<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-26437
================================================================================
ACCRUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3238684
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
48634 MILMONT DRIVE
FREMONT, CA 94538-7353
(Address of principal executive offices, including zip code)
(510) 580-4500
(Registrant's telephone number, including area code)
[FORMER NAME OR FORMER ADDRESS, IF APPLICABLE]
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
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 FEBRUARY 11, 2000, there were 26,824,782 shares of the
registrant's Common Stock outstanding.
<PAGE> 2
ACCRUE SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1999 AND MARCH 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1999 AND 1998 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACCRUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC 31, MAR 31,
1999 1999
-------- --------
(UNAUDITED)
-----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 37,931 $ 2,862
Accounts receivable, net 4,350 2,005
Prepaid expenses and other current assets 542 188
-------- --------
Total current assets 42,823 5,055
Property and equipment, net 1,835 894
Other assets, net 860 160
-------- --------
TOTAL ASSETS $ 45,518 $ 6,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,085 $ 475
Accrued liabilities 2,305 791
Accrued liabilities - merger 597 -
Deferred revenue 2,659 1,127
Current portion of long term debt - 136
-------- --------
Total current liabilities 6,646 2,529
Long term debt, net of current portion
- 169
-------- --------
Total liabilities 6,646 2,698
-------- --------
Stockholders' equity
Convertible preferred stock, $0.001 par value - 15,517
Common stock, $0.001 par value 25 7
Additional paid-in capital 67,470 6,803
Notes receivable from stockholders (213) (213)
Unearned compensation (5,154) (4,930)
Accumulated deficit (23,256) (13,773)
-------- --------
Total stockholders' equity 38,872 3,411
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,518 $ 6,109
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
ACCRUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DEC 31, DEC 31, DEC 31, DEC 31,
1999 1998 1999 1998
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Net revenue:
Software license $ 3,654 $ 949 $ 9,049 $ 2,009
Maintenance and service 963 258 2,304 649
-------- -------- -------- ----------
Total revenue 4,617 1,207 11,353 2,658
-------- -------- -------- ----------
Cost of revenues
Software license 129 79 329 181
Maintenance and service 564 53 1,164 147
-------- -------- -------- ----------
Total cost of revenues 693 132 1,493 328
-------- -------- -------- ----------
Gross profit 3,924 1,075 9,860 2,330
-------- -------- -------- ----------
Operating expenses:
Research and development 985 828 2,815 2,291
Sales and marketing 3,136 1,487 8,595 3,629
General and administrative 576 436 1,690 1,257
Merger costs - - 3,560 -
Stock-based compensation expense 1,021 447 3,427 620
-------- -------- -------- ----------
Total operating expenses 5,718 3,198 20,087 7,797
-------- -------- -------- ----------
Loss from operations (1,794) (2,123) (10,227) (5,467)
Other income 502 38 788 67
Interest expense - (10) (42) (37)
-------- -------- -------- ----------
Net loss $ (1,292) $ (2,095) $ (9,481) $ (5,437)
======== ======== ======== ==========
Net loss per share, basic and diluted $ (0.06) $ (0.44) $ (0.67) $ (1.17)
======== ======== ======== ==========
Shares used in computing net loss per
share, basic and diluted 23,171 4,755 14,183 4,640
======== ======== ======== ==========
Net loss per share, pro forma $ (0.06) $ (0.13) $ (0.41) $ (0.35)
======== ======== ======== ==========
Shares used in computing net loss per
share, pro forma 23,220 15,582 23,220 15,582
======== ======== ======== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DEC 31, DEC 31,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss (9,481) (5,437)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 342 167
Provision for sales returns and doubtful accounts 155 62
Amortization of discount on line of credit 7 -
Stock-based compensation expense 3,427 620
Changes in operating assets and liabilities:
Restricted cash - 82
Accounts receivable (2,500) (347)
Prepaid expenses and other current assets (354) (41)
Notes receivable (783) -
Other assets 75 -
Accounts payable 612 275
Accrued liabilities 1,513 344
Accrued costs related to mergers and acquisitions 598 -
Deferred revenue 1,529 516
------- -------
Net cash used in operating activities (4,860) (3,760)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,275) (377)
------- -------
Net cash used in investing activities (1,275) (377)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of
issuance costs - 7,364
Proceeds from initial public offering, net of issuance costs 40,815 -
Proceeds from equipment loan 602 -
Proceeds from note payable - (520)
Proceeds from stock options exercised 694 57
Repayment of equipment loan (907) (68)
------- -------
Net cash provided by financing activities 41,204 6,833
------- -------
Net increase in cash and cash equivalents 35,069 2,696
Cash and equivalents at beginning of period 2,862 479
------- -------
Cash and equivalents at end of period 37,931 3,175
======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown. The balance sheet as of March 31, 1999 was
derived from audited financial statements, but does not include all required
disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's report
on Form S-1 (File No. 333-79491) and the Company's Form 8-K dated September 30,
1999, filed with the Securities and Exchange Commission on November 15, 1999.
The condensed consolidated financial statements have been restated to reflect
the September 1999 acquisition of Marketwave Corporation, which was accounted
for as a pooling of interests.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other
future interim periods.
NOTE 2 - NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options, unissued warrants, shares subject
to repurchase and convertible preferred stock were not included in the
computation of diluted net loss per share because the effect would be
anti-dilutive.
Net loss per share for the three and nine months ended December 31, 1998 does
not include the effect of approximately 10,753,135 shares of convertible
preferred stock outstanding, 1,991,400 stock options outstanding, 350,000 common
stock warrants outstanding, and 1,670,998 shares of common stock issued and
subject to repurchase by the Company, because their effects are anti-dilutive.
Net loss per share for the three and nine months ended December 31, 1999 does
not include the effect of approximately 1,894,800 stock options outstanding,
20,000 common stock warrants outstanding, and 1,877,441 shares of common stock
issued and subject to repurchase by the Company, because their effects are
anti-dilutive.
Pro forma net loss per share is computed using the outstanding number of common
shares, less shares subject to repurchase, at the end of the period and the
assumed conversion of preferred stock, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro forma net loss per share, basic and diluted:
Net loss $ (1,292) $ (2,095) $ (9,481) $ (5,437)
======== ======== ======== ========
Shares outstanding at respective period end 25,097 6,500 25,097 6,500
Shares subject to repurchase (1,877) (1,671) (1,877) (1,671)
Adjustment to reflect the assumed conversion of
preferred stock 10,753 10,753
-------- -------- -------- --------
Shares used in computing pro forma net
loss, basic and diluted 23,220 15,582 23,220 15,582
======== ======== ======== ========
Pro forma net loss per share, basic and
diluted $ (0.06) $ (0.13) $ (0.41) $ (0.35)
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
NOTE 3 - EQUITY TRANSACTIONS
For the three and nine months ended December 31, 1998, the Company recorded
unearned stock-based compensation expense of $0 and $6,019,638, respectively.
For the three and nine months ended December 31, 1999, the Company recorded
unearned stock-based compensation of $0 and $3,652,282, respectively, for the
difference at the grant date between the exercise price and the deemed fair
value of the common stock underlying the options granted during that period.
Amortization of unearned compensation recognized for the three and nine months
ended December 31, 1998 was $447,417 and $620,219, respectively, and for the
three and nine months ended December 31, 1999 was $1,021,213 and $3,427,908,
respectively.
During the three and nine months ended December 31, 1999, the Company granted
options to purchase an aggregate of 50,000 and 1,535,824, shares of common
stock, respectively, pursuant to the Company's 1996 Stock Option Plan (the
"Option Plan"). Also 341,999 and 1,671,797 shares of common stock were exercised
pursuant to the Option Plan.
A Registration Statement on Form S-1 (File No. 333-79491) was filed on May 27,
1999, and declared effective by the Commission on July 29, 1999. The Company
offered an aggregate of 3,900,000 shares of its Common Stock for an aggregate
offering price of $39.0 million (the "IPO"). Simultaneously with the closing of
the IPO, all of the Company's convertible preferred stock was automatically
converted into an aggregate of 10,280,188 shares of common stock.
On September 30, 1999, the Company completed the acquisition of Marketwave
Corporation, a Washington corporation. Under the terms of the acquisition, which
was accounted for as a pooling of interests, the Company exchanged 3,446,414
shares of Accrue Common Stock for all of Marketwave outstanding common stock and
unexpired and unexercised options to acquire Marketwave capital stock.
NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Revenue by geographic region is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
United States $ 3,986 $ 1,021 $ 9,988 $ 2,425
Foreign 631 186 1,365 233
------- ------- ------- -------
$ 4,617 $ 1,207 $11,353 $ 2,658
======= ======= ======= =======
</TABLE>
No one customer accounted for more than 10% of revenue for the quarter ended
December 31, 1999 and December 31, 1998. No one customer accounted for more than
10% of revenue for the nine months ended December 31, 1999 and December 31,
1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed
historical financial information and the notes thereto included in this report
and Management's Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Company's
Registration Statement on Form S-1 (File No. 333-79491) and its periodic reports
filed pursuant to the Exchange Act.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
7
<PAGE> 8
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE
CAPTION "RICK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN.
THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES.
OVERVIEW
Accrue Software was founded in 1996 and is headquartered in Fremont, California
with regional sales offices throughout the US, and an international office in
London, England. Our principle product, Accrue Insight, is a software solution
that collects, stores and analyzes detailed Web site traffic information and
visitor activity data and presents this information in detailed reports to help
managers and marketers make more effective merchandising and marketing
decisions. We sell Accrue Insight to customers for a license fee and also
provide related maintenance services. In addition, we provide professional
services to assist customers at every stage of Accrue Insight deployment, from
identification of specific business needs through enterprise integration and
customization of e-business analysis reporting, to delivering a rapid and
effective implementation. We also offer an application hosting service, Accrue
Site Knowledge (ASK) Service, that enables customers to outsource system
administration responsibilities in connection with their purchase of Accrue
Insight.
Substantially all of our product revenues through December 31, 1999 were
attributable to licensing Accrue Insight, Accrue Hit List and related products
and support services. We anticipate that these will continue to account for a
substantial portion of our revenues for the foreseeable future. Consequently, a
decline in the price of or demand for Accrue Insight, Accrue Hit List, or
related products and services, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
We generally recognized license revenue, net of estimated returns allowance,
upon product shipment. Where multiple products or services are sold together
under one contract, we allocate revenue to each element based on their relative
fair value, with fair value being determined using the price charged when that
element is sold separately. We recognize maintenance service revenue ratably
over the term of the service agreement, and we recognize consulting service
revenue as services are performed.
We market our products, both domestically and internationally, through our
direct sales force. Sales derived through indirect channels, which consist
primarily of international resellers and system integrators, accounted for less
than 15% of our total revenue to date. We expect that sales derived through
indirect channels will increase as a percentage of total revenue as we expand
our international efforts. We license our products to our customers primarily on
a perpetual basis. We offer multiple pricing models from usage-based to server-
and CPU-based, allowing for additional revenue as a customer's e-business
expands. Selling prices for our products have typically ranged from ten to
several hundred thousand dollars. Annual support and maintenance contracts,
which are purchased with initial product licenses, entitle customers to
telephone support and upgrades, when and if available. The price for our support
and maintenance program is based on a percentage of list price and is paid in
advance. Consulting fees for implementation services and training are charged on
a time-and-materials basis or a fixed-fee basis for package services.
RESULTS OF OPERATIONS
Revenue. Total revenues were $4.6 million and $11.4 million for the three and
nine months ended December 31, 1999, respectively, an increase of 282% from $1.2
million for the quarter ended December 31, 1998 and an
8
<PAGE> 9
increase of 327% from $2.7 million for the nine months ended December 31, 1998.
No one customer accounted for more than 10% of revenue for the quarter ended
December 31, 1999 and December 31, 1998. No one customer accounted for more than
10% of revenue for the nine months ended December 31, 1999 and December 31,
1998.
Software license revenue. Revenue from software licenses was $3.7 million for
the quarter ended December 31, 1999, an increase of $2.7 million, or 285%, over
$0.9 million for the quarter ended December 31, 1998. For the nine months ended
December 31, 1999, revenue from software licenses was $9.0 million, an increase
of $7.0 million, or 350%, over $2.0 million for the nine months ended December
31, 1998. The majority of the growth in product revenue was due to higher unit
sales volumes and an increase in the average dollar size of licenses. We
anticipate that revenue from product licenses will continue to represent a
substantial majority of our revenues in the future. We expect that because of
our small but increasing revenue base, historical percentage growth rates of our
product revenue will not be sustainable in the future.
Maintenance and service revenue. Maintenance and service revenues were $1.0
million and $2.3 million for the three and nine months ended December 31, 1999,
respectively, representing increases of 273% from $0.3 million and 255% from
$0.6 million from the corresponding periods in fiscal 1998. This growth is
primarily due to expanded service offerings, more proactive sales of these
offerings, and a higher proportion of renewals of maintenance contracts by
existing customers. We expect that historical percentage growth rates of our
maintenance and service revenue will not be sustainable in the future.
Cost of revenue. Cost of revenue consists of royalties paid to third parties and
the salaries and related expenses for maintenance and service personnel. These
costs were $0.7 million and $1.5 million, or 15% and 13% of revenue,
respectively, for the three and nine months ended December 31, 1999, as compared
to $0.1 million and $0.3 million or 11% and 12% of revenue in the corresponding
periods in fiscal 1998. These dollar amount increases of cost of revenue reflect
the higher volumes of product shipped, related third-party royalties and
substantial increase in maintenance and service personnel headcount. Because all
development costs incurred in the research and development of software products
and enhancements to existing software products have been expensed as incurred,
cost of revenue includes no amortization of capitalized software development
costs.
Gross profit. Gross profit remained nearly flat at 85% and 89% of revenue for
the quarters ended December 31, 1999 and 1998, and 87% and 88% for the nine
months ended December 31, 1999 and 1998. In the future, we expect that royalties
paid to third parties will increase in absolute dollars. In addition, we expect
that sales derived through indirect channels will increase as a percentage of
total revenue. We also expect that maintenance and service revenue will increase
as a percentage of total revenue as we expand our service offerings and maintain
our maintenance contract renewal rates with customers. Maintenance and service
revenue has lower gross margins than product revenue. For all of these reasons,
we expect that our gross margins will decline over time.
Operating expenses. Total operating expenses were $5.7 million for the quarter
ended December 31, 1999, or 124% of revenues as compared to $3.2 million or 265%
of revenues for the quarter ended December 31, 1998. For the nine months ended
December 31, 1999, total operating expenses were $20.1 million, or 177% of
revenue, as compared to $7.8 million, or 293% of revenue for the nine months
ended December 31, 1998. The increases in absolute dollars were largely due to
increased salaries, commissions and related expenses associated with newly hired
employees, stock-based compensation expenses, and the recorded nonrecurring
expenses of $3.6 million related to the Marketwave acquisition in the quarter
ended September 30, 1999.
Research and development expenses. Research and development expenses consist
primarily of salaries and related costs associated with the development of new
products, the enhancement of existing products, and the performance of quality
assurance and documentation activities. Research and development expenses were
$1.0 million for the quarter ended December 31, 1999, or 21% of revenue, as
compared to $0.8 million, or 69% of revenue for the quarter ended December 31,
1998. For the nine months ended December 31, 1999, research and development
expenses were $2.8 million, or 25% of revenue, as compared to $2.3 million, or
86% of revenue for the nine months ended December 31, 1998. The increase in
absolute dollars is primarily attributable to increased staffing and associated
support for software engineers required to expand and enhance our product and
services offerings. We believe that research and development expenses will
increase in dollar amount but remain constant as a
9
<PAGE> 10
percentage of total revenue in the future. Research and development expenditures
are charges to operations as incurred.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, and
promotional expenses. Sales and marketing expenses were $3.1 million, or 68% of
revenue, for the quarter ended December 31, 1999, compared to $1.5 million, or
123% of revenue for the quarter ended December 31, 1998. For the nine months
ended December 31, 1999, sales and marketing expenses were $8.6 million, or 76%
of revenue, as compared to $3.6 million, or 137% of revenue for the nine months
ended December 31, 1998. The increases were primarily due to increased headcount
and commission expense in our sales and marketing departments, and increased
marketing communications expenditures associated with our products and services.
We believe that sales and marketing expenses will increase in dollar amount but
continue to decrease as a percentage of total revenue in the future.
General and administrative expenses. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive,
financial, human resource, business development, and other related
administrative functions, as well as legal and accounting costs. General and
administrative expenses were $0.6 million, or 12% of revenue, for the quarter
ended December 31, 1999, as compared to $0.4 million, or 36% of revenue for the
quarter ended December 31, 1998. For the nine months ended December 31, 1999,
general and administrative expenses were $1.7 million, or 15% of revenue, as
compared to $1.3 million, or 47% of revenue for the nine months ended December
31, 1998. The increase in absolute dollars was primarily the result of increased
staffing and associated expenses necessary to manage and support our growth. We
believe that general and administrative expenses will increase in dollar amount
as we continue to increase staffing to manage expanding operations and
facilities, and incur additional expenses associated with operating as a public
company. However, we believe that general and administrative expenses will
decrease as a percentage of total revenue in the future.
Stock-based compensation. Total stock-based compensation as of December 31, 1999
amounted to $9.9 million, of which approximately $1.0 million was amortized for
the quarter ended December 31, 1999 and $3.4 million was amortized for the nine
months ended December 31, 1999. Total stock-based compensation as of December
31, 1998 amounted to $6.0 million, of which approximately $0.4 million was
amortized for the quarter ended December 31, 1998 and $0.6 million was amortized
for the nine months ended December 31, 1998. The remaining balance will continue
to be amortized over the vesting of the related options.
Other income (expense), net. Other income (expense), net consists of interest
income, interest expense, other income and other expense. Other income
(expense), net was $502,000 for the quarter ended December 31, 1999 and $28,000
for the quarter ended December 31, 1998. Other income (expense), net was
$746,000 for the nine months ended December 31, 1999 and $30,000 for the nine
months ended December 31, 1998, due to interest on proceeds from the initial
public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations principally through private
sales of preferred stock, with net proceeds of $12.9 million, bank loans, and
with the net proceeds of $40.9 million from our initial public offering
completed in August 1999. We used $4.9 million of cash in operations for the
nine months ended December 31, 1999 and $3.8 million of cash in operations for
the nine months ended December 31, 1998. We used cash primarily to fund our net
losses from operations and to pay for the merger related expenses. For the nine
months ended December 31, 1999, cash used by operating activities was primarily
attributable to our net loss of $9.5 million and an increase in accounts
receivable of $2.5 million, offset in part by an increase in deferred revenue of
$1.5 million, an increase in accrued liabilities of $1.5 million, an increase in
accrued costs related to mergers and acquisitions of $0.6 million and
stock-based compensation expense of $3.4 million. The increase in accounts
receivable, provision for sales returns and doubtful accounts and deferred
revenue were a result of higher unit sales. Cash provided by financing
activities was $41.2 million for the nine months ended December 31, 1999 and
$6.8 million for the nine months ended December 31, 1998. We have a $2.0 million
working capital line of credit
10
<PAGE> 11
with Silicon Valley Bank, which expires in June 2000. Interest is payable
monthly. There were no amounts outstanding under the line as of December 31,
1999.
Capital expenditures were $1.3 million for the nine months ended December 31,
1999, and $0.4 million for the nine months ended December 31, 1998. Our capital
expenditures consist primarily of purchases of property and equipment, including
computer equipment and software. We expect that our capital expenditures will
continue to increase in the future. We expect to experience significant growth
in our operating expenses in the future in order to execute our business plan,
particularly research and development and sales and marketing expenses. As a
result, we anticipate that our operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. We believe that the net
proceeds from the sale of the common stock in our initial public offering
completed in August 1999 will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. Thereafter, we
may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
YEAR 2000 READINESS
"Year 2000 Issues" refer generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31,
1999 to January 1, 2000 date change;
- Function according to the product documentation provided for
this date change, without changes in operation resulting from
the advent of a new century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the
ambiguity as to century in a disclosed, defined and
predetermined manner; Store and provide output of date
information in ways that are unambiguous as to century if the
date elements in interfaces and data storage specify the
century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured and
used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. We have tested
our products for Year 2000 compliance.
As of February 11, 2000, we have not experienced any significant issues as a
result of Year 2000 problems and do not anticipate incurring material
incremental costs in future periods due to such issues.
RISK FACTORS
The following is a discussion of certain factors which currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our capital stock or other securities is
cautioned to carefully consider these factors, along with the factors discussed
in the Company's Registration Statement on Form S-1 (File No. 333-79491) and its
periodic reports filed pursuant to the Exchange Act.
WE HAVE A LIMITED OPERATING HISTORY.
Accrue was formed in February 1996, and we introduced Accrue Insight 1.0, our
first software product, in January 1997. For the fiscal year ended March 31,
1998, we generated $2.0 million in revenue, for the fiscal year ended
11
<PAGE> 12
March 31, 1999, we generated $4.7 million in revenue, and for the nine months
ended December 31, 1999 we generated $11.4 million in revenue. Thus, we have
only a limited operating history upon which you can evaluate our business and
prospects. Due to our limited operating history, it is difficult or impossible
for us to predict future results of operations. For example, we cannot forecast
operating expenses based on our historical results because they are limited, and
we are required to forecast expenses in part on future revenue projections. Most
of our expenses are fixed in the short term and we may not be able to quickly
reduce spending if our revenue is lower than we had projected, therefore net
losses in a given quarter would be greater than expected. In addition, our
ability to forecast accurately our quarterly revenue is limited due to a number
of factors described in detail below, making it difficult to predict the quarter
in which sales will occur. Moreover, due to our limited operating history, any
evaluation of our business and prospects must be made in light of the risks and
uncertainties often encountered by early-stage companies in Internet-related
products and services markets, which is new and rapidly evolving. Many of these
risks are discussed under the sub-headings below. We may not be able to
successfully address any or all of these risks and our business strategy may not
be successful. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more detailed information on our
historical results of operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
We have not achieved profitability and we expect to incur net losses for the
foreseeable future. We incurred net losses of $2.0 million for the fiscal year
ended March 31, 1997, $4.2 million for the fiscal year ended March 31, 1998,
$7.6 million for the fiscal year ended March 31, 1999 and $9.5 million for the
nine months ended December 31, 1999. As of December 31, 1999, we had an
accumulated deficit of $23.3 million. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis in the future, or at all.
WE EXPECT OPERATING EXPENSES TO INCREASE, WHICH MAY IMPEDE OUR ABILITY TO
ACHIEVE PROFITABILITY.
As we grow our business we expect operating expenses to increase significantly,
and as a result, we will need to generate increased quarterly revenue to achieve
and maintain profitability. In particular, we expect to incur additional costs
and expenses related to the expansion of our sales force and distribution
channels, the expansion of our product and services offerings, the development
of relationships with strategic business partners, the expansion of management
and infrastructure, and brand development, marketing and other promotional
activities.
IF WE CANNOT FUND OPERATIONS FROM CASH GENERATED BY OUR BUSINESS, WE MAY BE
REQUIRED TO SELL ADDITIONAL STOCK, WHICH COULD DEPRESS OUR COMMON STOCK PRICE.
To date, we have been unable to fund operations from cash generated by our
business and have funded operations primarily by selling securities. If our
revenue fails to offset operating expenses, we may be required to fund future
operations through the sale of additional common stock, which could cause our
common stock price to decline.
FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON
STOCK.
Our annual and quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, particularly
as a result of the risks we describe in this section. Because our operating
results are volatile and difficult to predict, you should not rely on the
results of one quarter as an indication of future performance. It is likely that
in some future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock may fall significantly.
12
<PAGE> 13
OUR SUCCESS DEPENDS ON CERTAIN KEY MANAGEMENT PERSONNEL.
Our success depends largely upon the continued services of our key management
and technical personnel, the loss of which could seriously harm our business. In
particular, we rely on Richard Kreysar, President, Chief Executive Officer and a
director, and Bob Page, Vice President of Product Development and Chief
Technical Officer. Messrs. Kreysar and Page do not have employment or
non-competition agreements and could therefore terminate their employment with
us at any time without penalty. We do not maintain key person life insurance
policies on any of our employees.
WE FACE INTENSE COMPETITION, WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS NOW AND IN THE FUTURE.
The market for e-business analysis solutions is intensely competitive, evolving
and subject to rapid technological change. We expect the intensity of
competition to increase in the future. Competitors vary in size and in the scope
and breadth of the products and services they offer. Our principal competitors
today include vendors of software that target e-business customer data
collection and analysis markets such as Andromedia, Inc., net.Genesis
Corporation and WebTrends Corporation; developers of software that address only
certain technology components of our products; and in-house development efforts
by potential customers or partners.
We expect that if we are successful in our strategy to expand the scope of our
products and services, we may encounter many additional, market-specific
competitors. In addition, because there are relatively low barriers to entry in
the software market, we expect additional competition from traditional business
intelligence and enterprise software vendors as the Internet software market
continues to develop and expand. Some of these companies, as well as some other
competitors, have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and a larger installed base of customers than we have. In addition, many of our
competitors have well-established relationships with current and potential
customers of ours, have extensive knowledge of our industry and are capable of
offering a single-vendor solution. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, devote greater resources to the development, promotion and sale of
their products, or adopt more aggressive pricing policies to gain market share.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase
as a result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors, in which case our
business could suffer.
WE RELY ON SALES OF A SINGLE PRODUCT LINE FOR OUR REVENUE.
We currently derive all of our revenue from the license and related upgrades,
professional services and support of our Accrue Insight and Accrue Hit List
products. We expect that we will continue to depend on revenue related to new
and enhanced versions of these products for at least the next several quarters.
We cannot be certain that we will be successful in upgrading and marketing our
products and services or that we will successfully develop and market new
products and services on a timely basis. If we do not continue to increase
revenue related to our existing products and services or generate revenue from
new products and services, our business would be seriously harmed.
IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN E-COMMERCE TECHNOLOGY, OUR PRODUCT
REVENUE COULD DECLINE.
The market for our products 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
13
<PAGE> 14
enhancements or new products compliant with present or emerging Internet
technology standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted by
the industry, our customers and competitors. If the standards adopted are
different from those, which we have chosen to support, market acceptance of our
products may be significantly reduced or delayed and our business will be
seriously harmed. In addition, we may be required to make significant
expenditures to adapt our products to changing or emerging technologies. 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 products 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. E-business analysis 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, operating results and financial condition.
THE FAILURE TO RETAIN AND ATTRACT KEY TECHNICAL PERSONNEL COULD HARM OUR
BUSINESS.
Because of the complexity of our products and technologies, we are substantially
dependent upon the continued service of our existing product development
personnel. In addition, we intend to hire a number of engineers with high levels
of experience in designing and developing software and Internet-related products
in time-pressured environments. The competition in Silicon Valley for qualified
engineers in the computer software and Internet markets is intense. New
personnel will require training and education and take time to reach full
productivity. Our future success depends on our ability to attract, train and
retain these key personnel.
FAILURE TO EXPAND OUR SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD LIMIT
OUR GROWTH.
In order to maintain and increase our market share and revenue, we will need to
expand our direct and indirect sales operations and channels of distribution. We
have recently expanded our direct sales force and plan to hire additional sales
personnel. Our direct sales and support organization consisted of 30 employees
as of April 30, 1999 and 48 employees as of December 31, 1999, including the
addition of 11 people from the Marketwave merger. Competition for qualified
sales personnel is intense, and we might not be able to hire the kind and number
of sales personnel we are targeting. New hires will require extensive training
and typically take several months to achieve productivity. In addition, we need
to expand our relationships with domestic and international channel partners,
distributors, value-added resellers, systems integrators, online and other
resellers, Internet service providers, original equipment manufacturers, and
other partners to build our indirect sales channel.
WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE PROFESSIONAL SERVICES
ORGANIZATION WHICH COULD NEGATIVELY AFFECT BOTH OUR OPERATING RESULTS AND OUR
ABILITY TO ASSIST OUR CUSTOMERS WITH THE IMPLEMENTATION OF OUR PRODUCTS.
Customers that license our software typically engage our professional services
organization to assist with support, training, consulting and implementation of
their e-business analysis solutions. We believe that growth in our product sales
depends on our ability to provide our customers with these services and to
educate third-party resellers on how to use our products. We expect our services
revenue to increase in absolute dollars as we continue to provide consulting and
training services that complement our products and as our installed base of
customers grows. We generally bill our clients for our services on a
time-and-materials basis. Failure to estimate accurately the resources and time
required for an engagement, to manage our customers' expectations effectively
regarding the scope of services to be delivered for an estimated price or to
complete fixed-price engagements within budget, on time and to the customer's
satisfaction could expose us to risks associated with cost overruns, and in some
cases, penalties, and may harm our business. Although we plan to expand our
services in order to address our customers' needs we cannot be certain that it
will ever achieve profitability.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND
INTERNATIONALLY.
14
<PAGE> 15
Licenses and services sold to clients located outside the United State for the
three and nine months ended December 31, 1999 were 14% and 12%, respectively, of
our total revenue and 15% and 9%, respectively, for the three and nine months
ended December 31, 1998. We expect international revenue to account for an
increasing percentage of total revenue in the future. We believe that we must
expand our international sales activities in order to be successful. We
initiated operations in selected international markets in the first quarter of
fiscal 2000. Expansion into international markets will require management
attention and resources. We also intend to enter into a number of international
alliances as part of our international strategy and rely extensively on these
business partners to conduct operations, coordinate sales and marketing efforts,
and provide software localization services. To date, we have non-exclusive
alliances with Sumisho Electronics Company, Ltd., a subsidiary of Sumitomo
Corporation, and Itochu Techno-Science Corporation for distribution of our
products in Japan, and Scientific Computers GmbH for distribution of our
products in Europe. These alliances are not subject to binding agreements, have
no specified performance requirements by us or our allied partners, and may be
terminated by either party at any time. Our success in international markets
will depend on the success of our business partners and their willingness to
dedicate sufficient resources to our relationships.
We cannot assure you that we will be successful in expanding internationally.
International operations are subject to other inherent risks, including such
factors as protectionist laws and business practices that favor local
competition, difficulties and costs of staffing and managing foreign operations,
dependence on local vendors, multiple, conflicting and changing governmental
laws and regulations, longer sales and collection cycles, foreign currency
exchange rate fluctuations, political and economic instability, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity, and expenses associated with localizing
products for foreign countries. If we fail to address these risks adequately our
business may be seriously harmed.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO SUCCESSFULLY IDENTIFY AND INTEGRATE
POTENTIAL ACQUISITIONS AND INVESTMENTS.
Due to the intensely competitive nature of the e-business analysis market, we
believe that our success will depend on our ability to attain significant market
share, which will depend in part on our ability to successfully identify and
acquire businesses, products and technologies from third parties that are
complementary to our existing products and services. We do not have any present
understanding, nor are we having any discussions relating to any acquisition or
investment. We cannot be certain that we will be able to rapidly expand our
product and services offerings through these acquisitions or investments. Some
of the risks we may encounter include complementary products and services may
not be available on commercially reasonable terms; we may be unable to compete
for acquisitions of products and services with many of our competitors who have
greater financial resources than we do; acquired products and services may not
meet the needs of our customers; we may incur difficulties associated with the
integration of the personnel and operations of an acquired company with our
personnel and operations; we may incur difficulties in assimilating acquired
products, services or technologies, with our existing products, services and
technologies; and integration of acquired and existing products and services may
result in decreases in revenue from existing products and services.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses. Furthermore, we may have to issue
equity securities to pay for any future acquisition which could be dilutive to
our existing stockholders. We may also have to incur debt which could contain
covenants that restrict our operations. In addition, acquisitions and
investments may have negative effect on our reported results of operations from
acquisition-related charges and amortization of acquired technology and other
intangibles. Any of these acquisition-related risks could harm our business.
OUR VARIED SALES CYCLES MAKE IT DIFFICULT TO BUDGET AND FORECAST OUR OPERATING
RESULTS.
We have varied sales cycles because we generally need to educate potential
clients regarding the use and benefits of our product applications. The
stability of our sales cycle continues to evolve as our products mature. Our
long sales cycle makes it difficult to predict the quarter in which sales may
fall and to budget and forecast operating results. In addition, a significant
portion of our sales fall within the last month of a quarter, making it
difficult to predict revenue until late in the quarter and to adjust expenses
accordingly.
15
<PAGE> 16
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY SMALL DELAYS IN CUSTOMER
ORDERS OR PRODUCT INSTALLATIONS.
Small delays in customer orders can cause significant variability in our license
revenue and operating results for any particular period. We derive a substantial
portion of our revenue from the sale of software products and related services.
Our revenue recognition policy requires us to deliver the software prior to
recognizing any revenue for the product and to substantially complete the
implementation of our product before we can recognize service revenue. Any end
of quarter delays in orders for delivery or product installation schedules could
harm operating results for that quarter.
IF THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS IS NO LONGER AVAILABLE, OUR
BUSINESS COULD BE HARMED.
We integrate third-party software as a component of our software. For example,
we rely on Red Brick database technology licensed to us by Informix Software,
Inc. to maintain data stored in our Accrue Insight product. This agreement
terminates in March 2000, and we cannot be certain that Informix will renew this
agreement. If Informix does not renew this agreement, we will be required to
obtain similar technology from other parties, which may not be available to us
on commercially reasonable terms. Although we plan to integrate additional
database technology in our products prior to March 2000, we cannot be certain
that we will be able to successfully integrate this technology prior to this
date. We also incorporate graphic generation tools from VI/Visualize, Inc. in
Accrue Insight. This agreement terminates in July 2000. If we cannot maintain
licenses to key third-party software, shipments of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could seriously harm our business, financial results and results
of operations.
IF WE FAIL TO SUCCESSFULLY PROMOTE OUR ACCRUE BRAND NAME OR IF WE INCUR
SIGNIFICANT EXPENSES PROMOTING AND MAINTAINING OUR ACCRUE BRAND NAME, OUR
BUSINESS COULD BE HARMED.
Due in part to the emerging nature of the market for e-business analysis
solutions and the substantial resources available to many of our competitors,
there may be a time-limited opportunity for us to achieve and maintain a
significant market share. Developing and maintaining awareness of the Accrue
brand name is critical to achieving widespread acceptance of our e-business
analysis solutions. Furthermore, the importance of brand recognition will
increase as competition in the market for our products increases. Successfully
promoting and positioning the Accrue brand will depend largely on the
effectiveness of our marketing efforts and our ability to develop reliable and
useful products at competitive prices. Therefore, we may need to increase our
financial commitment to creating and maintaining brand awareness among potential
customers.
THE STRAIN THAT OUR GROWTH RATE PLACES UPON OUR SYSTEMS AND MANAGEMENT RESOURCES
MAY ADVERSELY AFFECT OUR BUSINESS.
We have recently experienced a period of significant expansion of our operations
that has placed a significant strain on our management, administrative and
operational resources. In addition, we have recently hired a significant number
of employees and plan to further increase our total headcount. Our headcount has
increased from 22 at March 31, 1997, to 38 at March 31, 1998, to 59 at March 31,
1999, and 92 at December 31, 1999. Furthermore, our Chief Financial Officer
joined us in April 1999 and has had limited exposure to our prior operations. In
addition, we intend to further expand our finance, administrative and operations
staff. Any failure to properly manage our growth could have a material adverse
effect on our business, results of operations, and financial condition. To
properly manage this growth, we must, among other things, implement and improve
additional and existing administrative, financial, and operational systems,
procedures, and controls on a timely basis. We may not be able to complete the
necessary improvements to our systems, procedures, and controls necessary to
support our future operations in a timely manner. Management may not be able to
hire, train, retain, motivate, and manage required personnel and may not be able
to successfully identify, manage, and exploit existing and potential market
opportunities. In connection with our expansion, we plan to increase our
operating expenses to expand our sales and marketing operations, develop new
distribution channels, fund greater levels of
16
<PAGE> 17
research and development, broaden professional services and support, and improve
operational and financial systems. Failure of our revenue to increase along with
these expenses during any fiscal period could have a materially adverse impact
on our financial results for that period.
ACCRUE INSIGHT, OUR MOST IMPORTANT PRODUCT, IS NOT PROTECTED BY A PATENT. IF
ANOTHER PARTY WERE TO USE THIS TECHNOLOGY, OUR BUSINESS WOULD SUFFER.
We regard substantial elements of our e-business analysis solutions as
proprietary and attempt to protect them by relying on patent, trademark, service
mark, trade dress, copyright, and trade secret laws and restrictions, as well as
confidentiality procedures and contractual provisions. Any steps we take to
protect our intellectual property may be inadequate, time consuming, and
expensive. In addition, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property,
which could have a material adverse effect on our business. Furthermore, legal
standards relating to the validity, enforceability, and scope of protection of
intellectual property rights in Internet-related industries are uncertain and
still evolving, and the future viability or value of any of our intellectual
property rights is uncertain. Effective trademark, copyright, and trade secret
protection may not be available in every country in which our products are
distributed or made available through the Internet. Furthermore, our competitors
may independently develop similar technology that substantially limits the value
of our intellectual property or design around patents issued to us.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In addition to the technology we have developed internally, we also use code
libraries developed and maintained by third parties and have acquired or
licensed technologies from other companies. Our internally developed technology,
the code libraries, or the technology we acquired or licensed may infringe a
third party's intellectual property rights who may bring claims against us
alleging infringement of their intellectual property rights. We have recently
received a letter from a patent holder regarding possible infringement of their
U.S. patent. We have investigated this patent and believe we have meritorious
defenses to any claims that could be asserted. Any infringement or claim of
infringement could have a material adverse effect on our business. In recent
years, there has been significant litigation in the United States involving
patents and other intellectual property rights. We are not currently involved in
any intellectual property litigation. However, as the number of entrants into
our market increases, the possibility of an intellectual property claim against
us grows and we may be a party to litigation in the future to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting litigation could subject
us to significant liability for damages and invalidation of our proprietary
rights, would likely be time-consuming and expensive to defend and would divert
management time and attention. Any potential intellectual property litigation
could also force us to cease selling, incorporating, or using products or
services that incorporate the challenged intellectual property; obtain from the
holder of the infringed intellectual property right a license to sell or use the
relevant technology, which license may not be available on reasonable terms, or
at all; and/or redesign those products or services that incorporate infringing
technology.
Any of these results could seriously harm our business.
PRODUCT DEFECTS COULD LEAD TO LOSS OF CUSTOMERS, WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Despite internal testing and testing by current and potential customers, our
current and future products may contain serious defects, including Year 2000
errors, the occurrence of which could result in adverse publicity, loss of or
delay in market acceptance, or claims by customers against us, any of which
could harm our business, results of operations, and financial condition. In
addition, our products and product enhancements are very complex and may from
time to time contain errors or result in failures that we did not detect or
anticipate when introducing our products or enhancements to the market. The
computer hardware environment is characterized by a wide variety of non-standard
configurations that make pre-release testing for programming or compatibility
errors very difficult and time consuming. Despite our testing, errors may still
be discovered in some new products or enhancements after the products or
enhancements are delivered to customers.
17
<PAGE> 18
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD REQUIRE
CONSIDERABLE EFFORT AND EXPENSE TO DEFEND AND WHICH COULD HARM OUR BUSINESS.
Our products are used to monitor the traffic data of our customers' Web sites,
and to segment, analyze and report this data. These and other functions that our
products provide are often critical to our customers, especially in light of the
considerable resources many organizations spend on the development and
maintenance of their Web sites. Our end-user licenses contain provisions that
limit our exposure to product liability claims, but these provisions may not be
enforceable in all jurisdictions. Additionally, we maintain limited products
liability insurance. To the extent our contractual limitations are unenforceable
or these claims are not covered by insurance, a successful products liability
claim could harm our business.
RISKS RELATED TO OUR INDUSTRY
EVOLVING REGULATION OF THE INTERNET MAY HARM OUR BUSINESS.
As e-commerce continues to evolve, increasing regulation by federal, state, or
foreign agencies becomes more likely. This regulation is likely in the areas of
user privacy, pricing, content, quality of products and services, taxation,
advertising, intellectual property rights, and information security. In
particular, laws and regulations applying to the solicitation, collection, or
processing of personal or consumer information could negatively affect our
activities. Typically, our products capture traffic data when consumers,
business customers or employees visit a Web site. The perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the data
captured after visiting Web sites may be used by marketing entities to
unilaterally direct product promotion and advertising to that user. We are not
aware of any similar legislation or regulatory requirements currently in effect
in the United States. Other countries and political entities, such as the
European Economic Community, have adopted legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business could be harmed. Moreover, the applicability to the Internet of
existing laws governing issues such as intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity and libel is
uncertain and developing. Furthermore, any regulation imposing fees or assessing
taxes for Internet use could result in a decline in the use of the Internet and
the viability of e-commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet, may impose additional burdens on e-commerce
or may require us to alter how we conduct our business. This could decrease the
demand for our products and services, increase our cost of doing business,
increase the costs of products sold through the Internet or otherwise have a
negative effect on our business, results of operations and financial condition.
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET.
Continued expansion in the sales of our e-business analysis solutions will
depend upon the continued growth of the Internet as a widely used medium for
commerce and communication. Rapid growth in the use of the Internet is a recent
phenomenon. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of customers may not adopt or continue to use the
Internet and online services as a medium of commerce and communication. Demand
and market acceptance for recently-introduced products and services relating to
the Internet are subject to a high level of uncertainty and few proven products
and services exist. If the Internet does not continue to grow as a widespread
communications medium and commercial marketplace, the demand for our e-business
analysis solutions could be significantly reduced. The Internet may not prove to
be a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone, or timely
development of complementary products, such as high speed modems. The Internet
infrastructure may not be able to support the demands placed on it by continued
growth. Additionally, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, security, reliability, cost, ease of use,
accessibility, and quality of service.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuation, and changes in the market values of it investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company has not used
derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company protects and preserves
its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carries a degree of interest rate risk. Fixed rate securities may have their
fair market value adversely impacted due to a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, the Company's future investment income may
fall short of expectations due to changes in interest rates or the Company may
suffer losses in principle if forced to sell securities which have declined in
market value due to changes in interest rates.
FOREIGN CURRENCY RISK
To date, international sales are made by our direct sales force or through
international alliances and are all transacted in U.S. dollars. However, as we
continue to increase our international business we could be subject to risks
typical of an international business, including but not limited to differing
economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely impacted
by changes in these or other factors.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge any foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that are material to its
business or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Securities sold during the quarter ended December 31, 1999 that were not
registered under the Securities Act.
The sales of the securities listed below were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities Act")
in reliance on Section 4(2) of the Securities Act or Rule 701 promulgated under
section 3(b) of the Securities Act as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contract relating to compensation as provided under such rule 701. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate
19
<PAGE> 20
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
(i) During the quarter ended December 31, 1999, the Company granted
options to purchase an aggregate of 50,000 shares of Common Stock to an
aggregate of 5 employees pursuant to the Company's 1996 Stock Option
Plan (the "Option Plan").
(ii) During the quarter ended December 31, 1999, options to purchase an
aggregate of 341,999 shares of Common Stock were exercised by an
aggregate of 17 employees pursuant to the Option Plan.
d. Use of proceeds from sale of Registered Securities.
On August 4, 1999, the Company completed an initial public offering of its
Common Stock, $0.001 par value. The managing underwriters in the offering were
BancBoston Robertson Stephens and Thomas Weisel Partners, LLC, (the
"Underwriters"). 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 (the "Registration Statement") (Reg. No. 333-79491) that was declared
effective by the SEC on July 29, 1999. The offering commenced on July 30, 1999,
on which date 3,900,000 shares of Common Stock registered under the Registration
Statement were sold at a price of $10.00 per share. The aggregate price of the
offering amount registered and sold was $39,000,000. In connection with the
offering, the Company paid an aggregate of $2,730,000 in underwriting discounts
and commissions to the Underwriters and the aggregate proceeds to the Company
were approximately $35.6 million after deducting estimated offering expenses of
$700,000. The Underwriters also had an overallotment option to purchase 585,000
shares, which closed on August 26, 1999. The aggregate price of the offering was
$44,850,000. The aggregate underwriting discounts and commissions to the
Underwriters was $3,139,500 and the aggregate net proceeds to the Company was
approximately $40.8 million after deducting offering expenses of $856,000.
The Company currently expects to use the net proceeds primarily for working
capital and general corporate purposes, including funding product development
and expanding the sales and marketing organization. We have not yet determined
the actual expected expenditures and thus cannot estimate the amounts to be used
for each of these purposes. The amounts and timing of these expenditures will
vary depending on a number of factors, including the amount of cash generated by
our operations, competitive and technological developments and the rate of
growth, if any, of our business. In addition, we have used a portion and may
continue to use a portion of the net proceeds for further development of our
product lines through acquisitions of products, technologies and businesses. On
September 30, 1999, the Company acquired Marketware Corporation. Approximately
$3.3 million of cash was used to pay for the acquisition related expenses.
None of the Company's net proceeds of the offering were paid directly or
indirectly to any director, officer, general partner of Accrue or their
associates, persons owning 10% or more of any class of equity securities of
Accrue, or an affiliate of Accrue.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibit is attached hereto:
27.1 Financial Data Schedule
20
<PAGE> 21
b. The Company filed a report on Form 8-K on November 15, 1999 with the SEC,
which amended its previously filed report on October 12, 1999. The
reports describe the acquisition of Marketwave Corporation by the Company
on September 30, 1999. The reports include the following financial
statements of Marketwave Corporation: balance sheets as of March 31, 1999
and 1998 and the results of operations for the years then ended, and
unaudited balance sheet as of September 30, 1999 and results of
operations for the six months ended September 30, 1999 and 1998. The
reports also include unaudited pro forma combined condensed statements
of operations for the years ended March 31, 1997, 1998 and 1999.
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.
ACCRUE SOFTWARE, INC.
By: /s/ GREGORY C. WALKER
--------------------------------------
GREGORY C. WALKER
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCE OFFICER)
Date: FEBRUARY 11, 2000
21
<PAGE> 22
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Exhibit number Description
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001087243
<NAME> ACCRUE SOFTWARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 37,931 3,185
<SECURITIES> 0 0
<RECEIVABLES> 4,719 1,219
<ALLOWANCES> 369 86
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,823 4,454
<PP&E> 2,528 1,133
<DEPRECIATION> 693 362
<TOTAL-ASSETS> 45,518 5,262
<CURRENT-LIABILITIES> 6,646 1,921
<BONDS> 0 203
0 0
0 13,996
<COMMON> 25 46
<OTHER-SE> 38,847 (10,904)
<TOTAL-LIABILITY-AND-EQUITY> 45,518 5,262
<SALES> 9,049 2,009
<TOTAL-REVENUES> 11,353 2,658
<CGS> 329 181
<TOTAL-COSTS> 1,493 328
<OTHER-EXPENSES> 20,087 7,797
<LOSS-PROVISION> 155 9
<INTEREST-EXPENSE> 42 37
<INCOME-PRETAX> (9,481) (5,437)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (9,481) (5,437)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,481) (5,437)
<EPS-BASIC> (0.67) (1.17)
<EPS-DILUTED> (0.67) (1.17)
</TABLE>
