<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
[_] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-30925
----------------
BLUE MARTINI SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3319751
(I.R.S. Employer Identification Number)
(State or other jurisdictionof
incorporation or organization)
2600 Campus Drive
San Mateo, California 94403
(Address of principal executive offices)
Telephone Number (650) 356-4000
(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 [_]
As of November 1, 2000, there were approximately 68,947,000 shares of the
registrant's common stock outstanding.
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<PAGE>
BLUE MARTINI SOFTWARE, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets September 30, 2000 3
and December 31, 1999.....................................
Condensed Consolidated Statements of Operations Three and
nine months ended September 30, 2000 and 1999............. 4
Condensed Consolidated Statements of Cash Flows Nine months
ended September 30, 2000 and 1999......................... 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market 23
Risk.......................................................
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 25
Item 6. Exhibits and Reports on Form 8-K........................... 26
Signatures.......................................................... 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE MARTINI SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $116,491 $ 10,362
Short-term investments............................. 24,345 2,562
Accounts receivable, net........................... 12,131 3,649
Prepaid expenses and other current assets.......... 5,769 656
-------- --------
Total current assets............................. 158,736 17,229
Property and equipment, net.......................... 6,899 2,761
Long-term investments................................ 26,004 --
Other assets......................................... 519 370
-------- --------
Total assets..................................... $192,158 $ 20,360
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 3,002 $ 1,874
Accrued employee compensation...................... 11,379 2,578
Other current liabilities.......................... 7,318 1,074
Deferred revenues.................................. 20,332 3,577
Current portion of long-term obligations........... 176 418
-------- --------
Total current liabilities........................ 42,207 9,521
Long-term obligations, less current portion.......... 196 544
-------- --------
Total liabilities................................ 42,403 10,065
-------- --------
Stockholders' equity:
Convertible preferred stock........................ -- 6
Common stock....................................... 69 31
Additional paid-in-capital......................... 261,374 31,640
Deferred stock compensation........................ (51,667) (8,926)
Accumulated other comprehensive loss............... (134) --
Accumulated deficit................................ (59,887) (12,456)
-------- --------
Total stockholders' equity....................... 149,755 10,295
-------- --------
Total liabilities and stockholders' equity....... $192,158 $ 20,360
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BLUE MARTINI SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
License............................... $ 11,966 $ 1,934 $ 26,457 $ 3,025
Service............................... 9,053 1,661 20,263 2,287
-------- ------- -------- -------
Total revenues...................... 21,019 3,595 46,720 5,312
-------- ------- -------- -------
Cost of revenues:
License............................... 1,025 170 2,337 387
Service............................... 11,594 1,824 28,295 2,294
-------- ------- -------- -------
Total cost of revenues.............. 12,619 1,994 30,632 2,681
-------- ------- -------- -------
Gross profit............................ 8,400 1,601 16,088 2,631
-------- ------- -------- -------
Operating expenses:
Sales and marketing................... 14,821 2,133 36,248 3,592
Research and development.............. 5,835 1,951 15,151 4,532
General and administrative............ 6,151 315 14,086 876
-------- ------- -------- -------
Total operating expenses............ 26,807 4,399 65,485 9,000
-------- ------- -------- -------
Loss from operations.................... (18,407) (2,798) (49,397) (6,369)
Interest income and other, net.......... 1,827 97 1,966 141
-------- ------- -------- -------
Net loss................................ $(16,580) $(2,701) $(47,431) $(6,228)
======== ======= ======== =======
Basic and diluted net loss per common
share.................................. $ (0.33) $ (0.11) $ (1.39) $ (0.27)
======== ======= ======== =======
Shares used in computing basic and
diluted net loss per common share...... 50,760 24,030 34,230 23,310
======== ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BLUE MARTINI SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended September
30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(47,431) $(6,228)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,717 406
Amortization of stock compensation and warrants......... 23,807 1,712
Provision for doubtful accounts......................... 1,390 111
Changes in operating assets and liabilities:
Accounts receivable....................................... (9,872) (2,243)
Prepaid expenses and other current assets................. (5,112) (817)
Accounts payable, accrued employee compensation and other
current liabilities...................................... 16,173 2,498
Deferred revenues......................................... 16,755 1,202
-------- -------
Net cash used in operating activities................. (1,573) (3,359)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (6,570) (2,126)
Purchases of available-for-sale investments, net.......... (47,938) --
Other assets.............................................. (91) (20)
-------- -------
Net cash used for investing activities................ (54,599) (2,146)
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred
stock.................................................... -- 17,450
Net proceeds from issuance of common stock................ 4,635 83
Repurchases of common stock............................... (89) (3)
Net proceeds from initial public offering of common
stock.................................................... 158,611 --
Proceeds from bank borrowings............................. -- 750
Repayment of debt and capital lease obligations........... (856) (67)
-------- -------
Net cash provided by financing activities............. 162,301 18,213
-------- -------
Net increase in cash and cash equivalents................... 106,129 12,708
Cash and cash equivalents at beginning of period............ 10,362 261
-------- -------
Cash and cash equivalents at end of period.................. $116,491 $12,969
======== =======
Supplemental disclosures of noncash investing and financing
activities:
Property and equipment acquired under capital lease
obligations.............................................. $ 265 $ 305
======== =======
Deferred stock compensation............................... $ 50,836 $ 4,143
======== =======
Warrants issued in connection with lease financing and
marketing arrangement.................................... $ 14,008 $ --
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
BLUE MARTINI SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of Blue Martini
Software, Inc. (the "Company") at September 30, 2000 and for the three and nine
month periods then ended reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Registration
Statement on Form S-1 declared effective by the Securities and Exchange
Commission on July 24, 2000. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results
for the entire year ending December 31, 2000.
Note 2. Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average
number of outstanding shares of common stock during the period, excluding
shares of restricted stock subject to repurchase. Dilutive net loss per common
share is computed using the weighted average number of common shares
outstanding during the period and, when dilutive, potential common shares from
options and warrants to purchase common stock, common stock subject to
repurchase, using the treasury stock method, and from convertible preferred
stock, using the "if-converted" method. Potential shares consist of convertible
preferred stock, common stock subject to repurchase, stock options and
warrants. Common stock subject to repurchase represents the Company's right,
under the 2000 Equity Incentive Plan, to repurchase stock upon the voluntary or
involuntary termination of the purchaser's employment from the Company at the
original issuance price.
The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended
September
30,
------------
2000 1999
----- ------
<S> <C> <C>
Shares issuable under stock options........................... 7,335 3,352
Shares of restricted stock subject to repurchase.............. 9,202 6,779
Shares issuable pursuant to warrants.......................... 2,445 --
Shares of convertible preferred stock on an "as-if-converted"
basis........................................................ -- 23,297
</TABLE>
The weighted average exercise price of stock options outstanding was $6.35
and $0.15 at September 30, 2000 and 1999, respectively. The weighted average
purchase price of restricted stock subject to repurchase was $0.46 and $0.02 at
September 30, 2000 and 1999, respectively. The weighted average exercise price
of warrants was $4.94 at September 30, 2000.
Each share of convertible preferred stock automatically converted to four
shares of common stock upon the closing of our initial public offering on July
28, 2000.
6
<PAGE>
BLUE MARTINI SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Comprehensive Income (Loss)
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are recorded as an element
of stockholders' equity but are excluded from net income. The components of
accumulated comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September Ended September
30, 30,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss............................. $(16,580) $(2,701) $(47,431) $(6,228)
Unrealized loss on available for sale
investments, net of tax............. (134) -- (134) --
-------- ------- -------- -------
Total comprehensive loss........... $(16,714) $(2,701) $(47,565) $(6,228)
======== ======= ======== =======
</TABLE>
Note 4. Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are recorded at cost, which approximates
fair value. At September 30, 2000 the Company's cash equivalents consisted of
high-quality institutional money market funds.
Note 5. Investments
Investments consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Short-term investments:
Corporate obligations........................... $15,975 $2,562
Asset-backed securities......................... 8,370 --
------- ------
Sub-total..................................... 24,345 2,562
Long-term investments:
Corporate obligations........................... 26,004 --
------- ------
Total......................................... $50,349 $2,562
======= ======
</TABLE>
The Company determines the appropriate classification of its investments at
the time of purchase and re-evaluates such classification as of each balance
sheet date. The Company has classified all of investments as available-for-sale
and carries such securities at fair value, with unrealized gains and losses
calculated using the specific identification method, net of tax, reported as a
component of accumulated other comprehensive income.
The contractual maturities of the Blue Martini's short-term investments at
September 30, 2000, were one year or less while the Company's long-term
investments had contractual maturities between one and two years. Expected
maturities may differ from contractual maturities because the issuers of the
securities have the right to prepay or call obligations without prepayment
penalties.
7
<PAGE>
BLUE MARTINI SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Computer equipment............................... $ 9,034 $2,996
Furniture and office equipment................... 859 344
Leasehold improvements........................... 501 217
------- ------
10,394 3,557
Less accumulated depreciation and amortization... 3,495 796
------- ------
$ 6,899 $2,761
======= ======
</TABLE>
Note 7. Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The method for
determining what information to report is based on the way management organizes
the operating segments within the Company for making operating decisions and
assessing financial performance.
The Company's chief operating decision-maker is considered to be the chief
executive officer ("CEO"). The CEO reviews financial information presented for
purposes of making operating decisions and assessing financial performance. The
financial information is identical to the information presented in the
accompanying statements of operations and the Company had no significant
foreign operations through September 30, 2000. On this basis, the Company is
organized and operates in a single segment: the design, development and
marketing of software solutions.
Note 8. Initial Public Offering
On July 28, 2000, the Company closed its initial public offering of
8,625,000 shares of its common stock, which included 1,125,000 shares issued in
connection with the exercise of the underwriters' overallotment, at $20 per
share. Net proceeds of the offering were approximately $158.6 million, after
deducting underwriter discounts, commissions and other offering expenses.
Simultaneously with the closing of the initial public offering, all 5,824,317
shares of the Company's convertible preferred stock were automatically
converted into 23,297,268 shares of common stock.
Note 9. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, (or "FASB), issued
Statement of Financial Accounting Standards, or SFAS, No. 133, entitled
Accounting for Derivative Instruments and Hedging Activities. We are required
to adopt SFAS No. 133, as amended, for the year ending December 31, 2001. SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and
do not currently engage in hedging activities, the adoption of SFAS No. 133 is
not expected to have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission, (or "SEC"),
released Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in
Financial Statements, and amended by SAB No. 101A and
8
<PAGE>
BLUE MARTINI SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SAB No. 101B, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. In June 2000,
the SEC issued SAB No. 101B that delayed the implementation of SAB 101 until
October 1, 2000. We do not believe that SAB No. 101 will have a material impact
on our financial statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of the Accounting
Principals Board, or APB, Opinion No. 25. This Interpretation clarifies the
application of APB Opinion 25 including:
. the definition of employee for purposes of applying APB Opinion 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a business
combination
In general, this Interpretation was effective July 1, 2000. The adoption of
Interpretation No. 44 has not had a material effect on our financial position
or results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Blue Martini Software, Inc. (the "Company") should be read in
conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and the Notes
thereto included in the Company's Registration Statement on Form S-1. This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
using terminology such as "may," "believe," "will," "expect," "plans,"
"anticipate," "estimate," "potential," or "continue," or the negative thereof
or other comparable terminology regarding beliefs, plans, expectations or
intentions regarding the future. Forward-looking statements involve risks and
uncertainties and actual results could differ materially from those discussed
in the forward-looking statements. All forward-looking statements and risk
factors included in this document are made as of the date hereof, based on
information available to the Company as of the date thereof, and the Company
assumes no obligation to update any forward-looking statement or risk factors.
Overview
Blue Martini LLC, a Delaware limited liability company, was founded on June
5, 1998. On January 12, 1999, Blue Martini LLC merged into Blue Martini
Software, Inc., a Delaware corporation, with Blue Martini Software, Inc. being
the surviving entity. This merger was treated for financial reporting purposes
as a reorganization of entities under common control in a manner similar to a
pooling of interests.
We provide enterprise software applications and services that enable
companies to understand, target and interact with customers across Internet-
related customer touch points, such as websites, mobile wireless devices and
on-line trading exchanges and traditional customer touch points, such as stores
and contact centers. In late March 1999, we released the first commercial
version of our product. Following the initial release of our product, we
substantially increased spending on our consulting services, technical support,
training, sales and marketing organizations. We have incurred significant
losses since inception, and as of September 30, 2000, we had an accumulated
deficit of $59.9 million.
Our revenues are derived from the licensing of our software applications and
the sale of related services. The license agreement for our software product
typically provides for an initial fee to use the software in perpetuity.
License revenues are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable
and collectibility is probable, assuming no significant future obligations or
customer acceptance rights exist. If an acceptance period is contractually
provided, revenues are recognized upon the earlier of customer acceptance or
the expiration of that period. In instances where delivery is electronic and
all other criteria for revenue recognition have been achieved, the product is
considered to have been delivered when the customer either takes possession by
downloading the software or the access code to download the software has been
provided to the customer. Payments received in advance of revenue recognition
are recorded as deferred revenues.
Services revenues are principally derived from consulting services,
technical support and training. To date, all customers who have licensed our
software product have purchased maintenance contracts. Our maintenance
agreements entitle customers to receive software updates, maintenance releases
and technical support. Maintenance is typically paid in advance and the related
revenues are deferred and recognized ratably over the term of the maintenance
contract, which is typically one year. A majority of our customers use systems
integrators to implement our product. Consulting services and training are
typically sold on a time-and-materials basis and revenues from these services
are recognized when the services are performed and collectibility is deemed
probable.
10
<PAGE>
We market our software product through a direct sales force. We also engage
in alliances with systems integrators and technology vendors to assist us in
marketing and selling our software product and related services. While our
revenues to date have been derived principally from customers in the United
States, international revenues accounted for 19% of our revenues for both the
three and nine months ended September 30, 2000. We believe international
revenues will represent a more significant portion of our total revenues in the
future but may fluctuate as a percentage of revenues in the near term as we
build out our international presence. Although we have a limited operating
history, we believe that our quarterly operating results may experience
seasonal fluctuations. For instance, quarterly results may fluctuate based on
our customers' fiscal year, budgeting cycles, sales incentive plans and slow
summer purchasing patterns.
To date, we have derived a significant portion of our revenues from a small
number of customers. While no single customer accounted for more than 10% of
our total revenues for the three months ended September 30, 2000, three
customers accounted for 25% of our revenues in this period. Sales to three
customers individually represented 27%, 15% and 13% of our revenues for the
comparable period in 1999. While we do not anticipate that any one customer
will represent more than 10% of total revenues in 2000, we do expect that a
limited number of customers will continue to account for a substantial portion
of our license revenues in a given quarter. As a result, if we lose a major
customer or if an anticipated license contract is delayed or agreement is not
reached on terms, our revenues and operating results in a particular quarterly
period would be adversely affected. In addition, customers that have accounted
for significant revenues in the past may not generate revenues in any future
period. If we fail to obtain a significant number of new customers or
additional orders from existing customers, our business and operating results
could be harmed.
We believe our success requires expanding our customer base, growing our
relationships with systems integrator partners, continuing to enhance our
software product and growing our professional services, sales, technical
support and training organizations. We expect that our operating expenses will
increase as we invest to expand our sales and marketing operations worldwide,
fund greater levels of research and development, grow our global professional
services, technical support and training organizations and expand our related
infrastructure. As a result of anticipated increases in our operating expenses,
we expect to continue to incur net losses both on a quarterly and annual basis
for the next few years. Our operating expenses are based in part on our
expectations of future revenues and are relatively fixed in the short term. As
such, a delay in the recognition of revenues from one or more license contracts
could cause variations in our operating results from quarter to quarter and
could result in net losses in a given quarter being greater than expected.
11
<PAGE>
Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Revenues:
License............................... 57 % 54 % 57 % 57 %
Service............................... 43 46 43 43
------ ------ ------- ------
Total revenues...................... 100 100 100 100
------ ------ ------- ------
Cost of revenues:
License............................... 5 4 5 7
Service............................... 55 51 61 43
------ ------ ------- ------
Total cost of revenues.............. 60 55 66 50
------ ------ ------- ------
Gross profit............................ 40 45 34 50
------ ------ ------- ------
Operating expenses:
Sales and marketing................... 71 59 78 68
Research and development.............. 28 54 32 85
General and administrative............ 29 9 30 17
------ ------ ------- ------
Total operating expenses............ 128 122 140 170
------ ------ ------- ------
Loss from operations.................... (88) (77) (106) (120)
Interest and other, net................. 9 2 4 3
------ ------ ------- ------
Net loss................................ (79)% (75)% (102)% (117)%
====== ====== ======= ======
</TABLE>
Revenues
License. Our software product was commercially released in late March 1999,
and we recognized no license revenues before that date. License revenues
increased from $1.9 million for the three months ended September 30, 1999 to
$12.0 million for the three months ended September 30, 2000. For the nine
months ended September 30, 2000, license revenues increased to $26.5 million
from $3.0 million for the comparable period in 1999. The increase in license
revenues for the three and nine month periods ended September 30, 2000 as
compared to the comparable periods in 1999 was due to an increase in software
licenses to new customers.
Service. Service revenues increased from $1.7 million for the three months
ended September 30, 1999 to $9.1 million for the three months ended September
30, 2000. For the nine months ended September 30, 2000, service revenues
increased to $20.3 million from $2.3 million for the comparable period in 1999.
The increases for the three and nine month periods ended September 30, 2000 as
compared to the same periods in 1999 were due to an increase in the number of
consulting service engagements and customer maintenance agreements, as well as
an increase in training revenues. We expect that our service revenues will
fluctuate as a percentage of total revenues as we build our professional
services staff in the near term, and then decrease as a percentage of total
revenues over the long term as systems integrators and other professional
services organizations provide the consulting services, technical support and
training that we currently provide.
Cost of Revenues
License. Cost of license revenues consists of royalties payable to third
parties for software that is either embedded in or bundled with our product.
Cost of license revenues increased from $170,000 for the three
12
<PAGE>
months ended September 30, 1999 to $1.0 million for the three months ended
September 30, 2000. These amounts represented 9% of license revenues for these
periods. For the nine months ended September 30, 2000, cost of license revenues
increased to $2.3 million from $387,000 for the comparable period in 1999.
These amounts represented 9% and 13% of license revenues for these periods. The
increase in cost of license revenues in absolute dollars for the three and nine
month periods ended September 30, 2000 compared to the comparable period in
1999 was principally the result of growth in license revenues resulting in
increased royalties payable to third parties. We expect cost of license
revenues will increase in absolute dollars in the future due to higher
royalties payable to third parties as a result of anticipated growth in license
revenues. To the extent license revenues increase, we expect cost of license
revenues to decline slightly as a percentage of license revenues as a result of
royalty agreements that typically contain declining royalty rates.
Service. Cost of service revenues consists primarily of salaries and other
personnel-related expenses, amortization of deferred stock compensation, as
well as depreciation of equipment used to provide consulting services,
technical support and training. Cost of service revenues increased from $1.8
million for the three months ended September 30, 1999 to $11.6 million for the
three months ended September 30, 2000. These amounts represented 110% and 128%
of service revenues for these periods. For the nine months ended September 30,
2000, cost of service revenues increased to $28.3 million from $2.3 million for
the comparable period in 1999. These amounts represented 140% and 100% of
service revenues for these periods. The increase in absolute dollars for the
three and nine month periods ended September 30, 2000 as compared to the same
periods in 1999 resulted from the expansion of our consulting services,
technical support and training organizations to support the growth in new
licenses and increased amortization of deferred stock compensation. We expect
cost of service revenues to increase in absolute dollars in the future as we
continue to expand our consulting services, technical support and training
organizations to meet anticipated growth. While cost of services, when
expressed as a percentage of related service revenues, may fluctuate in the
near term as additional personnel are hired, we expect this percentage to
decrease over time due to higher productivity of our consulting services
organizations and economies of scale.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of costs
of our direct sales and marketing personnel, amortization of deferred stock
compensation, as well as costs of marketing programs including trade shows,
advertisements, promotional activities and media events. Sales and marketing
expenses increased from $2.1 million for the three months ended September 30,
1999 to $14.8 million for the three months ended September 30, 2000. For the
nine months ended September 30, 2000, marketing and sales expenses increased to
$36.2 million from $3.6 million in the comparable period in 1999. The increases
for the three and nine month periods ended September 30, 2000 as compared to
the same periods in 1999 were primarily attributable to an increase in sales
and marketing personnel expenses and commissions to sales personnel associated
with higher revenues and increased spending for marketing and advertising
programs. Additionally, amortization of deferred stock compensation accounted
for an increase in sales and marketing expense for the three and nine month
periods ended September 30, 2000 as compared to the comparable periods in 1999
due to the increase in the number of sales marketing personnel. We believe
sales and marketing expenses will continue to increase in absolute dollars in
the future due to the planned growth of our sales force, the establishment of
additional sales offices in both domestic and foreign locations and increases
in marketing programs.
In April 2000, we entered into a non-exclusive marketing and business
development agreement with a systems integrator to promote and market our
product in Europe, the Middle East and Africa. As part of this arrangement, we
issued a warrant to purchase 600,000 shares of our Series C convertible
preferred stock at an exercise price of $20.00 per share. Effective upon the
closing of our initial public offering on July 28, 2000, these warrants were
automatically converted to warrants to purchase 2,400,000 shares of common
stock at an exercise price of $5.00 per share. The warrant is fully vested and
non-forfeitable and is exercisable at the end of eight years and can be
exercised sooner upon the achievement of performance thresholds during the
first four years of the agreement. The fair value of this warrant based on an
independent valuation was $13.8 million.
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The value of this warrant is being amortized over the service period and
included as a non-cash component of marketing and sales expense in our
statement of operations. Amortization expense for the three and nine months
ended September 30, 2000 was $864,000 and $1.4 million, respectively.
Research and Development. Research and development expenses consist
primarily of salaries and related expenses for engineering personnel,
amortization of deferred stock compensation, costs of contractors and
depreciation of equipment used in the development of our software product. To
date, we have expensed all internal software development costs as incurred.
Research and development expenses increased from $2.0 million for the three
months ended September 30, 1999 to $5.8 million for the three months ended
September 30, 2000. For the nine months ended September 30, 2000, research and
development expenses increased to $15.2 million from $4.5 million in the
comparable period in 1999. The growth in expenses for the three and nine month
periods ended September 30, 2000 as compared to the comparable periods of 1999
was primarily due to an increase in personnel-related expenses resulting from
the addition of engineering personnel to support the development and
enhancement of our product and an increase in the amortization of deferred
stock compensation. We expect research and development expenses to increase
significantly in absolute dollars in future periods.
General and Administrative. General and administrative expenses include
costs associated with our finance, human resources, legal and other
administrative functions and consist principally of amortization of deferred
stock compensation, salaries and related expenses, professional fees,
provisions for doubtful accounts and equipment depreciation. General and
administrative expenses increased from $315,000 for the three months ended
September 30, 1999 to $6.2 million for the three months ended September 30,
2000. For the nine month period ended September 30, 2000, general and
administrative expenses increased to $14.1 million from $876,000 in the
comparable period in 1999. The increase in expenses in 2000 as compared to the
same periods in 1999 was attributable to expenses for administrative personnel
and professional fees, amortization of deferred stock compensation and an
increase in the provision for doubtful accounts. We believe general and
administrative expenses will continue to increase in absolute dollars in future
periods as we hire additional staff, invest in infrastructure projects to
support our continued growth and incur expenses associated with operating as a
public company.
Stock Compensation. Deferred stock compensation represents the difference
between the exercise price of stock option grants to employees and the deemed
fair value of our common stock at the time of those grants. We recorded
deferred stock compensation of $4.1 million for the nine months ended September
30, 1999 and $50.8 million for the comparable period in 2000. We are amortizing
deferred stock compensation to expense over the period during which the stock
options vest, generally four years using a method consistent with Financial
Accounting Standards Board Interpretation No. 28. Under this method, each
vested tranche of options is accounted for as a separate option grant awarded
for past service. Accordingly, the compensation expense is recognized over the
period during which the services have been provided. Such amortization amounted
to $9.7 million and $837,000 for the three months ended September 30, 2000 and
1999, respectively, and $22.1 million and $1.7 million for the nine months
ended September 30, 2000 and 1999, respectively.
During the nine month period ended September 30, 2000 and the comparable
period in 1999, we granted immediately vested and exercisable stock options to
non-employees. In connection with these grants, we recorded non-cash
compensation expense of $1.4 million and $45,000 for the nine months ended
September 30, 2000 and the comparable period in 1999. This reflects the fair
value of these stock options based on the Black-Scholes option pricing model.
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The amortization of deferred stock compensation, combined with the expense
associated with stock options granted to non-employees, relates to the
following items in the accompanying condensed consolidated statement of
operations (in thousands):
<TABLE>
<CAPTION>
Nine
Months
Three Months Ended Ended
September September
30, 30,
------------------------------------
2000 1999 2000 1999
---------- ----------------- -------
<S> <C> <C> <C> <C>
Cost of revenues....................... $ 2,079 $ 97 $ 5,173 $ 143
Sales and marketing.................... 1,916 420 5,220 810
Research and development............... 1,784 244 5,157 534
General and administrative............. 3,010 76 6,581 218
---------- -------- -------- -------
$8,789 $ 837 $ 22,131 $ 1,705
========== ======== ======== =======
</TABLE>
Amortization of deferred stock compensation is estimated to total $30.6
million for 2000, $19.8 million for 2001, $8.5 million for 2002, $3.0 million
for 2003 and $180,000 for 2004. Amortization of deferred stock compensation
will be reduced in future periods to the extent options are terminated prior to
full vesting.
Interest Income and Other, Net
Interest Income and other, net consists of interest income from cash, cash
equivalents and available-for-sale short and long-term investments, partially
offset by amortization of a warrant issued in connection with lease financing
and interest expense associated with capital leases and bank borrowings.
Interest income and other, net increased from $97,000 for the three months
ended September 30, 1999 to $1.8 million for the three months September 30,
2000. For the nine month period ending September 30, 2000, interest income and
other, net increased to $2.0 million from $141,000 in the comparable period in
1999. The increase was due primarily to higher balances of cash, cash
equivalents and short and long-term investments as a result of our initial
public offering in July 2000, net against increases in interest expense due on
borrowings.
Income Taxes
From inception to September 30, 2000, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit.
Because of our limited operating history and our losses incurred to date,
management does not believe that the realization of the related deferred income
tax asset meets the criteria required by generally accepted accounting
principles. Therefore, we have recorded a 100% valuation allowance against the
deferred income tax assets.
Liquidity and Capital Resources
On July 28, 2000, we closed our initial public offering of 8,625,000 share
of common stock, which included 1,125,000 shares in connection with the
exercise of the underwriters' over-allotment option, at $20 per share. We
received net proceeds of approximately $158.6 million in cash. Prior to this
offering, we have financed our operations from the sale of our preferred and
common stock and $750,000 of borrowings under a secured loan agreement. As of
September 30, 2000, we had cash, cash equivalents and short-term investments of
$140.8 million and $1.5 million available under an equipment lease facility.
Under a loan agreement, we can borrow up to $750,000. There were no
borrowings outstanding under this agreement at September 30, 2000. Loans under
this agreement would be collateralized by equipment and other assets.
Outstanding borrowings under this agreement would bear interest at the bank's
prime rate plus 0.50% per annum. At September 30, 2000, we had capital lease
obligations of $372,000.
The Company has not in the past factored or otherwise assigned its accounts
receivable.
In the first nine months of 2000, net cash used in operating activities was
$1.6 million compared to $3.4 million in the comparable period in 1999. Net
cash used in operating activities for the first nine months of 2000 and for the
comparable period in 1999 was primarily the result of net losses of $47.4
million and $6.2 million, respectively, after adjusting for amortization of
deferred stock compensation and warrants of $23.8 million and $1.7 million for
the first nine months of 2000 and for the comparable period in 1999.
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Net cash used for investing activities was $54.6 million for the first nine
months of 2000 and $2.1 million for the comparable period in 1999. The cash
used for investing activities was principally related to the purchase of short
and long-term investments, and to purchase computer hardware and software,
office furniture and equipment.
Net cash provided by financing activities was $162.3 million for the first
nine months of 2000 and $18.2 million for the comparable period in 1999. The
cash provided by financing activities for the first nine months of 2000 was
principally related to the net proceeds received from the initial public
offering of common stock, net of issuance costs. The cash provided by
financing activities for the first nine months of 1999 was principally related
to the net proceeds received from the issuance of convertible preferred stock.
Our liquidity, capital resources and results of operations in any period
could be impacted by the exercise of outstanding stock options and warrants.
For example, at September 30, 2000, we had outstanding options to purchase 7.3
million shares of our common stock at a weighted average exercise price of
$6.35 per share, and had approximately 8.1 million additional shares reserved
for future grant under our stock option plans. In addition, we have issued
warrants which are now exercisable to purchase 2,445,000 shares of common
stock at a weighted average exercise price of $4.94 per share. Accordingly,
our liquidity and capital resources may be impacted in future periods by cash
proceeds upon exercise of these securities and from securities reserved for
future issuance under our stock option plans. In addition, our per share
results of operations could also be impacted by the increased number of
outstanding shares. However, we cannot predict the timing or amount of
proceeds from the exercise of these securities, if they are exercised at all.
We expect to experience significant growth in our operating expenses for
the foreseeable future in order to execute our business plan. As a result, we
expect that operating expenses and planned capital expenditures will
constitute a material use of our cash balances. In addition, we may use cash
to fund acquisitions or invest in other businesses, technologies or product
lines. We currently anticipate that our existing cash, investments and credit
facilities, will be sufficient to meet our presently anticipated working
capital, capital expenditure and business expansion requirements for the next
twelve to eighteen months. However, we may require additional funds within
this time period. We may seek to raise these additional funds through public
or private debt or equity financing to meet these additional working capital
requirements. There can be no assurance that this additional financing will be
available, or if available, will be on reasonable terms and not dilutive to
our stockholders. If adequate funds are not available on acceptable terms, our
business and operating results could be adversely affected.
Factors That May Impact Future Operating Results
Our short operating history makes it difficult to evaluate our business and
prospects.
You must consider our business and prospects given the risks, expenses and
challenges we might encounter because we are at an early stage of development
in a new and rapidly evolving market. We were founded in June 1998 and
licensed our first software product in late March 1999, and our sales and
service organizations are new and still growing. Due to our short operating
history, our future financial performance is not predictable and may
disappoint investors and result in a significant decline in our stock price.
We have incurred losses during our operating history and expect losses to
continue for the next several years and we may not achieve or maintain
profitability.
We incurred net losses of $1.6 million for the period from June 5, 1998,
our date of inception, through December 31, 1998, $10.9 million for the year
ended December 31, 1999 and $47.4 million for the nine months ended September
30, 2000. As of September 30, 2000, we had an accumulated deficit of $59.9
million. We expect to continue to incur losses on both a quarterly and annual
basis for the next few years. Moreover, we expect to continue to incur
significant sales and marketing and research and development expenses.
Further, we will incur substantial stock compensation expense in future
periods, which represents non-cash charges
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incurred due to the issuance of stock options prior to the closing of our
initial public offering on July 28, 2000. Therefore, we will need to
significantly increase our revenues to achieve and maintain profitability. We
may not be able to sustain our recent revenue growth rates or be able to
generate sufficient revenues to achieve profitability.
Because a small number of customers have accounted, and are likely to
continue to account, for a substantial portion of our revenues, our revenues
could decline due to the loss or delay of a single customer order.
A relatively small number of customers account for a significant portion of
our total revenues. The loss or delay of individual orders could have a
significant impact on revenues and operating results. In the three months
ended September 30, 2000, sales to three customers accounted for 25% of our
total revenues, and in the comparable period in 1999, sales to three customers
accounted for 52% of total revenues. We expect that revenues from a limited
number of new customers will continue to account for a large percentage of
total revenues in future quarters. Our ability to attract new customers will
depend on a variety of factors, including the performance, quality, breadth,
depth and price of our current and future products. Our failure to add new
customers that make significant purchases of our product and services would
reduce our future revenues.
We record as deferred revenues payments from customers that do not meet our
revenue recognition policy requirements. Since only a portion of our revenues
each quarter is recognized from deferred revenues, our quarterly results will
depend primarily upon entering into new contracts to generate revenues for
that quarter. New contracts may not result in revenues in the quarter in which
the contract was signed and commissions and royalties become payable, and we
may not be able to predict accurately when revenues from these contracts will
be recognized. Similarly, declines in deferred revenues from prior quarters
may disappoint investors and could result in a significant decline in our
stock price. We expect the level of our deferred revenues to fluctuate in
future periods.
If our product does not successfully function for customers with large
numbers of transactions, customers or product offerings, we may lose sales
and suffer decreased revenues.
Our product must be able to accommodate a large number of transactions,
customers and product offerings. Large scale usage presents significant
technical challenges which are difficult or impossible to predict. To date,
our product has been deployed by only a limited number of customers and,
therefore, we cannot assure you that our product is able to meet our
customers' demands for large scale usage. If our customers experience
difficulty with our product during periods of high traffic or usage, it could
damage our reputation and reduce our revenues.
All of our revenues to date have been derived from the licensing of our
software product and the sale of related services, and if we fail to
successfully upgrade or enhance our product and introduce new products, our
revenues would decline.
All of our revenues to date have been derived from the licensing of our
software product and the sale of related services. For the nine months ended
September 30, 2000, 57% of our total revenues were derived from the licensing
of our product. Our future revenues will depend, in significant part, on our
successful development and license of new and enhanced versions of our product
and of other new products. If we are not able to successfully develop new
products or these new products do not achieve market acceptance, our revenues
would be reduced.
Our product has a long and variable sales cycle, which makes it difficult to
predict our quarterly results and may cause our operating results to vary
significantly.
The period between initial contact with a prospective customer and the
licensing of our product varies, but is typically three to seven months. The
licensing of our product is often an enterprise-wide decision by our customers
that involves a significant commitment of resources by us and the prospective
customer. Customers
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<PAGE>
generally consider a wide range of issues before committing to purchase our
product, including product benefits, cost and time of implementation, ability
to operate with existing and future computer systems and ability to
accommodate increased transaction volume and product reliability. As part of
the sales process, we spend a significant amount of resources informing
prospective customers about the use and benefits of our product, which may not
result in a sale, therefore reducing our margins. As a result of this variable
and unpredictable sales cycle, our revenues are unpredictable and could vary
significantly from quarter to quarter causing our operating results and the
number of new customers to vary significantly from quarter to quarter.
Our failure to develop and maintain strong relationships with systems
integrators would harm our ability to market our product, which could reduce
future revenues and increase our expenses.
A portion of our sales are influenced by the recommendation of our product
by systems integrators, consulting firms and other third parties that help
deploy our product for our customers. Losing the support of these third
parties may limit our ability to penetrate our existing or potential markets.
These third parties are under no obligation to recommend or support our
product and could recommend or give higher priority to the products and
services of other companies or to their own products. Our inability to gain
the support of systems integrators or a shift by these companies toward
favoring competing products could negatively affect our software license and
service revenues.
Some systems integrators also engage in joint marketing and sales efforts
with us. If our relationships with systems integrators fail, we will have to
devote substantially more resources to the sales and marketing of our product.
In many cases, these parties have extensive relationships with our existing
and potential customers and influence the decisions of these customers. A
number of our competitors have longer and more established relationships with
these systems integrators than we do, and as a result these systems
integrators may be more likely to recommend competitors' products and services
and increase our expenses.
Our failure to develop and maintain strong relationships with systems
integrators would harm our ability to implement our product.
Systems integrators assist our customers with the installation and
deployment of our product, in addition to those of our competitors, and
perform custom integration of computer systems and software. If we are unable
to develop and maintain relationships with systems integrators, we would be
required to hire additional personnel to install and maintain our product,
which would result in delays in our ability to recognize revenue and higher
expenses.
If our product does not operate with a wide variety of hardware, software and
operating systems used by our customers, our revenues would be harmed.
We currently serve a customer base that uses a wide variety of constantly
changing hardware, software applications and operating systems. Our product
will only gain broad market acceptance if it can support a wide variety of
hardware, software applications and systems. If our product is unable to
support a variety of these products, our revenues would be harmed. Our
business depends on the following factors, among others:
. our ability to integrate our product with multiple hardware systems and
existing software systems and to modify our product as new versions of
packaged applications are introduced;
. our ability to anticipate and support new standards, especially Internet-
based standards; and
. our ability to integrate additional software modules under development
with our existing product.
Defects in our product could diminish demand for our product and result in
loss of revenues, decreased market acceptance, injury to our reputation and
product liability claims.
We have in the past discovered software errors and performance problems
with our product after commencement of commercial shipment, and as a result,
have experienced injury to our reputation, increased
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<PAGE>
expenses, delays in the shipment of our product and our customers have
experienced difficulty in deploying and operating our product.
Errors in our product may be caused by defects in third-party software
incorporated into our product. If so, we may not be able to fix these defects
without the cooperation of these software providers. Since these defects may
not be as significant to our software providers as they are to us, we may not
receive the rapid cooperation that we may require. We may not have the
contractual right to access the source code of third-party software and, even
if we access the source code, we may not be able to fix the defect.
Since our customers use our product for critical business applications such
as e-commerce, any errors, defects or other performance problems of our
product could result in damage to the businesses of our customers.
Consequently, these customers could delay or withhold payment to us for our
software and services, which could result in an increase in our provision for
doubtful accounts or an increase in collection cycles for accounts receivable,
both of which could disappoint investors and result in a significant decline
in our stock price. In addition, these customers could seek significant
compensation from us for their losses. Even if unsuccessful, a product
liability claim brought against us would likely be time consuming and costly
and harm our reputation, and thus our ability to license to new customers.
Even if a suit is not brought, correcting errors in our product could increase
our expenses.
We depend on technologies licensed to us by third parties, and the loss or
inability to maintain these licenses could prevent or delay sales of our
product.
We license technologies from third party software providers that are
incorporated into our product. We anticipate that we will continue to license
technologies from third parties in the future. In particular, we license
application server technology from BEA Systems, Inc. and we license a rules
engine from Blaze Software Inc. that automates the execution of business
processes according to criteria set by our customers. The license agreement
with BEA expires in July 2003, and the license agreement with Blaze expires in
June 2007. We may not be able to renew our license agreements for this
software on commercially reasonable terms, if at all. The loss of these
technologies or other third-party technologies could prevent sales of our
product and increase our costs until substitute technologies, if available,
are developed or identified, licensed and successfully integrated into our
product. Even if substitute technologies are available, there can be no
guarantee that we will be able to license these technologies on commercially
reasonable terms, if at all.
If we fail to introduce new versions and releases of our product in a timely
manner, customers may license competing products and our revenues may
decline.
We may fail to introduce or deliver new products on a timely basis, if at
all. In the past, we have experienced delays in the commencement of commercial
shipments of enhancements to our product. To date, these delays have not had a
material impact on our revenues. If we are unable to ship or implement new
products or enhancements to our product, including our recently announced
version 4.0 of our product, when planned or at all, or fail to achieve timely
market acceptance of these new products or enhancements, we may suffer lost
sales and could fail to increase our revenues. Our future operating results
will depend on demand for our product, including new and enhanced releases
that are subsequently introduced.
We may not successfully enter international markets or generate significant
revenues abroad, which could result in slower revenue growth and harm our
business.
To date, we have generated limited revenues from sales outside the United
States. We have established a sales office in the United Kingdom and intend to
do so elsewhere in Europe, Asia and Latin America. If we fail to sell our
product in international markets, we could experience slower revenue growth
and our business could
19
<PAGE>
be harmed. We anticipate devoting significant resources and management
attention to expanding international opportunities. Expanding internationally
subjects us to a number of risks, including:
. greater difficulty in staffing and managing foreign operations;
. expenses associated with foreign operations and compliance with
applicable laws;
. changes in a specific country's or region's political or economic
conditions;
. expenses associated with localizing our product for foreign countries;
. differing intellectual property rights;
. protectionist laws and business practices that favor local competitors;
. longer sales cycles and collection periods or seasonal reductions in
business activity;
. multiple, conflicting and changing governmental laws and regulations; and
. foreign currency restrictions and exchange rate fluctuations.
Our growth continues to place a significant strain on our management systems
and resources, and if we fail to manage our growth our ability to market and
license our product, sell our services and develop new products may be
harmed.
We must manage our growth effectively in order to successfully license our
product, sell our services and achieve revenue growth and profitability in a
rapidly evolving market. Our growth has placed, and will continue to place, a
significant strain on our management systems and resources, and we may not be
able to effectively manage our growth in the future. We continue to increase
the scope of our operations and have added a substantial number of employees.
For example, the number of our employees grew from 123 people at December 31,
1999 to 383 people at September 30, 2000. In addition, we need to obtain
additional office space in Northern California to accommodate our growth. We
may not be able to obtain space at commercially reasonable rates, if at all.
For us to effectively manage our growth, we must continue to do the following:
. improve our operational, financial and management controls;
. improve our reporting systems and procedures;
. install new management and information control systems; and
. expand, train and motivate our workforce.
In particular, we are currently migrating to a new accounting software
package designed to allow greater flexibility in reporting and tracking
financial results. If we fail to install this software in an efficient and
timely manner, or if the new system fails to adequately support our level of
operations, then we could incur substantial additional expenses to remedy
these failures.
Competition in our markets is intense and could reduce our sales and prevent
us from achieving profitability.
The market for our product is intensely competitive and subject to rapid
technological change. We expect the intensity of competition to increase in
the future. Increased competition is likely to result in price reductions,
reduced gross margins and loss of our market share, any one of which could
reduce our future revenues or earnings, if any. Our current competitors
include:
. Point Application Vendors. We compete with providers of stand-alone point
solutions such as BroadVision, Inc., E.piphany, Inc. and Vignette
Corporation.
. Component Vendors. We compete with component vendors such as Art
Technology Group, Inc., IBM and Microsoft Corporation.
. Enterprise Resource Planning Software, Customer Relationship Management
Software and Supply Chain Management Software Vendors. We compete with
enterprise resource planning software, customer relationship management
software and supply chain management software vendors such as Oracle
Corp., PeopleSoft, Inc., SAP AG, Siebel Systems, Inc. and i2
Technologies, Inc.
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. Internal IT Departments. Information technology departments of potential
customers have developed or may develop systems that provide for some or
all of the functionality of our product. We expect that internally-
developed application integration and process automation efforts will
continue to be a principal source of competition for the foreseeable
future. In particular, it can be difficult to license our product to a
potential customer whose internal development group has already made
large investments in, and progress towards completion of, systems that
our product is intended to replace.
Most of our competitors have greater resources and broader customer
relationships than we do. In addition, many of these competitors have
extensive knowledge of our industry. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to offer a single solution and increase the ability of
their products to address customer needs. To the extent we cannot establish
cooperative relationships with other companies in the e-business market that
can provide us with greater resources and customer relationships, our business
will be harmed.
Because competition for qualified personnel is intense, we may not be able to
retain or recruit personnel, which could impact the development and license
of our product.
If we are unable to hire or retain qualified personnel, or if newly hired
personnel fail to develop the necessary skills or to reach expected levels of
productivity, our ability to develop and market our product will be weakened.
Our success also depends on the continued contributions of our key management,
engineering, sales and marketing and professional services personnel. In
particular, Monte Zweben, our Chairman, President and Chief Executive Officer,
would be difficult to replace.
Our ability to increase our sales will depend on our ability to recruit,
train and retain top quality sales people who are able to target prospective
customers' senior management, and who can generate and service large accounts.
There is a shortage of qualified sales personnel in our industry and
competition for them is intense.
Failure of our prospective Internet customers to receive necessary funding
could harm our business.
Our targeted customers include rapidly growing Internet companies. Most
privately and publicly held Internet companies require outside cash sources to
continue operations. Recently, funding has been less available for Internet
companies as a result of the stock market decline and public and private
investor concern regarding Internet-based businesses. These factors have
reduced demand for our product from Internet-based customers and reduced
demand for additional services from current Internet-based customers. Failure
by existing customers in this industry to receive or generate adequate funding
has and may continue to require us to make reserves for bad debt or to write
off amounts due.
Increasing government regulation of the Internet, imposition of sales and
other taxes on products sold by our customers over the Internet and privacy
concerns relating to the Internet could reduce the license of our product and
harm our business.
Federal, state or foreign agencies may adopt laws or regulations affecting
the use of the Internet as a commercial medium. We expect that laws and
regulations relating to user privacy, pricing, content and quality of products
and services could indirectly affect our business.
Current federal legislation limits the imposition of state and local taxes
on Internet-related sales at this time. Congress may choose not to renew this
legislation in 2001, in which case state and local governments would be free
to impose taxes on electronically purchased goods. The imposition of new sales
or other taxes could limit the growth of Internet commerce in general and, as
a result, the demand for our product and services.
Businesses use our software to capture information regarding their
customers when those customers contact them on-line with customer service
inquiries. Privacy concerns may cause visitors to withhold personal
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data, which would limit the effectiveness of our software product. More
importantly, even the perception of privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of our product.
We have no issued patents. If we are unable to protect our intellectual
property or become subject to intellectual property infringement claims, we
may lose a valuable asset or incur costly and time-consuming litigation.
Our success and ability to compete depend upon our proprietary rights and
intellectual property. We rely on trademark, trade secret and copyright laws
to protect our intellectual property. We have no issued patents and have filed
two patent applications. Since we do not have any issued patents, existing
laws afford only limited protection for our intellectual property. Despite our
efforts to protect our intellectual property, a third party could copy or
obtain the source code to our software or other proprietary information
without authorization, or could develop software competitive to ours. Our
means of protecting our proprietary rights may not be adequate, and our
competitors may independently develop similar technology or duplicate our
product.
We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets or know-how or to determine their scope, validity or
enforceability. This enforcement would be expensive, could cause the diversion
of our resources and may not prove successful. If we are unable to protect our
intellectual property, we may lose a valuable asset.
Third parties could claim that we have infringed their intellectual
property rights by claiming that our product infringes their patents, trade
secrets or copyrights. Any claims, with or without merit, could be costly and
time-consuming to defend, divert our management's attention or cause product
delays. We have no patents that we could use defensively against any company
bringing such a claim. If our product was found to infringe a third party's
proprietary rights, we could be required to enter into royalty or licensing
agreements to be able to sell our product. Royalty and licensing agreements,
if required, may not be available on terms acceptable to us, or at all.
If we are unable to meet the rapid changes in technology, our existing
product could become obsolete.
The market for our product is marked by rapid technological change,
frequent new product introductions, Internet-related technology enhancements,
uncertain product life cycles, changes in client demands and evolving industry
standards. We cannot be certain that we will successfully develop and market
new products, new product enhancements or new products compliant with present
or emerging Internet technology standards. New products based on new
technologies or new industry standards can render existing products obsolete
and unmarketable. To succeed, we will need to enhance our current product and
develop new products on a timely basis to keep pace with developments related
to Internet technology and to satisfy the increasingly sophisticated
requirements of our clients. Enterprise application software technology is
complex and new products and product enhancements can require long development
and testing periods. Any delays in developing and releasing enhanced or new
products could harm our business.
Our directors and executive officers maintain significant control over Blue
Martini Software, which may lead to conflicts with other stockholders over
corporate governance.
Our directors, executive officers and holders of 5% or more of our
outstanding common stock beneficially owned approximately 60.0% of our
outstanding common stock as of September 30, 2000. Monte Zweben, our Chairman,
President and Chief Executive Officer, together with related entities, owned
approximately 39.5% of our common stock as of this date. These stockholders,
acting together, and Mr. Zweben, individually, will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and significant corporate transactions, such as mergers
or other business combination transactions. This control may delay or prevent
a third party from acquiring or merging with us.
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We are at risk of securities class action litigation due to our expected stock
price volatility.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities
class action claims than companies in other industries. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
harm our business.
There may be sales of a substantial amount of our common stock in the near
future that could cause our stock price to fall.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future, subject to
restrictions under the Securities Act and contracted restrictions with the
managing underwriters of our initial public offering. Sales of a substantial
number of shares of our common stock within a short period of time after this
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
stock. A description of the shares eligible for future sale is set forth in our
Registration Statement on Form S-1, declared effective by the Securities and
Exchange Commission on July 24, 2000.
We have implemented anti-takeover provisions which could discourage or prevent
a takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. establishment of a classified board of directors requiring that not all
members of the board may be elected at one time;
. authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
. limitations on the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent and requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
Through September 30, 2000, all of our recognized revenues have been
denominated in United States dollars and were primarily from customers in the
United States. Our exposure to foreign currency exchange rate changes has been
immaterial. We expect, however, that future license and service revenues may
also be derived from international markets and may be denominated in the
currency of the applicable market. In addition, as we expand our international
operations and hire personnel in Europe and Asia Pacific, we will have
operating expenses denominated in foreign currencies. As a result, our
operating results may become subject to
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significant fluctuations based upon changes in the exchange rates of foreign
currencies in relation to the United States dollar. Furthermore, to the extent
that we engage in international sales denominated in United States dollars, an
increase in the value of the United States dollar relative to foreign
currencies could make our products less competitive in international markets.
Although we will continue to monitor our exposure to currency fluctuations and,
when appropriate, may use financial hedging techniques in the future to
minimize the effect of these fluctuations, we cannot assure that exchange rate
fluctuations will not adversely affect our financial results in the future.
Through September 30, 2000, the Company had not engaged in foreign currency
hedging activities.
Interest Rate Risk
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio. We typically do not attempt to reduce or eliminate our market
exposure on our investment securities because a substantial majority of our
investments are in fixed rate, short-term securities. We do not have any
derivative instruments. The fair value of our investment portfolio or related
income would not be significantly impacted by either a 100 basis point increase
or decrease in interest rates due mainly to the fixed-rate, short-term nature
of our available-for-sale investment portfolio.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, (or "FASB"), issued
Statement of Financial Accounting Standards, or SFAS, No. 133, entitled
Accounting for Derivative Instruments and Hedging Activities. We are required
to adopt SFAS No. 133, as amended, for the year ending December 31, 2001. SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and
do not currently engage in hedging activities, the adoption of SFAS No. 133 is
not expected to have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission, (or "SEC"),
released Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in
Financial Statements, and amended by SAB No. 101A and SAB No. 101B, which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB No. 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB No. 101B that delayed the implementation of SAB 101 until October 1,
2000. We do not believe that SAB No. 101 will have a material impact on our
financial statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of the Accounting
Principals Board, or APB, Opinion No. 25. This Interpretation clarifies the
application of APB Opinion 25 including:
. the definition of employee for purposes of applying APB Opinion 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a business
combination.
In general, this Interpretation was effective July 1, 2000. The adoption of
Interpretation No. 44 has not had a material effect on our financial position
or results of operations.
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PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 28, 2000, we closed our initial public offering of 8,625,000 shares
of our common stock, which includes 1,125,000 shares in connection with the
exercise of the underwriters' overallotment option, at $20 per share. The
managing underwriters in the offering were Goldman Sachs & Co., Dain Rauscher
Wessels, Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray. The shares
of common stock sold in the offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement on Form S-1 (Reg. No. 333-
36062) that was declared effective by the SEC on July 24, 2000. The aggregate-
offering amount including the overallotment exercise was $172.5 million. We
incurred expenses of approximately $13.9 million, of which approximately $12.1
million represented underwriting discounts and commissions and approximately
$1.8 million represented other expenses related to the offering.
Currently, we have placed the net proceeds from the offering principally in
short-term, fixed income, investment grade securities. We expect to use the net
proceeds from the offering for working capital and general corporate purposes,
and to fund increased expenses related to additional personnel in our
consulting services, technical support and training organizations; to fund
increased expenses related to the expansion of our sales and marketing
organization; to fund increased research and development expenses; and to fund
increased general and administrative expenses related to the enhancement of our
infrastructure to support our growth. In addition, we intend to use the
proceeds of our initial public offering to repay existing indebtedness and fund
anticipated capital expenditures.
Simultaneously with the closing of the initial public offering, all of our
outstanding convertible preferred stock, par value $0.001 per share,
automatically converted into an aggregate of approximately 23.3 million shares
of common stock.
From July 1, 2000 through July 24, 2000, the Company granted options to
purchase approximately 1.4 million shares of common stock at a weighted average
exercise price of approximately $14.49 per share to employees, consultants and
directors under its 2000 Equity Incentive Plan and issued an aggregate of
approximately 172,000 shares of its common stock at a weighted average exercise
price of approximately $4.20 per share to employees, consultants and directors
as a result of exercises of options granted under the 2000 Equity Incentive
Plan. These sales were made in reliance on Rule 701 and Section 4(2).
In connection with the Company's initial public offering, the Company's
underwriters required that each of the Company's stockholders or optionholders
sign a lock-up agreement which prevents their sale of the Company's stock for
180 days following the initial public offering, except with the consent of the
underwriters. These lock-up agreements allow for automatic release of a certain
number of shares on October 23, 2000 and November 21, 2000, if certain trading
thresholds are met. The trading thresholds were not met for either period and
therefore no shares were released from the lock-up agreements on October 23,
2000 and no shares will be released from the lock-up agreement on November 21,
2000. A discussion of the lock-up terms is contained in the Registration
Statement on Form S-1 filed by the Company with the Securities and Exchange
Commission.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.1 Fourth Amended and Restated Certificate of Incorporation of
Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
3.3 Specimen Stock Certificate.(2)
10.17 First Amendment to lease between Peninsula Office Park Associates,
L.P. and Blue Martini Software, Inc., dated May 12, 1999.
10.18 Second amendment to lease between Peninsula Office Park Associates,
L.P. and Blue Martini Software, Inc., dated August 5, 1999.
10.19 Third amendment to lease between Peninsula Office Park Associates,
L.P. and Blue Martini Software, Inc., dated January 11, 2000.
10.20 Sublease between Virage, Inc. and Blue Martini Software, Inc., dated
August 15, 2000.
10.21 License agreement between Diversified Computer Consultants, LLC and
Blue Martini Software, Inc., dated September 13, 2000.
27.1 Financial Data Schedule.
</TABLE>
--------
(1) Documents incorporated by reference from the Company's Form 10-Q for the
six-month period ended June 30, 2000.
(2) Document incorporated by reference from the Company's Registration
Statement on Form S-1, as amended (333-36062)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 2000
Blue Martini Software, Inc.
(Registrant)
/s/ John E. Calonico, Jr.
By___________________________________
John E. Calonico, Jr.
Vice President, Chief Financial
Officer
(Duly Authorized Officer and
Principal Accounting Officer)
27
