<PAGE> 1
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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 June 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 registrant as specified in its charter)
Delaware 77-0417081
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
181 Constitution Drive
Menlo Park, CA 94025
(Address of principal executive offices including zip code)
(650) 614-8300
(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 Registrant's common stock outstanding as of August 9, 2000:
47,513,495
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BROADBASE SOFTWARE, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999.................. 3
Condensed Consolidated Statements of Operations for the three months and six months ended
June 30, 2000 and June 30, 1999............................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and
June 30, 1999................................................................................. 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds..................................................... 21
Item 3. Defaults upon Senior Securities............................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders........................................... 22
Item 5. Other Information............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................................................. 23
Signatures.................................................................................... 24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999(1)
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 165,244 $ 76,642
Short-term investments 56,181 --
Accounts receivable, net 13,822 2,712
Prepaid expenses and other current assets 4,346 1,239
------------- -------------
Total current assets 239,593 80,593
Property and equipment, net 8,426 2,868
Restricted cash 633 633
Other assets 360,934 676
------------- -------------
Total assets $ 609,586 $ 84,770
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,414 $ 559
Accrued compensation 5,957 2,919
Accrued expenses 12,091 2,341
Current portion of bank line of credit, notes payable and capital lease
obligations 351 749
Deferred revenue 8,768 4,663
------------- -------------
Total current liabilities 28,581 11,231
------------- -------------
Bank line of credit, notes payable and capital lease obligations 221 333
------------- -------------
Total liabilities 28,802 11,564
------------- -------------
Stockholders' equity:
Common stock 47 17
Additional paid-in capital 714,750 124,297
Deferred stock compensation (23,403) (8,710)
Notes receivable from stockholders (722) (693)
Accumulated other comprehensive loss (92) (33)
Accumulated deficit (109,796) (41,672)
------------- -------------
Total stockholders' equity 580,784 73,206
------------- -------------
Total liabilities and stockholders' equity $ 609,586 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenue:
License $ 7,240 $ 1,567 $ 11,760 $ 2,693
Professional services 2,262 239 3,381 383
Maintenance 891 247 1,553 463
-------- -------- -------- --------
Total net revenue 10,393 2,053 16,694 3,539
-------- -------- -------- --------
Cost of revenue:
License 1,434 168 2,041 428
Professional services (1) 2,696 388 4,227 661
Maintenance (2) 490 153 778 271
Amortization of acquired core and
developed technology 397 -- 661 --
-------- -------- -------- --------
Total cost of revenue 5,017 709 7,707 1,360
-------- -------- -------- --------
Gross margin 5,376 1,344 8,987 2,179
-------- -------- -------- --------
Operating expenses:
Sales and marketing (3) 8,346 3,839 15,924 6,495
Research and development (4) 3,460 1,612 6,224 2,800
General and administrative (5) 1,367 438 2,493 932
Amortization of deferred stock
compensation 4,393 1,547 7,903 2,472
Amortization of intangible assets and
goodwill 17,844 -- 29,740 --
Acquired in-process research and
development -- -- 10,057 --
Merger expenses 4,096 -- 10,280 --
-------- -------- -------- --------
Total operating expenses 39,506 7,436 82,621 12,699
-------- -------- -------- --------
Loss from operations (34,130) (6,092) (73,634) (10,520)
Interest income 3,631 81 5,810 194
Interest expense (167) (301) (300) (561)
-------- -------- -------- --------
Net loss $(30,666) $ (6,312) $(68,124) $(10,887)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.67) $ (1.54) $ (1.58) $ (2.84)
======== ======== ======== ========
Weighted-average shares used in computing
basic and diluted net loss per share 45,603 4,101 43,029 3,827
======== ======== ======== ========
</TABLE>
(1) Excludes $1,022, $1,864, $60 and $98 of amortization of deferred stock
compensation for the three and six months ended June 30, 2000 and for the three
and six months ended June 30, 1999, respectively.
(2) Excludes $35, $61, $25 and $42 of amortization of deferred stock
compensation for the three and six months ended June 30, 2000 and for the three
and six months ended June 30, 1999, respectively.
(3) Excludes $789, $1,678, $818 and $1,175 of amortization of deferred stock
compensation for the three and six months ended June 30, 2000 and for the three
and six months ended June 30, 1999, respectively.
(4) Excludes $1,077, $1,442, $413 and $745 of amortization of deferred stock
compensation for the three and six months ended June 30, 2000 and for the three
and six months ended June 30, 1999, respectively.
(5) Excludes $1,470, $2,858, $231 and $412 of amortization of deferred stock
compensation for the three and six months ended June 30, 2000 and for the three
and six months ended June 30, 1999, respectively.
See accompanying notes to the Condensed Consolidated Financial Statements.
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BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (68,124) $ (10,887)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred stock compensation 7,903 2,472
Depreciation and amortization 825 451
Acquired in-process research and development 10,057 --
Amortization of acquired core and developed technology 661 --
Amortization of intangible assets and goodwill 29,740 --
Write-off of note receivable from stockholder -- 7
Value of common stock options issued for severance and to non-employees 403 --
Changes in balance sheet items:
Accounts receivable (9,104) (646)
Prepaid expenses and other current assets (1,955) (565)
Accounts payable (4,782) 468
Accrued expenses 6,014 2,032
Deferred revenue 3,608 251
--------- ---------
Net cash used in operating activities (24,754) (6,417)
INVESTING ACTIVITIES:
Purchase of short-term investments, net (56,181) --
Purchases of property and equipment (4,862) (637)
--------- ---------
Net cash used in investing activities (61,043) (637)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock, net -- 19,979
Proceeds from issuance of common stock upon exercise of options 526 176
Proceeds from issuance of common stock from employee stock purchase
program 322 --
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 421 --
Proceeds from issuance of convertible debt -- 1,275
Payments on notes payable (1,061) (194)
Principal payments on capital lease obligations (41) (15)
Principal payments on equipment line of credit (167) (167)
--------- ---------
Net cash provided by financing activities 174,458 21,046
--------- ---------
Effect of foreign exchange rate changes on cash and cash equivalents (59) (1)
--------- ---------
Net increase in cash and cash equivalents 88,602 13,991
Cash and cash equivalents:
Beginning of period 76,642 13,990
--------- ---------
End of period $ 165,244 $ 27,981
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 60 $ 541
Supplemental schedule of non cash investing and financing activities:
Issuance of common stock in connection with purchase
business combinations $ 391,728 --
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
5
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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 on March 13, 2000. Operating results for the six month
period ended June 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 June 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):
<TABLE>
<CAPTION>
<S> <C>
Cash equivalents:
Money market funds $ 550
Short-term taxable municipals 64,450
Demand notes 44,432
Commercial paper 53,912
--------
Total cash equivalents $163,344
========
Short-term investments
Corporate bonds $ 44,181
Government agencies 12,000
--------
Total short-term investments $ 56,181
========
</TABLE>
3. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(30,666) $(6,312) $(68,124) $(10,887)
Translation gain (loss) (13) (10) (59) (1)
--------- ------- -------- --------
Comprehensive loss $(30,679) $(6,322) $(68,183) $(10,888)
========= ======== ========= =========
</TABLE>
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The accumulated other comprehensive loss at June 30, 2000 of $92,000
consisted entirely of cumulative 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic and diluted net loss per share:
Net loss $(30,666) $ (6,312) $(68,124) $(10,887)
Weighted-average shares of common
stock outstanding 46,380 6,186 43,853 5,878
Less weighted-average shares subject
to repurchase (777) (2,085) (824) (2,051)
Weighted-average shares of common
stock outstanding used in
computing basic and diluted net
loss per share 45,603 4,101 43,029 3,827
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.67) $ (1.54) $ (1.58) $ (2.84)
======== ======== ======== ========
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued 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 Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principals to revenue recognition in financial statements.
In recent actions, the SEC has further delayed the required implementation date
of SAB 101 which, for the Company, will be no later than the fourth quarter of
2000, retroactive to the beginning of the current fiscal year. The SEC has
indicated that additional implementation guidance will be forthcoming in the
form of "Frequently Asked Questions", however such guidance has not been issued
to date. Although we cannot fully assess the impact of SAB 101 until the
additional guidance from the SEC is issued, our preliminary conclusion is that
the implementation of SAB 101 will not have a material impact on the Company's
consolidated results of operations or financial position.
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
7
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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.
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. ACQUISITION OF RUBRIC, INC.
On February 1, 2000, the Company completed its acquisition of Rubric, Inc., a
Delaware corporation ("Rubric"), 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 transactions 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
Rubric purchase price was $371.8 million and included $301.7 million for the
issuance of our common stock, $61.3 million for the exchange of options to
purchase our 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 incurred
merger-related costs of $11.3 million as of June 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 close 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 $6.3 million of costs associated with combining the operations of the two
companies, including $5.5 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, excluding the one-time write-off of acquired in-process
research and development, totaled approximately $29.7 million at June 30, 2000.
The following unaudited pro forma summarized results of operations have been
prepared assuming that the Rubric 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 six months ended June 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 $10.3 million.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue $ 10,393 $ 3,015 $ 16,980 $ 4,823
Net loss $(26,570) $(26,427) $(57,321) $(51,165)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Basic and diluted net loss per share $ (0.58) $ (2.62) $ (1.31) $ (5.22)
</TABLE>
9. ACQUISITION OF APERIO, INC.
On June 23, 2000, the Company completed its acquisition of Aperio, Inc.
("Aperio"), 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.
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
consideration for Aperio was $30.1 million, consisting of $23.8 million in
Broadbase common stock, $5.0 million in options to purchase Broadbase common
stock, and $1.3 million of acquisition related costs. 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.
10. SUBSEQUENT EVENTS
On July 7, 2000, the Company granted to each employee an option to purchase
500 shares of Broadbase common stock at an exercise price of $1.00 per share, or
in aggregate 130,500 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 will record approximately $4.1
million of deferred stock compensation in July 2000, 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 using a graded vesting method over the options' vesting term of two
years.
On July 7, 2000, Broadbase entered into a definitive agreement to acquire
privately-held Panopticon, Inc. ("Panop.com"), 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. Under the terms of the agreement, the Company will issue
approximately 3.2 million shares of Broadbase common stock, and options and
warrants to purchase Broadbase common stock, in exchange for all securities of
Panop.com outstanding as of the date of the agreement. The transaction will be
recorded using the purchase method of accounting for business combinations.
Completion of this acquisition is expected in September 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
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31, 1999. As of June 30, 2000 we had 260 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 Statement of Position ("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. Maintenance and
support revenue associated with new product licenses and maintenance revenue
resulting from renewed maintenance contracts are deferred and recognized ratably
over the contract period. Professional services revenue is recognized when
services are performed.
Currently, businesses that license our products generally license one or more
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 channels accounted for approximately 12.7% of our total net revenue for
the six months ended June 30, 2000.
Revenue from customers outside North America represented 28.2% of our total
net revenue for the six months ended June 30, 2000. 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 June 30, 2000, we had an accumulated deficit of $109.8 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.
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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 July 7, 2000, Broadbase entered into a definitive agreement to acquire
privately-held Panopticon, Inc. ("Panop.com"), 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. Under the terms of the agreement, the Company will issue
approximately 3.2 million shares of Broadbase common stock, and options and
warrants to purchase Broadbase common stock, in exchange for all securities of
Panop.com outstanding as of the date of the agreement. The transaction will be
recorded using the purchase method of accounting for business combinations.
Completion of this acquisition is expected in September 2000 and is subject to
obtaining all necessary stockholder and regulatory approvals and to other
customary closing conditions.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenue
License $ 7,240 $ 1,567 $ 11,760 $ 2,693
Professional services 2,262 239 3,381 383
Maintenance 891 247 1,553 463
-------- -------- -------- --------
Total net revenue 10,393 2,053 16,694 3,539
-------- -------- -------- --------
Cost of revenue:
License 1,434 168 2,041 428
Professional services 2,696 388 4,227 661
Maintenance 490 153 778 271
Amortization of acquired core and developed technology 397 -- 661 --
-------- -------- -------- --------
Total cost of revenue 5,017 709 7,707 1,360
-------- -------- -------- --------
Gross margin 5,376 1,344 8,987 2,179
-------- -------- -------- --------
Operating expenses:
Sales and marketing 8,346 3,839 15,924 6,495
Research and development 3,460 1,612 6,224 2,800
General and administrative 1,367 438 2,493 932
Amortization of deferred stock compensation 4,393 1,547 7,903 2,472
Amortization of intangible assets and goodwill 17,844 -- 29,740 --
Acquired in-process research and development -- -- 10,057 --
Merger expenses 4,096 -- 10,280 --
-------- -------- -------- --------
Total operating expenses 39,506 7,436 82,621 12,699
-------- -------- -------- --------
Loss from operations (34,130) (6,092) (73,634) (10,520)
Interest income 3,631 81 5,810 194
Interest expense (167) (301) (300) (561)
-------- -------- -------- --------
Net loss $(30,666) $ (6,312) $(68,124) $(10,887)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.67) $ (1.54) $ (1.58) $ (2.84)
======== ======== ======== ========
Weighted-average shares used in computing basic and
diluted net loss per share 45,603 4,101 43,029 3,827
======== ======== ======== ========
</TABLE>
NET REVENUE
License. The increase in license revenue comparing the three and six months
ending June 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.
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<PAGE> 12
Professional services. Professional services revenue is recognized as the
services are performed. The growth in professional services revenue comparing
the three and six months ending June 30, 2000 to the corresponding periods in
1999 reflects the significant expansion of our customer installed base requiring
services and the increased capacity of our consulting organization.
Maintenance. Maintenance revenue is recognized on a straight-line basis over
the period support is provided, usually one year. The increase in maintenance
revenue during the periods presented reflects expansion of our customer
installed 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 six months ending June
30, 2000 to the 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 these costs for the periods presented
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 these
costs for the periods presented 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 intangible core and developed technology acquired from
Rubric on February 1, 2000. The useful life of the core and developed
technologies acquired is 1 and 5 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 six months ending
June 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.
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.
Increased research and development costs during the periods presented are
primarily attributable to significant expansion of our development workforce,
including developers previously employed by Rubric, 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 six months ending June 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 for the periods presented resulted primarily from
grants during the six months ended June 30, 2000 of options to purchase our
common stock at a exercise
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<PAGE> 13
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 common stock at below fair market value. These two
option grants will result in approximately $24.3 million in additional
amortization expense over the next four years. Finally, on July 7, 2000, we
granted to all employees an aggregate of 130,500 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 over the
following four years.
Amortization of intangible assets and goodwill. Amortization of intangible
assets and goodwill during the six months ended June 30, 2000 represents
amortization of intangible assets recorded in connection with the acquisition of
Rubric on February 1, 2000, compared to no such acquisition activity during
1999. This expense will increase in future quarters as approximately $28.8
million in intangible assets recorded in connection with the Aperio acquisition
are amortized beginning in July 2000. We expect to record additional intangible
assets and goodwill in connection with our proposed acquisition of Panop.com,
which is expected to close in September 2000. Intangible assets and goodwill are
amortized over a period of 3 to 5 years.
Acquired in-process research and development. The expense of $10.1 million
for the six months ended June 30, 2000 was incurred in the first quarter of
2000. It represents the write-off of research and development work acquired from
Rubric, which was in process at the time of the acquisition, but which had not
reached technological feasibility and, in the opinion of management, had no
alternative future use.
Merger expenses. In connection with the acquisition of Rubric we recorded
merger and integration costs of approximately $11.3 million of which $1.0
million was incurred in the fourth quarter of 1999 and $10.3 million was
incurred during the six months ended June 30, 2000. This amount included $2.0
million of payments to Rubric to fund its working capital requirements prior to
the close 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 $6.3
million of costs associated with combining the operations of the two companies
including $5.5 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 third quarter
of 2000 as we complete Rubric-committed product implementations and as we
complete our pending acquisition of Panop.com.
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 six months ended June 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 initial public offering completed in September 1999 and 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 six months ended June 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
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Since inception, Broadbase has funded its net 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 $211.0 million at June 30, 2000, due primarily
to proceeds from our secondary public offering completed in February 2000.
Changes in current assets other than cash were largely offset by changes in
current liabilities. The increase in accounts 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 $24.8 million for the six months ended June
30, 2000 from $6.4 million for the corresponding period of 1999, due primarily
to increased operating losses excluding non-cash charges and one-time merger
related costs incurred primarily in connection with the acquisition of Rubric
during the six months ended June 30, 2000.
Use of cash in investing activities increased approximately $60.4 million
comparing the six months ended June 30, 2000 to the corresponding period during
1999. Investing activities consisted primarily of the purchase of $56.2 million
in short-term investment securities using cash obtained in our initial and
secondary public offerings, as well as a $4.2 million increase in investments in
property and equipment. Investments in property and equipment during the six
months ended June 30, 2000, included computer and communications equipment,
software, office equipment, furniture, fixtures and leasehold improvements.
Financing activities during the six months ended June 30, 2000 generated
$174.4 million, compared to $21.0 million during the same period in 1999. Net
cash provided from financing activities during the first half 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 six
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 June 30, 2000, we held $221.4 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. There can be no certainty that such funding will be
available in quantities or on terms favorable to us, or at all. Failure to
obtain such 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 to which common
stockholders may be subordinate.
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 before investing in our common stock. The risks described below are not
the only ones we face. Additional risks that we are aware of or that we
currently believe are immaterial may become important factors that affect our
business. If any of the following risks occur, or if others occur, our business,
operating results and financial condition could be seriously harmed. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED.
We are still in the early stages of our development. Our revenue and income
potential is unproven and depends on emerging, rapidly changing markets and on
acceptance of products that we have only recently introduced. Because our
operating history is limited and our product offerings are evolving, it is
difficult to evaluate our business and our future prospects. Additionally,
because we have only recently introduced our products, it is difficult to
predict whether our products will continue to be accepted by the market and the
level of revenues we can expect to derive from sales of our products.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred net losses and losses from operations for each period from our
inception through the first six months of 2000. As of June 30, 2000, we had
accumulated net losses of approximately $109.8 million. We have not achieved
profitability and we expect to
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<PAGE> 15
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. Although our revenue grew significantly in
1999 and during the first six months of 2000, our growth may not continue at the
current rate or at all.
WE EXPECT OUR QUARTERLY REVENUE AND OPERATING RESULTS TO FLUCTUATE.
Our revenue and operating results are likely to vary significantly from
quarter to quarter. The factors that affect our quarterly operating results
include:
- the demand for our products, particularly our e-business applications;
- the size and timing of customer orders for our products and our
professional services;
- increased expenses for sales and marketing, product development and
administration;
- changes in the level of sales of professional services as compared to
product licenses;
- changes in the mix of our domestic and international sales; and
- changes in general economic and market conditions.
Our quarterly revenue increased 406% from the second quarter of 1999 to the
second 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 fall.
OUR OPERATING EXPENSES ARE INCREASING AND WE WOULD NOT BE ABLE TO REDUCE THEM
QUICKLY, WHICH COULD RESULT IN LOWER THAN EXPECTED OPERATING RESULTS IF WE DO
NOT ACHIEVE EXPECTED REVENUE LEVELS.
We plan to significantly increase our operating expenses as we expand our
sales, marketing, research and development, professional services, customer
support and administrative groups. These expenses will be incurred before we
generate any revenues from this increased spending. If we do not significantly
increase revenues as a result of these efforts, we will not achieve
profitability. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. As a result, we would not
be able to reduce spending quickly if our revenue was lower than we had
projected. Our ability to accurately forecast our quarterly revenue is limited
because of our limited operating history, the rapidly evolving nature of our
market and the sales cycle for our products, which can be long and
unpredictable. If our revenue falls below our expectations in any quarter, or if
we increase our spending ahead of our revenue growth, our operating results will
be lower than expected.
THE UNPREDICTABLE TIMING OF OUR SALES AND IMPLEMENTATION CYCLE MAKES IT
DIFFICULT TO FORECAST OUR OPERATING RESULTS.
Our products can have a long and unpredictable sales cycle. Consequently, we
face difficulty predicting the quarter in which sales to expected customers will
occur. This contributes to the uncertainty of our future operating results.
Potential customers often require time to weigh the costs and benefits of our
products compared to those of in-house development and integration efforts. As a
result, our sales cycle has typically ranged from approximately two to four
months, although it can take longer, particularly for sales to traditional
"bricks and mortar" companies.
In a typical application license transaction, a portion of the implementation
of our products is performed by our professional services group, which connects
our products to the customer's systems and data sources. Upon completion of that
connection, no significant obligations remain with respect to implementation,
and we recognize the revenue related to that license. The actual connection
process can often be completed in approximately two to four weeks. However, the
timing of the commencement and completion of this connection process is subject
to factors that may be beyond our control, as this process requires access to
the
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<PAGE> 16
customer's facilities and coordination with the customer's personnel after
delivery of the software. As a result, we typically do not recognize the license
revenue from an application license until one to three months after our product
is shipped to the customer. Uncertainty as to when our product can be connected
at the customer's facilities makes it more difficult to forecast our operating
results and can result in significant variability in our period-to-period
results.
OUR ACQUISITIONS MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND MANAGEMENT DUE TO
DIFFICULTIES IN ASSIMILATING PERSONNEL, TECHNOLOGY AND OPERATIONS.
We may not realize the benefits from our acquisitions to the extent that we
anticipate, or at all. We may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key professional
services, engineering and marketing personnel. The integration of acquired
companies into our operations will be a complex, time consuming and expensive
process and may disrupt our operations if it is not completed efficiently or in
a timely manner. Among the challenges we may face in this regard are
demonstrating to customers and suppliers that the acquisition will not result in
adverse changes in client service standards or dilution or distraction to our
business focus, retaining key personnel in the transition and ensuring that
acquired products and services can be successfully integrated with our products
and services. The difficulties of integrating our businesses could be greater
than we anticipate. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. Furthermore, we
may have to incur debt or issue equity securities to pay for any additional
future acquisitions or investments, the issuance of which could be dilutive to
us or our existing stockholders.
OUR PROFITABILITY WILL BE DELAYED AND THEREAFTER REDUCED AS A RESULT OF
ACCOUNTING CHARGES RELATING TO OUR CURRENT AND FUTURE ACQUISITIONS.
We accounted for the Rubric acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of Rubric was
allocated based on an independent valuation, to the specific tangible and
intangible assets acquired and liabilities assumed from Rubric. As a result, we
recorded a charge to operations upon consummation of the transaction related to
acquired in-process research and development of approximately $10.1 million. We
also recorded merger-related costs of approximately $11.3 million, of which $1.0
million were included in the our 1999 results of operations. We expect to incur
additional merger related costs in the third quarter of 2000 as we complete
Rubric-committed product implementations. Also, we recorded approximately $362.0
million of intangible assets and goodwill on our balance sheet 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. We will likely record
additional intangible assets and goodwill and merger related costs in connection
with potential future acquisitions. These charges will delay and thereafter
reduce our profitability.
WE NEED TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL IN A
COMPETITIVE EMPLOYMENT MARKET.
Our success depends on our ability to attract, train and retain qualified,
experienced employees. There is substantial competition for experienced
management, engineering, sales and marketing personnel, particularly in the
market segment in which we compete. If we are unable to retain our existing key
personnel, or to attract, train and retain additional qualified personnel, we
may experience inadequate levels of staffing to develop and sell our products
and perform services for our customers.
The market price of our common stock has 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, three of our executive
officers have joined us since January 2000 and others joined us upon the
completion of our acquisition of Rubric in February 2000. We cannot assure you
that our new executive officers will be able to work effectively together to
manage our growth and continuing operations. If we are unable to expand our
sales and marketing organizations in a timely manner, our growth could be
limited.
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OUR GROWTH DEPENDS ON MARKET ACCEPTANCE OF OUR APPLICATIONS DESIGNED FOR
INTERNET-BASED SYSTEMS AND RUBRIC'S EMA PRODUCT.
We first introduced applications designed for Internet-based systems in May
1999, and Rubric first introduced its eMA product in May 1998. We expect that
our future growth will depend significantly on revenue from licenses of these
applications, eMA and related services. There are significant risks inherent in
introducing these new products. Market acceptance of these new products will
depend on the growth of the market for e-business solutions. This growth may not
occur. We cannot assure you that our new e-business applications or eMA will
meet customer performance expectations. If they do not meet customer
expectations or the market for these products fails to develop or develops more
slowly than we expect, our business would be harmed.
OUR BUSINESS WILL SUFFER IF WE DO NOT INCREASE MARKET AWARENESS OF OUR PRODUCTS
BY SIGNIFICANTLY EXPANDING OUR SALES CAPABILITIES.
We sell our products primarily through our direct sales force. We must
significantly expand our direct sales operations to increase market awareness of
our products and increase revenue. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts. As a result, our ability to increase our direct sales operation
will depend on our ability to recruit, train and retain top sales people with
advanced sales skills and technical knowledge. There is a shortage of sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry.
The introduction of our new e-business applications has required us to hire
new sales personnel with the skills required to sell these products. As a
result, most of our current direct sales force has been with us for a relatively
short period. During 1999, we added 12 direct sales representatives to our
direct sales force, which represents 52.2% of our total direct sales
representatives and 24.0% of our total sales personnel as of December 31, 1999.
In the first six months of 2000 we added an additional 35 direct sales
representatives. New sales personnel require training and take time to achieve
full productivity. If we are unable to hire or retain qualified sales personnel,
or if newly hired personnel fail to develop the necessary skills or reach
productivity more slowly than anticipated, our business could be harmed.
WE ARE DEPENDENT ON MARKETING, TECHNOLOGY AND DISTRIBUTION RELATIONSHIPS THAT
MAY GENERALLY BE TERMINATED AT ANY TIME, AND IF OUR CURRENT AND FUTURE
RELATIONSHIPS ARE NOT SUCCESSFUL, OUR GROWTH MAY BE LIMITED.
We rely on marketing and technology relationships with a variety of companies
which, in part, generate leads for the sale of our products. These marketing and
technology relationships include relationships with:
- system integrators and consulting firms;
- vendors of e-commerce and Internet software;
- vendors of software designed for customer relationship management or for
management of organizations' operational information;
- vendors of key technology and platforms;
- demographic data providers; and
- an application service provider and an Internet hoster.
If we cannot maintain successful marketing and technology relationships or
cannot enter into additional marketing and technology relationships, we may have
difficulty expanding the sales of our products and our growth may be limited.
While these companies do not sell or distribute our products, we believe that
many of our direct sales are the result of leads generated by vendors of
e-business and enterprise applications that work with our products. Our
marketing and technology relationships are generally not documented in writing,
or are governed by agreements that can be terminated by either party with little
or no prior notice. Some of these agreements specify that payments are to be
made by us to these companies for providing us with qualifying customer leads.
The generation of leads to date by these companies has not generally satisfied
the specified criteria and therefore payments for leads have been immaterial in
amount.
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In addition, we have distribution relationships with companies located in the
United States, Japan and the Netherlands that distribute or resell our products
-- our indirect sales channel. Sales through our indirect sales channel
accounted for approximately 28.7% of our total revenue for 1998, 35.3% for 1999
and 12.7% for the first six months of 2000. Sales of our products to Indus,
which integrates Foundation into certain of its enterprise solutions for the
energy and utility industries, represented 18.4% of our total revenue in 1998,
11.2% in 1999 and 5.1% in the first six months of 2000. A significant portion of
our sales in Japan were made through distributors. If we cannot maintain
successful relationships with our indirect sales channel, we may have difficulty
expanding the sales of our products and our growth may be limited.
Companies with which we have a marketing, technology or distribution
relationship may promote products of several different companies, including, in
some cases, products that compete with our products. These companies may not
devote adequate resources to selling our products. We may not be able to
maintain these relationships and enter into additional relationships that will
provide timely and cost-effective customer support and service.
CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES GROUP, WHICH ASSISTS OUR CUSTOMERS WITH THE
IMPLEMENTATION OF OUR PRODUCTS.
We believe that growth in our product sales depends on our ability to provide
our customers with professional services to assist with support, training,
consulting and initial implementation of our products and to educate third-party
systems integrators in the use of our products. As a result, we plan to increase
the number of professional services personnel to meet these needs. New
professional services personnel will require training and take time to reach
full productivity. We may not be able to attract or retain a sufficient number
of highly qualified professional services personnel. Competition for qualified
professional services personnel with the appropriate knowledge is intense. We
are in a new market and there is a limited number of people who have the
necessary skills. To meet our customers' needs for professional services, we may
also need to use more costly third-party consultants to supplement our own
professional services group. In addition, we could experience delays in
recognizing revenue if our professional services group falls behind schedule in
connecting our products to customers' systems and data sources.
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 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.
MARKET ACCEPTANCE OF OUR PRODUCTS MAY SUFFER IF WE ARE UNABLE TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Rapidly changing technology and operating system standards may impede market
acceptance of our products. Our new applications have been designed based upon
currently prevailing Internet technology. If new Internet technologies emerge
that are incompatible with our applications, our key products may become
obsolete and our existing and potential customers may seek alternatives to our
products. We may not be able to quickly adapt our products to any new Internet
technology.
Additionally, we have designed our products to work with databases such as
Oracle and Microsoft SQL Server. Any changes to those databases, or increasing
popularity of other databases, could require us to modify our products, and
could cause us to delay releasing future products and enhancements. Furthermore,
software adapters are necessary to integrate our products with other systems and
data sources used by our customers. We must develop and update these adapters to
reflect changes to these systems and data sources in order to maintain the
functionality provided by our products. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, databases, customer relationship
management software, web servers and other enterprise and Internet-based
applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase and
deployment of our products.
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FAILURE TO LICENSE NECESSARY THIRD PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES.
We license third party software which we incorporate into our products. These
licenses may not continue to be available on commercially reasonable terms or at
all. The loss of any such license could result in delays or reductions of our
applications until equivalent software is identified, licensed and integrated or
developed by us.
WE FACE INTENSE COMPETITION WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS.
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Our competitors vary in size and in the scope and breadth of
products and services offered.
We currently face competition from providers of consulting-based analysis
solutions, vendors of point technologies that provide website analysis and
in-house development efforts by potential customers. In addition, we face
potential competition from vendors of other enterprise applications as they
expand the functionality of their product offerings, including companies that
design software for decision support, management of customer relationships or of
organizations' operational information, as well as vendors of database
applications. Accordingly, it is possible that new competitors may emerge and
acquire our market share.
Some of our current and potential competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we do, and thus may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have wider name recognition and more extensive customer
bases that they could leverage, thereby gaining market share to our detriment.
They may be able to undertake more extensive promotional activities, adopt more
aggressive pricing strategies, and offer purchasers more attractive terms than
we can. Our competitors may develop products that are superior to ours or that
achieve greater market acceptance. In addition, current and potential
competitors may establish cooperative relationships among themselves or with
third parties to enhance their products to address customer needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH.
We intend to expand our international operations, but we may face significant
barriers to this expansion. Our failure to manage our international operations
effectively could limit the future growth of our business. International sales
represented approximately 5.1% of our total revenue for the year ended December
31, 1998, 23.2% of our total revenue in 1999 and 28.2% of our total revenue for
the first six months of 2000, substantially all of which consisted of sales to
customers in Canada, Europe and Japan. We conduct our international sales
primarily through direct sales offices in Germany, the Netherlands and the
United Kingdom, through our Canadian subsidiary and through distributors in
Japan. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources.
Our international operations face numerous risks. Our products must be
localized -- customized to meet local user needs -- in order to be sold in
particular foreign countries. Developing local versions of our products for
foreign markets is difficult and can take longer than we anticipate. We
currently have limited experience in localizing products and in testing whether
these localized products will be accepted in the targeted countries. For
example, we are currently marketing localized products only in Germany and
Japan. We cannot assure you that our localization efforts will be successful. In
addition, we have only a limited history of marketing, selling and supporting
our products and services internationally. As a result, we must hire and train
experienced personnel to staff and manage our foreign operations. However, we
may experience difficulties in recruiting and training an international staff.
We must also be able to enter into strategic relationships with companies in
international markets, particularly in Japan where all of our sales have been
made through distributors. If we are not able to maintain successful strategic
relationships internationally or recruit additional companies to enter into
strategic relationships, our future growth could be limited.
We also face certain other risks inherent in conducting business
internationally, such as:
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- difficulties and costs of staffing and managing international operations;
- language and cultural differences;
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates;
- legal and governmental regulatory requirements;
- trade barriers; and
- potentially adverse tax consequences.
Any of these factors could seriously harm our international operations and,
consequently, our business.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We have not engaged in any foreign exchange
hedging transactions, and we are therefore subject to foreign currency risk.
WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH, INCLUDING
EXPANSION OF OUR MANAGEMENT SYSTEMS, COULD 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 75 at December 31, 1998 to 131 at December 31,
1999 to 260 at June 30, 2000, and 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. In particular, we need to
implement several new information systems. If we cannot effectively establish
and improve our processes, we may not be able to manage our growth successfully
or sustain and manage the growth rates we have experienced in the past.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH.
We expect that our cash on hand, cash equivalents and proceeds from our
initial and secondary public offerings will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. However,
we may need to raise additional funds to fund expansion, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. We cannot assure you that we would be able to obtain additional
financing on favorable terms, if at all. If we issue additional equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise necessary additional funds
on acceptable terms, we may not be able to develop or enhance our products, fund
expansion, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
Our common stock began trading on the Nasdaq National Market on September 22,
1999. The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities laws and under
agreements that our stockholders have entered into with the underwriters of our
initial and secondary public offerings and with us.
Sales of a substantial number of shares of our common stock in the future
could cause our stock price to fall. In addition, the sale of shares by our
stockholders could impair our ability to raise capital through the sale of
additional stock.
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OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS AND TO
SECURITIES LITIGATION.
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 our stock price to decline.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in their stock price. This
type of litigation could result in substantial costs and could divert our
management's attention and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
During the first six 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 June 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 June 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 June
30, 2000 we do not believe that a hypothetical 10% change in foreign currency
rates would materially harm our financial position.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On February 1, 2000, in connection with our acquisition of Rubric, we issued
5,984,192 shares of our common stock and options and warrants to purchase
1,215,800 shares of our common stock to the security holders of Rubric in
exchange for all outstanding securities of Rubric. We obtained a permit for the
issuance of these securities after a fairness hearing conducted by the
California
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Department of Corporations, and therefore this transaction 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
Broadbase's 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 the our common stock were registered with the SEC with an aggregate
registered offering price of $64.4 million, all of which were registered on
behalf of Broadbase. 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. The sale of
8,000,000 of such shares closed on September 27, 1999 and the sale of the
remaining 1,200,000 of such shares closed 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. Thus 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 ten percent (10%) or more of any class of equity
securities of Broadbase, or to any other of our affiliates.
As of June 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>
<CAPTION>
<S> <C>
Construction of plant, building and facilities: $ 1.7
Purchase and installation of machinery and equipment: $ 5.2
Purchases of real estate: $ 0
Acquisition of other businesses: $ 0
Repayment of indebtedness: $ 1.2
Working capital: $49.7
Other purposes: $ 0
</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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits have been filed with this report:
27.1 Financial Data Schedule
b. Reports on Form 8-K.
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None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BROADBASE SOFTWARE, INC.
Dated: August 9, 2000 By: /s/ Rusty Thomas
----------------------------------
Rusty Thomas
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
27.1 Financial Data Schedule
25
