514 431
Interest expense (12) (275) (312) (836)
-------- ------- -------- --------
Net loss $(37,370) $(6,629) $(105,494) $(17,516)
======== ======= ========= ========
Basic and diluted net loss per share $ (0.78) $ (0.85) $ (2.37) $ (3.40)
======== ======== ========= ========
Weighted-average shares used in computing basic and
diluted net loss per share 48,001 7,808 44,483 5,154
======== ======= ======== ========
</TABLE>
NET REVENUE
License. The increase in license revenue comparing the three and nine months
ending September 30, 2000 to the corresponding periods in 1999 is primarily
attributable to increases in the number of customers licensing our products in
2000 and an overall increase in the average revenue per license transaction. The
increased number of license sales resulted primarily from significant expansion
of our direct sales force and our indirect sales channels, while the increase in
the average revenue per license transaction resulted from price increases for
our individual applications and our new, higher-priced application bundles
offered to customers in 2000. We intend to continue to expand both our direct
and indirect sales channels.
Professional services. The growth in professional services revenue comparing
the three and nine months ending September 30, 2000 to the corresponding periods
in 1999 reflects the significant expansion of our installed customer base and
its demand for services and the increased capacity of our consulting
organization.
Maintenance. The increase in maintenance revenue during the periods presented
reflects expansion of our installed customer base and increased prices charged
by us for annual maintenance.
COST OF REVENUE
Cost of license. The cost of licenses consists primarily of royalties paid
to third parties and the cost of product manuals, media, packaging and shipping.
The increase in cost of licenses comparing the three and nine months ending
September 30, 2000 to the
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<PAGE> 14
corresponding periods in 1999 resulted primarily from increased royalty
obligations incurred as a result of increased volume of license sales. Our
royalty obligations vary significantly by product; accordingly, our cost of
licenses may vary significantly from quarter to quarter as a percentage of
license revenue depending on the mix of products licensed in any given quarter.
Cost of professional services. The cost of professional services consists
primarily of personnel costs for employees and contractors providing consulting
and training services. The increases in cost of professional services comparing
the three and nine months ending September 30, 2000 to the corresponding periods
in 1999 resulted primarily from expansion of our consulting and training
organizations and increased use of contract consultants, as necessary to serve
our expanding customer base. We plan to continue expanding our professional
services capacity through both internal hiring and partnerships with external
consultants.
Cost of maintenance. The cost of maintenance consists primarily of personnel
costs for employees in our customer support organization. The increases in cost
of maintenance comparing the three and nine months ending September 30, 2000 to
the corresponding periods in 1999 resulted primarily from expansion of our
customer support organization and increased investments in facilities and
equipment necessary to provide support to our expanded customer base. We expect
continued growth in our installed base to require us to continue to expand the
capacity of our support organization.
Amortization of acquired core and developed technology. This cost represents
amortization of the core and developed technology acquired from Rubric on
February 1, 2000 ($6.8 million) and from Panopticon on September 15, 2000 ($0.7
million). The useful life of the core and developed technologies acquired are
one and five years, respectively.
OPERATING EXPENSES AND OTHER ITEMS
Sales and marketing. Sales and marketing expenses consist primarily of costs
for personnel, sales commissions, travel and entertainment, promotional
activities, advertising, and domestic and international field sales offices.
Increased sales and marketing expenses comparing the three and nine months
ending September 30, 2000 to the corresponding periods in 1999 resulted
primarily from significant expansion of our domestic and international direct
sales force. We also expanded our marketing organization, increasing both the
number of employees and the level of promotional and advertising activities. We
plan to continue expanding our sales and marketing organizations, and expect our
sales and marketing expenses to increase.
Research and development. Research and development expenses consist primarily
of salaries for development personnel, development facilities and equipment,
product localization, product documentation, and quality assurance testing. The
increases in these expenses comparing the three and nine months ending September
30, 2000 to the corresponding periods in 1999 are primarily attributable to
significant expansion of our development workforce, including developers
previously employed by Rubric and Panopticon, and increased use of contractors
and other outside service providers to assist in development efforts. We plan to
continue expanding our research and development organization, and expect our
research and development expenses to increase.
General and administrative. General and administrative expenses consist
primarily of costs of executive, finance, human resources, legal, and
information technology personnel, as well as outside professional fees for
legal, tax, accounting and other services. The increase in general and
administrative costs comparing the three and nine months ending September 30,
2000 to the corresponding periods in 1999 resulted primarily from personnel
additions required to provide administrative and information technology support
for our expanded employee base. The use of professional services also increased
significantly. Management plans to continue expansion of its general and
administrative organizations as necessary to support our growth.
Amortization of deferred compensation. The increase in amortization of
deferred stock compensation comparing the three and nine months ending September
30, 2000 to the corresponding periods in 1999 resulted primarily from grants of
options to purchase our common stock at a exercise prices that were below the
fair market value of the underlying stock. Specifically, we granted options to
purchase 600,000 shares of our common stock at below fair market value to two
new officers on January 4, 2000. In addition, on May 3, 2000, we granted to
certain employees options to purchase an aggregate of 806,000 of the Company's
common stock at below fair market value. These option grants will result in
approximately $24.3 million in additional deferred stock compensation
amortization over the next four years. Also, on July 7, 2000, we granted to all
employees an aggregate of 131,000 options to purchase shares of Broadbase common
stock at an exercise price of $1.00 per share. This grant will result in an
additional $4.1 million of deferred stock compensation expense over the
following four years. On August 23, 2000, we granted to certain employees
options to purchase an aggregate of 5,500 of the Company's common stock at below
fair market value. These option grants will result in approximately $108,000 in
additional deferred stock compensation amortization over the next two years. On
September 20, 2000, we granted options to purchase 132,000 shares of our common
stock at below fair market value to a new officer. This grant will result in an
additional $2.2 million in additional deferred stock compensation amortization
over the next four years. Finally, on September 20, 2000, we
14
<PAGE> 15
granted to certain employees options to purchase an aggregate of 134,000 of the
Company common stock at below fair market value. These option grants will result
in approximately $2.3 million in additional deferred stock compensation
amortization over the next two years.
Amortization of intangible assets and goodwill. Amortization of intangible
assets and goodwill during the nine months ended September 30, 2000 represents
amortization of intangible assets recorded in connection with the acquisitions
of Rubric and Aperio. We did not acquire any companies and did not record such
charges during 1999. This expense will increase in future quarters as
approximately $88.0 million in intangible assets recorded in connection with the
Panopticon acquisition will be amortized beginning in October 2000. We expect to
record additional intangible assets and goodwill in connection with our proposed
acquisitions of Decisionism and Servicesoft, which are both expected to close in
December 2000. Intangible assets and goodwill are amortized over a period of
three to five years.
Acquired in-process research and development. The majority of the expense of
$12.9 million for the nine months ended September 30, 2000 was charged to
operations in the first quarter of 2000. This expense represents the write-off
of in-process research and development in connection with the acquisition of
Rubric.
Merger expenses. In connection with the acquisition of Panopticon we recorded
merger and integration costs of approximately $2.5 million during the three
months ended September 30, 2000. This amount included approximately $2.0 million
of payments to Panopticon to fund its working capital requirements prior to the
closing of the merger, $300,000 of employee bonuses paid upon successful
completion of the merger, and approximately $200,000 of costs associated with
combining the operations of the two companies. In connection with the
acquisition of Rubric, we recorded merger and integration costs of approximately
$14.8 million, of which $1.0 million was incurred in the fourth quarter of 1999
and $13.8 million was incurred during the nine months ended September 30, 2000
(including $3.5 million in the quarter ended September 30, 2000). This amount
included $2.0 million of payments to Rubric to fund its working capital
requirements prior to the closing of the merger, $2.2 million of employee
bonuses paid upon successful completion of the merger, $800,000 of costs to
announce the merger, and $9.8 million of costs associated with combining the
operations of the two companies, including $9.0 million for customer integration
costs, $400,000 for severance and related costs and $400,000 for write-off of
redundant assets and other costs. We expect to incur additional merger related
costs in the fourth quarter of 2000 as we complete the integration of the Rubric
and Panopticon acquisitions and complete our pending acquisitions of Decisionism
and Servicesoft.
Interest income. Interest income consists of interest earned on our cash,
cash equivalents and short-term investments. The significant increase in
interest income comparing the three and nine months ended September 30, 2000 to
the corresponding periods of 1999 resulted from substantially higher cash
balances available for investment during 2000. Higher cash balances during 2000
resulted from our secondary public offering completed in February 2000.
Interest expense. The decrease in interest expense for the periods presented
is attributable to lower debt balances during 2000.
Income taxes. As of December 31, 1999, we had deferred tax assets of
approximately $13.2 million. Such deferred tax assets are derived primarily from
net operating loss and tax credit carryforwards generated by our annual losses
since inception. As of December 31, 1999, federal and state net operating loss
carryforwards totaled approximately $29.1 million and $13.6 million,
respectively. We have also generated federal and state research and development
tax credit carryforwards of approximately $500,000 and $300,000, respectively.
Realization of these deferred tax assets, including any assets generated by
losses during the nine months ended September 30, 2000, is dependent on future
earnings, the timing and amount of which are uncertain. Due to these
uncertainties, we have recorded a full valuation allowance in an amount equal to
our deferred tax assets; accordingly no tax benefit is reflected in the results
of operations for any period since inception for the deferred tax assets
generated to date. Our net operating loss and tax credit carryforwards will
expire on various dates beginning in 2004 if not used to offset future income
prior to their expiration. Utilization of the net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operating and capital expenditure
requirements primarily through the sale of equity securities, as well as through
limited debt financing. Our working capital increased from $69.4 million at
December 31, 1999 to $198.8 million at September 30, 2000, due primarily to
proceeds from our secondary public offering completed in February 2000. Changes
in current assets other than cash and short-term investments were largely offset
by changes in current liabilities. The increase in accounts
15
<PAGE> 16
receivable resulted primarily from a larger number of product sales transactions
at higher average prices. The increase in current liabilities resulted primarily
from greater accrued compensation and other expenses and an increase in deferred
revenue resulting from a higher volume of product sales transactions. Overall,
net cash used in operating activities increased to $33.0 million for the nine
months ended September 30, 2000 from $8.4 million for the corresponding period
of 1999, due primarily to increased operating losses excluding non-cash charges
and merger related costs incurred primarily in connection with the acquisitions
of Rubric and Panopticon.
Net cash used in investing activities during the nine months ended September
30, 2000 increased approximately $80.0 million compared to the corresponding
period during 1999. Investing activities consisted primarily of the purchase of
$71.4 million in short-term investment securities using cash obtained in our
initial and secondary public offerings, as well as a $7.8 million increase in
investments in property and equipment, including computer and communications
equipment, software, office equipment, furniture, fixtures and leasehold
improvements.
Financing activities during the nine months ended September 30, 2000
generated $176.4 million, compared to $72.3 million during the corresponding
period in 1999. Net cash provided from financing activities during the first
nine months of 2000 consisted primarily of $175.0 million in net proceeds from
our secondary public offering in February 2000. Net cash provided by financing
activities during the first nine months of 1999 consisted primarily of net
proceeds from the issuance of Series E Preferred Stock in June 1999, which was
subsequently converted to common stock at the time of our initial public
offering.
As of September 30, 2000, we held $210.2 million of cash, cash equivalents
and short-term investments. We anticipate that our cash and cash equivalents on
hand, combined with cash flows from customers, will be sufficient to fund
operating and capital requirements for the next 12 months. However, should
additional funding be required for operating requirements, capital expenditures,
acquisitions, or unanticipated events, we may be required to obtain such
additional funding through debt facilities or the public or private sales of
debt or equity securities. Such funding may not be available in quantities or on
terms favorable to us, or at all. Failure to obtain funding when needed could
seriously harm us and adversely affect our future results of operations.
Furthermore, equity securities issued to obtain any required funding in the
future may substantially dilute the ownership of common stockholders and have
rights, preferences or privileges senior to the rights, preferences or
privileges of our common stockholders.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
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, as well as the risks and information in our annual 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.
WE HAVE INCURRED LOSSES SINCE OUR 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 first nine months of 2000. As of September 30, 2000,
we had accumulated net losses of approximately $147.2 million. Servicesoft,
which we agreed to acquire in September 2000, had accumulated net losses of
approximately $89.8 million as of June 30, 2000. We have not achieved
profitability to date, and we expect to continue to incur substantial 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.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED.
Because we are still in the early stages of our development, we will be
subject to the risks, expenses and uncertainties frequently encountered by a
young company. For example, because we introduced a number of our products in
May 1999, it is difficult to predict whether our products will continue to be
accepted by the market, which is evolving rapidly, and the level of revenues we
can expect to derive from sales of our products. Furthermore, several members of
our management team have been with us for only a short period of time. Because
of our limited operating history and evolving product offerings, our insights
into trends that may emerge and affect our business are limited.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. The factors that affect our quarterly operating results
include:
- changes in our pricing policies, or changes in the pricing policies
of our competitors;
- the size and timing of customer orders for our products and our
professional services;
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<PAGE> 17
- the demand for our products, particularly our e-business
applications;
- uncertainty regarding the timing of the implementation cycle for our
products;
- increased expenses for sales and marketing, product development and
administration;
- changes in the level of sales of professional services as compared to
product licenses;
- the timing of the introduction of new product and services by us or
our competitors, which could affect the demand for our existing
products and services;
- the purchasing and budgeting cycles of our customers, which could
result in seasonality;
- costs incurred with respect to acquisitions of technology or
businesses;
- changes in the mix of our domestic and international sales; and
- changes in general economic and market conditions.
Our quarterly revenues increased 418% from the third quarter of 1999 to
the third quarter of 2000. We do not believe that this rate of growth is
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 decrease.
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. 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 two to seven months, although it can
take longer. 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.
Delays and uncertainty in product and service implementations can
compound the difficulty of forecasting our operating results. In most customer
sales, we are involved in the installation of their software products at the
customer site, and we recognize revenue from a customer sale based in part on
when the installation is complete. However, the timing of the commencement and
completion of the installation 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. In
addition, customers may elect to delay product implementations. These factors
make it difficult to forecast operating results and can result in significant
variability in period-to-period results.
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OUR OPERATING EXPENSES ARE INCREASING, AND IF WE FAIL TO MEET OUR REVENUE
FORCASTS, WE WILL NOT BE ABLE TO REDUCE THESE EXPENSES QUICKLY.
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 our increased spending. If we do not significantly
increase revenues as a result of these efforts, we will not achieve
profitability. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. As a result, we would not
be able to reduce spending quickly if our revenue was lower than we had
projected. Therefore, if our revenue falls below our expectations in any
quarter, or if we increase our spending ahead of our revenue growth, our
operating results will be lower than expected.
IF OUR ACQUISITIONS ARE NOT PERCEIVED AS SUCCESSFUL, THIS MAY CAUSE A DECLINE IN
OUR STOCK PRICE.
We recently acquired several companies, we have agreed to acquire
Servicesoft and Decisionism, Inc., and if we are presented with appropriate
opportunities, we may acquire additional companies or make investments in other
companies, products or technologies in the future. Many of these companies are
in the early stages of their development and have unproven business models. We
may not realize the anticipated benefits of these or other acquisitions or
investments to the extent that we anticipate, or at all. 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 our existing
stockholders. If these acquisitions are not perceived as accretive, our stock
price may decline.
OUR ACQUISITIONS MAY RESULT IN DISRUPTIONS TO OUR BUSINESS DUE TO DIFFICULTIES
IN ASSIMILATING PERSONNEL, TECHNOLOGY AND OPERATIONS.
The integration of acquired companies into our own will be a complex,
time consuming and expensive process and may disrupt our business if not
completed efficiently or in a timely manner. We must demonstrate to customers
and suppliers that an acquisition will not result in adverse changes in client
service standards, or dilution of or distraction to our business focus. We may
not be able to successfully assimilate additional personnel, operations,
acquired technology or products into our business. In particular, we will need
to assimilate and retain key professional services, engineering and marketing
personnel. The difficulties of integrating other businesses could be greater
than we anticipate, and could disrupt our ongoing business, disrupt our
management and employees and increase our expenses.
ACCOUNTING CHARGES RELATING TO ACQUISITIONS WILL PREVENT US FROM ACHIEVING
POSITIVE NET INCOME UNDER GAAP AS QUICKLY AS WE MIGHT OTHERWISE.
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We have acquired several companies recently, in addition to our proposed
acquisitions of Servicesoft and Decisionism, and we have accounted or intend to
account for these acquisitions using the purchase method of accounting. Under
the purchase method, the purchase price of the acquired company is allocated
based on an independent valuation, to the specific tangible and intangible
assets acquired and liabilities assumed. We recorded approximately $362.0
million of intangible assets and goodwill on our balance sheet in connection
with our acquisition of Rubric, which will result in amortization expense of
$66.9 million for 2000, $72.7 million for 2001, $72.7 million for 2002, $72.1
million for 2003, $71.6 million for 2004 and $6.0 million for 2005. We also
recorded $28.8 million in intangible assets and goodwill in connection with our
acquisition of Aperio, and $88.0 million in intangible assets and goodwill in
connection with our acquisition of Panopticon. We expect to record approximately
$550.7 million in intangible assets and goodwill in connection with our proposed
acquisition of Servicesoft, which would result in annual amortization expense of
approximately $112.3 million, and expect to record a charge to operations upon
completion of this acquisition of approximately $13.0 million for acquired
in-process research and development. This allocation is subject to change
pending a final analysis of the fair values of the assets acquired and
liabilities assumed. We will likely record additional intangible assets and
goodwill and merger related costs in connection with potential future
acquisitions. These charges will reduce our net income reported under generally
accepted accounting principles.
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 fluctuated 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 harm 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, five of our executive
officers commenced employment with us during 2000. We cannot assure you that our
new executive officers will be able to work effectively together to manage our
growth and continuing operations.
OUR GROWTH DEPENDS ON MARKET ACCEPTANCE OF OUR APPLICATIONS DESIGNED FOR
INTERNET-BASED SYSTEMS.
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We first introduced our applications designed for Internet-based systems
in May 1999. We expect that our future growth will depend significantly on
revenue from licenses of these applications 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 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 ARE UNABLE TO SIGNIFICANTLY EXPAND OUR SALES
FORCE.
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. If we are unable to hire or retain qualified sales
personnel, or if newly hired personnel fail to develop the necessary skills or
reach productivity more slowly than anticipated, our business could be harmed.
WE RELY 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 that, 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
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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. In addition, companies with which we have marketing, technology or
distribution relationships may promote products of several different companies.
If these companies choose not to promote our products or if they develop, market
or recommend software applications that compete with our products, our business
will be harmed.
In addition, we have distribution relationships with companies located
around the world that distribute or resell our products. Sales through these
indirect sales channels accounted for approximately 28.7% of our total revenues
for 1998, 35.3% for 1999 and 13.3% for the first nine months of 2000. If we
cannot maintain successful relationships with our indirect sales channel
partners, we may have difficulty expanding the sales of our products and our
international growth may be limited.
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 have recently released new versions of a number of our existing
analytic applications. We may not be successful in marketing and supporting
these new versions, or developing and marketing 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.
WE DEPEND ON INCREASED BUSINESS FROM OUR NEW CLIENTS, AND IF WE FAIL TO GROW OUR
CLIENT BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING RESULTS COULD BE HARMED.
If we fail to grow our client base or generate repeat and expanded
business from our current and future clients, our business and operating results
will be seriously harmed. Some of our clients initially make a limited purchase
of our products and services for pilot programs. These clients may not choose to
purchase additional licenses to expand their use of our products. These clients
have not yet developed or deployed initial applications based on our products.
If these clients do not successfully develop and deploy these initial
applications, they may choose not to purchase deployment licenses or additional
development licenses.
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In addition, as we introduce new versions of our products or new
products, our current clients may not require the functionality of our new
products and may not ultimately license these products. Because the total amount
of maintenance and support fees we receive in any period depends in large part
on the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively affect our future services
revenue. In addition, if clients elect not to renew their maintenance
agreements, our services revenue could decline significantly.
MARKET ACCEPTANCE OF OUR PRODUCTS MAY SUFFER IF WE ARE UNABLE TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES AND INDUSTRY STANDARDS.
Rapidly changing technology and operating system standards, changes in
customer requirements and evolving industry 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, or if competing products emerge
which are based on new technologies or new industry standards which perform
better or cost less than our products, 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,
customer requirements or industry standards.
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.
FAILURE TO LICENSE NECESSARY THIRD PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES.
We license third party software that we incorporate into our products.
These licenses may not continue to be available on commercially reasonable terms
or at all. Some of this technology would be difficult to replace. 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.
If we are required to enter into license agreements with third parties for
replacement technology, we could be subject to higher royalty payments and a
loss of product differentiation.
WE FACE INTENSE COMPETITION THAT COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS.
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Our market is intensely competitive, and we expect competition to
intensify in the future. Recently, some of our competitors reduced the prices of
their products and services substantially in certain cases in order to obtain
new customers. Competitive pressures may make it difficult for us to acquire and
retain customers and may require us to reduce the price of our products. 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. We currently face competition from providers of
consulting-based analytic solutions, vendors of point technologies that provide
website analysis, in-house development efforts by potential customers, and from
other software providers. In addition, we face 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. In addition, we expect
that competition may increase as a result of software industry consolidations
and formations of alliances among industry participants or with third parties.
For example, Kana Communications, Inc. recently acquired Silknet Software, Inc.,
eGain Communications Corp. recently acquired Inference Corporation, Siebel
Systems Inc. recently acquired Onlink Technologies, Inc. and E.piphany, Inc.
recently acquired Octane Software, Inc. Finally, 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.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY IN MARKET ACCEPTANCE FOR
OUR PRODUCTS OR MAY EXPOSE US TO LIABILITY.
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. We recently released new versions of a number of our analytic
software applications. As a result, these products may be particularly
susceptible to errors. Although we continue to evaluate our products for errors
following the commencement of commercial shipments and receive information from
customers regarding errors they detect, if we are not able to detect and correct
errors in products or releases before commencing commercial shipments, we may
experience loss of or delay in revenues, loss of market share or failure to
achieve market acceptance for our products, diversion of development resources
or injury to our reputation.
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We may encounter product liability claims in the future as a result of
any product defects. 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. 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 have only a limited history of marketing, selling and supporting our
products and services internationally. We conduct our international sales
primarily through direct sales offices in Europe and Asia and through
distributors in Japan. International sales represented approximately 5.1% of our
total revenue for the year ended December 31, 1998, 23.2% for 1999 and 19.1% for
the first nine months of 2000, substantially all of which consisted of sales to
customers in Canada, Europe and Japan. 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. The expansion of our existing international operations and
entry into additional international markets will require significant management
attention and financial resources.
Our products must be localized, or 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.
We also face certain other risks inherent in conducting business
internationally, such as:
- difficulties and costs of staffing and managing international
operations;
- difficulties in recruiting and training an international staff;
- difficulties in entering into strategic relationships with companies
in international markets, particularly in Japan where all of our
sales have been made through distributors;
- 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;
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- legal and governmental regulatory requirements;
- tariffs, duties, price controls and other 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 to mitigate exchange rate risk. Accordingly, our results of
operations could be harmed by foreign currency exchange rate fluctuations.
WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH, INCLUDING
EXPANSION OF OUR MANAGEMENT SYSTEMS, COULD HARM 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 131 at December 31, 1999 to 320 at September 30,
2000. We anticipate further significant increases in the number of our
employees. 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. 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.
In the third quarter of 2000, we began and partially completed the
implementation of several new operational information systems. In the fourth
quarter of 2000, we will begin an extensive upgrade of our finance, accounting,
and product distribution systems. In addition, we plan to deploy certain of
these systems in our international operations during the fourth quarter of 2000
and the first quarter of 2001. Failure to successfully complete these systems
implementations, upgrades, and deployments in a timely and effective manner may
result in the disruption of our operations, which could adversely affect our
operating results.
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 the foreseeable future. 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 fund expansion, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS AND TO
SECURITIES LITIGATION.
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The market price of our common stock has been and is likely to continue
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 the 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.
ADDITIONAL RISKS RELATED TO OUR PROPOSED ACQUISITION OF SERVICESOFT
FAILURE TO COMPLETE THE MERGER COULD HARM OUR STOCK PRICE AND FUTURE BUSINESS
AND OPERATIONS.
Our proposed acquisition of Servicesoft is subject to several closing
conditions, including approval by each company's stockholders. Although each
company has scheduled its stockholder meetings for December 14, 2000, we cannot
assure you as to when, or whether, the merger will be successfully completed. In
the event that the merger is not successfully completed, we may be subject to a
number of material risks, including the following:
- we may be required to pay Servicesoft a termination fee of $12.5
million;
- Servicesoft may be required to repay loans of up to $15 million that
may be borrowed from Broadbase during the interim period;
- Broadbase may be required to forgive any portion of the outstanding
loans to Servicesoft, up to $15 million, and to pay any portion of
the loans that are not funded to Servicesoft;
- the trading price of our common stock may decline to the extent that
the current market price reflects a market assumption that the merger
will be completed; and
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- costs related to the proposed merger, such as legal, accounting and
financial advisory fees and employee retention bonuses, must be paid
by each of the parties, whether or not the merger is completed.
In addition, the failure to complete the proposed merger may have a
negative impact on our ability to sell our products and services, attract and
retain employees and clients, and maintain strategic relationships with third
parties. If the merger is not completed, we may not be able to restore the
status of our business as it existed prior to the announcement of the merger. If
the merger is not completed and our board of directors determines to seek
another merger or business combination, we may not be able to find a partner
with comparable technology, products or business.
IF WE COMPLETE THE ACQUISITION, BUT DO NOT SUCCESSFULLY INTEGRATE THE OPERATIONS
AND PERSONNEL OF SERVICESOFT IN A TIMELY MANNER, THIS WILL DISRUPT THE COMBINED
COMPANY'S BUSINESS AND COULD NEGATIVELY AFFECT ITS OPERATING RESULTS.
Our proposed acquisition of Servicesoft involves risks related to the
integration and management of Servicesoft's operations and personnel. The
integration of Servicesoft into our business will be a complex, time consuming
and expensive process and may disrupt the businesses of both companies if not
completed in a timely and efficient manner. After the merger, we must operate as
a combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices.
We may encounter substantial difficulties, costs and delays involved in
integrating Servicesoft's operations into our own, including:
- potential incompatibility of business cultures;
- perceived adverse changes in business focus;
- potential conflicts in distribution, marketing or other important
relationships; and
- the loss of key employees and diversion of the attention of
management from other ongoing business concerns.
Our integration of Servicesoft's operations and personnel may be
particularly difficult due to the location of Servicesoft's headquarters in
Natick, Massachusetts. There are currently no plans to relocate either company's
headquarters. Failure to complete the integration successfully could result in
the loss of key personnel and customers. We will need to devote significant
resources to the integration of the acquired operations and personnel, and if
unsuccessful, our business will suffer. In addition, the attention and effort
devoted to the integration of Servicesoft will significantly divert each
company's management's attention from other important issues, which could
negatively affect the business and operating results of the combined company.
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IF WE AND SERVICESOFT DO NOT INTEGRATE OUR PRODUCTS AND TECHNOLOGIES QUICKLY AND
EFFECTIVELY, MANY OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT BE REALIZED.
We will need to integrate Servicesoft's product development operations,
products and technologies with our own. This integration may be difficult and
unpredictable because each company's products are highly complex and were
developed independently and without regard to this integration. Successful
integration of Servicesoft's product development operations and product lines
with our own also requires coordination of different development and engineering
teams, as well as sales and marketing efforts and personnel. This, too, may be
difficult and unpredictable because of possible differences between our
corporate cultures and organizations, different product and technology decisions
and the geographic distance between our headquarters. In addition, this
integration may take longer than expected, and we may be required to expend more
resources on integration than anticipated. The need to expend additional
resources on integration would reduce the resources which would otherwise be
spent on developing each companies' own products and technologies. If we cannot
successfully integrate Servicesoft's operations, products and technologies with
our own, or if this integration takes longer than anticipated, the combined
company may not be able to operate efficiently or realize the expected benefits
of the merger.
IN ORDER TO ACHIEVE THE ANTICIPATED BENEFITS OF THE MERGER, THE COMBINED COMPANY
WILL NEED TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW AND ENHANCED PRODUCTS.
As a combined company, we expect to develop and introduce new products,
and enhanced versions of each company's currently existing products, that
interoperate as a single platform. In addition to the risks and uncertainties
inherent in the development and introduction of new products, the need to
develop and introduce, in a timely manner, new products and versions that work
effectively together and allow customers to achieve the benefits of a broader
product offering presents significant additional obstacles. In particular,
because our market is characterized by rapidly shifting customer requirements,
we may not be able to assess these requirements accurately, or our joint
products may not sufficiently satisfy these requirements. In addition, the
introduction of these anticipated new products and versions may result in longer
sales cycles and product implementations, which may cause revenue and operating
income to fluctuate and fail to meet expectations.
To date, we have not thoroughly investigated the obstacles,
technological, market-driven or otherwise, to developing and marketing these new
products and services in a timely and efficient way. We may not be able to
overcome these obstacles, or market acceptance of new products and services
developed by the combined company after the merger may not meet expectations.
PARTNERS AND CUSTOMERS OF BOTH COMPANIES MAY REACT UNFAVORABLY TO THE MERGER.
We and Servicesoft have entered into relationships with other technology
companies, including software and services firms, to deliver our products to
customers. Some of these other
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companies may feel that the combined company poses new competitive threats to
their businesses and as a result may terminate their relationships with us, or
reduce their level of activity on behalf of the combined company. In addition,
we will need to educate our indirect sales channels regarding Servicesoft's
products and services, and these indirect channels may not market these products
and services effectively or at all.
The merger may also have the effect of disrupting customer relationships.
Broadbase and Servicesoft customers may not continue their current buying
patterns during the pendency of, and following, the merger. Customers may defer
purchasing decisions as they evaluate the likelihood of successful integration
of Servicesoft's products and services with our own, and the combined company's
future product and service strategy. Also, because of the broader product and
service offering that we will offer after the merger, some of our customers may
view the combined company as more of a direct competitor than either Broadbase
or Servicesoft as an independent company, and may therefore cancel or fail to
place additional orders after the merger. Any significant delay or reduction in
orders for either company's products could have a material, negative impact on
the combined company's operating results after the merger.
IF WE AND SERVICESOFT ARE NOT BE ABLE TO SUCCESSFULLY CROSS-SELL OUR PRODUCTS
AND SERVICES TO EACH OTHER'S CUSTOMERS, THIS MAY NEGATIVELY AFFECT THE COMBINED
COMPANY'S OPERATING RESULTS.
After the merger, we intend to offer our current products to existing
Servicesoft customers, and Servicesoft's current products to our existing
customers. There can be no assurance that either company's customers will have
an interest in the other company's products and services. The failure of
cross-marketing efforts would diminish our ability to achieve one of the
benefits that we expect to realize in the merger, and could have a material,
negative impact on the combined company's business, financial condition and
operating results.
FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE ANTICIPATED BENEFITS OF THE
MERGER.
The successful combination of Broadbase and Servicesoft will depend in
part on the retention of personnel critical to the business and operations of
the combined company due to, for example, their technical skills or management
expertise. Employees may experience uncertainty about their future role with us
until our strategies with regards to Servicesoft's employees are announced or
executed. We have different corporate cultures, and Servicesoft employees may
not want to work for a larger, publicly-traded company instead of a smaller,
start-up company. Some officers, including the Chief Executive Officer and
President, and all directors of Servicesoft have agreements that provide for
benefits, including severance and other payments and acceleration of vesting of
stock options or restricted stock grants, that may be triggered upon the closing
of the merger, and this may affect our ability to retain these employees. In
addition, competitors may recruit employees before the merger and during
integration, as is common in high technology mergers. If we are unable to retain
personnel that are critical to the successful integration of Servicesoft with
our company, we could face disruptions to our operations, loss of key
information, expertise or know-how and unanticipated additional recruitment and
training costs. In addition, the loss of key personnel could diminish the
anticipated benefits of the merger.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
During the first nine months of 2000, our exposure to market risk for changes
in interest rates related primarily to our investment portfolio. The primary
objective of our investment activities is to preserve principal while at the
same time maximizing yields without significantly increasing risk. At September
30, 2000, our portfolio included money market funds, commercial paper,
short-term taxable municipals, government agencies, and corporate bonds. The
diversity of the portfolio helps us to achieve our investment objective. As of
September 30, 2000 the weighted average maturity of our portfolio was less than
90 days.
Our debt obligations consist primarily of a capital lease assumed in
connection with the acquisition of Rubric and a note payable entered into prior
to our public offering. These debt facilities were used primarily to purchase
capital items such as computers and office equipment. Currently, all such
capital spending is funded using working capital. We have no significant
interest rate exposure on our note payable and the interest rate on our capital
lease obligation is fixed.
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
September 30, 2000 we do not believe that a hypothetical 10% change in foreign
currency rates would materially harm our financial position.
29
<PAGE> 30
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On June 23, 2000, in connection with our acquisition of Aperio, we issued
approximately 561,000 shares of our common stock in exchange for all outstanding
shares of Aperio capital stock, and converted outstanding options to acquire
Aperio common stock into options and warrants to acquire approximately 119,000
shares of Broadbase's common stock. We obtained a permit for the issuance of
these securities after a fairness hearing conducted by the California Department
of Corporations, and therefore the offer and sale of these shares was exempt
from registration under the Securities Act pursuant to Section 3(a)(10) of the
Securities Act of 1933.
On September 15, 2000, in connection with our acquisition of Panopticon, we
issued approximately 2.66 million shares of common stock in exchange for all
outstanding shares of Panopticon capital stock, and converted outstanding
options and warrants to acquire Panopticon capital stock into options and
warrants to purchase approximately 519,860 shares of Broadbase common stock. We
obtained a permit for the issuance of these securities after a fairness hearing
conducted by the California Department of Corporations, and therefore the offer
and sale of these shares was exempt from registration under the Securities Act
pursuant to Section 3(a)(10) of the securities Act of 1933.
Use of Proceeds from Sale of Registered Securities
Our registration statement on Form S-1 (File No. 333-82251) was declared
effective by the SEC on September 21, 1999. A total of 9,200,000 shares of our
common stock were registered with the SEC with an aggregate registered offering
price of $64.4 million. The offering commenced on September 21, 1999, and all
9,200,000 shares of common stock were sold for the aggregate registered offering
price through a syndicate of underwriters managed by Deutsche Banc Alex. Brown,
Dain Rauscher Wessels, Thomas Weisel Partners LLC and E*Offering. We sold
8,000,000 shares closed on September 27, 1999 and 1,200,000 shares on October
18, 1999.
We paid the underwriters underwriting discounts and commissions totaling $4.5
million in connection with the offering. In addition, we incurred additional
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 $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 made
directly or indirectly to any directors or officers of Broadbase or their
associates, persons owning 10% or more of any class of equity securities of
Broadbase, or to any other of our affiliates.
As of September 30, 2000, we had used the estimated aggregate net proceeds of
$57.8 million that we received from our initial public offering as follows (in
millions):
<TABLE>
<S> <C>
Construction of plant, building and facilities: $ 1.7
Purchase and installation of machinery and equipment: $ 9.3
Repayment of indebtedness: $ 1.0
Working capital: $ 45.8
</TABLE>
The foregoing amounts represent our best estimate of the use of proceeds for
the period indicated. No such payments were made to directors or officers of
Broadbase or their associates, holders of 10% or more of any class of equity
securities of ours or to affiliates of ours.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
30
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits have been filed with this report:
2.1 Agreement and Plan of Merger between Broadbase and Panopticon, Inc.
dated July 6, 2000.
2.2 Agreement and Plan of Merger between Broadbase and Servicesoft, Inc.
dated September 18, 2000.
3.1 First Amended and Restated Certificate of Incorporation, adopted by
Broadbase's board of directors on November 6, 2000, subject to
stockholder approval.
10.1 Offer letter for Fabio Angelillis dated August 21, 2000.
10.2 Aperio, Inc., 1998 Incentive and Nonqualified Stock Option Plan and
related forms of agreements.
10.3 Panopticon, Inc., 1999 Stock Plan and related forms of agreements.
10.4 Lease between between J. Robert S. Wheatley and Roger A. Fields,
d.b.a. R & R Properties, and the registrant dated August 11, 2000.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
On September 26, 2000, we filed a current report on Form 8-K reporting under
Item 2, relating to our acquisition of Panopticon.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BROADBASE SOFTWARE, INC.
Dated: November 13, 2000 By: /s/ Rusty Thomas
-------------------------------------
Rusty Thomas
Executive Vice President and
Chief Financial Officer
32
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM FILE NO. EXHIBIT FILING DATE HEREWITH
------ ------------------- ---- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
2.1 Agreement and Plan of Merger between Broadbase 8-K 2.01 09/26/00
and Panopticon, Inc. dated July 6, 2000.
2.2 Agreement and Plan of Merger between Broadbase S-4 333-48696 2.01 11/9/00
and Servicesoft, Inc. dated September 18, 2000.
3.1 First Amended and Restated Certificate of S-4 333-48696 4.05 11/9/00
Incorporation, adopted by Broadbase's board of
directors on November 6, 2000, subject to
stockholder approval.
10.1 Offer letter for Fabio Angelillis dated August X
21, 2000.
10.2 Aperio, Inc., 1998 Incentive and Nonqualified S-8 333-40206 4.09 06/27/00
Stock Option Plan and related forms of
agreements.
10.3 Panopticon, Inc., 1999 Stock Plan and related S-8 333-46652 4.08 09/26/00
forms of agreements.
10.4 Lease between between J. Robert S. Wheatley X
and Roger A. Fields, d.b.a. R & R Properties,
and the registrant dated August 11, 2000.
27.1 Financial Data Schedule. X
</TABLE>
33
