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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 June 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 No X
----- -----
As of August 1, 2000, there were approximately 68,957,000 shares of the
registrant's common stock outstanding.
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BLUE MARTINI SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
-------
<S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999.........................................3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2000 and 1999...........................4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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...................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................23
Item 4. Submission of Matters to a Vote of Security Holders......................23
Item 6. Exhibits and Reports on Form 8-K.........................................24
Signatures...............................................................24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE MARTINI SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,720 $ 10,362
Short-term investments 249 2,562
Accounts receivable, net 11,572 3,649
Prepaid expenses and other current assets 2,296 656
-------- --------
Total current assets 23,837 17,229
Property and equipment, net 5,991 2,761
Other assets 669 370
-------- --------
Total assets $ 30,497 $ 20,360
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 951 $ 1,874
Accrued employee compensation 7,442 2,578
Other current liabilities 6,693 1,074
Deferred revenues 17,834 3,577
Current portion of long-term obligations 506 418
-------- --------
Total current liabilities 33,426 9,521
Long-term obligations, less current portion 472 544
-------- --------
Total liabilities 33,898 10,065
-------- --------
Stockholders' equity (deficit):
Convertible preferred stock 6 6
Common stock 37 31
Additional paid-in-capital 96,917 31,640
Deferred stock compensation (57,054) (8,926)
Accumulated deficit (43,307) (12,456)
-------- --------
Total stockholders' equity (deficit) (3,401) 10,295
-------- --------
Total liabilities and stockholders'
equity (deficit) $ 30,497 $ 20,360
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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BLUE MARTINI SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
License $ 8,421 $ 1,066 $ 14,491 $ 1,091
Service 6,599 410 11,210 626
-------- ------- -------- -------
Total revenues 15,020 1,476 25,701 1,717
-------- ------- -------- -------
Cost of revenues:
License 751 214 1,312 217
Service 10,464 353 16,701 470
-------- ------- -------- -------
Total cost of revenues 11,215 567 18,013 687
-------- ------- -------- -------
Gross profit 3,805 909 7,688 1,030
-------- ------- -------- -------
Operating expenses:
Sales and marketing 12,847 935 21,427 1,459
Research and development 4,914 1,587 9,316 2,581
General and administrative 5,407 314 7,935 561
-------- ------- -------- -------
Total operating expenses 23,168 2,836 38,678 4,601
-------- ------- -------- -------
Loss from operations (19,363) (1,927) (30,990) (3,571)
Interest and other, net 79 13 139 44
-------- ------- -------- -------
Net loss $(19,284) $(1,914) $(30,851) $(3,527)
======== ======= ======== =======
Basic and diluted net loss per common share $(0.76) $(0.09) $(1.22) $(0.16)
======== ======= ======== =======
Shares used in computing basic and diluted
net loss per common share 25,420 22,100 25,220 22,100
======== ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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BLUE MARTINI 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 $(30,851) $(3,527)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,530 168
Amortization of stock compensation and warrants 14,125 874
Provision for doubtful accounts 1,040 69
Changes in operating assets and liabilities:
Accounts receivable (8,963) (1,912)
Prepaid expenses and other current assets (1,639) (737)
Accounts payable, accrued employee compensation and
other current liabilities 9,560 1,612
Deferred revenues 14,257 1,366
-------- -------
Net cash used in operating activities (941) (2,087)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (4,475) (1,045)
Sales and maturities of available-for-sale short-term investments, net 2,294 -
Other assets (211) (16)
-------- -------
Net cash used for investing activities (2,392) (1,061)
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock - 5,000
Net proceeds from issuance of common stock 3,824 14
Repurchases of common stock (31) (3)
Payments of issuance costs related to initial public offering (852) -
Proceeds from bank borrowings - 384
Repayment of debt and capital lease obligations (250) (44)
-------- -------
Net cash provided by financing activities 2,691 5,351
-------- -------
Net (decrease) increase in cash and cash equivalents (642) 2,203
Cash and cash equivalents at beginning of period 10,362 261
-------- -------
Cash and cash equivalents at end of period $ 9,720 $ 2,464
======== =======
Supplemental disclosures of noncash investing and financing activities:
Property and equipment acquired under capital lease
obligations $ 265 $ 305
======== =======
Deferred stock compensation $ 46,781 $ 1,114
======== =======
Warrants issued in connection with lease financing and
marketing arrangement $ 14,008 $ -
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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BLUE MARTINI SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Preparation
The unaudited condensed consolidated financial statements of Blue Martini
Software, Inc. (the "Company") at June 30, 2000 and for the three and six 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 six
months ended June 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>
Six Months Ended
June 30,
----------------
<S> <C> <C>
2000 1999
------ ------
Shares issuable under stock options 6,138 1,642
Shares of restricted stock subject to
repurchase 10,450 7,797
Shares issuable pursuant to warrants 2,445 -
Shares of convertible preferred stock on an
"as-if-converted" basis 23,297 14,991
</TABLE>
The weighted average exercise price of stock options was $3.81 and $0.12 at
June 30, 2000 and 1999, respectively. The weighted average purchase price of
restricted stock subject to repurchase was $0.35 and $0.01 at June 30, 2000 and
1999, respectively. The weighted average exercise price of warrants was $4.94
at June 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.
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. Through June 30, 2000,
the Company had incurred insignificant unrealized gains (losses) on its
available for sale
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short-term investments. Accordingly, management has deemed such amounts as
trivial and has not separately disclosed such items in the accompanying
condensed consolidated financial statements.
Note 4. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------ ------
<S> <C> <C>
Computer equipment $7,094 $2,996
Furniture and office equipment 811 344
Leasehold improvements 394 217
------ ------
8,299 3,557
Less accumulated depreciation and amortization 2,308 796
------ ------
$5,991 $2,761
====== ======
</TABLE>
Note 5. 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 June 30, 2000. On this basis, the Company is organized and
operates in a single segment: the design, development and marketing of software
solutions.
Note 6. 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 $158.5 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 7. 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, SFAS No. 133. 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. We have not determined the
impact that SAB No. 101 will have on our
7
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financial statements and believe that such determination will not be meaningful
until closer to the date of initial adoption.
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 is effective July 1, 2000. We do not expect
the adoption of Interpretation No. 44 to have a material effect on our financial
position or results of operations.
8
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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,"
"will," "expects," "plans," "anticipates," "estimates," "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 software and services that enable companies to build brand equity
through direct customer interaction 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
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
June 30, 2000, we had an accumulated deficit of $43.3 million.
Our revenues are derived from the licensing of our software product 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.
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 20% of our revenues for the three
months ended June 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. Although we have a limited
operating history, we believe
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that our quarterly operating results may experience seasonal fluctuations. For
instance, quarterly results may fluctuate based on our customers' fiscal year,
budgeting cycles and slow summer purchasing patterns.
To date, we have derived a significant portion of our revenues from a small
number of customers. Sales to two customers individually represented 13% and 11%
of our revenues for the three months ended June 30, 2000, and sales to three
customers individually represented 42%, 31% and 25% 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 cancelled, 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, continuing to
enhance our software product and growing our professional services, 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.
Results of Operations
The following table presents selected financial data for the periods indicated
as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
2000 1999 2000 1999
------- ------ ------- --------
<S> <C> <C> <C> <C>
Revenues:
License 56 % 72 % 56 % 64 %
Service 44 28 44 36
---- ---- ------- --------
Total revenues 100 100 100 100
---- ---- ------- --------
Cost of revenues:
License 5 14 5 13
Service 70 24 65 27
---- ---- ------- --------
Total cost of revenues 75 38 70 40
---- ---- ------- --------
Gross profit 25 62 30 60
---- ---- ------- --------
Operating expenses:
Sales and marketing 85 64 84 85
Research and development 33 108 36 150
General and administrative 36 21 31 33
---- ---- ------- --------
Total operating expenses 154 193 151 268
---- ---- ------- --------
Loss from operations (129) (131) (121) (208)
Interest and other, net 1 1 1 3
---- ---- ------- --------
Net loss (128) % (130) (120) % (205) %
==== ==== ======= ========
</TABLE>
10
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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 $1.1 million for the three months ended June 30, 1999 to $8.4
million for the three months ended June 30, 2000. For the six months ended June
30, 2000, license revenues increased to $14.5 million from $1.1 million for the
comparable period in 1999. The increase in license revenues for the three and
six month periods ended June 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 $410,000 for the three months ended
June 30, 1999 to $6.6 million for the three months ended June 30, 2000. For the
six months ended June 30, 2000, service revenues increased to $11.2 million from
$626,000 for the comparable period in 1999. The increases for the three and six
month periods ended June 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 $214,000 for the three months ended June
30, 1999 to $751,000 for the three months ended June 30, 2000. These amounts
represented 20% and 9% of license revenues for these periods. For the six
months ended June 30, 2000, cost of license revenues increased to $1.3 million
from $217,000 for the comparable period in 1999. These amounts represented 9%
and 20% of license revenues for these periods. The increase in cost of license
revenues in absolute dollars for the three and six month periods ended June 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 on equipment used to provide consulting services, technical
support and training. Cost of service revenues increased from $353,000 for the
three months ended June 30, 1999 to $10.5 million for the three months ended
June 30, 2000. These amounts represented 86% and 159% of service revenues for
these periods. For the six months ended June 30, 2000, cost of service revenues
increased to $16.7 million from $470,000 for the comparable period in 1999.
These amounts represented 149% and 75% of service revenues for these periods.
The increase in absolute dollars for the three and six month periods ended June
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 $935,000 for the three months ended June 30, 1999 to
$12.8 million for the three months ended June 30, 2000. For the six months ended
June 30, 2000, marketing and sales expenses increased to $21.4 million
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from $1.5 million in the comparable period in 1999. The increases for the three
and six month periods ended June 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 programs. Additionally, amortization of
deferred stock compensation accounted for an increase in sales and marketing
expense for the three and six month periods ended June 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. 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
six months ended June 30, 2000 was $575,000.
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 $1.6 million for the three
months ended June 30, 1999 to $4.9 million for the three months ended June 30,
2000. For the six months ended June 30, 2000, research and development expenses
increased to $9.3 million from $2.6 million in the comparable period in 1999.
The growth in expenses for the three and six month periods ended June 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 $314,000 for the three months ended June 30, 1999 to
$5.4 million for the three months ended June 30, 2000. For the six month period
ended June 30, 2000, general and administrative expenses increased to $7.9
million from $561,000 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 $1.1 million for the six months ended June 30, 1999 and
$46.8 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 $7.6 million and
$509,000 for the three months ended June 30, 2000 and 1999, respectively, and
$11.9 million and $864,000 for the six months ended June 30, 2000 and 1999,
respectively.
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During the six month period ended June 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 $10,000 for the six months ended June 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.
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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----- ----- ------- -----
Cost of revenues $1,991 $ 36 $ 3,094 $ 47
Sales and marketing 1,912 218 3,304 390
Research and development 1,206 188 3,373 294
General and administrative 2,472 67 3,571 143
------ ----- ------- -----
$7,581 $ 509 $13,342 $ 874
====== ===== ======= =====
</TABLE>
Amortization of deferred stock compensation is estimated to total $28.0
million for 2000, $17.6 million for 2001, $7.6 million for 2002, $2.6 million
for 2003 and $116,000 for 2004. Amortization of deferred stock compensation will
be reduced in future periods to the extent options are terminated prior to full
vesting.
Interest and Other, Net
Interest and other, net consists of interest income from cash, cash
equivalents and available-for-sale short-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 and other,
net increased from $13,000 for the three months ended June 30, 1999 to $79,000
for the three months June 30, 2000. For the six month period ending June 30,
2000, interest and other, net increased to $139,000 from $44,000 in the
comparable period in 1999. The increase was due primarily to higher average
balances of cash, cash equivalents and short-term investments net against
increases in interest expense due on borrowings. We expect that our interest and
other, net will increase as a result of proceeds from our initial public
offering completed in July 2000.
Income Taxes
From inception to June 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 $158.5 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 June 30, 2000, we
had cash, cash equivalents and short-term investments of $10.0 million and $1.5
million available under a equipment lease facility.
As of June 30, 2000, we had outstanding borrowings of $550,000 under a secured
loan agreement. The loan agreement provides for borrowing of up to $750,000 and
is collateralized by equipment and other assets. This borrowing bears interest
at the bank's prime rate plus 0.50% per annum. At June 30, 2000, we also had
capital lease obligations of $429,000. In July 2000, we paid off our existing
indebtedness under the secured loan agreement.
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In the first six months of 2000, net cash used in operating activities was
$941,000 compared to $2.1 million in the comparable period in 1999. Net cash
used in operating activities for the first six months of 2000 and for the
comparable period in 1999 was primarily the result of net losses of $30.9
million and $3.5 million, respectively, after adjusting for amortization of
deferred stock compensation and warrants of $14.1 million and $874,000 for the
first six months of 2000 and for the comparable period in 1999.
Net cash used for investing activities was $2.4 for the first six months of
2000 and $1.1 million for the comparable period in 1999. The cash used for
investing activities was principally related to the purchase of computer
hardware and software, office furniture and equipment, partially offset by sales
and maturities of short-term investments.
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 June 30, 2000, we had outstanding options to purchase 6.1 million
shares of our common stock at a weighted average exercise price of $3.81 per
share, and had approximately 8.7 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 an 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 the net cash proceeds from our recent initial public
offering, together with our available cash balances 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.
14
<PAGE>
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 $30.9 million for the six months ended June 30, 2000. As
of June 30, 2000, we had an accumulated deficit of $43.3 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
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.
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.
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
June 30, 2000, sales to two customers accounted for 24% of our total revenues,
and in the comparable period in 1999, sales to three customers accounted for 98%
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.
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 six months ended June
30, 2000, 56% 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
15
<PAGE>
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 five 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 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 sales
cycle, our revenues are unpredictable and could vary significantly from quarter
to quarter causing our operating results 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 significant 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. A significant 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
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.
16
<PAGE>
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.
Errors may be found from time to time in our existing, new or enhanced
products after commencement of commercial shipments, resulting in loss of
revenues or injury to our reputation. We have in the past discovered software
errors and performance problems with our product and, as a result, have
experienced 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. 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.
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 March
2004. 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
enhancements to our product when planned or at all, or fail to achieve timely
market acceptance of these 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 intend to establish offices in the United Kingdom and 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 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;
. 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;
17
<PAGE>
. 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 127 people at December 31, 1999
to 324 people at June 30, 2000. In particular, our consulting services,
technical support and training organizations grew from 49 people at December 31,
1999 to 154 people at June 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.
. 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.
Many 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.
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<PAGE>
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 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.
19
<PAGE>
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 67.8% of our outstanding common
stock as of June 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.
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.
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
20
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. 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 Blue Martini.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rate Risk
Through June 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 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 June 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, SFAS No. 133. 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
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<PAGE>
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. We have not determined the impact that SAB No. 101 will have on our
financial statements and believe that such determination will not be meaningful
until closer to the date of initial adoption.
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 is effective July 1, 2000. We do not expect
the adoption of Interpretation No. 44 to have a material effect on our financial
position or results of operations.
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<PAGE>
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 $14.0 million, of which approximately $12.1 million
represented underwriting discounts and commissions and approximately $1.9
million represented other expenses related to the offering.
Currently, we have placed the net proceeds from the offering principally in
government instruments as well as other short-term, interest bearing, 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 April 1, 2000 through June 30, 2000, the Company granted options to
purchase approximately 2.5 million shares of common stock at a weighted average
exercise price of approximately $7.63 per share to employees, consultants and
directors under its 2000 Equity Incentive Plan and issued an aggregate of
approximately 1.1 million shares of its common stock at a weighted average
exercise price of approximately $1.42 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).
Item 4. Submission of Matters to a Vote of Security Holders
By way of Action by Written Consent, our stockholders approved the following
proposals on June 23, 2000:
<TABLE>
<S> <C>
. A proposal to amend and restate our Certificate of Incorporation to
amend the authorized capital stock of the Company to consist of
500,000,000 shares of common stock and 5,000,000 of preferred stock at
the closing of our initial public offering;
. a proposal to amend and restate our bylaws;
. a proposal to amend and restate the 1998 Equity Incentive Plan as the
2000 Equity Incentive Plan;
. a proposal to approve our 2000 Employee Stock Purchase Plan;
. a proposal to approve our 2000 Non-Employee Directors' Stock Option
Plan;
. a proposal to approve the form of Indemnity Agreement for use as an
agreement between the Company and each of our directors and executive
officers; and
. a proposal to ratify the selection of KPMG LLP as independent auditors
of the Company for the year ended December 31, 2000.
</TABLE>
<TABLE>
<CAPTION>
Shares Voting:
<S> <C>
For: 49,735,092
Against: 0
Abstaining: 0
</TABLE>
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
------ -------------
3.1 Fourth Amended and Restated Certificate of Incorporation
of the Registrant
3.2 Bylaws of the Registrant
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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: August 11, 2000
BLUE MARTINI SOFTWARE, INC.
(Registrant)
/S/ Monte Zweben
----------------
Monte Zweben
Chairman, President and Chief Executive Officer
/S/ John E. Calonico, Jr.
-------------------------
John E. Calonico, Jr.
Vice President, Chief Financial Officer and
Secretary
(Principal Accounting Officer)
24
