<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 2000
REGISTRATION NO. 333-32066
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACCRUE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 94-3238684
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
48634 MILMONT DRIVE
FREMONT, CALIFORNIA 94538-7353
(510) 580-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD D. KREYSAR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ACCRUE SOFTWARE, INC.
48634 MILMONT DRIVE
FREMONT, CALIFORNIA 94538-7353
(510) 580-4500
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
JOHN V. BAUTISTA
KENNETH D. CRAMER
FRANCES JOHNSTON
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION
2800 SAND HILL ROAD
MENLO PARK, CA 94025
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-3206
[Accrue Logo]
3,225,261 SHARES
COMMON STOCK
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
The 3,225,261 shares of our common stock, $0.001 par value, covered by this
prospectus are offered for the account of the selling stockholders listed under
"Principal and Selling Stockholders" below. 2,880,475 of the shares were issued
to the selling stockholders in connection with an Agreement and Plan of Merger
and Reorganization dated as of September 14, 1999 among Accrue, Marketwave
Acquisition Corp., and Marketwave Corporation, pursuant to which Marketwave
Corporation became our wholly-owned subsidiary. 344,786 of the shares were
issued upon exercise by the selling stockholders of outstanding Marketwave
options that were assumed by Accrue in connection with our acquisition of
Marketwave. We have agreed to maintain the effectiveness of this registration
statement for one hundred twenty (120) days or such longer time as we may
decide, in our sole discretion. No sales may be made pursuant to this prospectus
after that time unless we amend or supplement this prospectus to indicate that
we have agreed to extend the period of its effectiveness. The selling
stockholders may sell the shares from time to time on the over-the-counter
market in regular brokerage transactions, in transactions directly with market
makers or in certain privately negotiated transactions. Each selling stockholder
has advised us that no sale or distribution other than as disclosed in this
prospectus will be effected until after this prospectus has been appropriately
amended or supplemented, if required, to set forth those terms. We will not
receive any proceeds from the sale of the shares by the selling stockholders.
Each of the selling stockholders may be deemed to be an "underwriter," as
such term is defined in the Securities Act of 1933, as amended.
On March 20, 2000, the last sale price of our common stock on the Nasdaq
National Market was $38.50 per share. Our common stock is listed on the Nasdaq
National Market under the symbol "ACRU."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(1)
-----------------------------------------------------------------------------------------------------------------
Per Share......................................
Total.......................................... See Text Above See Text Above See Text Above
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(1) All expenses of registration of the shares, estimated to be approximately
$377,000 shall be borne by Accrue. Selling commissions, brokerage fees, any
applicable stock transfer taxes and any fees and disbursements of counsel to
the selling stockholders are payable individually by the selling
stockholders.
The date of this prospectus is March 22, 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 5
Risks related to our business............................. 5
Risks related to our industry............................. 13
Risks related to the offering............................. 14
You Should Not Rely on Forward-Looking Statements Because
They Are Inherently Uncertain............................. 17
Proceeds from this Offering................................. 17
Dividend Policy............................................. 17
Other Information........................................... 17
Capitalization.............................................. 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 48
Related Party Transactions with Directors, Officers and 5%
Stockholders.............................................. 62
Issuance of Common Stock and Options to the Selling
Stockholders.............................................. 65
Plan of Distribution........................................ 65
Principal and Selling Stockholders.......................... 66
Description of Capital Stock................................ 70
Shares Eligible for Future Sale............................. 72
Legal Matters............................................... 74
Experts..................................................... 74
Additional Information Available to You..................... 74
Index to Consolidated Financial Statements.................. F-1
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We own or have rights to trademarks or tradenames that we use in
conjunction with the sale of our products and services. Accrue is a registered
trademark owned by us. Other trademarks that are owned by us include without
limitation Accrue Insight, Report Wizard and MyAccrue. This prospectus also
makes reference to trademarks of other companies.
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SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the financial statements and notes, before deciding to invest
in shares of our common stock.
OUR COMPANY
Accrue is a leading provider of Internet data collection and analysis
software which enables business decision makers to address critical marketing
and merchandising questions concerning the effectiveness of their Web sites. Our
products, Accrue Insight, Hit List and Decision Series are comprehensive
solutions that we believe help Internet businesses increase numbers of visitors,
customer loyalty and sales by collecting, storing, analyzing and reporting Web
site activity data at a level of detail and accuracy that distinguishes our
technology from others. Accrue products are highly scalable, meaning they are
detailed and robust enough to meet the needs of successful and rapidly expanding
Web sites as their user volumes greatly expand.
Merchandising managers traditionally depend on analysis of marketing
metrics like campaign effectiveness, shopping patterns or price elasticity, and
the quantity of that data has increased dramatically as the information age has
extended the number of methods and reach for marketing communications.
Conducting traditional marketing analysis has therefore become more complicated.
In addition, the Internet has now emerged as the fastest growing communication
and commerce medium in history, creating new challenges which further compound
the complexity of collecting and analyzing valuable merchandising information.
As a result, businesses are demanding analysis that provides a measure of return
on investment for their Internet initiatives. Despite the need for a detailed,
flexible, robust and easy-to-use approach to Internet merchandising analysis, we
believe Accrue is the only company available that delivers an integrated
solution addressing all of these requirements.
The Internet is a global medium enabling millions of people worldwide to
communicate and conduct business electronically. As a result, many organizations
are implementing Web-based business initiatives to automate business processes,
transact sales, and manage customer service, commonly referred to as conducting
"e-business." The growing adoption of the Web represents a significant
opportunity for businesses to effectively conduct commercial transactions over
the Internet, such as the sale of goods and services, commonly referred to as
"e-commerce." According to International Data Corporation, the total value of
e-commerce revenue is expected to increase from approximately $32.0 billion in
1998 to approximately $426 billion in 2002. Organizations must support their
e-business initiatives by investing heavily in Internet technology, content, and
infrastructure software. Forrester Research estimates that spending on software
and services to support e-commerce alone exceeded $5.6 billion in 1998 and will
grow to $35 billion by 2002.
Accrue products enable businesses to assess the effectiveness of their Web
sites by collecting, storing, analyzing and reporting comprehensive, detailed
Web site traffic information and visitor activity data such as the date, time
and duration of visit, Web pages viewed, and visitor identification information.
The most precise way to analyze this data is to collect it directly from packets
of data that move across the network, analysis referred to as "packet sniffing."
This network-based analysis provides a factual and complete picture of a
visitor's activity at a Web site beyond that which can be achieved through more
common approaches which analyze data from log files of a Web server computer.
Our packet sniffing technology summarizes the details of each interaction to
prepare the
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data for storage and analysis. The benefits of our packet sniffing analysis
include the ability to collect data pertaining to:
- Visitors -- understanding who Web site visitors are, where they came
from, and how long they stayed.
- Visits -- exploring behavioral (duration and page depth) patterns of
visitors over repeat visits.
- Content -- measuring the effectiveness of content, including the actual
delivered content, the most popular content, and the stickiness, or
duration of viewing, of content.
- Navigation -- determining the flow of visitors through a Web site to
measure the effectiveness of site layout, and the most common path to
purchase for each market segment.
Increasing numbers of Web sites receive millions of hits per day and this
traffic is growing exponentially. To enable effective e-business analysis,
companies must collect, process, store and make available for analysis the data
generated from these millions of hits. Accrue products are designed to operate
effectively across Web sites with the following characteristics:
- 50 million hits per day;
- hundreds of Web servers supporting over 2,000 Web sites;
- generation of thousands of unique reports per day;
- storage of hundreds of gigabytes of historical activity data; and
- complex, globally-distributed content.
We also provide professional services to assist customers at every stage of
Accrue product deployment, from identification of specific business needs
through enterprise integration and customization of e-business analysis
reporting, to delivering a rapid and effective implementation.
Our objective is to extend our position as a leading provider of
enterprise-class e-business analysis software. To achieve this objective, our
strategy includes the following key elements: extend leadership in high-end
e-business analysis, maintain technological leadership in e-business analysis
software, leverage Web data platform, leverage and expand blue chip customer
base, continue developing strategic alliances, expand sales and distribution
channels, and pursue strategic acquisitions. In January 2000, to complement and
expand our existing product offerings and services, we acquired NeoVista
Software, Inc., a provider of decision support software applications and
services.
Accrue was incorporated in Delaware under the name "Plumb, Inc." in
February 1996 and changed our name to "Gauge Technologies, Inc." in April 1996.
In October 1996 we changed our name from "Gauge Technologies, Inc." to "Accrue
Software, Inc." Our principal executive offices are located at 48634 Milmont
Drive, Fremont, California 94538-7353, and our telephone number is (510)
580-4500. The address of our Web site is http://www.accrue.com. Information
contained on our Web site shall not be deemed to be a part of this prospectus.
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THE OFFERING
Common stock offered by selling
stockholders........................ 3,225,261 shares
Common stock to be outstanding after
the offering........................ 26,824,782 shares
Use of proceeds..................... We will not receive any proceeds from
this offering. All proceeds will be
received by the selling stockholders.
Nasdaq National Market symbol....... ACRU
The common stock to be outstanding after the offering is based on the
number of shares outstanding as of January 15, 2000. This number excludes:
- 2,773,849 shares subject to outstanding options as of January 15, 2000 at
a weighted average exercise price of approximately $4.41 per share;
- 14,000 shares subject to outstanding warrants as of January 15, 2000 at
an exercise price equal to $10.00 per share and 3,421 shares subject to
outstanding warrants as of January 15, 2000 at an exercise price equal to
approximately $17.54 per share.
- 796,284 additional shares available for grant under our stock plans as of
January 15, 2000.
We have agreed to maintain the effectiveness of this registration statement
for one hundred twenty (120) days or such longer time as we may decide, in our
sole discretion. No sales may be made pursuant to this prospectus after that
time unless we amend or supplement this prospectus to indicate that we have
agreed to extend the period of effectiveness.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In the following summary financial data, the statement of operations data
for the years ended March 31, 1997, 1998 and 1999 are derived from and qualified
in their entirety by our audited consolidated financial statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statement of operations data for the nine months ended December
31, 1998 and 1999 and the balance sheet data as of December 31, 1999 are derived
from our unaudited consolidated financials included elsewhere in this
prospectus.
The unaudited pro forma information reflects our recent acquisition of
NeoVista Software, Inc., and has been derived from our unaudited pro forma
combined condensed financial statements included elsewhere in this prospectus.
The unaudited pro forma combined condensed statement of operations data is
derived from our statement of operations data for the nine months ended December
31, 1999 combined with the statement of operations data of NeoVista for the nine
months ended September 30, 1999, giving effect to the acquisition as if it
occurred on April 1, 1999. The unaudited pro forma combined condensed balance
sheet data presents our balance sheet data as of December 31, 1999 combined with
the balance sheet data of NeoVista, as of September 30, 1999, giving effect to
the acquisition as if it had occurred on December 31, 1999. The unaudited pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the transaction had been consummated at the dates indicated,
nor is it necessarily indicative of the future operating results or financial
position of the combined company.
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NINE MONTHS
NINE MONTHS ENDED ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
--------------------------- ------------------ 1999
1997 1998 1999 1998 1999 PRO FORMA
------- ------- ------- ------- -------- ------------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenue................. $ 430 $ 2,057 $ 4,684 $ 2,658 $ 11,353 $ 13,701
Gross profit.................. 400 1,829 4,215 2,330 9,860 10,300
Loss from operations.......... (2,076) (4,280) (7,651) (5,467) (10,227) (49,199)
Net loss...................... (1,969) (4,201) (7,601) (5,437) (9,481) (48,539)
Net loss per share, basic and
diluted.................... (0.73) (0.99) (1.63) (1.17) (0.67) (3.04)
Shares used in computing net
loss per share, basic and
diluted.................... 2,690 4,264 4,670 4,640 14,183 15,962
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DECEMBER 31, 1999
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PRO
ACTUAL FORMA
------- -----------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $37,931 $ 38,356
Working capital........................................... 36,181 28,872
Total assets.............................................. 45,518 176,310
Long-term debt, net of current portion.................... -- 89
Total stockholders' equity................................ 38,876 160,896
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RISK FACTORS
You should carefully consider the following risks before making an
investment in our company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are all the risks that we currently believe are material risks of this offering.
However, additional risks not presently known to us, or risks that we currently
believe are immaterial, may also impair our business operations. You should also
refer to the other information set forth in this prospectus, including the
discussions set forth in "Special Note Regarding Forward-Looking Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as our financial statements and the related
notes.
Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading of our common stock could decline, and you could
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND YOUR INVESTMENT
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 $2.1 million in revenue, and for the fiscal year ended March
31, 1999, we generated $4.7 million in revenue. For the nine months ended
December 31, 1998, we generated $2.7 million in revenue, and for the nine months
ended December 31, 1999, we generated $11.4 million in revenue. Thus, we have 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 INCURRED NET LOSSES OF $2.0 MILLION, $4.2 MILLION AND $7.6 MILLION FOR EACH
OF THE RESPECTIVE FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NET
LOSSES OF $5.4 MILLION AND $9.5 MILLION FOR EACH OF THE RESPECTIVE NINE MONTH
PERIODS ENDED DECEMBER 31, 1998 AND 1999
We have not achieved profitability. 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, and $7.6 million for the fiscal year ended March 31, 1999. We
incurred net losses of $5.4 million for the nine month period ended December 31,
1998, and $9.5 million for the nine month period ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of $23.3 million. If we do
achieve
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profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future, or at all. Please
see "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more detailed information on
our historical results of operations.
WE EXPECT OPERATING EXPENSES TO INCREASE SIGNIFICANTLY, 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;
- development of relationships with strategic business partners;
- the expansion of management and infrastructure; and
- brand development, marketing and other promotional activities.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information on our operating expenses.
IF WE CANNOT FUND OPERATIONS FROM CASH GENERATED BY OUR BUSINESS, WE MAY BE
REQUIRED TO SELL ADDITIONAL COMMON STOCK, WHICH COULD DEPRESS OUR COMMON STOCK
PRICE
To date, we have been unable to fund our 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. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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. Please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Selected Quarterly Operating Results."
THE LOSS OF KEY MANAGEMENT PERSONNEL COULD HARM OUR BUSINESS AND DECREASE THE
VALUE OF YOUR INVESTMENT
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 Technology Officer. Messrs. Kreysar and Page do not have
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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 FOR US 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,
WebTrends Corporation, Broadbase Software, Inc. and E.piphany, Inc.;
- 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. See "Business -- Competition."
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 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
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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 AND DECREASE THE VALUE OF YOUR INVESTMENT
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. As of January 15, 2000, our direct sales and support
organization consisted of 52 employees. 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 fixed-price basis; however, from time to time we bill our clients
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
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may harm our business. Although we plan to expand our services in order to
address our customers' needs, we cannot be certain that this organization will
ever achieve profitability.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND
INTERNATIONALLY
Licenses and services sold to clients located outside of the United States
were less than 5% of our total revenue in fiscal year 1999, and less than 10% of
our total revenue for the nine month period ended December 31, 1999. We expect
international revenue to account for an increasing percentage of total revenue
in the future. We believe that we must continue to expand our international
sales activities in order to be successful. We initiated operations in selected
international markets in the third quarter of our fiscal year ending March 31,
2000. Continued 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 a small number of value added resellers and distributors
for distribution of our products in Europe. These alliances are not subject to
binding agreements, have no specified performance requirements by us or our
alliance 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:
- 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
9
<PAGE> 13
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
sales cycles make 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.
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 WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT AND FUTURE
CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED
Our success is dependent on the continued growth of our customer base and
the retention of our customers. For the fiscal year ended March 31, 1999, and
the nine month period ended December 31, 1999, approximately 15-20% of our
revenue was derived from sales of products and services to existing customers.
We expect to continue to derive a significant amount of revenue from our
existing
10
<PAGE> 14
customers. If we fail to generate repeat and expanded business from our current
and future customers, particularly from maintenance contract renewals, our
operating results would be seriously harmed. Our ability to attract new
customers will depend on a variety of factors, including the accuracy,
scalability, reliability and cost-effectiveness of our products and services and
our ability to effectively market our products and services. In the past, we
have lost potential customers to competitors for various reasons, including
lower prices and other incentives not matched by us. Many of our current
customers initially purchase a license for our products and services for
installation on a limited number of servers. If an installation is successful,
the customer may purchase additional licenses to expand the use of our products
in its organization, license additional products and services from us, or renew
maintenance fees.
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 AND DECREASE THE VALUE OF YOUR INVESTMENT
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 to 99 at December 31, 1999. 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 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
11
<PAGE> 15
laws and restrictions, as well as confidentiality procedures and contractual
provisions. However, Accrue Insight, our most important product, is not
protected by a patent. 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. See "Business -- Intellectual Property and
Other Proprietary Rights."
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. 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 do one or more of the following:
- 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
12
<PAGE> 16
or enhancements after the products or enhancements are delivered to customers.
See "Business -- Products and Services."
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
product liability insurance. To the extent our contractual limitations are
unenforceable or these claims are not covered by insurance, a successful product
liability claim could harm our business.
WE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY MARKETWAVE CORPORATION AND/OR
NEOVISTA SOFTWARE, INC. INTO OUR BUSINESS OR ACHIEVE THE EXPECTED BENEFITS OF
THE ACQUISITIONS
Our acquisition of Marketwave Corporation, which was completed in
September, 1999, and our acquisition of NeoVista Software, Inc., which was
completed in January 2000, will require integrating the businesses and
operations of those two companies with our company. We may not be able to
successfully assimilate the personnel, technology, operations and customers of
Marketwave and/or NeoVista into our business. Additionally, we may fail to
achieve the anticipated synergies from either or both acquisitions, including
marketing, product development, distribution and other operational synergies.
The integration process may further strain our existing financial and managerial
controls and reporting systems and procedures. This may result in the diversion
of management and financial resources from our core business objectives. In
addition, we are not experienced in managing significant facilities or
operations in geographically distant areas. Finally, we cannot be certain that
we will be able to retain Marketwave and/or NeoVista employees.
WE MAY ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE, AND THESE ACQUISITIONS
COULD RESULT IN THE DILUTION OF OUR STOCKHOLDERS AND DISRUPTION OF OUR BUSINESS
We may acquire technologies or companies in the future. Entering into an
acquisition entails many risks of any which could materially harm our business,
including:
- diversion of management's attention from other business concerns;
- failure to assimilate the acquired company with our pre-existing
business;
- potential loss of key employees from either our pre-existing business or
the acquired business;
- dilution of our existing stockholders as a result of issuing equity
securities; and
- assumption of liabilities of the acquired company.
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
13
<PAGE> 17
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.
RISKS RELATED TO THE OFFERING
BECAUSE ACCRUE'S OFFICERS AND DIRECTORS WILL OWN APPROXIMATELY 19.9% OF THE
OUTSTANDING COMMON STOCK AFTER THIS OFFERING, YOU AND OTHER INVESTORS WILL HAVE
MINIMAL INFLUENCE ON STOCKHOLDER DECISIONS
Assuming that all shares registered pursuant to this registration statement
are sold by the selling stockholders, our officers and directors will
beneficially own approximately 19.9% of the outstanding common stock after this
offering. As a result, they will be able to exercise significant influence over
all matters requiring stockholder approval, and you and other investors will
have minimal influence
14
<PAGE> 18
over the election of directors or other stockholder actions. As a result, these
stockholders could approve or cause Accrue to take actions which you disapprove
or that are contrary to your interests and those of other investors. Our
certificate of incorporation and bylaws do not provide for cumulative voting;
therefore, our controlling stockholders will have the ability to elect all of
our directors. The controlling stockholders will also have the ability to
approve or disapprove significant corporate transactions without further vote by
the investors who purchase common stock pursuant to this offering. This ability
to exercise influence over all matters requiring stockholder approval could
prevent or significantly delay another company or person from acquiring or
merging with us. See "Management" and "Principal and Selling Stockholders."
THE EFFECTS OF ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE
LAW COULD PREVENT A CHANGE IN CONTROL OF ACCRUE WHICH MAY REDUCE THE MARKET
PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws may have the
effect of delaying or preventing a merger or sale of Accrue, or making a merger
or acquisition less desirable to a potential acquiror, even where stockholders
may consider the acquisition or merger favorable. These provisions could also
have the effect of making it more difficult for a third party to effect a change
of control of the board of directors. See "Description of Capital
Stock -- Delaware Law and the Effect of Certain Certificate of Incorporation and
Bylaw Provisions." The issuance of preferred stock may have the effect of
delaying, deferring, or preventing a change in control without further action by
the stockholders. Any issuance of preferred stock may harm the market price of
the common stock. The issuance of preferred stock may also result in the loss of
the voting control of holders of common stock to the holders of the preferred
stock. See "Description of Capital Stock -- Preferred Stock."
THE MARKET PRICE FOR OUR COMMON STOCK, LIKE OTHER TECHNOLOGY STOCKS, MAY BE
VOLATILE
The stock markets have, in general, and with respect to Internet companies
in particular, recently experienced extreme stock price and volume volatility
that has affected companies' stock prices. The stock markets may continue to
experience volatility that may adversely affect the market price of our common
stock. Stock prices for many companies in the technology and emerging growth
sector have experienced wide fluctuations that have often been unrelated to the
operating performance of these companies. Fluctuations such as these may affect
the market price of our common stock. In addition, if we fail to address any of
the risks described in this section, the market price for our common stock, and
consequently, the value of your investment, could decline.
SIGNIFICANT FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES CLASS ACTION CLAIMS AGAINST US, WHICH COULD SERIOUSLY HARM OUR
BUSINESS
Securities class action claims have been brought against companies in the
past where volatility in the market price of that company's securities have
taken place. This kind of litigation could be very costly and divert our
management's attention and resources, and any adverse determination in this
litigation could also subject us to significant liabilities, any or all of which
could seriously harm our business.
IF WE CANNOT RAISE FUNDS, IF NEEDED, ON ACCEPTABLE TERMS, WE MAY NOT BE ABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE
OPPORTUNITIES OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED CAPITAL
REQUIREMENTS WHICH COULD HARM OUR BUSINESS
We expect the net proceeds from our public offering in July 1999, cash on
hand, cash equivalents and commercial credit facilities to meet our working
capital and capital expenditure needs for at least the next 12 months. We expect
that we will continue to experience negative operating
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<PAGE> 19
cash flow in the near term. Accordingly, we may need to raise additional funds
and we cannot be certain that we would be able to obtain additional financing on
favorable terms, if at all. Further, if we issue equity securities, stockholders
may experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock.
If we incur indebtedness to help us meet our future capital requirements, this
debt could contain covenants which restrict our operations. If we cannot raise
funds, if needed, on acceptable terms, we may not be able to develop or enhance
our products and services, take advantage of future opportunities or respond to
competitive pressures or unanticipated capital requirements, which could harm
our business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for more information on our
capital needs.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock in the public
market after the offering, or the perception that these sales may occur, could
adversely affect the market price of the common stock by potentially introducing
a large number of sellers of our common stock into a market in which the common
stock price is already volatile, thus driving the common stock price down. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional equity securities. On completion of this
offering, based on the number of shares outstanding as of January 15, 2000, we
will have 26,824,782 shares of common stock outstanding. The 3,225,261 shares
sold in this offering will be freely tradable without restriction or further
registration under the Federal securities laws unless held by our "affiliates"
as that term is defined in Rule 144. 4,485,000 shares of our common stock,
including the underwriter's option to purchase additional shares which was
exercised in full, were registered in connection with the initial public
offering of our common stock. The remaining 19,114,521 shares of common stock
outstanding on completion of the offering are "restricted securities" as that
term is defined in Rule 144; however, virtually all of these shares are eligible
for sale, in some cases only subject to the volume, manner of sale and notice
requirements of Rule 144. In addition, 11,274,407 shares of our common stock
issuable upon exercise of options held by employees and consultants or available
for grant to them have been registered and may generally be sold upon exercise
of these options. See "Shares Eligible for Future Sale," for information on
shares available for future sale.
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<PAGE> 20
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future" "intends" and similar expressions to identify
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding the
growth of Internet use. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this prospectus.
PROCEEDS FROM THIS OFFERING
We will not receive any portion of the proceeds from the sale of the
3,225,261 shares of common stock being offered by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and
anticipate that all future earnings, if any, will be retained for development of
our business. The payment of dividends will be at the discretion of our board of
directors and will depend upon factors such as future earnings, capital
requirements, the financial condition of Accrue, and general business
conditions. Additionally, our loan and security agreement with our current
lender limits our ability to pay dividends.
OTHER INFORMATION
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders may only offer to sell,
and seek offers to buy, shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
This prospectus includes statistical data regarding the Internet industry.
The statistical data that we used was taken or derived from information
published by sources including Netcraft Web Server Survey, a media research firm
that focuses on the Internet industry, and International Data Corporation and
Forrester Research, firms that provide market and strategic information to the
information technology industry. Although we believe that the statistical data
we used was generally indicative of the matters for which we used it,
statistical data is inherently imprecise, and you are cautioned not to place
undue reliance on the statistical data regarding the Internet industry that we
used in this prospectus.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of December 31,1999:
- on an actual basis; and
- on a pro forma basis to reflect our acquisition of NeoVista Software,
Inc. as if it had occurred on December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL PRO FORMA
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.001 par value;
5,000,000 shares authorized, no shares issued or
outstanding........................................... -- --
Common stock, $0.001 par value,
75,000,000 shares authorized; 25,097,325 shares issued
and outstanding actual; 26,876,745 shares issued and
outstanding pro forma................................. 25 27
Additional paid-in capital............................. 67,470 190,368
Notes receivable from stockholders..................... (213) (213)
Unearned compensation.................................. (5,154) (5,154)
Accumulated deficit.................................... (23,252) (24,132)
-------- --------
Total stockholders' equity........................... 38,876 160,896
-------- --------
Total capitalization.............................. $ 38,876 $160,896
======== ========
</TABLE>
The information in the table above excludes:
- 2,230,642 shares of common stock issuable upon exercise of stock options
and warrants outstanding as of December 31, 1999;
- 796,284 additional shares available for grant under our stock plans as of
December 31, 1999;
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes to our
consolidated financial statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which are included elsewhere
in this prospectus. The statements of operations data for the years ended March
31, 1997, 1998 and 1999, and the balance sheet data as of March 31, 1998 and
1999, are derived from audited consolidated financial statements included
elsewhere in this prospectus. The balance sheet data as of March 31, 1997 are
derived from audited consolidated financial statements not included in this
prospectus. The statement of operations data for the nine months ended December
31, 1998 and 1999 and the balance sheet data as of December 31, 1999 are derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus.
The unaudited pro forma information reflects our recent acquisition of
NeoVista, and has been derived from our unaudited pro forma combined condensed
financial statements included elsewhere in this prospectus. The unaudited pro
forma combined condensed statement of operations data is derived from our
statement of operations data for the nine months ended December 31, 1999
combined with the statement of operations data of NeoVista for the nine months
ended September 30, 1999, giving effect to the acquisition as if it occurred on
April 1, 1999. The unaudited pro forma combined condensed balance sheet data
presents our balance sheet data as of December 31, 1999 combined with the
balance sheet data of NeoVista, as of September 30, 1999, giving effect to the
acquisition as if it had occurred on December 31, 1999. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of the future operating results or financial position
of the combined company.
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, 1999
--------------------------- ------------------ -----------------
1997 1998 1999 1998 1999 PRO FORMA
------- ------- ------- ------- -------- -----------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
Software license..................... $ 394 $ 1,857 $ 3,640 $ 2,009 $ 9,049 $ 9,781
Maintenance and service.............. 36 200 1,044 649 2,304 3,300
Systems hardware and maintenance..... -- -- -- -- -- 620
------- ------- ------- ------- -------- --------
Total revenue..................... 430 2,057 4,684 2,658 11,353 13,701
Cost of revenue:....................... 30 228 469 328 1,493 3,401
------- ------- ------- ------- -------- --------
Gross profit........................... 400 1,829 4,215 2,330 9,860 10,300
OPERATING EXPENSES:
Research and development............. 947 2,403 3,166 2,291 2,815 4,705
Sales and marketing.................. 818 2,744 5,448 3,629 8,595 10,326
General and administrative........... 711 962 1,927 1,257 1,690 3,421
Merger costs......................... -- -- -- -- 3,560 3,560
Amortization of intangibles and
goodwill.......................... -- -- -- -- -- 32,260
Stock-based compensation expense..... -- -- 1,325 620 3,427 5,227
------- ------- ------- ------- -------- --------
Total operating expenses.......... 2,476 6,109 11,866 7,797 20,087 59,499
------- ------- ------- ------- -------- --------
Loss from operations................... (2,076) (4,280) (7,651) (5,467) (10,227) (49,199)
Other income........................... 107 97 96 67 788 847
Interest expense....................... -- (18) (46) (37) (42) (187)
------- ------- ------- ------- -------- --------
Net loss............................... $(1,969) $(4,201) $(7,601) $(5,437) $ (9,481) $(48,539)
======= ======= ======= ======= ======== ========
Net loss per share, basic and
diluted.............................. $ (0.73) $ (0.99) $ (1.63) $ (1.17) $ (0.67) $ (3.04)
======= ======= ======= ======= ======== ========
Shares used in computing net loss per
share, basic and diluted............. 2,690 4,264 4,670 4,640 14,183 15,962
======= ======= ======= ======= ======== ========
</TABLE>
19
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1999
--------------- DECEMBER 31, ------------
1998 1999 1999 PRO FORMA
------ ------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 570 $2,862 $37,931 $ 38,356
Working capital............................................. 232 2,529 36,181 28,872
Total assets................................................ 2,112 6,109 45,518 176,310
Long term debt, net of current portion...................... 312 169 -- 89
Total stockholders' equity.................................. 557 3,414 38,876 160,896
</TABLE>
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Accrue should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and notes
thereto appearing elsewhere in this prospectus. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors including, but
not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
Our principal 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.
From our inception through March 31, 1997, our operations consisted
primarily of start-up activities, such as raising capital, recruiting personnel,
conducting research and development, developing our initial product,
establishing the market for our initial product and purchasing operating assets.
During fiscal years 1998 and 1999, we continued to invest in research and
development, building sales channels, expanding marketing activities and
developing administrative operations. In January 1997 we began shipping our
initial product, Accrue Insight 1.0 for analyzing Web site traffic. In February
1998 we released Accrue Insight 2.0, which added scalability and functionality
to provide e-business analysis capabilities. In August 1998 we released Accrue
Insight 2.5, which added personalized Web pages and push technology for
distributing reports via email. From October 1998 through March 1999 we
continued to expand the functional capabilities of Accrue Insight through a
series of releases including an easy-to-use interface, a customized integration
bridge with Vignette StoryServer, and enhanced network collection technology. In
April 1999, we released Accrue Insight 3.1, which adds new features that enhance
Web data collection, analysis, storage and reporting, expands the amount and
types of information captured, provides new information access and report
distribution options, increases scalability, and improves manageability. The
Accrue Site Knowledge (ASK) Service, also introduced in April 1999, provides a
new application hosting service that enables customers to outsource system
administration responsibilities in connection with their purchase of Accrue
Insight. In September 1999, we acquired the Hit List family of products when we
merged with Marketwave Corporation. In November 1999, we released Accrue Hit
List 4.5, offering increased functionality, improved performance, broader
database and platform support.
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 products 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 their failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
21
<PAGE> 25
We generally recognize 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-based 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.
We have recorded stock-based compensation related to stock options granted
below fair market value through March 31, 1999 and December 31, 1999 of
approximately $6.3 million and $9.9 million, respectively. Of this amount, we
amortized approximately $1.3 million in fiscal year 1999 and $3.4 million for
the nine months ended December 31, 1999. This amount represents the difference
between the exercise price of these stock option grants and the deemed fair
value of the common stock at the time of grant. The remaining balance of
stock-based compensation will be amortized over the remaining vesting period of
the options, generally four years or less. As a result, the amortization of
stock-based compensation will impact our reported results of operations through
fiscal 2003.
We have sustained losses on a quarterly and annual basis since inception.
As of our fiscal year ended March 31, 1999, we had an accumulated deficit of
approximately $13.8 million, and as of December 31, 1999, we have an accumulated
deficit of approximately $23.3 million. Our net loss was approximately $2.0
million in fiscal year ended March 31, 1997, $4.2 million in fiscal year 1998,
$7.6 million in fiscal year 1999, and $9.5 million for the nine months ended
December 31, 1999. These losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant growth in our operating expenses in order to execute our business
plan, particularly in the areas of research and development, sales and
marketing, and increased international distribution. As a result, we anticipate
that these operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. 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.
You should not rely upon our past operating results as an indication of
future performance. While we have experienced significant percentage growth in
revenues in recent periods, we have a limited operating history and we do not
believe that prior growth rates are sustainable or indicative of future growth
rates.
We anticipate that our total revenue and net loss for the fiscal year
ending March 31, 2000 will be approximately $17.5 million and $25.7 million,
respectively.
22
<PAGE> 26
ACQUISITION OF NEOVISTA SOFTWARE, INC.
On January 14, 2000, we acquired privately-held, NeoVista Software, Inc., a
provider of decision support software applications and services for large retail
marketing and merchandising companies. NeoVista's data-mining and
personalization products and services allow customers to analyze large volumes
of retail customer data from a variety of data sources. This data includes
customer demographics, transaction histories, and personalized behavior
analysis. The data can be analyzed to provide guidance and recommendations with
respect to specific marketing and merchandising campaigns. In connection with
our acquisition of NeoVista, we issued approximately 1.8 million shares of our
common stock in exchange for all outstanding shares of NeoVista capital stock,
and converted all outstanding options and warrants to acquire NeoVista capital
stock into options and warrants to purchase approximately 550,000 shares of our
common stock. The merger is intended to qualify as a tax-free reorganization.
For the years ended December 31, 1997 and 1998, NeoVista had total revenues
of $5.4 million and $4.3 million, respectively. For the first nine months of
1999, total revenues were $2.3 million, down from $3.5 million for the first
nine months of 1998. Cost of revenues decreased slightly from $2.5 million in
1997 to $2.4 million in 1998 and operating expenses increased from $5.9 million
to $6.1 million during the same period. Cost of revenues and operating expenses
through September 1999 were $1.9 million and $7.2 million, respectively, as
compared to $1.8 million and $4.3 million, respectively, for the first nine
months of 1998. As of December 31, 1998, NeoVista had accumulated losses of
$78.7 million, which increased to $85.5 million as of September 30, 1999.
We will account for the NeoVista acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of NeoVista will be
allocated to the assets acquired and liabilities assumed from NeoVista. As a
result we expect to record a charge to operations related to acquired in-process
research and development of approximately $0.9 million. Additionally, we expect
to record approximately $129.9 million of intangible assets and goodwill on our
balance sheet, which will result in an amortization expense of approximately
$10.8 million for fiscal 2000, $43.0 million for fiscal 2001, $43.0 million for
fiscal 2002 and $33.1 million for fiscal 2003.
23
<PAGE> 27
RESULTS OF OPERATIONS
The following tables set forth our historical operating information, as
well as the information as a percentage of our total revenue represented by each
item, for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------- ---------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
Software license.................. $ 394 $ 1,857 $ 3,640 $ 2,009 $ 9,049
Maintenance and service........... 36 200 1,044 649 2,304
------- ------- ------- ------- --------
Total revenue.................. 430 2,057 4,684 2,658 11,353
Cost of revenue..................... 30 228 469 328 1,493
------- ------- ------- ------- --------
Gross profit........................ 400 1,829 4,215 2,330 9,860
------- ------- ------- ------- --------
Operating expenses:
Research and development.......... 947 2,403 3,166 2,291 2,815
Sales and marketing............... 818 2,744 5,448 3,629 8,595
General and administrative........ 711 962 1,927 1,257 1,690
Merger costs...................... -- -- -- -- 3,560
Stock-based compensation
expense........................ -- -- 1,325 620 3,427
------- ------- ------- ------- --------
Total operating expenses....... 2,476 6,109 11,866 7,797 20,087
------- ------- ------- ------- --------
Loss from operations................ (2,076) (4,280) (7,651) (5,467) (10,227)
Other income (expense), net......... 107 79 50 30 746
------- ------- ------- ------- --------
Net loss............................ $(1,969) $(4,201) $(7,601) $(5,437) $ (9,481)
======= ======= ======= ======= ========
AS A PERCENTAGE OF TOTAL REVENUE:
Net revenue:
Software license.................. 91.6% 90.3% 77.7% 75.6% 79.7%
Maintenance and service........... 8.4 9.7 22.3 24.4 20.3
------- ------- ------- ------- --------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue..................... 7.0 11.1 10.0 12.3 13.2
------- ------- ------- ------- --------
Gross profit........................ 93.0 88.9 90.0 87.7 86.8
------- ------- ------- ------- --------
Operating expenses:
Research and development.......... 220.2 116.8 67.6 86.2 24.8
Sales and marketing............... 190.2 133.4 116.3 136.5 75.7
General and administrative........ 165.4 46.8 41.1 47.3 14.9
Merger costs...................... -- -- -- -- 31.4
Stock-based compensation
expense........................ -- -- 28.3 23.4 30.1
------- ------- ------- ------- --------
Total operating expenses....... 575.8 297.0 253.3 293.4 176.9
------- ------- ------- ------- --------
Loss from operations................ (482.8) (208.1) (163.3) (205.7) (90.1)
Other income (expense), net......... 24.9 3.9 1.0 1.1 6.6
------- ------- ------- ------- --------
Net loss............................ (457.9)% (204.2)% (162.3)% (204.6)% (83.5)%
======= ======= ======= ======= ========
</TABLE>
24
<PAGE> 28
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Revenue. Total revenue increased from $0.4 million in fiscal year 1997 to
$2.1 million in fiscal year 1998 and $4.7 million in fiscal year 1999. These
increases reflect year-to-year revenue growth of 378% and 128%, respectively. No
customer accounted for more than 10% of our revenue in fiscal year 1998 or 1999.
Software license revenue. Revenue from software licenses was $0.4 million
in fiscal year 1997, $1.9 million in fiscal year 1998 and $3.6 million in fiscal
year 1999, representing increases of $1.5 million, or 371%, from fiscal year
1997 to fiscal year 1998 and $1.8 million, or 96% from fiscal year 1998 to
fiscal year 1999. The majority of the growth in product revenue for both fiscal
years was due to higher unit sales volumes of Accrue Insight as a result of
increased market awareness of our products, introductions of new features,
increases in both the size and productivity of our sales force, and increased
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, our
historical percentage growth rates of our product revenue will not be
sustainable in the future.
Maintenance and service revenue. Maintenance and service revenue was less
than $0.1 million in fiscal year 1997, $0.2 million in fiscal year 1998 and $1.0
million in fiscal year 1999, representing increases of 456% from fiscal year
1997 to fiscal year 1998, and 422% from fiscal year 1998 to fiscal year 1999.
This growth was 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 our historical percentage growth
rates of our maintenance and service revenue will not be sustainable in the
future.
Cost of revenue. Cost of revenue consists primarily of royalties paid to
third parties for technology used in our products. These costs were less than
$0.1 million, or 7% of revenue, in fiscal year 1997, $0.2 million, or 11.1% of
revenue, in fiscal year 1998 and $0.5 million, or 10% of revenue, in fiscal year
1999, representing increases of 660% from fiscal year 1997 to fiscal year 1998,
and 106% from fiscal year 1998 to fiscal year 1999. These dollar amount
increases of cost of revenue reflect the higher volumes of product shipped and
related third-party royalties. The decrease in cost of revenue as a percentage
of revenue from fiscal year 1998 to fiscal year 1999 is primarily due to
economies of scale realized as a result of shipping greater quantities of
product in fiscal year 1999 and a substantial reduction in royalty rates
beginning in January 1999. 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. Historically, cost of
maintenance and service revenue has been insignificant.
Gross profit. Gross profit was 93% in fiscal year 1997, 89% in fiscal year
1998, and 90% in fiscal year 1999, primarily as a result of increased product
sales and sliding-scale royalty rates. 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 profit than product revenue. For all of these reasons,
we expect that our gross profit will decline.
Operating expenses. Total operating expenses increased from $2.5 million in
fiscal year 1997, to $6.1 million in fiscal year 1998 and $11.9 million in
fiscal year 1999. The increases reflect year-to-year growth of 147% and 94%,
respectively. These increases were largely due to increased salaries and related
expenses associated with newly hired employees, including a stock-based
compensation expense of $1.3 million in fiscal year 1999.
25
<PAGE> 29
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 $0.9 million in fiscal year 1997, $2.4 million in fiscal year 1998
and $3.2 million in fiscal year 1999. The increases were 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 decrease as a
percentage of total revenue in the future. Research and development expenditures
are charged 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 $0.8 million in
fiscal year 1997, $2.7 million in fiscal year 1998 and $5.4 million in fiscal
year 1999. The increases were primarily due to increased headcount 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 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, information services, and other administrative
functions, as well as legal and accounting costs. General and administrative
expenses were $0.7 million in fiscal year 1997, $1.0 million in fiscal year 1998
and $1.9 million in fiscal year 1999. These increases were 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 expense. Total stock-based compensation expense as
of March 31, 1999 amounted to $6.3 million, of which approximately $1.3 million
was amortized in fiscal year 1999.
Other income (expense), net. Other income (expense), net consists of
interest income, interest expense, other income and other expense. Other income
(expense), net was $0.1 million in fiscal year 1997, and less than $0.1 million
in each of fiscal years 1998 and 1999.
As of March 31, 1999 we had net federal and state operating loss
carryforwards of approximately $10.0 million and $10.3 million, respectively,
available to reduce future taxable income. In addition, as of March 31, 1999, we
had $0.4 million and $0.2 million of federal and state tax credit carryforwards,
respectively. These operating loss carryforwards and credits will expire between
fiscal year 2003 and fiscal year 2014. Under the provisions of the Internal
Revenue Code, certain substantial changes in our ownership may limit in the
future the amount of net operating loss and tax credit carryforwards that we
could utilize annually to offset future taxable income. We have recorded a
valuation allowance for the full amount of our net deferred tax assets, as the
future realization of the tax benefit is not currently likely.
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
Revenue. Total revenues were $11.4 million for the nine months ended
December 31, 1999, an 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 nine months ended December 31, 1998 and 1999.
26
<PAGE> 30
Software license revenue. 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 revenue was $2.3
million for the nine months ended December 31, 1998, representing an increase of
255% from $0.6 million from the corresponding period in fiscal 1999. 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 was $1.5 million, or 13% of revenue, for
the nine months ended December 31, 1999, as compared to $0.3 million or 12% of
revenue in the corresponding period in fiscal 1998. This dollar amount increase
of cost of revenue reflects the higher volumes of product shipped, related
third-party royalties and substantial increase in maintenance and service
personnel headcount.
Gross profit. Gross profit remained nearly flat at 87% and 88% for the nine
months ended December 31, 1999 and 1998.
Operating expenses. Total operating expenses were $20.1 million, or 177% of
revenue, for the nine months ended December 31, 1999 as compared to $7.8
million, or 293% of revenue for the nine months ended December 31, 1998. This
increase in absolute dollars was 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 our acquisition of Marketwave Corporation in the quarter ended
September 30, 1999.
Research and development expenses. Research and development expenses were
$2.8 million, or 25% of revenue, for the nine months ended December 31, 1999 as
compared to $2.3 million, or 86% of revenue for the nine months ended December
31, 1998. This 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.
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 $8.6 million, or 76%
of revenue for the nine months ended December 31, 1999, 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.
General and administrative expenses. General and administrative expenses
were $1.7 million, or 15% of revenue for the nine months ended December 31,
1999, 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.
Stock-based compensation. Total stock-based compensation as of December 31,
1999 amounted to $9.9 million, of which approximately $3.4 million was amortized
for the nine months ended December 31, 1999. Total stock-based compensation as
of December 31, 1998 amounted to
27
<PAGE> 31
$6.0 million, of which approximately $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 $0.7 million 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 our initial public offering.
We establish our expenditure levels for product development, sales and
marketing and other operating expenses based, in large part, on our expected
future revenue. Our expectations regarding future revenue may not be accurate.
As a result, if revenue falls below expectations, our operating results are
likely to be adversely and disproportionately affected because only a small
portion of our expenses vary with revenue. Due to these factors, our operating
results are difficult to forecast. We believe that period-to-period comparisons
of our historical operating results are not meaningful and should not be relied
upon as an indication of future performance. Since our quarterly operating
results are expected to vary from quarter to quarter please see the risks
described in "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations principally through
private sales of preferred stock, with net proceeds of $15.5 million, bank
loans, and with the net proceeds of $40.8 million from our initial public
offering completed in August 1999. We used $1.8 million of cash in operations in
fiscal year 1997, $4.4 million in fiscal year 1998, $5.5 million in fiscal year
1999, and $4.9 million for the nine months ended December 31, 1999. We used cash
primarily to fund our net losses from operations and to pay for the acquisition
related expenses. In fiscal years 1997 and 1998, cash used by operating
activities was primarily attributable to our net losses from operations. In
fiscal year 1999, cash used by operating activities was primarily attributable
to a net loss of $7.6 million and an increase in accounts receivable of $1.4
million offset in part by an increase in deferred revenue of $0.9 million,
provision for sales returns and doubtful accounts of $0.2 million, increase in
accrued liabilities of $0.5 million and stock-based compensation expense of $1.3
million. The increases in accounts receivable, provision for sales returns and
doubtful accounts and deferred revenue were a result of higher unit sales of
Accrue Insight. At March 31, 1999, we had $2.5 million in working capital. Cash
provided by financing activities was $5.8 million in fiscal year 1997, $1.8
million in fiscal year 1998 and $8.4 million in fiscal year 1999.
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. At December 31, 1999, we
had $36.2 million in working capital. 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 with Silicon Valley Bank which
expires in June 2000. Interest is payable monthly. There were no amounts
outstanding under the line as of March 3, 2000.
Capital expenditures were $0.5 million in fiscal year 1997, $0.3 million in
fiscal year 1998, $0.5 million in fiscal year 1999, and $1.3 million for the
nine months ended December 31, 1999. Our capital expenditures consist primarily
of purchases of property and equipment, including computer
28
<PAGE> 32
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 July 1999 will be sufficient to meet our working capital and
capital expenditure requirements through at least December 31, 2000. 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 compliance 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 March 3, 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accounts, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or purchased
for internal use, including when such costs should be capitalized. We do not
expect SOP 98-1, which is effective for financial statements for fiscal years
beginning after December 15, 1998, to have a significant effect on our financial
condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires companies to expense the costs of
start-up activities and organization costs as
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incurred. In general, SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. We believe the adoption of SOP 98-5 will not have a material
impact on our results of operations.
In June 1998, the Financial Accounting Standards Board on FASB, issued
Statement of Financial Accounting Standard No. 133, or SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. We do not expect SFAS No. 133 to have a significant effect
on our financial condition or results of operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or VSOE,
of the fair values of all the undelivered elements that are not accounted for by
means of long-term contract accounting, and (2) VSOE of fair value does not
exist for one or more of the delivered elements, and (3) all revenue recognition
criteria of SOP 97-2 and SOP 98-9 will be effective for transactions entered
into in fiscal years beginning after March 15, 1999. We do not expect SOP 98-9
to have any effect, on our results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of Accrue.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates is limited to the
exposure related to credit facilities which are tied to market rates. We do not
plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to mitigate
default risk by investing in high-credit quality securities.
RECENT DEVELOPMENTS
On July 14, 2000, we acquired specific assets of the Infocharger division
of Tantau Software, Inc., including a high performance Internet data analysis
tool, a two-year term license to certain Tantau technology, and some engineering
employees of the Infocharger division will become employees of Accrue. The
Infocharger assets were acquired in exchange for 1,666,667 newly issued shares
of our common stock (of which 234,722 shares are subject to the fulfillment by
Tantau of certain post-closing conditions and are held in escrow) and $5,000,000
according to the terms of the asset purchase agreement dated June 30, 2000 among
the Company, Tantau and its subsidiary, Tantau Software International, Inc. and
the software license and services agreement between the Company and Tantau dated
June 30, 2000.
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BUSINESS
OVERVIEW
Accrue provides a software solution that enables businesses to answer the
question, "How effective is my Web site?" Our principal product, Accrue Insight,
provides marketing and merchandising managers with comprehensive and detailed
analysis of Web site activity to help companies with significant Web initiatives
attract new customers, retain existing customers and increase e-commerce sale.
Accrue Insight is also flexible and robust enough to meet the needs of different
businesses as their Web sites become more complex and they experience increasing
numbers of customers and e-commerce sales.
Merchandising managers traditionally depend on analysis of marketing
metrics like campaign effectiveness, shopping patterns or price elasticity, and
the quantity of that data has increased dramatically as the information age has
extended the number of methods and reach for marketing communications.
Conducting traditional marketing analysis has therefore become more complicated.
In addition, the Internet has now emerged as the fastest growing communication
and commerce medium in history, creating new challenges which further compound
the complexity of collecting and analyzing valuable merchandising information.
As a result, businesses are demanding analysis that provides a measure of return
on investment for their Internet initiatives. Despite the need for a detailed,
flexible, robust and easy-to-use approach to Internet merchandising analysis, we
believe Accrue Insight is the only product available that delivers an integrated
solution addressing all of these requirements.
INDUSTRY BACKGROUND
Traditional Merchandising and Marketing Analysis
Analysis of customer behavior and preferences is critical to the success of
all businesses. Analysis helps business managers make informed decisions and
understand the results of those decisions. Historically, retailers knew their
customers personally, enabling them to address the needs and preferences of
customers in their wholesale or distribution ordering practices. Product and
service providers have always tracked sales patterns and inventory turn rates to
determine which types of offerings should be emphasized to manage production
capacity. Sales patterns began to be used in determining marketing strategy as
businesses grew to recognize that similar products and services with
differentiated packaging, or other distinguishing features, could inspire
noticeably different levels of demand.
As mass media developed and businesses continued to evolve, managers became
increasingly concerned with monitoring the effectiveness of merchandising
methods employed to encourage purchases. Publishers and broadcasters responded
to this concern by providing managers with circulation or audience rankings,
such as Nielson Reports for television, and advertising response tracking
methods, such as code numbered coupons. This marketing reach and effectiveness
data has become so important that today the advertising industry primarily
prices its services based on quantitative analysis of this data. As the types
and accuracy of merchandising information expanded, managers grew to depend on
that information to drive answers to a growing number of questions, such as:
Where did my customers come from? How did my customers shop? Where in the store
should products be placed? How should products or services be packaged? Which
customer segments respond best to different types of products? What is my
customers' sensitivity to various price points? Informed responses to these and
other related questions have become critical to designing and maintaining
successful sales and marketing strategies.
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The quantity, variety and complexity of marketing and merchandising
information continues to grow as the information age has driven an increase in
the number of methods and channels for disseminating marketing messages.
Merchandising managers have begun to turn to robust, or enterprise quality,
decision support software to help transform data gathered in traditional
marketing environments into business intelligence that can be used by various
constituencies within their organizations. In this context of increasing
complexity for conducting traditional merchandising and marketing analysis, the
Internet has emerged as the fastest growing and most expansive communication and
commerce medium in history.
Growth of the Internet and e-Commerce
The Internet is a rapidly growing medium for global communications and
electronic business. International Data Corporation estimates that the number of
Web users will grow from approximately 97 million worldwide in 1998 to
approximately 320 million by the end of 2002. The U.S. Department of Commerce
estimates that Internet traffic doubles every 100 days. The number of Web sites
detected by the Netcraft Web Server Survey increased from approximately 1.0
million in April 1997 to approximately 2.2 million in April 1998, and to over
5.0 million in April 1999, reflecting annual growth exceeding 100%.
The growth of the Internet is attributable to its value as a low-cost, open
and accessible platform for communications and commerce. As a result of these
attributes, organizations are increasingly embracing the Internet as a critical
platform for communicating with partners, customers and employees, and
conducting business. The Internet allows companies to develop one-to-one
relationships with customers worldwide without making significant incremental
investments in traditional infrastructure, such as retail outlets, distribution
networks and sales personnel. However, organizations must support their
e-business initiatives by investing heavily in Internet technology, content, and
infrastructure software.
Because Internet interactions are two-way and entirely technology-based,
the Internet creates exponentially expanded quantities and types of customer
interaction data points, compounding the complexity associated with collecting
and analyzing this valuable merchandising and marketing information. This
information drives critical business decisions and the need for e-commerce data
collection and analysis.
The Need for e-Business Analysis
As an increasing portion of existing businesses migrate some of their
activity to e-business platforms, advanced technologies are required to enable
the type of sophisticated merchandising and marketing analysis those managers
have grown to depend on in their traditional businesses. So too are entirely new
businesses being formed to focus on e-business alone. Both migrating and new
Web-based businesses are demanding data that provides a measure of the return on
their investment in Internet initiatives. This return is ultimately expressed in
terms of increased customer traffic, visitor loyalty and sales through their Web
sites. With Internet activity rates high and growing rapidly, e-businesses must
collect and analyze large volumes of data for use by various e-business units
within their organizations by finding robust enterprise-class solutions. An
inherent requirement of enterprise class e-business analysis solutions is the
capability to address the following needs:
- need for decisions based on facts
- need for scalable, robust solutions
- need for comprehensive, customer analysis
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To date, e-commerce companies have purchased available network software
tools originally designed for purposes other than Web site effectiveness
analysis. Reporting and management tools originally designed for traditional
network management cannot analyze Internet-specific activity and therefore
cannot provide the level of detail and accuracy required to make strategic
e-business decisions. Further, these traditional tools are generally focused on
monitoring and maintaining network infrastructure areas such as traffic,
security, availability or quality of service. Some companies have internally
developed applications for tracking and evaluating Web traffic, but they are
limited in functionality and expensive to maintain. Web-centric tools that
simply track the Web pages visitors click on by sorting and counting log files,
fail to reflect all of the visitor's interactions during a Web site visit.
Traditional business intelligence tools, known as online analytical processing,
or OLAP, cannot access Web customer data, such as timing, resets and navigation
flows of visitors through the Web site. OLAP products also lack Web modeling
capabilities, such as those required to configure global Web networks and define
Web sites, including pages and hits. Comprehensive e-business analysis solutions
must be able to:
- handle large traffic volumes and scale to handle the exponential growth
expected in Internet usage on successful Web sites;
- collect accurate and complete customer activity information from complex
Web environments, comprised of mirrored content, switches, hubs, routers
and servers in multiple geographical locations;
- accommodate e-business requirements, such as security requirements or
business rules, and provide the specific information each business unit
manager needs;
- integrate customer activity information with data from multiple sources,
such as customer profile or demographic information, and transaction
data;
- recognize the amount of time a visitor spends on a particular Web site
activity or content, the paths taken through the site and when a visitor
resets a page instead of waiting to download the complete page;
- allow managers to easily drill down into reports and mine the data
interactively, with data filtering and segmentation capabilities, for a
more detailed understanding of customer activity; and
- offer flexible distribution capabilities for reporting and analysis
throughout the enterprise.
Despite the critical need for comprehensive, scalable and easy-to-use
e-business analysis solutions, we believe current products other than Accrue
Insight fail to deliver an integrated solution that addresses all of these
competitive requirements.
THE ACCRUE SOLUTION
Our products provide a comprehensive, scalable, e-business analysis
solution that allows organizations to evaluate the effectiveness of their
e-business initiatives. Accrue Insight provides detailed Web site traffic
information and visitor activity data in a format and with a level of accuracy
that facilitates strategic merchandising and marketing decisions. Web site
managers and marketers can analyze this rich data to make merchandising and
marketing decisions which maximize revenue, new buyers and customer loyalty. We
also provide professional services to assist customers at every stage of Accrue
Insight deployment, from identification of specific business needs through
enterprise
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integration and customization of e-business analysis reporting, to delivering a
rapid and effective implementation. We believe customers can utilize Accrue
Insight to obtain the following results:
- Increase number of customers. Our solution provides insight into which
external Web sites send the more qualified prospects to a customer's Web
site, allowing our customers to more effectively spend marketing dollars
and increase the number of customers.
- Increase customer loyalty. Our solution permits customers to know
factually which content is important and appropriate, thereby enhancing
customer satisfaction and encouraging return visits.
- Increase sales. Our solution allows customers to determine how different
customer segments interact with their Web sites, enabling them to turn
more lookers into buyers.
Our solution provides the following enterprise-class e-business analysis
features:
Network-Based Measurement Mechanism. The most precise way to analyze Web
traffic is to collect data directly from the network by deciphering the content
of, and indicators embedded in, data packets as they move across the network,
analysis referred to as "packet sniffing." This network based analysis provides
a factual and complete picture of a visitor's activity at a Web site beyond that
which can be achieved through more common log file based approaches. Our packet
sniffing technology summarizes the details of each interaction to prepare the
data for storage and analysis. The benefits of our packet sniffing analysis
include the ability to collect data pertaining to:
- Visitors -- understanding who Web site visitors are, where they came
from, and how long they stayed.
- Visits -- exploring behavioral (duration and page depth) patterns of
visitors over repeat visits.
- Content -- measuring the effectiveness of content, including the actual
delivered content, the most popular content, and the stickiness, or
duration of viewing, of content.
- Navigation -- determining the flow of visitors through a Web site to
measure the effectiveness of site layout, and the most common path to
purchase for each market segment.
Integrated Data Warehouse for Scalability. Increasing numbers of Web sites
receive millions of hits per day and this traffic is growing exponentially. To
enable effective e-business analysis, companies must collect, process, store and
make available for analysis the data generated from these millions of hits.
Accrue Insight is designed to operate effectively across Web sites with the
following characteristics:
- 50 million hits per day;
- hundreds of Web servers supporting over 2,000 Web sites;
- generation of thousands of unique reports per day;
- storage of hundreds of gigabytes of historical activity data; and
- complex, globally-distributed content.
High-Value Navigation Analysis. Integral to today's complex merchandising
decisions is understanding visitors' paths through Web sites, including where
they came from, what they looked at
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and where they went. Accrue Insight provides a graphical view of customers'
visits illustrating the following:
- the referring Web site links, such as ad banners, affiliate sites or
search engines;
- content viewed and sequence of interaction; and
- path taken from shopping to buying.
Open Architecture. Our solution is designed to accommodate enterprise
standards, corporate rules, and dynamically changing businesses. Accrue Insight
easily integrates into companies existing information systems and merges
existing corporate customer and transaction data with Web site visitor data,
thereby extending organizations' e-business analysis capabilities.
Comprehensive Analysis. Our solution provides powerful, easy to use,
comprehensive analysis capabilities through advanced data mining and flexible
report generation. An interactive Web-based interface allows users to select
pre-defined reports and specify parameters such as a date range and filters. Our
software performs complex queries and substantial post-processing to generate
targeted reports. These reports display the results of quantitative analysis,
showing counters, averages and trends of a wide variety of Web site visitor,
content and navigation activity.
Enterprise Report Distribution. All reports can be scheduled for daily,
weekly or monthly execution and emailed to a select corporate-wide distribution
list as both an hyper-text machine language, or HTML, page and spreadsheet-ready
format for additional processing.
ACCRUE STRATEGY
Our objective is to extend our position as a leading provider of
enterprise-class e-business analysis software. To achieve this objective, our
strategy includes the following key elements:
Extend Leadership in High-End e-Business Analysis. We believe that we are a
leading provider of high-end, e-business analysis products and services as a
result of our advanced technologies for the collection and analysis of
comprehensive Web site activity data, and our broad base of global customers
across multiple industries. We plan to extend this leadership by continuing to
cater to business decision makers through our focus on enhancing analysis
functions for e-commerce, sales, marketing, advertising and Web site design. As
managers of e-business units develop new requirements and confront new
questions, we plan to anticipate and respond to those needs. We intend to do
this through internal product development, corporate partnering, and
acquisitions. We also intend to offer our customers consulting services to help
them analyze collected data in order to make more effective Web marketing and
merchandising decisions.
Maintain Technological Leadership in e-Business Analysis Software. Our
solutions are based on advanced proprietary technologies which provide the basis
for our leading high-end e-business analysis software. For example, our solution
utilizes non-intrusive, network-based measurement technology as the primary
mechanism for Web data collection. In combination with our robust data warehouse
architecture, we believe our technology has allowed us to develop the most
detailed, accurate and scalable commercial product currently available in our
market. Our product is capable of successfully tracking, collecting and storing
data generated by complex, multi-server Web sites that serve more than 50
million hits per day. These technologies were developed by our software
engineers who have a significant amount of experience designing enterprise
software applications. To maintain our technological leadership for the high-end
enterprise market, we plan to continue to invest in research and development and
to incorporate additional industry-leading components into our software.
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Leverage Web Data Platform. Through the use of our software, our customers
collect comprehensive Web site visitor information and may leverage that
information by using it in business software applications provided by us now and
in the future as well as by other third party vendors. For example, we intend to
offer our customers expanded capabilities to contribute their Web site activity
data to their existing corporate applications. As a result, our customers will
be able to utilize this information in a variety of sophisticated ways,
including in combination with back office applications such as sales force
automation tools, such as those provided by Siebel Systems, Inc., call center
applications, such as those provided by Clarify, Inc., and e-business
applications, such as those provided by Vignette Corporation and Net
Perceptions, Inc., and traditional business intelligence tools, such as those
provided by MicroStrategy, Inc. We believe attractive incremental product and
service revenue opportunities exist for Accrue in helping our customers realize
this leverage.
Leverage and Expand Blue Chip Customer Base. We currently provide our
software and services to more than 500 leading companies across numerous
industries, including publishing, entertainment, media, high-technology,
financial services and retail. Our customers frequently purchase additional
software and services from us as they experience increases in Web site traffic,
higher levels of complexity in the scope of their e-business activities, and
more sophisticated needs for internal merchandising and marketing analysis. Our
customer base also provides an accessible market for newly developed or acquired
products and services.
Continue Developing Strategic Alliances. We intend to continue developing
alliances with leading strategic platform providers, e-business application
providers, interactive agencies and Web hosting organizations, solution
providers, and business process applications vendors. We believe that these
partnerships will accelerate market penetration of our software by providing
additional marketing and distribution channels for our applications. We believe
that these alliances could also promote additional revenue opportunities, such
as partnered consulting service fees generated by our cooperation with partners
to help customers analyze collected data to make e-business decisions.
Expand Sales and Distribution Channels. By increasing the number of direct
sales professionals as well as utilizing systems integrators and resellers to
complement direct selling efforts we will be able to address a broader market
for our products. In addition, as use of the Internet increases internationally,
we believe that international markets will represent a significant market for
our products and services. We plan to establish an early marketing, sales and
support presence in selected international markets, including targeted European
and Asian countries, to enhance our long-term competitive advantage in these
regions. We also intend to utilize international distributors in international
markets generally and to implement localized versions of our applications.
Pursue Strategic Acquisitions. We intend to pursue acquisitions of
businesses, products, services, technologies, and distribution channels that are
complementary to our existing business to expand our position in the enterprise
e-business analysis software market. Although we have no present commitments or
agreements regarding any acquisitions, we believe that there are many
acquisition candidates that could enhance our position in this market.
PRODUCTS AND SERVICES
Accrue Insight 3.1
Our flagship product, Accrue Insight 3.1, provides our customers with
detailed information about visitors to their Web sites including the frequency
of visits by each visitor, content effectiveness, the external site from which a
visitor reached the Web site, the path taken by visitors within the Web site,
time spent by visitors at the Web site, and specific page resets. Accrue Insight
monitors traffic
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served from any Web server on all hardware platforms and is capable of providing
information to address the following questions:
- How many visitors are coming to the Web site?
- How many new versus repeat visitors are coming to the Web site?
- What are some of the demographics of visitors to the Web site?
- Which search engines and portals are referring qualified prospects to the
Web site?
- What was the point of reference for a specific visitor to access the Web
site?
- How are visitors traveling or progressing through the Web site?
- Which pages are most popular?
- What changes can be made to the Web site to make the most popular pages
easy to find?
- How can the appearance of the Web site be improved in light of the most
frequently used browsers and access speeds of visitors?
- How many visits to the Web site result in sales transactions?
- What is the revenue generated by a particular page?
- How many times did visitors reach a particular page and then hit the stop
button to end the visit?
Accrue Insight consists of our network collector, analyzer and data
warehouse combined with powerful reporting and access options within an
integrated system architecture:
Network Collector. Our network collector software sits passively in the
customer's network configuration of Web servers, routers, switches and load
balancing products, and counts and records all click streams comprising visitor
activity to the customer's Web site. The network collector runs on the Sun
Solaris 2.5/2.6 and Microsoft NT 4.0 operating system platforms, and is
installed outside of the customer's firewall to achieve non-invasive
functionality. The network collector scales to handle millions of hits per day
on a 100Mbps ethernet network while recording all details from each visit.
Analyzer. Our analyzer software organizes the raw data gathered by the
network collector, analyzes Web site traffic and activity according to the
customer's specifications, filters out unneeded information, and adds a level of
intelligence to the data for optimal loading and storage. The analyzer organizes
and processes data so as to be able to answer questions from customers
concerning the flow of traffic to and from their Web sites.
Data Warehouse. Data that is processed by our analyzer is optimized for
bulk loading into our high-speed data warehouse. Our data warehouse enables
automated and efficient data management, including storage, consolidation and
archiving, batch reporting and interactive data mining. Our data warehouse runs
on the Sun Solaris 2.5/2.6 operating system platform. We currently employ the
Red Brick database technology licensed to us by Informix Software, Inc. to
maintain data stored in our data warehouse.
Report Wizard. Report Wizard is our software tool that allows customers to
design customized reports displaying data extracted from the data warehouse. The
reports can be saved, exported to spreadsheet programs like Microsoft Excel,
scheduled for automatic generation and delivery at a later time via email, or
posted to a restricted-access Web page.
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MyAccrue. MyAccrue is our report personalization software which allows
end-users to design either standard or customized reports which are
automatically updated and distributed as scheduled on a daily, weekly or monthly
basis, via email to the end-user.
Application Access. Accrue Insight 3.1 allows customers to provide their
Web site data to third party applications that can take action on it, such as
those provided by Siebel Systems, Inc., Clarify, Inc., and eGain Communications
Corporation, or whose applications will be enhanced by our licensed software,
such as those provided by Vignette Corporation, NetGravity, Inc., and Net
Perceptions, Inc.
Pricing of Accrue Insight 3.1 is determined by total number of CPUs
contained in the servers of the Web sites a customer wishes to analyze. Annual
maintenance fees (which include product upgrades) are priced as a percentage of
the list license fee. Additional services are billed either on a fixed-fee or
time-and-materials basis.
Accrue Hit List 4.5
Our Microsoft Windows NT offering, Accrue Hit List 4.5, provides our
customers with similar functionality to Accrue Insight for sites with smaller
deployments and basic merchandising questions. We acquired this product in
connection with our acquisition of Marketwave Corporation in September 1999.
Accrue Decision Series 3.2
Our newest addition, Accrue Decision Series 3.2, provides our customers
with additional data mining and personalization capabilities to identify
profitable customers and to recommend products and content that are useful to
their Web site visitors. We acquired this product in connection with our
acquisition of NeoVista Software, Inc. in January 2000.
Professional Services and Customer Support.
Technical Support. We provide technical support to our customers through
telephone, email, our Web site, and on-site training. We offer toll-free
telephone assistance to our customers twenty-four hours a day, seven days a
week. Additionally, we offer monthly training sessions, called Tips &
Techniques, to our customers over the Web using a screen sharing product called
PictureTalk from Pixion, Inc. We have also established an online bulletin board
using software provided by eShare Technologies, Inc. for our customers to share
ideas and questions with each other and with us. Our Web site also provides
online documentation of historical trouble-shooting cases.
Training. We offer traditional on-site system administration training and
monthly end-user training over the Web using PictureTalk.
Consulting. We offer consulting services to customers on either a fixed-fee
or time-and-materials basis. Our current consulting services and applicable fees
include the following:
- QuickInsight -- installation and configuration of Accrue Insight in the
customer's network over a two-day period for a fixed fee.
- Vignette Quick Bridge -- consulting service and application to convert
Web addresses produced by Vignette StoryServer into descriptive
information suitable for analysis for a fixed fee per each deployed
Vignette license.
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- ATG Bridge -- consulting service and application to convert Web addresses
produced by Art Technology Group, Inc. into descriptive information
suitable for analysis for a fixed fee per each deployed ATG license.
- Custom Data Integration and Reporting -- integration of data from a
separate customer database into the database created by Accrue Insight,
billed at a daily rate.
- Accrue Discovery Service -- strategic business consulting and analysis
based on information derived from data collected and analyzed by Accrue
Insight, billed at a fixed fee for a one-time evaluation.
Online Services -- Accrue Site Knowledge (ASK) Service. We offer customers
the opportunity to outsource system administration responsibilities in
connection with their purchase of Accrue Insight by subscribing to our Accrue
Site Knowledge (ASK) Service, a hosting service administered by Accrue in
cooperation with AboveNet Communications, Inc. ASK Service customers install the
network collectors at their site to collect their Web data, the data is
automatically transferred to a data warehouse hosted by Accrue. Using Accrue
Insight's flexible reporting options, customers receive daily, weekly or monthly
reports through email, or by accessing them through secure, personalized
MyAccrue Web pages on the Internet. By hosting the day-to-day management of
Accrue Insight for the customer, Accrue reduces the initial time and cost of
deployment and provides continuous and dependable application maintenance and
support. For the ASK Service customers pay Accrue's standard license and
maintenance fees for Accrue Insight plus a service fee and equipment leasing
costs.
We have also established a number of informal alliances with solution
providers to supplement our internal service capacity to customers as required
to meet their deadlines and specifications. These alliances are not subject to
binding agreements, have no specified performance requirements by us or our
alliance partners, and may be terminated at any time. These solution providers
include Viant Corporation (Web site strategies), World Wide Web Associates
(training and consulting services with respect to our products), Cambridge
Technologies, Inc. (computer systems consulting and integration), Organic
Online, Inc.(online business builder) and AboveNet Communications, Inc. (Web
hosting services).
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CUSTOMERS
As of January 15, 2000, we had licensed our products to over 500 customers
and no single customer accounted for more than 10% of our total revenue in
either of our fiscal years ending March 31, 1999 or March 31, 1998. Our
customers represent a broad spectrum of enterprises within diverse industries,
including publishing, entertainment and media, high technology, financial
services, and retail. The following is a representative list of our licensed
customers to date from which we continue to derive maintenance and service
revenue:
<TABLE>
<CAPTION>
PUBLISHING, ENTERTAINMENT
AND MEDIA HIGH TECHNOLOGY FINANCIAL SERVICES
------------------------- --------------- ------------------
<S> <C> <C>
Bolt Media, Inc. AMP Incorporated Ameritrade Holding
Children's Television Apple Computer, Inc. Corporation
Workshop Ascend Communications, Inc. Investools, Inc.
Christian Science Monitor Check Point Software NationsBank Corporation
DreamWorks L.L.C. Technologies Standard & Poor's MMS
Family Education Company Eastman Kodak Company T. Rowe Price Associations,
Hearst New Media and Ford Motor Company Inc.
Technology Gateway Companies, Inc. TheStreet.com, Inc.
Hollywood Online, Inc. General Motors Corporation Toronto Dominion Bank
Houston Chronicle Hitachi America, Ltd. Financial Group
Interactive Iomega, Inc. E-COMMERCE
Los Angeles Times Lam Research Corporation Beyond.com
Meredith Corporation MathWorks, Inc. CDNow
Miller Freeman, Inc. Merck, Inc. Costco Wholesale Corporation
News America Digital Motorola, Inc. DHL Worldwide Express
Publishing, Inc. National Semiconductor Federal Express Corporation
Philadelphia Newspapers, Corporation Hasbro, Inc.
Inc. NetObjects, Inc. Micro Warehouse, Inc.
Salon Internet, Inc. Network Appliance, Inc. Mrs. Baird's Bakeries
San Jose Mercury News Nokia, Inc. MySimon, Inc.
Seattle Times, Inc. Nortel (Northern Telecom Preview Travel, Inc.
Spinner Networking, Inc. Limited) Ralston Purina Company
(DBA Spnner.com) Oracle Corporation J.C. Penney Company, Inc.
SportsLine, USA, Inc. Qualcomm, Inc. Wal-Mart Stores, Inc.
Star Tribune SABRE Group, Inc. Walgreen Co.
Viacom Interactive Seagate Technology, Inc. Lands' End, Inc.
Media-MTV Silicon Graphics, Inc. ShopNow.com, Inc.
Knight-Ridder, Inc. Sprint L.P. Beyond.com Corporation
Gannett Co., Inc. Sun Microsystems, Inc. Sears, Roebuck and Co.
Dow Jones & Company Synopsys, Inc.
VeriSign, Inc.
</TABLE>
SELECTED CUSTOMER CASE STUDIES
Some examples of the manner in which our products are used to address
e-business applications are set forth below.
TheStreet.com. TheStreet.com is a leading web-based provider of original,
timely, comprehensive, and trustworthy financial news, commentary and
information aimed at helping readers make informed investment decisions.
TheStreet.com chose Accrue Insight as its primary vehicle for
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tracking current and potential subscriber usage on its Web site. By analyzing
this information, TheStreet.com has been able to prepare more effective
marketing programs targeted at prospective subscribers. Currently, approximately
35 professionals at TheStreet.com, including business analysts, editors, and
executives in the company's technology, marketing, advertising, and financial
departments, use the information generated by Accrue Insight.
The Seattle Times. The Seattle Times newspaper is utilizing Accrue
Insight's rich data collection and reporting features to generate detailed
reports for the company's editorial, advertising and marketing staff. These
reports aid the development and positioning of online content and ad banners,
and provide feedback on the effectiveness of marketing campaigns to attract Web
site visitors. Accrue Insight's graphs of weekly Web site traffic highlights
entry and exit points on the Web site, showing how customers navigate the site's
pages and what pages receive the most attention. Analysis of such data helps
advertising personnel determine optimal advertising locations and pricing. With
Accrue Insight, the Seattle Times' marketing personnel can look at which
external URLs are driving traffic to their Web site, and even to specific pages
in the Web site. With this information, management has been able to design media
buying plans that it believes have resulted in more visitors to its Web site. In
addition, the Seattle Times' editorial personnel can see which sections and
stories receive the most attention and accordingly, match content placement to
customers' preferences, which it believes has resulted in greater customer
satisfaction and loyalty.
National Semiconductor Corporation. National Semiconductor Corporation, is
a leader in the design and manufacturing of analog and mixed signal
semiconductor products. National Semiconductor chose Accrue Insight for its
ability to provide an enriched view of online customers. This comprehensive view
of customer activity offers National Semiconductor the information necessary to
ensure that their Web site is constructed to provide customers the shortest path
to the content they seek. Before implementing Accrue Insight, engineers using
National Semiconductor's Web site went through an average of 7 screens to access
needed information. After implementing Accrue Insight, National Semiconductor
had the information necessary to rearchitect their Web site to reduce the
average number of screens to 2.2. By reducing the number of screens necessary
for its customers to access needed information, Accrue Insight has helped
increase customer satisfaction and sales on National Semiconductor's Web site.
Net-Temps Inc. Net-Temps Inc. provides Web-based services to assist
placement firms and third-party recruiters in finding and placing temporary
employees, primarily in high-tech industries. Placement firms and recruiters
post job openings on their Web site and search their resume database for
appropriate candidates. With Accrue Insight, Net-Temps can monitor the traffic
generated by its partners to see which advertisers are delivering the greatest
return on investment to them. By using Accrue Insight to identify the
effectiveness of over 5 million banner impressions per month, Net-Temps modified
its media buying plan and increased the amount of traffic to its Web site.
The MathWorks, Inc. The MathWorks, Inc. develops, markets and supports a
computational engine, a block-diagram environment and a family of data analysis
toolboxes for engineer, scientists, and technical professionals. The MathWorks
chose Accrue Insight for its complex analysis functionality and scalability as
well as its reporting features. Accrue Insight's sophisticated reports are used
company-wide by site designers, marketers, information technology and executive
management. By using Accrue's navigation graph the MathWorks has been able to
determine that a large number of visitors run its online product demonstration
while viewing product information. As a result, The MathWorks has dedicated more
areas of its Web site to product demonstrations, which is expected to shorten
its sales cycle.
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TECHNOLOGY AND ARCHITECTURE
Accrue Insight is designed to provide a robust architecture for customers
to implement flexible, scalable, detailed, and accurate e-business analysis. The
Accrue Insight architecture is compatible with documented application
programming interfaces, APIs, protocols and file formats to enable integration
with external systems such as Web applications (such as commerce servers and ad
servers) and business process applications (such as sales force automation
systems and call center systems). The architecture adheres to numerous standard
programming languages, including hyper-text machine language, or HTML, Java and
C, and network protocols, including hyper-text transfer protocol, or HTTP. In
addition, we believe that our system architecture is flexible and powerful
enough to serve as the foundation for related future products.
The Accrue Insight system architecture may be viewed as a Series of layers,
each performing specific functions between our customer's Web site and their
visitors.
Collection Layer. The collection modules consist of our network collector,
server collector and logfile collector, each of which obtains data from
different sources. Our network collector is the most comprehensive collection
module within Accrue Insight and obtains data from the network through packet
sniffing technology. Our server collector is a customized module which plugs
directly into the customer's Web server for use in environments where encryption
of network traffic prevents packet sniffing, such as in credit card processing
and banking applications. Finally, our logfile collector may also be used when
encrypted or secure Web servers are employed or to obtain customer legacy data
that existed prior to installation of packet sniffing technology contained in
our network collector. All of these collection modules may be used in any
combination to gather and consolidate data into our data warehouse.
Modeling Layer. Our analyzer provides a fast, flexible mechanism for
filtering, segmenting and organizing collected data into a Web site
configuration model that the customer has defined. Our analyzer performs the
following tasks:
- sews or stitches collector data into a coherent view of the Web site,
taking into consideration where the Web server resides in the customer's
system configuration (physical server), the execution of the Web server,
or logical server, and the specific mirrored set of content, or content
set obtained from the Web server;
- discards non-essential details;
- translates raw hit information into concepts such as page views and the
time spent viewing a page;
- transposes raw Web server transaction data into higher-level information,
such as visitors and visits;
- tracks visitors across Web servers, time zones and different
authentication mechanisms;
- summarizes activity in many dimensions, such as by machine, URL or Web
site identifier, content set, logical server, or Web site; and
- creates a set of data to be loaded into the data warehouse.
Storage Layer. The storage layer consists of a data warehouse for storing
Web customer activity data processed by the analyzer, Web site definition data,
and Web network configuration data, collectively known as meta data or data
about data. The storage layer also consists of an online analytical processing,
or OLAP, database for fast access to summarized data. In addition, the storage
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layer includes a database administration subsystem capable of handling high
volumes of data, thereby alleviating the customer's need to dedicate excessive
resources to data administration.
Data Access Layer. The data access layer consists of an API that provides a
unified view into the various storage facilities that make up the data warehouse
within Accrue Insight. It can also be used to access external databases, such as
those containing customer profile, demographic information and transaction data.
Application Layer. Accrue and third-party software vendors can write
applications to provide additional, customized functionality in addition to
Accrue Insight's basic functionality. For instance, a rules engine can view the
data for specific business rules, and manipulate the data accordingly.
Presentation Layer. MyAccrue provides enterprise-class service
functionality, such as scheduling, email and printing, that can be executed by
Accrue Insight. Report Wizard provides an easy to use, HTML interface to create
and save data queries in a format that can then be read by MyAccrue.
Integration Layer. We originally designed Accrue Insight and continue to
enhance its features to allow for maximum integration into existing systems and
the creation of new functionality. Accrue Insight can be integrated into
existing systems through the following APIs:
- Network Collector API. Our network collector API allows business rules to
be invoked as data is being collected. For instance, the collector can be
instructed not to save any hits for graphic images, and to ignore all
hits from the local domain.
- Analyzer API. Our analyzer API allows third-party applications to tailor
how the analyzer executes. For instance, this API may cause the Analyzer
to rewrite the URL to be more analysis-friendly, such as in the case of
the Vignette Profile Bridge.
- Data Access API. Our data warehouse provides a unified view of various
legacy and third-party databases and data marts.
INDUSTRY STANDARDS
We use many widely accepted standards in developing our products, including
structured query language, or SQL, and open data base connectivity, or ODBC, for
accessing the data warehouse, Netscape Application Programming Interface, or
NSAPI, for accessing Netscape's Web servers, hyper-text transfer protocol, or
HTTP, for communication between collectors and the central warehouse machine,
and hyper-text machine language, or HTML and Java for user interfaces. In
addition, Accrue Insight contains software that supports the ABC Interactive
digital signature standard, used for auditing log files for tampering. Most of
our software is written in C and Java, two widely accepted standard programming
languages for applications development. Adherence to industry standards provides
compatibility with existing applications, enables ease of modification, and
reduces the need for software to be rewritten, thus protecting the customer's
investment.
SALES AND MARKETING
We currently market and sell our products primarily through our direct
sales force in North America. We have maintained a ratio of two to one sales
territory manager to sales engineer to support the consulting nature of our
sales process. We also intend to expand our marketing and selling efforts
through partnering with third parties. We have recently expanded into
international markets through informal alliances with Sumisho Electronics
Company, Ltd., a subsidiary of Sumitomo Corporation, and Itochu Techno-Science
Corporation in Japan and Scientific Computers
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GmbH in Europe and we plan to leverage our management's experience in
international expansion as opportunities occur.
Once a new customer lead is qualified, our typical sales process includes a
presentation of our products to the appropriate business executives within the
customer's organization, such as their vice president of sales, vice president
of marketing, or e-commerce director, followed by a product demonstration and
dialogue concerning technical questions. Normally product trials and evaluation
of the software are not required, as existing customer referrals and validation
are sufficient to handle new customer concerns.
Currently, we have eleven sales territory mangers located in Boston, New
Jersey, New York, Atlanta, Dallas, Chicago, Toronto, Seattle, San Francisco, San
Jose and Los Angeles. They are supported by four corporate sales representatives
located at our headquarters in Fremont, California and six regional systems
engineers in New York, Dallas, Chicago, and the San Francisco Bay Area. To
ensure maximum yields per sales representative and to facilitate ramp-up and
training for new sales personnel we utilize the Vantive Corporation Sales
Automation System which tracks customer and contract information, as well as new
sales prospects and sales call history. Our internal Web site also contains
extensive competitive information, case histories and sales presentation and
training materials that are used as resources for our sales organization.
Building brand awareness and commanding recognition of our leadership in
the marketplace is key to our success. We employ a number of marketing vehicles
to promote our brand in the e-business analysis market and to generate leads for
our sales organization. Traditional methods include press releases, speaking
engagements, product reviews, discussions with industry analysts and attendance
at tradeshows and seminars. We have also found, however, that emerging means of
communication, such as email and Web seminars, provide us with even greater
reach at less cost. Continued investment into our own Web site is critical to
maintain our image in the e-business community and to generate sales leads. We
also post important information about our products, technology and organization
on our Web site for potential customers' ease of access. Finally we publish data
sheets, white papers and articles concerning our products and services.
STRATEGIC ALLIANCES
A critical element of our sales and marketing strategy is to establish
alliances and partnerships to provide integrated solutions to our customers,
extend our sales reach, assist in implementation and customization of our
solutions, and broaden our brand awareness. Some examples of our current
partners include the following:
- Vignette Corporation. Our co-marketing and sales partnership includes
joint seminars and sales calls, joint development of the Vignette
QuickBridge for integration of Accrue Insight with Vignette StoryServer.
- MicroStrategy, Inc. Our joint-development partnership provides Accrue
access to MicroStrategy's OLAP technology for the development of
e-commerce analysis applications.
- ABC Interactive. Our joint-development partnership provides Accrue access
to ABC Interactive's encryption technology for the development of audited
traffic results for advertisers.
- DoubleClick -- Our co-marketing and sales partnership includes joint
seminars, sales calls and development of the Accrue AdVisor product,
which measures the marketing return on investment of online advertising
campaigns processed through DoubleClick's DART network.
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- Art Technology Group -- Our co-marketing and sales partnership includes
joint seminars and sales calls, and joint development of the QuickBridge
for ATG Dynamo, which measures effectiveness of sites deployed using
Dynamo.
- Broadvision -- Our co-marketing and sales partnership includes joint
seminars and sales calls, and joint development of the QuickBridge for
BroadVision One to One product for measuring effectiveness of sites using
One to One.
- IBM -- Our co-marketing and sales partnership includes joint seminars,
sales calls and development of the Accrue WholeSale for Net.Commerce
product, which provides e-commerce return on investment analysis.
We have alliances with strategic platform partners, e-business application
partners, interactive agencies/hosters and solution providers. By partnering
with the leading vendors in each of these categories, we are better able to
provide the technical integration expertise and sales and marketing resources,
which result in the most valuable integrated solutions to our customers and
prospects.
Strategic Platform Providers. To ensure that our products are based on
current technologies and standards, we have partnered with companies whose
products represent the best-of-breed in their respective categories. These
companies include Cisco Systems, Inc., Informix Software, Inc., Oracle
Corporation, Microsoft Corporation, Netscape Corporation, Sun Microsystems,
Inc., Veritas Software Corporation, IBM Corporation, and Intel Corporation.
E-Business Application Partners. These partners sell complimentary
technologies to similar high-end clientele. These technologies include
personalization, ad serving, content management, customer relationship
management, load balancing, e-commerce and application serving. Our alliances
range from strong sales and co-marketing relationships to alliances with
companies with whom we have built integrated technology. Representative
companies include Vignette Corporation, Art Technology Group, Inc., DoubleClick,
Inc., Broadvision, Inc., and IBM Corporation.
Interactive Agencies and Web-Hosting Organizations. Our relationships with
these firms ensure that our product is the recommended solution of choice when
customers and prospects are seeking e-business analysis solutions while
implementing or upgrading their Web sites. We have worked with and have joint
customers with the following interactive agencies: Organic Online, Inc.,
USWeb/CKS Corporation, Modem Media.Poppe Tyson, Inc. We share customers with the
following Web-Hosting firms: AboveNet Communications, Inc., Exodus
Communications, Inc., NaviSite, Inc. and Frontier Corporation.
Solution Providers. To supplement our internal service capacity, we have
established relationships with firms, such as Cambridge Technology Partners,
Viant Corporation, Scient Corporation, Ogilivy & Mather, Andersen Consulting,
and Worldwide Web Associates, which provide implementation and customization
services. We have also partnered with firms that provide strategic
web-merchandising, web-marketing and online advertisement analysis services to
our clients, such as Viant Corporation.
Most of our strategic relationships are not subject to binding agreements,
have no specified performance requirements by us or by our alliance partners,
and may be terminated by either party at any time.
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COMPETITION
We believe that the principal competitive factors affecting our market are:
- product features;
- product performance, including scalability and integrity;
- ease of integration with customers' existing enterprise systems;
- quality of support and service; and
- company reputation.
Although we believe that our products currently compete favorably with
respect to such factors, our market is relatively new and is rapidly evolving.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources. A description of our
principal competitors and the risks associated with the competitive nature of
our market are discussed in greater detail in "Risk Factors -- We face intense
competition which could make it difficult for us to acquire and retain customers
now and in the future."
We may not be able to compete successfully against current and future
competitors. If we fail to compete successfully against current and future
competitors, our business could suffer.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We are a technology company. Our success depends on protecting our
intellectual property assets. If we do not adequately protect our intellectual
property, our business, financial condition and results of operations would be
seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
including but not limited to requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
We currently have no issued U.S. or foreign patents, we have applied for
one U.S. patent and we have no pending foreign patent applications. It is
possible that no patents will issue from our currently pending patent
application and that our potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages, that
we may not develop future proprietary products or technologies that are
patentable, and that the patents of others may seriously limit our ability to do
business. In this regard, we generally have not performed any comprehensive
analysis of patents of others that may limit our ability to do business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States. A
discussion of risks associated with the protection of our patents and
intellectual property rights and potential infringement by us of the
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patents and intellectual property rights and potential infringement by us of the
patents and intellectual property rights of others is presented in "Risk
Factors -- Accrue Insight, our most important product, is not protected by a
patent. If another party were to use this technology, our business would
suffer." and "-- Others may bring infringement claims against us which could
harm our business, results of operations and financial condition."
We also integrate third-party software into our software products and a
discussion of risks associated with this practice is presented in "Risk
Factors -- If third-party software incorporated in our products is no longer
available, our business could be harmed."
EMPLOYEES
As of December 31, 1999, Accrue had 99 full-time employees, including 31 in
product development, 52 in sales and support, 6 in marketing, and 10 in general
and administrative functions. From time to time, we also employ independent
contractors to support our engineering, marketing, sales and support and
administrative organizations. We believe that our relations with our employees
are good.
FACILITIES
We are headquartered in Fremont, California, where we lease approximately
30,000 square feet of office space under a lease expiring on March 31, 2002. We
lease additional facilities in Seattle, Washington and England for sales and
service personnel. We believe that our existing facilities are adequate to meet
our current and future requirements or that suitable additional or substitute
space will be available as needed.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of its business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of January 15, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard D. Kreysar................ 43 President, Chief Executive Officer and Director
Gregory C. Walker................. 45 Vice President of Finance and Chief Financial Officer
Bob Page.......................... 38 Chief Technology Officer
Brett Kilpatrick.................. 41 Vice President of Sales
Vito Salvaggio.................... 37 Vice President of Marketing
Jonathan D. Becher................ 35 Vice President of Product Strategy
Robert Wyman...................... 46 Vice President of Product Development
David Folkman(1).................. 65 Director
Max D. Hopper(2).................. 65 Director
Steven T. Podradchik.............. 32 Director
A. Brooke Seawell(1).............. 52 Director
Robert Smelick(2)................. 57 Chairman of the Board of Directors
</TABLE>
-------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Richard D. Kreysar, President and Chief Executive Officer, joined Accrue
and became a director in June 1998. From January 1997 to May 1998, Mr. Kreysar
taught high school mathematics and coached soccer and baseball. From January
1995 to January 1997, Mr. Kreysar was the General Manager and Vice President of
Operations at Network Associates, Inc., an enterprise security software company,
where he was responsible for marketing, sales, product line development,
consulting and MIS operations. From January 1994 to January 1995, Mr. Kreysar
was Executive Vice President of Marketing and Sales of Open Vision, a UNIX
systems management software company. From June 1985 to December 1993, Mr.
Kreysar was Vice President of Marketing and Sales at Computer Associates
International, Inc. (CA), an enterprise software company, where he was
responsible for integrating acquired companies and products into CA's
applications and personal computer products divisions. Mr. Kreysar holds a B.S.
degree in mathematics from Rockhurst College.
Gregory C. Walker, Vice President of Finance and Chief Financial Officer,
joined Accrue in April 1999. From October 1997 to March 1999, Mr. Walker was
Chief Financial Officer at Duet Technologies, Inc., a provider of semiconductor
design services and software. From January 1997 through September 1997, Mr.
Walker served as Chief Financial Officer of NeTpower, Inc., a manufacturer of
work stations and servers. From December 1990 to January 1997, Mr. Walker served
as Vice President of Finance and acting Chief Financial Officer at Synopsys,
Inc., a supplier of electronic design automation solutions for the global
electronic market. Prior to working at Synopsys, Mr. Walker held various
positions in financial operations at Xerox Corporation and IBM Corporation. Mr.
Walker holds a B.A. degree in economics from Union College and an M.B.A. from
the University of Rochester.
Bob Page, Chief Technology Officer, joined Accrue in February 1996. From
March 1989 to February 1996, Mr. Page worked at Sun Microsystems, Inc., a
leading manufacturer of UNIX operating platforms, where he served as Chief
Scientist with the Network Management group and Principal Investigator with the
Advanced Network Applications group. While at Sun Microsystems,
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Mr. Page served as the Technical Chair of the Desktop Management Task Force, a
cross-industry consortium of vendors formed to address issues in connection with
personal computers. From 1986 to 1989, Mr. Page was Senior Network Engineer and
Operations Manager at the University of Massachusetts, Lowell. Mr. Page received
his B.S. degree in computer science from Fitchburg State College.
Brett Kilpatrick, Vice President of Sales, joined Accrue in November 1998.
From January 1998 to July 1998, Mr. Kilpatrick was Vice President of Sales and
Business Development at AvantGo, Inc., a mobile computing software company. From
April 1997 to January 1998, Mr. Kilpatrick was Vice President of Sales and
Operations, Americas for IONA Technologies PLC, a producer of network
integration software. From February 1992 to March 1997, Mr. Kilpatrick was North
American Director of Sales at Versant Object Technology Corporation, a provider
of high performance object database management systems. Mr. Kilpatrick has also
held positions as Andersen Consulting's Midwest Sales Director and as Oracle
Corporation's Chicago Branch Manager. Mr. Kilpatrick holds a B.S. degree in
biology from Purdue University.
Vito Salvaggio, Vice President of Marketing, joined Accrue in September
1997. From August 1990 to September 1997, Mr. Salvaggio worked at Apple
Computer, Inc., where he served in various positions, including Director of
Product Marketing for System Software, Product Line Manager for Operating
Systems and Product Manager for High End Systems. From January 1986 until
September 1988, Mr. Salvaggio served as Design Engineer at Matrox Electronic
Systems, Ltd., a manufacturer of computer peripherals. Mr. Salvaggio holds a
B.S. degree in electrical engineering from Concordia University and an M.B.A.
from the Sloan School of Management at the Massachusetts Institute of
Technology.
Jonathan D. Becher, Vice President of Product Strategy, joined Accrue in
January 2000. Prior to this, from March 1996 to January 2000 and from July 1999
to January 2000, he served as Chief Technology Officer and Chief Executive
Officer and President respectively of NeoVista Software, Inc., which was
acquired by Accrue in January 2000. From March 1995 to March 1996, Mr. Becher
served as Director of Applications at MasPar Computer Corporation, a producer of
parallel computing products. Mr. Becher holds a B.S. degree in computer
engineering from University of Virginia and an M.S. degree in computer science
from Duke University.
Robert Wyman, Vice President of Product Development, joined Accrue in
September 1999. From March 1999 to September 1999, Mr. Wyman served as Vice
President of Product Development at Marketwave Corporation, which merged with
Accrue in September 1999. From 1997 to 1999, he served as a consultant to a
variety of financial institutions. During 1996, he served as Director of Product
Development for HealthGate Data Corporation. From 1993 to 1995, he served as
Vice President of Emerging Technologies for Medio Multimedia, Inc., a producer
of CD-rom software. From 1991 to 1993, he served as Senior Product Manager for
Applications Programmability at Microsoft Corporation.
David Folkman has served as a director of Accrue since December 1999. Mr.
Folkman currently serves as Chief Executive Officer, President and a director of
On-Site Dental Care, Inc., a private early stage start-up company and he also
has served as a principal and director of Regent Pacific Management Corp., a
consulting firm whose engagements primarily comprise management and advisory
services for a wide range of businesses, as well as consumer product firms,
since January 1991. During his tenure at Regent Pacific Management, Mr. Folkman
devoted one year, from April 1998 to April 1999, as full-time president of
Natural Wonders, Inc., a chain of stores in the nature and science gift niche.
In addition, he served from February 1993 to July 1995, as full-time Chief
Executive Officer and President of Esprit de Corp, an apparel manufacturer,
wholesaler and retailer. Previously, from April 1987 to December 1990, Mr.
Folkman was a general partner of U.S. Venture
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Partners, managing a venture fund with investments in technology, biomedical and
retail start-ups, and from April 1982 to April 1987, he served as Chief
Executive Officer and President of The Emporium, a division of Carter Hawley
Hale Stores, Inc. (now owned by Federated Department Stores, Inc.). Mr. Folkman
holds an A.B. degree in social relations from Harvard College and an M.B.A. from
Harvard Business School. Mr. Folkman also currently serves as a director of
Natural Wonders, Inc. and Shoe Pavilion, Inc.
Max D. Hopper has served as a director of Accrue since March 1999. Mr.
Hopper has been the Chief Executive Officer of Max D. Hopper Associates, Inc.,
an IS management consulting firm, since January 1995. From 1985 to January 1995,
he served in various positions at American Airlines, a subsidiary of AMR
Corporation, most recently as Senior Vice President, Information Systems and
Chairman of the SABRE Group, a provider of information technology services to
the travel and transportation industry. Mr. Hopper is also a director of Exodus
Communications, Inc., a Web hosting company, Gartner Group, Inc., a provider of
information technology research and recommendations, USDATA Corporation, a
provider of development tools and management software, Metrocall, Inc., a
provider of local and regional paging service, Payless Cashways, Inc., a
building materials specialty retailer, and United Stationers, Inc., a wholesaler
of office supplies and equipment. Mr. Hopper received a B.S. degree in
mathematics from the University of Houston.
Steven T. Podradchik has served as a director of Accrue since September
1999. Prior to this, from March 1997 to September 1999, Mr. Podradchik served as
Chief Executive Officer of Marketwave Corporation, a provider of Web traffic
analysis which was acquired by Accrue in September 1999, and from August 1994 to
August 1996, he served as Chief Executive officer of Medio Multimedia, Inc., a
producer of CD-rom software. Mr. Podradchik holds a B.S. degree in economics
from the University of Pennsylvania.
A. Brooke Seawell has served as a director of Accrue since May 1999. He
currently serves as a general partner of Technology Crossover Ventures. From
January 1997 to August 1998, Mr. Seawell was Executive Vice President of
NetDynamics, Inc., an Internet applications server company. From March 1991 to
April 1997, Mr. Seawell was Senior Vice President and Chief Financial Officer of
Synopsys, Inc. Mr. Seawell holds a B.A. degree in economics and an M.B.A. degree
in finance and accounting from Stanford University. Mr. Seawell serves on the
board of directors of Informatica Corporation, a software company, NVIDIA
Corporation, a three-dimensional graphics processor company, Mediaplex, Inc., a
provider of e-business advertising technology and services, and several
privately held companies.
Robert Smelick has served as a director of Accrue since May 1996. Mr.
Smelick is the managing director of Sterling Payot Management, Inc., the general
partner of Sterling Payot Capital, L.P., an investment partnership specializing
in technology based start-up companies and he is also a managing principal and
founding director of Sterling Payot Company, a private investment banking firm.
Before founding Sterling Payot Company in 1989, Mr. Smelick was a Managing
Director of First Boston Corporation. Prior to that, Mr. Smelick was an
investment banking partner of Kidder, Peabody & Co. Mr. Smelick received a B.A.
degree from Stanford University and an M.B.A. from the Harvard Business School.
He also attended the University of Melbourne in Melbourne, Australia. Mr.
Smelick currently serves as a director of Willamette Industries, a producer of
paper products, building materials and related specialty products and services.
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of six
directors. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his or
her successor is duly elected and qualified.
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BOARD COMPENSATION
Our directors do not receive cash compensation for their services as
directors, although some directors are reimbursed for reasonable expenses
incurred in attending board or committee meetings. In August 1998, Mr. Kreysar
was granted an option to purchase 1,605,683 shares of common stock at an
exercise price of $0.12 per share, which he exercised in October 1998. The
shares underlying the stock option are subject to our right of repurchase at the
original purchase price that lapses over a four-year period. Our repurchase
right will also lapse with respect to 25% of the shares purchased by Mr. Kreysar
in the event of a merger or sale resulting in a change of control, and our
repurchase right will lapse with respect to an additional 25% of the shares if
Mr. Kreysar is terminated within twelve months after a merger or sale resulting
in a change of control. In April 1999, Mr. Hopper purchased 100,000 shares of
common stock at a price per share of $0.75. The stock purchased by Mr. Hopper is
subject to our right of repurchase that lapses over a four-year period. Our
repurchase right will also lapse with respect to 25% of the shares purchased by
Mr. Hopper if he is terminated within six months after a merger or sale
resulting in a change of control. In May 1999, Mr. Seawell was granted an option
to purchase 50,000 shares of common stock at an exercise price of $8.00 per
share under our 1999 Directors' Stock Option Plan and in December 1999, Mr.
Folkman was also granted an option to purchase 50,000 shares of common stock at
an exercise price of $50.8125 per share under our 1999 Directors' Stock Option
Plan. Both options vest monthly over four years, provided that vesting will
accelerate with respect to 25% of the shares if either Mr. Seawell or Mr.
Folkman, respectively, is terminated within three months after a merger or sale
resulting in a change of control. All directors are eligible to participate in
our 1996 Stock Plan, and directors who are not employees of Accrue are eligible
to participate in our 1999 Directors' Stock Option Plan. See "Stock Plans."
We have entered into indemnification agreements with each member of the
board of directors and our executive officers providing them indemnification to
the fullest extent authorized and permitted by law.
BOARD COMMITTEES
The board of directors has a compensation committee that reviews and
recommends to the board the compensation arrangements for Accrue's management
team and administers the various stock plans. The current members of the
compensation committee are Messrs. Hopper and Smelick.
The board of directors has an audit committee that reviews Accrue's annual
audited financial results and unaudited quarterly results, and meets with
Accrue's independent auditors to review Accrue's financial statements, internal
controls and financial management practices. The current members of the audit
committee are Messrs. Folkman and Seawell.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of Accrue's board are
Messrs. Hopper and Smelick. Prior to December 1999, Jonathan Nelson also served
as a member of the compensation committee prior to Mr. Hopper. Neither Mr.
Hopper or Mr. Smelick have at any time been an officer or employee of Accrue.
However, Mr. Nelson served as Accrue's President and Chief Executive Officer
from February 1996 until May 1996. We have also issued and sold in private
placement transactions shares of common and preferred stock to Organic Holdings,
Inc. (formerly Organic Online, Inc.), Sterling Payot Capital L.P., Sterling
Payot Company and Mr. Hopper. Mr. Nelson is President and Chief Executive
Officer of Organic Holdings, Inc. Mr. Smelick is managing director of Sterling
Payot Management, Inc., the general partner of Sterling Payot Capital, L.P., and
he is also a principal of Sterling Payot Company. The following is a summary of
the stock
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purchase transactions between Accrue and Organic Holdings, Inc., between Accrue
and Sterling Payot Capital, L.P. and/or Sterling Payot Company, and between
Accrue and Max Hopper.
Organic Holdings, Inc.
- May 3, 1996: we issued 2,685,714 shares of common stock to Organic
Holdings, Inc. in consideration for Organic's transfer and assignment of
intellectual property to Accrue.
Entities Affiliated with Sterling Payot Capital, L.P.
- February 21, 1996: we issued a convertible promissory note in the
principal amount of $100,000 to Sterling Payot Capital, L.P., which note
was canceled and converted into shares of Series A preferred stock at
$0.70 per share on May 3, 1996.
- April 4, 1996: we issued a convertible promissory note in the principal
amount of $50,000 to Sterling Payot Capital, L.P., which note was
canceled and converted into shares of Series A preferred stock at $0.70
per share on May 3, 1996.
- April 26, 1996: we issued a convertible promissory note in the principal
amount of $100,000 to Sterling Payot Company, which note was canceled and
converted into shares of Series B preferred stock at $2.17 per share on
September 18, 1996.
- May 3, 1996: we issued and sold to Sterling Payot Company for $3,500 a
warrant to purchase 350,000 shares of common stock at an exercise price
of $0.70 per share for advisory services.
- May 3, 1996: we issued and sold to Sterling Payot Capital, L.P. 214,285
shares of Series A preferred stock at $0.70 per share in exchange for
cancellation and conversion of the promissory notes issued to Sterling
Payot Capital, L.P. on February 21, 1996 and April 4, 1996.
- September 18, 1996: we issued and sold to Sterling Payot Company and
Sterling Payot Capital, L.P. 93,092 shares of Series B preferred stock at
$2.17 per share.
- June 2, 1998: we issued and sold to Sterling Payot Capital, L.P. 142,907
shares of Series D preferred stock at $2.17 per share.
- July 10, 1998: we issued and sold to Sterling Payot Capital, L.P. 209,678
shares of Series D preferred stock at $2.17 per share.
- August 17, 1998: we issued and sold to Sterling Payot Capital, L.P.
1,350,000 shares of Series E preferred stock at $1.00 per share.
Max D. Hopper
- April 5, 1999: we issued and sold to Mr. Hopper 100,000 shares of common
stock at $0.75 per share.
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<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by, or paid
to each individual who served as chief executive officer of Accrue during the
fiscal year ended March 31, 1999 and each of the other four most highly
compensated executive officers (the "named officers"), each of whose
compensation exceeds $100,000 on an annual basis, two of whom were no longer
serving as executive officers at the end of the fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------------
---------------------------------------- RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION($) AWARD(S)($)(1) OPTIONS (#) COMPENSATION($)
------------------ ---------- --------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Kreysar(2)... $155,000 $100,000 -- -- 1,605,683 --
President and Chief
Executive Officer
Bob Page................ 155,000 -- -- -- 309,294 --
Vice President of
Product
Development and
Chief Technology
Officer
Brett Kilpatrick(3)..... 56,250 -- $25,683(8) -- 255,000 --
Vice President of
Sales
James Patterson(4)...... -- -- -- $7,700 -- --
President and Chief
Executive Officer
Simon Roy(5)............ 37,500 -- -- -- -- $87,500(9)
President and Chief
Executive Officer
Martin Yam(6)........... 73,089 -- 30,781(8) -- -- --
Vice President of
Sales
William Stein(7)........ 74,716 -- -- -- -- --
Vice President of
Product Development
</TABLE>
-------------------------
(1) The aggregate number and value of shares of restricted common stock of
Accrue outstanding at March 31, 1999 were 15,710,046 and $157,100,460, based
on the initial public offering price of $10.00 per share. On July 8, 1998,
Mr. Patterson was issued 22,000 shares of restricted stock under our 1996
Stock Plan in consideration of his services as our interim president and
chief executive officer during May and June 1998. As of March 31, 1999, the
market value of the 22,000 shares, based on the initial public offering
price of $10.00 per share less the amount paid by Mr. Patterson for them,
equaled $220,000, and Mr. Patterson continued to hold all of the shares.
(2) Richard D. Kreysar became President and Chief Executive Officer in June
1998. On an annual basis, Mr. Kreysar's salary would have been $200,000. Mr.
Kreysar's bonus of $100,000 earned in the fiscal year ending March 31, 1999
was paid in the fiscal year ending March 31, 2000.
(3) Brett Kilpatrick became Vice President of Sales in November 1998. On an
annualized basis, Mr. Kilpatrick's salary would have been $150,000.
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<PAGE> 57
(4) James Patterson served as President and Chief Executive Officer on an
interim basis from May 1998 until June 1998 until we completed our search
for a new chief executive officer. See footnote (1) above for more
information.
(5) Simon Roy served as President and Chief Executive Officer until May 1998. On
an annualized basis, Mr. Roy's salary would have been $150,000.
(6) Martin Yam terminated his employment as Vice President of Sales in October
1998. On an annualized basis, Mr. Yam's salary would have been $135,000.
(7) William Stein terminated his employment as Vice President of Product
Development in September 1998. On an annualized basis, Mr. Stein's salary
would have been $160,000.
(8) Sales commissions earned by Messrs. Kilpatrick and Yam.
(9) Severance payment to Mr. Roy.
OPTION GRANTS
The following table provides summary information regarding stock options
granted to the named officers during the fiscal year ended March 31, 1999. The
options were granted pursuant to our 1996 Stock Plan. Stock price appreciation
of 5% and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent Accrue's predictions of its stock
performance. There can be no assurance that the actual stock price appreciation
over the ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED (#) FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
---- ----------- -------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Kreysar....... 1,605,683(3) 47.67% $0.12 08/18/08 $25,549,369 $41,147,514
Bob Page................. 309,294(4) 9.18% $0.12 09/09/08 4,921,436 7,926,022
Brett Kilpatrick......... 255,000(5) 7.57% $0.12 11/19/08 4,057,519 6,534,675
James Patterson.......... -- -- -- -- -- --
Simon Roy................ -- -- -- -- -- --
Martin Yam............... -- -- -- -- -- --
William Stein............ -- -- -- -- -- --
</TABLE>
-------------------------
(1) We granted options for an aggregate of 3,368,000 shares to our employees and
consultants under our 1996 Stock Plan during our fiscal year ended March 31,
1999. See "Stock Plans."
(2) Options were granted at an exercise price equal to the fair market value of
the common stock, as determined by our board of directors on the date of
grant.
(3) The option was immediately exercisable on the date of grant, and was
exercised in full by Mr. Kreysar on October 1, 1998. However, the underlying
shares are subject to our right of repurchase at the original purchase
price. Our repurchase right will lapse with respect to 25% of the shares on
June 22, 1999 and with respect to 1/48th of the shares on the 22nd day of
each month after that date. In addition, our repurchase right will lapse
with respect to 25% of the shares held by Mr. Kreysar in the event of a
change of control in connection with a merger or sale, and our repurchase
right will lapse with respect to an additional 25% of the shares if Mr.
Kreysar is terminated without cause within twelve months after a change of
control in connection with a merger or sale.
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<PAGE> 58
(4) The option was immediately exercisable on the date of grant, and was
exercised in full by Mr. Page on April 14, 1999. However, the underlying
shares are subject to our repurchase right at the original purchase price.
Our repurchase right will lapse with respect to 25% of the shares on
September 9, 1999 and with respect to 1/48th of the shares on the 9th day of
each month after that date. In addition, our repurchase right will lapse
with respect to 25% of the shares held by Mr. Page in the event of a change
of control in connection with a merger or sale.
(5) The option was immediately exercisable on the date of grant, and was
exercised in full by Mr. Kilpatrick on April 15, 1999. However, the
underlying shares are subject to our repurchase right at the original
purchase price. Our repurchase right will lapse with respect to 25% of the
shares on November 16, 1999 and with respect to 1/48th of the shares on the
16th day of each month after that date. In addition, our repurchase right
will lapse with respect to 25% of the shares held by Mr. Kilpatrick if he is
terminated without cause within three months after a change of control in
connection with a merger or sale.
OPTION EXERCISES AND HOLDINGS
The following table provides summary information concerning the shares of
common stock acquired in the year ended March 31, 1999, the value realized upon
exercise of stock options during that period, and the number and value of
unexercised options with respect to each of the named officers as of March 31,
1999. The value was calculated by determining the difference between the fair
market value of the underlying common stock and the exercise price.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT MARCH 31, 1999
SHARES MARCH 31, 1999($) ($)
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE(#) REALIZED ($)(1) UNEXERCISABLE) UNEXERCISABLE)(1)
---- ------------ --------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Richard D. Kreysar(2).......... 1,605,683 $15,864,148 0/0 --
Bob Page(3).................... 139,029 $ 1,373,597 467,221/0 $4,610,563/0
Brett Kilpatrick(4)............ -- -- 255,000/0 $2,519,400/0
James Patterson................ -- -- 0/0 --
Simon Roy(5)................... 149,312 $ 1,472,632 0/0 --
Martin Yam(6).................. 31,667 $ 307,803 0/0 --
William Stein(7)............... 48,000 $ 466,560 0/0 --
</TABLE>
-------------------------
(1) The amount set forth represents the difference between the fair market value
of our underlying common stock at March 31, 1999 (using an initial public
offering price of $10.00 per share as the fair market value) and the
exercise price of the option.
(2) The option was immediately exercisable on the date of grant, and was
exercised in full by Mr. Kreysar on October 1, 1998. However, the underlying
shares are subject to our right of repurchase at the original purchase
price. Our repurchase right will lapse with respect to 25% of the shares on
June 22, 1999 and with respect to 1/48 of the shares on the 22nd day of each
month after that date. In addition, our repurchase right will lapse with
respect to 25% of the shares held by Mr. Kreysar in the event of a change of
control in connection with a merger or sale, and our repurchase right will
lapse with respect to an additional 25% of the shares if Mr. Kreysar is
terminated without cause within twelve months after a change of control in
connection with a merger or sale.
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<PAGE> 59
(3) Mr. Page had three separate option grants exercisable for 250,000 shares,
140,706 shares, and 309,294 shares, respectively, all of which were
immediately exercisable on the dates of grant. During our fiscal year ended
March 31, 1999 Mr. Page exercised the first option with respect to 83,333
shares and the second option with respect to 55,696 shares on January 4,
1999. Subsequently, he exercised the first option with respect to 72,917
shares, the second option with respect to 85,010 shares, and the third
option with respect to 309,294 shares on April 14, 1999. However, the
underlying shares are subject to our repurchase right at the original
purchase price. For the first option, our repurchase right lapsed with
respect to 25% of the shares on September 9, 1997 and it lapses with respect
to 1/48 of the shares on the 9th day of each month after that date. For the
second option, our repurchase right lapsed with respect to 25% of the shares
on June 26, 1998 and it lapses with respect to 1/48 of the shares on the
26th day of each month after that date. For the third option, our repurchase
right will lapse with respect to 25% of the shares on September 9, 1999 and
it will lapse with respect to 1/48 of the shares on the 9th day of each
month after that date. In addition, our repurchase right with respect to
each of these options will lapse with respect to 25% of the shares held by
Mr. Page in the event of a change of control in connection with a merger or
sale.
(4) The option was immediately exercisable on the date of grant, and was
exercised by Mr. Kilpatrick on April 15, 1998. However, the underlying
shares are subject to our right of repurchase at the original purchase
price. Our repurchase right will lapse with respect to 25% of the shares on
November 16, 1999 and with respect to 1/48 of the shares on the 16th day of
each month after that date. In addition, our repurchase right will lapse
with respect to 25% of the shares held by Mr. Kilpatrick if he is terminated
without cause within three months after a change of control in connection
with a merger or sale.
(5) Mr. Roy's employment terminated as of July 1, 1998.
(6) Mr. Yam's employment terminated as of October 2, 1998.
(7) Mr. Stein's employment terminated as of September 8, 1998.
EMPLOYEE BENEFIT PLANS
401(k) Plan. We maintain a 401(k) tax-qualified employee savings and
retirement plan covering all employees who satisfy eligibility requirements
relating to minimum age and length of service. Pursuant to our 401(k) plan,
eligible employees may elect to contribute up to 20% of their cash compensation
to the 401(k) plan. The 401(k) plan is intended to qualify under applicable law,
so that contributions to the 401(k) plan and income earned on the 401(k) plan
contributions are not taxable until withdrawn. The 401(k) plan is available to
Accrue's executive officers on terms not more favorable than those offered to
other employees. We may elect to make contributions to the 401(k) plan at the
discretion of our board of directors. No contributions have been made by us as
of March 31, 1999. All employee contribution are 100% vested.
STOCK PLANS
1996 Stock Plan. Our 1996 Stock Plan was adopted by our board of directors
in April 1996 and approved by our stockholders in November 1996. The plan was
amended at various times after November 1996 to increase the number of shares
reserved for issuance thereunder. These amendments were approved by our
stockholders. A total of 6,630,000 shares of common stock has been reserved for
issuance under our stock plan. As of January 15, 2000, options to purchase a
total of 6,931,280 shares had been granted at a weighted average exercise price
of approximately $5.82 per share, options to purchase 947,564 shares had been
canceled and returned to the plan, options to purchase 4,073,942
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<PAGE> 60
shares of common stock had been exercised, options to purchase a total of
1,909,774 shares of common stock were outstanding and 646,284 shares remained
available for future grants under the plan.
In connection with this offering, our board amended the stock plan to
provide for, among other things, an automatic annual increase in the number of
shares of common stock reserved for issuance during each calendar year remaining
in the term of the stock plan equal to the lesser of:
- 800,000 shares;
- 4% of the shares outstanding on the last day of the immediately preceding
fiscal year; or
- a lesser number of shares as determined by our board of directors.
The purposes of our stock plan are to attract and retain the best available
personnel, to provide additional incentives to our employees and consultants and
to promote the success of our business. Our stock plan provides for the granting
to employees, including officers and employee directors, of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and for the granting to employees and consultants
including directors of nonstatutory stock options, stock purchase rights and
stock bonuses. To the extent an optionee would have the right in any calendar
year to exercise for the first time one or more incentive stock options for
shares having an aggregate fair market value (under all plans of Accrue and
determined for each share as of the date the option to purchase the shares was
granted) in excess of $100,000, any such excess options shall be treated as
nonstatutory stock options. If not terminated earlier, our stock plan will
terminate in April 2006.
Our stock plan may be administered by the board of directors or a committee
of the board. Our stock plan is currently administered by the compensation
committee of the board. The administrator determines the terms of options
granted under our stock plan, including the number of shares subject to the
option, exercise price, term and exercisability. In no event, however, may an
individual employee receive option grants for more than 2,000,000 shares under
the stock plan in any fiscal year. The exercise price of all incentive stock
options granted under our stock plan must be at least equal to the fair market
value of our common stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who owns stock representing more
than 10% of the total combined voting power of all classes of our outstanding
capital stock must equal at least 110% of the fair market value of the common
stock on the date of grant. The exercise price of all nonstatutory stock options
and stock purchase rights shall be the price determined by the administrator,
provided, however, that the exercise price of any nonstatutory stock option or
stock purchase right granted to a named officer will generally equal at least
100% of the fair market value of the common stock on the date of grant. Payment
of the exercise price may be made in cash or other consideration as determined
by the administrator.
The administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to an optionee
who owns stock representing more than 10% of the total combined voting power of
all classes of our outstanding capital stock). Options and stock purchase rights
are generally nontransferable. The administrator may grant nonstatutory stock
option and stock purchase rights with limited transferability rights in
circumstances specified in the stock plan. Each option and stock purchase right
may be exercised during the lifetime of the optionee only by the optionee or a
permitted transferee. The administrator determines the vesting terms of options
and stock issued pursuant to stock purchase rights and stock bonuses. Options
granted and shares issued under our stock plan generally become exercisable or
vest at the rate of 1/4th of the total number of shares twelve months after the
date of grant, and 1/48 of the total number of shares each month thereafter.
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<PAGE> 61
In the event of a change of control due to the sale of all or substantially
all of our assets or our merger with another corporation, then each option may
be assumed or an equivalent option substituted by the successor corporation. If
the successor corporation does not agree to an assumption or substitution, each
outstanding stock option will terminate on the effective date of the
transaction. Certain option agreements issued by the administrator provide for
limited acceleration of vesting in certain circumstances following a change of
control transaction.
The administrator has the authority to amend or terminate our stock plan as
long as such action does not adversely affect any outstanding option, stock
purchase right or stock bonus and provided that stockholder approval shall be
required to the extent required by applicable law.
Marketwave Corporation 1997 Stock Option Plan. The 1997 Stock Option Plan
was adopted by the Marketwave Corporation Board of Directors in August 1997 and
assumed by Accrue in connection with our acquisition of Marketwave. The security
to be purchased under this plan is the common stock of Accrue. A total of
218,081 shares of common stock have been reserved for issuance under the
Marketwave plan. As of January 15, 2000, options to purchase 218,081 shares of
Accrue common stock were outstanding. No future grants will be made under this
plan.
The purpose of the Marketwave plan is to attract and retain the best
available personnel for positions of substantial responsibility, to give
employees and consultants a greater personal stake in the success of the
business, to provide additional incentive to employees and consultants to
continue their professional advancement with the company, and to promote our
success. The Marketwave plan provides for the granting to former employees
(including officers and employee directors) of Marketwave and any Marketwave
subsidiaries of incentive stock options within the meaning of Section 422 of the
Code, and for the granting of nonstatutory stock options to employees (including
officers and employee directors) and consultants (including non-employee
directors) of Marketwave and any subsidiaries of Marketwave. To the extent that
an optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value (under all plans of Accrue and determined for each share as of the
date the option to purchase the shares was granted) in excess of $100,000, any
such excess options shall be treated as nonstatutory stock options. No future
awards will be made out of this plan, which terminates in 2007.
The Marketwave plan may be administered by our board of directors and/or a
committee of the board. Currently, this plan is being administered by the
compensation committee of our board. The administrator may determine the terms
of the options granted, including the exercise or purchase price, the number of
shares subject to each option and the vesting and/or exercisability provisions
applicable to the option. The administrator also has the full power to select
the individuals to whom options will be granted and to make any combination of
grants to any participants. The Marketwave plan does not provide for a maximum
number of shares of common stock which may be granted under options to any
person under this plan in any fiscal year. The exercise price of all incentive
stock options granted under this stock plan must be at least equal to the fair
market value of our common stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who owns stock representing more
than 10% of the total combined voting power of all classes of our outstanding
capital stock must equal at least 110% of the fair market value of the common
stock on the date of grant. The exercise price of all nonstatutory stock options
shall be at least 85% of the fair market value per share of our common stock on
the date of grant; provided, however, that the exercise price of any
nonstatutory stock option or stock purchase right granted to a named officer
must equal at least 110% of the fair market value of the common stock on the
date of grant. Payment of the exercise price may be made in cash or other
consideration as determined by the administrator.
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<PAGE> 62
The administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to an optionee
who owns stock representing more than 10% of the total combined voting power of
all classes of our outstanding capital stock). Options are nontransferable other
than by will or the laws of descent and distribution. Each option may be
exercised during the lifetime of the optionee only by the original optionee. The
administrator determines the vesting terms of options. Options granted and
shares issued under this stock plan generally become exercisable or vest at the
rate of 1/4 of the total number of shares twelve months after the date of grant,
and 1/48 of the total number of shares each month thereafter.
The administrator has the authority to amend or terminate this stock plan
as long as such action does not adversely affect any outstanding option and
provided that stockholder approval shall be required to the extent required by
applicable law.
NeoVista Software, Inc. 1991 Incentive Stock Option Plan and 1991
Non-Qualified Stock Option Plan. The 1991 Incentive Stock Option Plan and the
1991 Non-Qualified Stock Option Plan (together, the "1991 Plan") was adopted by
the NeoVista Software, Inc. Board of Directors in 1991 and assumed by Accrue in
connection with our acquisition of NeoVista in January 2000. The security to be
purchased under the 1991 Plan is the common stock of Accrue. A total of 546,749
shares of our common stock have been reserved for issuance under the 1991 Plan.
As of January 15, 2000, options to purchase 545,994 shares of Accrue common
stock were outstanding. No future grants will be made under the 1991 Plan.
The purpose of the 1991 Plan is to provide our employees and consultants a
greater personal stake in the success of our business, to provide additional
incentive to employees and consultants to continue their professional
advancement with us, and to promote our success. The 1991 Plan provides for the
granting to former employees (including officers and employee directors) of
NeoVista and any NeoVista subsidiaries of incentive stock options within the
meaning of Section 422 of the Code, and for the granting of nonstatutory stock
options to employees (including officers and employee directors) and consultants
(including non-employee directors) of NeoVista and any subsidiaries of NeoVista.
To the extent that an optionee would have the right in any calendar year to
exercise for the first time one or more incentive stock options for shares
having an aggregate fair market value (under all plans of Accrue and determined
for each share as of the date the option to purchase the shares was granted) in
excess of $100,000, any such excess options shall be treated as nonstatutory
stock options. No future awards will be made out of the 1991 Plan which will
terminate in 2000.
The 1991 Plan may be administered by our board of directors and/or a
committee of the board. Currently, the 1991 Plan is being administered by the
compensation committee of our board. The administrator may determine the terms
of the options granted, the number of shares subject to each option and the
vesting and/or exercisability provisions applicable to each option. The
administrator also has the full power to select the individuals to whom options
will be granted and to make any combination of grants to any participants. The
1991 Plan does not provide for a maximum number of shares of common stock which
may be granted under options to any person under this plan in any fiscal year.
The exercise price of all incentive stock options granted under the 1991 Plan
must be at least equal to the fair market value of our common stock on the date
of grant. The exercise price of any incentive stock option granted to an
optionee who owns stock representing more than 10% of the total combined voting
power of all classes of our outstanding capital stock must equal at least 110%
of the fair market value of our common stock on the date of grant. The exercise
price of all nonstatutory stock options and stock purchase rights shall be at
least 85% of the fair market value of our common stock on the date of the grant;
provided, however, that the exercise price of any nonstatutory stock option or
stock purchase right granted to a named officer will generally equal at least
100% of the fair market value of our common stock on the date of grant. Payment
of the exercise price may be made in cash or other consideration as determined
by the administrator.
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<PAGE> 63
The administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to an optionee
who owns stock representing more than 10% of the total combined voting power of
all classes of our outstanding capital stock). Options and stock purchase rights
are generally nontransferable. Each option and stock purchase right may be
exercised during the lifetime of the optionee only by the optionee. The
administrator determines the vesting terms of options and stock issued pursuant
to stock purchase rights. Options granted and shares issued under the 1991 Plan
generally become exercisable or vest at the rate of 1/4 of the total number of
shares twelve months after the date of grant, and 1/48 of the total number of
shares each month thereafter.
The administrator has the authority to amend or terminate the 1991 Plan as
long as such action does not adversely affect any outstanding option or stock
purchase right and provided that stockholder approval shall be required to the
extent required by applicable law.
1999 Directors' Stock Option Plan. Our 1999 Directors' Stock Option Plan
was adopted by our board in May 1999 and approved by the stockholders in May
1999. A total of 250,000 shares of common stock have been reserved for issuance
under the directors' plan, plus an automatic annual increase on the first day of
our fiscal years beginning in 2000 and ending in 2004 equal to the lesser of:
- 100,000 shares;
- 1/2 of one percent of the shares outstanding on the last day of the
immediately preceding fiscal year; or
- a lesser number of shares as determined by our board.
As of January 15, 2000, two options to purchase a total of 100,000 shares
of our common stock had been granted under the directors' plan. The directors'
plan provides for the grant of nonstatutory stock options to nonemployee
directors of Accrue. The directors' plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the board of directors. To the extent they arise, it is
expected that conflicts of interest will be addressed by abstention of any
interested director from both deliberations and voting regarding matters in
which such director has a personal interest.
The directors' plan provides that each person who becomes a nonemployee
director of Accrue on or after May 23, 1999 will be granted an initial
nonstatutory stock option to purchase 50,000 shares of common stock on the date
on which the optionee first becomes a nonemployee director of Accrue.
Thereafter, on the date of Accrue's annual stockholders meeting each year, each
nonemployee director will be granted an additional option to purchase 5,000
shares of common stock if, on such date, he or she has served on our board for
at least six months.
The directors' plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method of
making a grant. No option granted under the directors' plan is transferable by
the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by such optionee. The
directors' plan provides that initial options shall become exercisable in
installments as to 1/48 of the number of shares subject to the option each month
after the date of grant. If a director ceases to serve as a director for any
reason other than death or disability, he or she may, but only within 90 days
after the date he or she ceases to be a director of Accrue, exercise options
granted under the directors' plan to the extent that he or she was entitled to
exercise it at the date of such termination. To the extent that he or she was
not entitled to exercise any such option at the date of such termination, or if
he or she does not exercise such option (which
60
<PAGE> 64
he or she was entitled to exercise) within such 90 day period, such option shall
terminate. The exercise price of all stock options granted under the directors'
plan shall be equal to the fair market value of a share of Accrue's common stock
on the date of grant of the option. Options granted under the directors' plan
have a term of ten years.
In the event of a change of control due to the sale of all or substantially
all of the assets of Accrue, the merger of Accrue with or into another
corporation or any other reorganization of Accrue in which more than 50% of the
shares of Accrue entitled to vote are exchanged, then each option may be assumed
or an equivalent option substituted by the successor corporation. If the
successor corporation does not agree to an assumption or substitution, each
outstanding stock option will terminate on the effective date of the
transaction. If the service of a director is terminated without cause within 3
months following a change of control transaction, then the vesting of unvested
shares under each outstanding option will automatically be accelerated by an
additional 12 months. The board of directors may amend or terminate the
directors' plan; provided, however, that no such action may adversely affect any
outstanding option. If not terminated earlier, the directors' plan will have a
term of ten years.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
was adopted by the board of directors in May 1999 and approved by the
stockholders in May 1999. A total of 500,000 shares of common stock have been
reserved for issuance under our purchase plan, plus an automatic annual increase
on the first day of each of our fiscal years beginning in 2000 and ending in
2004 equal to the lesser of:
- 200,000 shares;
- 1% of the shares outstanding on the last day of the immediately preceding
fiscal year; or
- a lesser number of shares as determined by our board.
Our purchase plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a Series of overlapping offering periods of 24
months' duration, with new offering periods (other than the first offering
period) commencing on August 1 and February 1 of each year. Each offering period
will consist of four consecutive purchase periods of 6 months duration. The
initial offering period commenced on July 30, 1999 and will end on July 31,
2001, and the initial purchase period ended on January 31, 2000. The purchase
plan is administered by the board of directors or by a committee appointed by
the board. Employees (including officers and employee directors) of Accrue, or
of any majority-owned subsidiary designated by the board, are eligible to
participate in the purchase plan if they are employed by Accrue or any such
subsidiary for at least 20 hours per week and more than five months per year.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 20% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of Accrue's common
stock at the beginning of each offering period or at the end of each purchase
period. In circumstances described in the purchase plan, the purchase price may
be adjusted during an offering period to avoid our incurring adverse accounting
charges. The maximum number of shares an employee may purchase during each
purchase period is 2,000 shares, subject to certain IRS limitations specified in
the plan. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with Accrue. If not terminated earlier, the purchase plan will
have a term of 20 years.
The purchase plan provides that in the event of a merger of Accrue with or
into another corporation or a sale of all or substantially all of Accrue's
assets, each right to purchase stock under the purchase plan will be assumed or
an equivalent right substituted by the successor corporation. If the successor
corporation does not agree to assume or substitute stock purchase rights, our
board of
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<PAGE> 65
directors will shorten the offering periods then in effect so that employees'
rights to purchase stock under the purchase plan are exercised prior to the
merger or sale of assets. The board of directors has the power to amend or
terminate the purchase plan as long as such action does not adversely affect any
outstanding rights to purchase stock thereunder, provided however, that the
board of directors may amend or terminate the purchase plan or an offering
period even if it would adversely affect outstanding options in order to avoid
our incurring adverse accounting charges.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, Accrue has included
in its restated certificate of incorporation a provision to eliminate the
personal liability of its officers and directors for monetary damages for breach
or alleged breach of their fiduciary duties as officers or directors,
respectively, subject to certain exceptions. In addition, Accrue's bylaws
provide that Accrue is required to indemnify its officers and directors under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and Accrue is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. Accrue has entered into indemnification
agreements with its officers and directors containing provisions that are in
some respects broader than the specific indemnification provisions contained in
Delaware Law. The indemnification agreements require Accrue, among other things,
to indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as officers and directors (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. Accrue has also obtained directors' and officers'
liability insurance.
At present, Accrue is not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of Accrue in which
indemnification would be required or permitted. Accrue is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. Accrue believes that its charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
RELATED PARTY TRANSACTIONS WITH DIRECTORS,
OFFICERS AND 5% STOCKHOLDERS
PRIVATE PLACEMENTS OF SECURITIES
Some stock option grants to our directors and executive officers are
described under the caption "Management -- Executive Compensation."
Since our inception, we have issued, in private placement transactions,
shares of preferred stock as follows: an aggregate of 742,857 shares of Series A
preferred stock at $0.70 per share in May 1996, an aggregate of 1,845,172 shares
of Series B preferred stock at $2.17 per share in September 1996 and November
1996, an aggregate of 512,867 shares of Series C preferred stock at $2.80 per
share in November 1996 and November 1997, an aggregate of 928,621 shares of
Series D preferred stock at $2.17 per share in June and July 1998, and an
aggregate of 5,003,017 shares of Series E preferred stock at $1.00 per share in
August 1998. In addition, in May 1996, we issued 2,685,714 shares of our common
stock to Organic Online, Inc. in consideration of Organic's transfer to us of
intellectual property pursuant to a technology assignment agreement. We also
issued and sold to Sterling Payot Capital L.P. for $3,500, a warrant to purchase
350,000 shares of our common stock
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<PAGE> 66
with an exercise price per share equal to $0.70. The following table summarizes
the shares of preferred stock purchased by named executive officers, directors
and 5% stockholders of Accrue and persons and entities associated with them in
the private placement transactions:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with Sterling
Payot Capital, L.P. (Robert
Smelick)........................ 214,285 93,092 0 352,585 1,350,000
Entities Affiliated with Mohr
Davidow Ventures................ 0 922,586 490,367 460,829 1,000,000
Patterson Family Trust U/D/T
8/26/88 (James Patterson)....... 0 0 22,500 0 0
Vertex Technology Fund Ltd........ 0 0 0 0 1,750,000
</TABLE>
Since our inception, we have, from time to time, issued and sold shares of
our common stock and granted options to purchase common stock to our employees,
directors and consultants.
DEBT FINANCINGS
In February 1996 and April 1996 we issued two convertible promissory notes
to Sterling Payot Capital, L.P. in the aggregate principal amount of $150,000.
The notes were subsequently canceled and converted into a total of 214,285
shares of our Series A preferred stock in May 1996.
In April 1996 we issued a convertible promissory note to Sterling Payot
Company in the aggregate principal amount of $100,000. The note was subsequently
canceled and converted into a total of 47,009 shares of our Series B preferred
stock in September 1996.
In February 1998, we entered into a subordinated convertible note purchase
agreement with certain affiliates of Mohr Davidow Ventures pursuant to which the
Mohr Davidow entities loaned us a total of $1,000,000 in March, April and May
1998 pursuant to ten subordinated convertible promissory notes. The notes were
subsequently canceled and converted into a total of 460,829 shares of our Series
D preferred stock in June 1998.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Affiliate Relationships. The following members of our board of directors
are affiliated with certain private investors that participated in the
transactions listed above: Robert Smelick (Sterling Payot Capital, L.P. and
Sterling Payot Company). Additionally, in August 1997 Marketwave Corporation
issued and sold to Steven Podradchik 1,410,000 shares of its common stock at a
per share price of $0.01. In October 1998, Marketwave effected a five-for-one
stock split pursuant to which the foregoing shares were converted into 7,050,000
shares of Marketwave common stock, which shares were exchanged for 1,309,890
shares of Accrue common stock in connection with our acquisition of Marketwave
in September 1999. Also, in connection with our acquisition of NeoVista
Software, Inc. in January 2000, we assumed two options previously granted to
David Folkman by NeoVista that are exercisable for a total of 3,309 shares of
our common stock at an exercise price of $4.14 per share. We have also granted
Mr. Folkman an option to purchase 50,000 shares of our common stock at an
exercise price of $50.8125 per share pursuant to our 1999 Directors Stock Option
Plan.
Acceleration of Vesting. Other than as specifically set forth below,
options granted to officers under our 1996 Stock Plan and options granted to
directors under our 1999 Directors Stock Option
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<PAGE> 67
Plan are subject to acceleration of vesting upon a change of control in
connection with our merger or sale with respect to 25% of the shares subject to
the option grant if the option holder is terminated without cause within three
months after the change of control.
Under the terms of Richard Kreysar's offer letter, if Accrue undergoes a
change of control in connection with a sale or merger, vesting for Mr. Kreysar's
option will be accelerated by one year, and if Mr. Kreysar's employment with
Accrue is terminated without cause in connection with or within twelve months
after a change of control in connection with a sale or merger, vesting for Mr.
Kreysar's option will be accelerated by an additional year. Should Mr. Kreysar's
employment with Accrue be terminated involuntarily for any reason other than for
cause, his salary, benefits and vesting will continue for six months following
the date of his termination.
Bob Page received option grants in September 1996, June 1997 and September
1998 and Vito Salvaggio received an option grant in September 1997 which are
subject to acceleration of vesting of 25% of the shares subjection to the option
grant upon a change of control in connection with a merger or sale of Accrue.
In July 1998 we issued to James Patterson, a former director of Accrue and
our interim president and chief executive officer during May and June 1998,
22,000 fully vested shares of our common stock in exchange for his services
rendered as our interim president and chief executive officer during May and
June 1998.
Settlement Agreement with Simon Roy. In April 1998 we entered into an
amended settlement agreement with Simon Roy, upon his resignation as our
president and chief executive officer. Mr. Roy received a lump sum severance
payment in the amount of $87,500 and seven months accelerated vesting for his
option to purchase shares of common stock.
LOANS TO OFFICERS
Loan to Richard D. Kreysar. In October 1998 Accrue loaned Richard Kreysar
$192,681.91 in exchange for a promissory note dated October 1, 1998, which
becomes due and payable with interest at the rate of 5.06% on the earlier of
October 1, 2002 or upon termination of Mr. Kreysar's employment or consulting
relationship with Accrue. $199,181.71 is outstanding under the note as of June
1, 1999. The loan is full-recourse and secured by all shares of Accrue common
stock held by Mr. Kreysar.
Loan to Simon Roy. In July 1998 Accrue loaned Simon Roy $20,488.43 in
exchange for a promissory note dated July 1, 1998 which becomes due and payable
with interest at the rate of 6.00% on the earlier of July 1, 2002 or twelve
months following the initial public offering of our common stock. $21,615.29 is
outstanding under the note as of June 1, 1999. The loan is full-recourse and
secured by all shares of Accrue common stock held by Mr. Roy.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our officers and
directors that contain provisions which may require Accrue, among other things,
to indemnify our officers and directors against certain liabilities that may
arise by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Limitation of Liability and
Indemnification Matters."
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<PAGE> 68
ISSUANCE OF COMMON STOCK AND OPTIONS TO THE SELLING STOCKHOLDERS
In connection with our acquisition of Marketwave Corporation in September
1999, we acquired all outstanding shares of the capital stock of Marketwave in
exchange for 2,880,475 shares of our common stock, which shares are being
registered for re-sale pursuant to this prospectus on behalf of the selling
stockholders. We also assumed all outstanding Marketwave options which, at the
effective time of the merger, became exercisable for shares of our common stock
based on the exchange ratio used in the merger. We agreed to register any shares
of our common stock that were issued upon exercise of these options pursuant to
this prospectus if we had not already registered these shares on a separate
registration statement on Form S-8. A total of 344,786 shares of our common
stock issued upon the exercise of the assumed Marketwave options are therefore
also being registered pursuant to this prospectus, which covers a total of
3,225,261 shares offered by the selling stockholders.
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares being registered hereunder in
whole or in part, from time to time on the over-the-counter market at prices and
on terms prevailing at the time of any such sale. Any sale may be made in
broker's transactions through broker-dealers acting as agents, in transactions
directly with market makers or in privately negotiated transactions where no
broker or other third party (other than the purchaser) is involved. Each selling
stockholder will pay selling commissions or brokerage fees, if any, with respect
to the sale of that person's shares in amounts customary for the type of
transaction effected. Each selling stockholder will also pay all applicable
transfer taxes and all fees and disbursements of counsel for that selling
stockholder that may be incurred in connection with the sale of shares.
Each selling stockholder has advised us that before or during the time that
the selling stockholder is engaged in an attempt to sell shares registered
hereunder, he or she will cause to be furnished to each person to whom the
shares are being offered, and to each broker-dealer, if any, through whom the
shares are being offered, the appropriate number of copies of this prospectus,
as supplemented or amended, as may be required by such person.
The selling stockholders, and any other persons who participate in the sale
of the shares registered hereunder, may be deemed to be "underwriters" as
defined in the Securities Act. Any commissions paid or any discounts or
concessions allowed to any of the foregoing persons, and any profits received on
resale of the shares, may be deemed to be underwriting discounts and commissions
under the Securities Act.
We have agreed to maintain the effectiveness of this registration statement
for one hundred twenty (120) days or such longer time as we may decide, in our
sole discretion. No sales may be made pursuant to this prospectus after that
time unless we amend or supplement this prospectus to indicate that we have
agreed to extend the period of its effectiveness.
We have agreed to indemnify the selling stockholders against certain
liabilities, including liabilities under the Securities Act.
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<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the shares of our common stock on a fully-diluted basis as of
January 15, 2000, and as adjusted to reflect the sale of 3,225,261 shares of our
common stock being offered by the selling stockholders pursuant to this
prospectus with respect to:
- each person who is known by us to own beneficially more than 5% of
Accrue's common stock on a fully-diluted basis;
- each of our directors;
- our chief executive officer and each of our other executive officers
named in the summary compensation table;
- the selling stockholders; and
- all of our directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Accrue Software, Inc., 48634 Milmont Dr., Fremont, California 94538-7353.
The table includes all shares of common stock beneficially owned by the
indicated stockholder as of January 15, 2000. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the percentage
of ownership of that person, shares of common stock subject to options held by
that person that are currently exercisable or exercisable within 60 days of
January 15, 2000 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage of ownership of any
other person. To our knowledge, except as otherwise noted, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community property
laws where applicable.
The percent of beneficial ownership for each stockholder is based on
26,824,782 shares of common stock outstanding as of January 15, 2000 on an as
converted basis. An "*" indicates ownership of less than 1%.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OWNED
PRIOR TO OFFERING OF AFTER OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
5% Stockholders:
Entities Affiliated with Mohr
Davidow Ventures.................. 3,673,737 13.7% 0 3,673,737 13.7%
2775 Sand Hill Road
Menlo Park, CA 94025
Organic Holdings, Inc. ........... 2,502,490 9.3% 0 2,502,490 9.3%
510 Third Street, Suite 540
San Francisco, CA 94107
Entities Affiliated with Sterling
Payot Capital, L.P. .............. 2,583,284 9.6% 0 2,583,284 9.6%
222 Sutter Street
San Francisco, CA 94108
</TABLE>
66
<PAGE> 70
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OWNED
PRIOR TO OFFERING OF AFTER OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Vertex Technology Fund Ltd........ 1,750,000 6.5% 0 1,750,000 6.5%
3 Lagoon Drive, Suite 220
Redwood City, CA 94065
Selling Stockholders:
Steven T. Podradchik.............. 1,309,890 4.9% 1,309,890 0 *
Entities Affiliated with The
Phoenix Partners.................. 601,117 2.2% 601,117 0 *
1000 Second Avenue, Suite 3600
Seattle, WA 98104
Crescent Capital V, L.L.C. ....... 327,881 1.2% 327,881 0 *
11624 S.E. 5th Street, #200
Bellevue, WA 98005
Beagle Limited.................... 273,235 1.0% 273,235 0 *
c/o Hecht and Company
111 West 40th Street, 20th Floor
New York, NY 10018
1999 R.J. CP Family Limited
Partnership....................... 209,025 * 209,025 0 *
6523 132nd Ave. N.E.
PMB 150
Kirkland, WA 98033
Robert Barry Allen................ 182,505 * 182,505 0 *
12615 198th Drive NE
Woodinville, WA 98072
Michael J. Raskin................. 109,293 * 109,293 0 *
620 Kirkland Way, Suite 101
Kirkland, WA 98033
Richard Bryan..................... 73,002 * 73,002 0 *
4368 257th Place SE
Issaquah, WA 98029-7608
Michael D. McClure................ 67,723 * 67,723 0 *
9520 221st Place SE
Woodinville, WA 98072
John J. Fitzpatrick............... 34,837 * 34,837 0 *
16709 168th Place NE
Woodinville, WA 98072
VLG Investments 1998.............. 7,178 * 7,178 0 *
2800 Sand Hill Road
Menlo Park, CA 94025
Harvey Storms..................... 5,574 * 5,574 0 *
P.O. Box 3382
Bellevue, WA 98009
Keith D. Grinstein................ 4,645 * 4,645 0 *
427 Lake Washington Boulevard
Seattle, WA 98122
</TABLE>
67
<PAGE> 71
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OWNED
PRIOR TO OFFERING OF AFTER OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Steve Sanders..................... 4,645 * 4,645 0 *
501 W. Sycamore
Louisville, CO 80027
Wendy Williams.................... 3,251 * 3,251 0 *
4215 NE 125th Street
Seattle, WA 98125
Paul A. Easter.................... 2,787 * 2,787 0 *
3421 232nd Street S.W.
Brier, WA 98036
Holly Newman...................... 2,787 * 2,787 0 *
15917 Waynita Way NE
Bothell, WA 98011
CNA Trust Company................. 1,267 * 1,267 0 *
Saving Plan FBO Craig E. Sherman
3080 South Bristol Street
Costa Mesa, CA 92626
Thomas Bray....................... 929 * 929 0 *
1325 Sunset Avenue SW
Seattle, WA 98116
Jerome A. Johnson................. 929 * 929 0 *
7748 21st Avenue NE
Seattle, WA 98115
Brian Mulholland.................. 929 * 929 0 *
3850 Klahanie Drive SE, Apt.
#27301
Issaquah, WA 98029
Lisa Way.......................... 464 * 464 0 *
31835 49th Terrace SW
Federal Way, WA 98023
Jeffrey Carter.................... 371 * 371 0 *
12527 NE 130th Court
Kirkland, WA 98034
Norman A. Chin.................... 371 * 371 0 *
6100 28th Avenue South
Seattle, WA 98108
Kim L. Cruchon.................... 278 * 278 0 *
12032 38th Avenue NE
Seattle, WA 98125
Elena Kopteva..................... 2,786 * 232 2,554 *
7557 20th Avenue NE
Seattle, WA 98115
Mark Rhonemus..................... 116 * 116 0 *
1128 17th Avenue
Seattle, WA 98122-4645
</TABLE>
68
<PAGE> 72
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OWNED
PRIOR TO OFFERING OF AFTER OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Officers and Directors:
Richard D. Kreysar................ 1,605,683 6.0% 0 1,605,683 6.0%
David Folkman..................... 5,688 * 0 5,688 *
Robert Smelick.................... 2,583,284 9.6% 0 2,583,284 9.6%
A. Brooke Seawell................. 17,374 * 17,374 *
Bob Page.......................... 700,370 2.6% 0 700,370 2.6%
Brett Kilpatrick.................. 255,510 * 0 255,510 *
Simon Roy......................... 287,020 1.1% 0 287,020 1.1%
James Patterson................... 96,570 * 0 96,570 *
Martin Yam........................ 31,667 * 0 31,667 *
William Stein..................... 48,000 * 0 48,000 *
All executive officers and
directors as a group (12
persons)........................ 6,682,188 24.8% 1,309,890 5,372,298 20.0%
</TABLE>
-------------------------
* Less than one percent of the outstanding shares of Common Stock.
The beneficial ownership for entities affiliated with Mohr Davidow Ventures
is comprised of 3,219,357 shares held by Mohr Davidow Ventures IV, L.P., 158,475
shares held by its general partners, and 162,681 shares held by MDV IV
Entrepreneurs Network Fund, L.P. It also includes warrants to purchase 133,224
shares of common stock issued to Mohr Davidow Ventures IV, L.P. and MDV IV
Entrepreneur's Network Fund, L.P. by Organic Holdings, Inc. that were exercised
on July 2, 1999.
Organic Holdings, Inc., the holder of 2,502,490 shares, was previously
known as Organic Online, Inc.
The beneficial ownership for entities affiliated with Sterling Payot
Capital, L.P. is comprised of 2,206,278 shares held by Sterling Payot Capital
L.P. and 377,009 shares held by Sterling Payot Company. Mr. Smelick is chairman
of the board of directors of Accrue and managing director of Sterling Payot
Management, Inc., the general partner of Sterling Payot Capital L.P., and he is
also a principal of Sterling Payot Company. Mr. Smelick disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
these shares.
Steven T. Podradchik is also a director of Accrue.
The beneficial ownership for entities affiliated with The Phoenix Partners
is comprised of 115,888 shares held by The Phoenix Partners III Liquidating
Trust, 161,445 shares held by The Phoenix Partners IIIB Limited Partnership,
23,225 shares held by The Phoenix Partners III Limited Partnership, and 300,559
shares held by The Phoenix Partners IV Limited Partnership.
The beneficial ownership for VLG Investments 1998 is comprised of 718
shares held by VLG Investments 1998 and 6,460 shares held by the general
partners of VLG Investments 1998.
The beneficial ownership for David Folkman is comprised of options to
purchase 5,688 shares that are currently exercisable or exercisable within 60
days of January 15, 2000.
The beneficial ownership for Robert Smelick is comprised of 2,206,275
shares held by Sterling Payot Capital and L.P., 377,009 shares held by Sterling
Payot Company. Mr. Smelick is a Chairman of the Board of Directors of Accrue and
managing director of Sterling Payot Management, Inc., the
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<PAGE> 73
general partner of Sterling Payot Capital L.P., and he is also a principal of
Sterling Payot Company. Mr. Smelick disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
The beneficial ownership for A. Brooke Seawell is comprised of 8,000 shares
and options to purchase 2,083 shares that are currently exercisable or
exercisable within 60 days of January 15, 2000.
The beneficial ownership for Bob Page includes 370 shares to be purchased
by Mr. Page under our 1999 Employee Stock Purchase Plan within 60 days of
January 15, 2000.
The beneficial ownership for Brett Kilpatrick includes 510 shares to be
purchased by Mr. Kilpatrick under our 1999 Employee Stock Purchase Plan within
60 days of January 15, 2000.
The beneficial ownership for James Patterson includes 29,570 shares held by
the Patterson Family Trust U/D/T 8/26/88 of which Mr. Patterson is a trustee.
Mr. Patterson disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in these shares.
The beneficial ownership for our executive officers and directors as a
group includes 85,423 shares under outstanding stock options or warrants that
are currently exercisable or exercisable within 60 days of January 15, 2000 and
2,790 shares that are to be purchaed by such individuals under our 1999 Employee
Stock Purchase Plan within 60 days of January 15, 2000.
DESCRIPTION OF CAPITAL STOCK
As of the date of this prospectus, our authorized capital stock consisted
of 75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
COMMON STOCK
As of January 15, 2000, there were 26,824,782 shares of common stock
outstanding held of record by 531 stockholders, and options to purchase an
aggregate of 2,773,849 shares of common stock were also outstanding. There will
be 26,824,782 shares of common stock outstanding (assuming no exercise of
outstanding options under our stock plans after January 15, 2000 or exercise of
warrants outstanding) after the closing of this offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The common stock
has no preemptive or conversion rights or other subscription rights. There are
no sinking fund provisions applicable to the common stock. The outstanding
shares of common stock are, and the shares of common stock to be issued upon
completion of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of undesignated preferred
stock. The Board of Directors is authorized to issue preferred stock in one or
more Series and to fix the rights, preferences, privileges and restrictions of
any Series of preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any Series or the
designation of such series, without further vote or action by the stockholders.
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<PAGE> 74
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of Accrue without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
voting rights of the holders of common stock. In certain circumstances, an
issuance of preferred stock could have the effect of decreasing the market price
of the common stock. As of the closing of the offering, no shares of preferred
stock will be outstanding and we currently have no plans to issue any shares of
preferred stock.
WARRANTS
At February 15, 2000, there was a warrant outstanding to purchase 14,000
shares of our common stock at an exercise price equal to $10.00 issued to a
financial institution in connection with a working capital line of credit. Also,
in January 2000, we assumed a warrant issued by NeoVista Software, Inc. which is
exercisable for 3,421 shares of our common stock at an exercise price of
$17.53873 per share, based on the exchange ratio used in connection with our
acquisition of NeoVista. These warrants contain provisions for the adjustment of
the exercise price and the aggregate number of shares issuable upon the exercise
of the warrants under certain circumstances, including stock dividends, stock
splits, reorganizations, reclassifications, consolidations, and the first
warrant contains similar provisions for certain dilutive issuances of securities
at prices below the then existing warrant exercise price.
REGISTRATION RIGHTS
The holders of approximately 13,279,902 shares of common stock, including
shares issuable upon exercise of outstanding warrants, or their transferees are
entitled to certain rights with respect to the registration of their shares
under the Securities Act. These rights are provided under the terms of an
agreement between us and the holders of these registrable securities. On the
written demand of holders of more than 25% of the then-outstanding registrable
securities, we are required to use our best efforts to register the shares and
those of any other stockholders who, by prompt notice, request registration,
provided, however, that participation may be cut back by the managing
underwriter. We are not required to effect more than two demand registrations on
Form S-1 at any time and more than two demand registrations on Form S-3 in any
twelve-month period. Stockholders are also entitled to unlimited piggyback
registration rights, provided, however, that participation may be cut back by
the managing underwriter. All offering expenses in connection with such
registration will be borne by us, excluding underwriting discounts and
commissions.
The holders of approximately 3,225,261 shares of common stock, including
shares issuable upon exercise of outstanding options, or their transferees are
entitled to certain rights with respect to the registration of their shares
under the Securities Act. These rights are provided under the terms of an
agreement between us and the former holders of shares of and options and/or
warrants exercisable for shares of capital stock of Marketwave Corporation,
which agreement was executed in connection with our acquisition of Marketwave in
September 1999. On the written demand of holders of these registrable securities
whose anticipated aggregate offering price, net of underwriting discounts and
commissions, would equal at least $10 million, we are required to register those
shares as well as the shares of any other stockholders who are parties to the
registration rights agreement and who, by prompt notice, request registration.
We are not required to effect more than two demand registrations on Form S-1 at
any time and more than one demand registration on Form S-3 in any twelve-month
period, or more than five demand registrations on Form S-3 total. Stockholders
are also entitled to unlimited piggyback registration rights, provided, however,
that participation may be cut back by the managing underwriter. All offering
expenses in connection with such registrations will be borne by us, excluding
underwriting discounts and commissions.
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<PAGE> 75
DELAWARE LAW AND THE EFFECT OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, and anti-takeover law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a business combination with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. For purposes of Section 203, an
"interested stockholder" is defined to include any person that is:
- the owner of 15% or more of the outstanding voting stock of the
corporation;
- an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation at any time
within three years immediately prior to the relevant date; or
- an affiliate or associate of the persons described in the foregoing
bullet points.
Stockholders may, by adopting an amendment to the corporation's certificate
of incorporation or bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither our certificate of
incorporation nor our bylaws exempt us from the restrictions imposed under
Section 203 of the Delaware General Corporation Law. It is anticipated that the
provisions of Section 203 of the Delaware General Corporation Law may encourage
companies interested in acquiring Accrue to negotiate in advance with our board
of directors because the stockholder approval requirement would be avoided if a
majority of the directors then in office approve either the business combination
or the transaction that results in the stockholder becoming an interested
stockholder.
Our amended and restated certificate of incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The bylaws provide that
special meetings of stockholders can be called only by the board of directors,
the chairman of the board, if any, the president and holders of not less than
10% of the votes entitled to be cast at a meeting. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the board of directors, the chairman
of the board, if any, the president or any such 10% holder. The bylaws set forth
an advance notice procedure with regard to the nomination, other than by or at
the direction of the board of directors, of candidates for election as directors
and with regard to business to be brought before a meeting of stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation. The transfer agent's address and telephone number is 1745
Gardena Avenue, 2nd Floor, Glendale, California 91204, (818) 502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, due to contractual
and legal restrictions on resale, only a limited number of shares will be
available for sale shortly after the offering. After these restrictions lapse,
sales of substantial
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<PAGE> 76
amounts of our common stock in the public market could adversely affect the
prevailing market price and our ability to raise equity capital.
Upon completion of the offering, based on the number of shares outstanding
as of January 15, 2000 we will have 26,824,782 outstanding shares of common
stock. Of these shares, as of January 15, 2000, 4,485,000 were freely tradeable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 of the Securities Act.
The remaining 22,339,782 shares of common stock outstanding were
"restricted securities" within the meaning of Rule 144. Restricted shares may be
sold in the public market only if registered with the Securities and Exchange
Commission or if they qualify for an exemption from registration under Rule 144,
Rule 144(k), or Rule 701 of the Securities Act, all of which are summarized
below. Sales of the restricted shares in the public market, or the availability
of shares for sale, could adversely affect the market price of our common stock.
The following shares will be eligible for sale in the public market at the
following times:
- beginning on the effective date, 3,225,261 shares are immediately
available for sale in the public market; and
- an additional 19,114,521 shares will be eligible for sale pursuant to
Rule 144 at various times in the period following the effective date.
Under Rule 144, the number of shares that may be sold by affiliates of our
stockholders are subject to volume restrictions. In general, under Rule 144, a
person who has beneficially owned restricted shares, including shares that are
aggregated to such person or persons, for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 268,248 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale. In order to sell shares under Rule
144, the selling stockholder must comply with manner of sale provisions
and notice requirements and current public information about us must be
available.
Under Rule l44(k), the following persons may be expected to sell their
shares without complying with the manner of sale, public information, number of
shares limitation or notice provisions of Rule 144:
- not our affiliate during the three months preceding a sale; and
- beneficially owned the shares proposed to be sold for at least two years.
Any of our employees, officers, directors, or consultants who purchased his
or her shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell their shares in reliance on Rule 144 without having to
comply with the holding period, public information, number of shares limitation
or notice provisions of Rule 144. In addition, we intend to file one or more
registration statements under the Securities Act as promptly as possible after
the effective date to register shares to be issued under our employee benefit
plans. As a result, any options exercised under our stock option plans or any
other benefit plan after the effectiveness of a registration statement will also
be freely tradable in the public market, unless the shares are held by
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<PAGE> 77
affiliates of ours. Shares held by our affiliates will still be subject to the
number of shares limitation, manner of sale, notice and public information
requirements of Rule 144 unless the shares may otherwise be sold under Rule 701.
As of January 15, 2000, there were outstanding options for the purchase of
2,773,849 shares (including two options for an aggregate of 100,000 shares under
our directors' plan). As of January 15, 2000, no shares had been issued under
our purchase plan. As of January 15, 2000, there were two outstanding warrants
for the purchase of 14,000 and 3,421 shares, respectively, of our common stock.
See "Risk Factors -- Our anticipated offering price will be substantially higher
than the per share value based on our assets after subtracting our liabilities.
"Management -- Stock Plans" and "Description of Capital Stock -- Registration
Rights."
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Accrue by Venture Law Group, A Professional Corporation, Menlo Park, California.
John V. Bautista, a director of Venture Law Group, is the secretary of Accrue.
As of the date of this prospectus, certain directors of Venture Law Group and an
investment partnership affiliated with Venture Law Group own approximately
31,302 shares of our common stock and hold options to purchase 20,000 shares of
our common stock at an exercise price of $8.00 per share.
EXPERTS
The consolidated financial statements of Accrue Software, Inc. as of March
31, 1998 and 1999 and for each of the three years in the period ended March 31,
1999 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of NeoVista Software, Inc. as of December 31, 1997
and 1998 and for the years then ended included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Marketwave Corporation as of March 31, 1998 and
1999 and for each of the three years in the period ended March 31, 1999 included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION AVAILABLE TO YOU
Accrue has filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedule therewith. For
further information with respect to Accrue and the common stock offered hereby,
reference is made to the registration statement and to the exhibits and
schedules therewith. Statements made in this prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect to
each such document filed as an Exhibit to the registration statement, reference
is made to the Exhibit for a more complete description of the matter involved.
The registration statement and the attached exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center,
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13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
of the registration statement may be obtained from the SEC's offices upon
payment of certain fees prescribed by the SEC. The SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is http:// www.sec.gov.
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<PAGE> 79
ACCRUE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accrue Software, Inc.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Accrue Software, Inc.
Unaudited Pro Forma Combined Condensed Financial
Statements............................................. F-23
Unaudited Pro Forma Combined Condensed Balance Sheet...... F-24
Unaudited Pro Forma Combined Condensed Statements of
Operations............................................. F-25
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements............................................. F-27
NeoVista Software, Inc.
Report of Independent Accountants......................... F-31
Balance Sheets............................................ F-32
Statements of Operations.................................. F-33
Statements of Preferred Stock and Shareholders' Equity
(Deficit).............................................. F-34
Statements of Cash Flows.................................. F-35
Notes to Financial Statements............................. F-36
Marketwave Corporation
Report of Independent Accountants......................... F-51
Balance Sheets............................................ F-52
Statements of Operations.................................. F-53
Statements of Stockholders' Equity (Deficit).............. F-54
Statements of Cash Flows.................................. F-55
Notes to Financial Statements............................. F-56
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Accrue Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Accrue Software, Inc. and its subsidiary as of March 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of Accrue's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
San Jose, California
May 25, 1999, except Note 3,
as to the pooling of interests with Marketwave Corporation
which is September 30, 1999.
F-2
<PAGE> 81
ACCRUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1998 1999 1999
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 570 $ 2,862 $ 37,931
Accounts receivable, net........................... 848 2,005 4,350
Prepaid expenses and other current assets.......... 57 188 542
------- -------- --------
Total current assets............................ 1,475 5,055 42,823
Property and equipment, net.......................... 587 894 1,835
Other assets, net.................................... 50 160 860
------- -------- --------
Total assets.................................... $ 2,112 $ 6,109 $ 45,518
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 140 $ 472 $ 1,081
Accrued liabilities................................ 305 791 2,305
Accrued liabilities, merger........................ -- -- 597
Deferred revenue................................... 205 1,127 2,659
Convertible subordinated notes payable............. 500 -- --
Current portion long term debt..................... 93 136 --
------- -------- --------
Total current liabilities....................... 1,243 2,526 6,642
Long term debt, net of current portion............... 312 169 --
------- -------- --------
Total liabilities............................... 1,555 2,695 6,642
------- -------- --------
Commitments (Note 5)
Convertible preferred stock, $0.001 par value:
Authorized: 10,944, 10,944 and 5,000 shares in
1998, 1999 and December 31, 1999
Issued and outstanding: 3,394, 10,317 and no shares
in 1998, 1999 and December 31, 1999............. 6,643 15,517 --
Common stock, $0.001 par value:
Authorized: 20,000, 20,000 and 75,000 shares in
1998, 1999 and December 31, 1999
Issued and outstanding: 4,543, 6,883 and 25,097
shares in 1998, 1999 and December 31, 1999...... 5 7 25
Additional paid-in capital........................... 79 6,803 67,470
Notes receivable from stockholders................... -- (213) (213)
Unearned compensation................................ -- (4,929) (5,154)
Accumulated deficit.................................. (6,170) (13,771) (23,252)
------- -------- --------
Total stockholders' equity...................... 557 3,414 38,876
------- -------- --------
Total liabilities and stockholders' equity...... $ 2,112 $ 6,109 $ 45,518
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 82
ACCRUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Software license.......................... $ 394 $ 1,857 $ 3,640 $ 2,009 $ 9,049
Maintenance and service................... 36 200 1,044 649 2,304
------- ------- ------- ------- --------
Total revenue.......................... 430 2,057 4,684 2,658 11,353
Cost of revenue............................. 30 228 469 328 1,493
------- ------- ------- ------- --------
Gross profit................................ 400 1,829 4,215 2,330 9,860
Operating expenses:
Research and development.................. 947 2,403 3,166 2,291 2,815
Sales and marketing....................... 818 2,744 5,448 3,629 8,595
General and administrative................ 711 962 1,927 1,257 1,690
Merger costs.............................. -- -- -- -- 3,560
Stock-based compensation expense.......... -- -- 1,325 620 3,427
------- ------- ------- ------- --------
Total operating expenses............... 2,476 6,109 11,866 7,797 20,087
------- ------- ------- ------- --------
Loss from operations........................ (2,076) (4,280) (7,651) (5,467) (10,227)
Other income................................ 107 97 96 67 788
Interest expense............................ -- (18) (46) (37) (42)
------- ------- ------- ------- --------
Net loss.................................... $(1,969) $(4,201) $(7,601) $(5,437) $ (9,481)
======= ======= ======= ======= ========
Net loss per share, basic and diluted....... $ (0.73) $ (0.99) $ (1.63) $ (1.17) $ (0.67)
======= ======= ======= ======= ========
Shares used in computing net loss per share,
basic and diluted......................... 2,690 4,264 4,670 4,640 14,183
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 83
ACCRUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------- --------------- PAID-IN FROM UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
------ -------- ------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock in exchange
for in process technology........... -- $ -- 2,686 $ 3 $ 24 $ -- $ --
Issuance of common shares for cash.... -- -- 1,394 1 21 -- --
Issuance of warrants to purchase 350
shares of common stock.............. -- -- -- -- 4 -- --
Issuance of Series A preferred stock
and conversion of notes payable,
net................................. 743 501 -- -- -- -- --
Issuance of Series B preferred stock
and conversion of note payable,
net................................. 1,845 3,979 -- -- -- -- --
Issuance of Series C preferred stock,
net................................. 490 1,350 -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
------ -------- ------ --- ------- ----- -------
Balances, March 31, 1997.............. 3,078 5,830 4,080 4 49 -- --
Issuance of Series C preferred stock,
net................................. 23 63 -- -- -- -- --
Issuance of Series C.1 preferred
stock, net.......................... 293 750 -- -- -- -- --
Exercise of stock options............. -- -- 463 1 30 -- --
Net loss.............................. -- -- -- -- -- -- --
------ -------- ------ --- ------- ----- -------
Balances, March 31, 1998.............. 3,394 6,643 4,543 5 79 -- --
Issuance of restricted common stock in
exchange for services............... -- -- 53 -- 167 -- --
Issuance of common shares for cash.... -- -- 7 -- 3 -- --
Issuance of common stock in exchange
for notes receivable................ -- -- 1,755 2 211 (213) --
Issuance of Series C.1 preferred
stock, net.......................... 144 370 -- -- -- -- --
Issuance of Series C.2 preferred
stock, net.......................... 883 1,521 -- -- -- -- --
Issuance of Series D preferred stock
and conversion of notes payable,
net................................. 929 2,003 -- -- -- -- --
Issuance of Series E preferred stock,
net................................. 5,003 4,980 -- -- -- -- --
Unearned compensation related to
grants of stock options............. -- -- -- -- 6,254 -- (6,254)
Amortization of unearned stock
compensation........................ -- -- -- -- -- -- 1,325
Exercise of stock options............. -- -- 610 -- 99 -- --
Repurchase of common stock............ -- -- (85) -- (10) -- --
Net loss.............................. -- -- -- -- -- -- --
------ -------- ------ --- ------- ----- -------
Balances, March 31, 1999.............. 10,353 15,517 6,883 7 6,803 (213) (4,929)
Exercise of stock options............. -- -- 1,779 2 454 -- --
Issuance of common stock in connection
with the Company's IPO, net......... -- -- 4,485 5 40,810 -- --
Unearned compensation related to
grants of stock options............. -- -- -- -- 3,652 -- (3,652)
Conversion of preferred stock into
common stock in connection with the
Company's IPO....................... (9,033) (12,876) 10,280 10 12,866 -- --
Conversion of preferred stock into
common stock in connection with the
Marketwave acquisition.............. (1,320) (2,641) 1,320 1 2,640 -- --
Exercise of warrants for shares of
common stock........................ -- -- 350 -- 245 -- --
Amortization of unearned stock
compensation........................ -- -- -- -- -- -- 3,427
Net loss.............................. -- -- -- -- -- -- --
------ -------- ------ --- ------- ----- -------
Balances, December 31, 1999
(unaudited)......................... -- $ -- 25,097 $25 $67,470 $(213) $(5,154)
====== ======== ====== === ======= ===== =======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -------
<S> <C> <C>
Issuance of common stock in exchange
for in process technology........... $ -- $ 27
Issuance of common shares for cash.... -- 22
Issuance of warrants to purchase 350
shares of common stock.............. -- 4
Issuance of Series A preferred stock
and conversion of notes payable,
net................................. -- 501
Issuance of Series B preferred stock
and conversion of note payable,
net................................. -- 3,979
Issuance of Series C preferred stock,
net................................. -- 1,350
Net loss.............................. (1,969) (1,969)
-------- -------
Balances, March 31, 1997.............. (1,969) 3,914
Issuance of Series C preferred stock,
net................................. -- 63
Issuance of Series C.1 preferred
stock, net.......................... -- 750
Exercise of stock options............. -- 31
Net loss.............................. (4,201) (4,201)
-------- -------
Balances, March 31, 1998.............. (6,170) 557
Issuance of restricted common stock in
exchange for services............... -- 167
Issuance of common shares for cash.... -- 3
Issuance of common stock in exchange
for notes receivable................ -- --
Issuance of Series C.1 preferred
stock, net.......................... -- 370
Issuance of Series C.2 preferred
stock, net.......................... -- 1,521
Issuance of Series D preferred stock
and conversion of notes payable,
net................................. -- 2,003
Issuance of Series E preferred stock,
net................................. -- 4,980
Unearned compensation related to
grants of stock options............. -- --
Amortization of unearned stock
compensation........................ -- 1,325
Exercise of stock options............. -- 99
Repurchase of common stock............ -- (10)
Net loss.............................. (7,601) (7,601)
-------- -------
Balances, March 31, 1999.............. (13,771) 3,414
Exercise of stock options............. -- 456
Issuance of common stock in connection
with the Company's IPO, net......... -- 40,815
Unearned compensation related to
grants of stock options............. -- --
Conversion of preferred stock into
common stock in connection with the
Company's IPO....................... -- --
Conversion of preferred stock into
common stock in connection with the
Marketwave acquisition.............. -- --
Exercise of warrants for shares of
common stock........................ -- 245
Amortization of unearned stock
compensation........................ -- 3,427
Net loss.............................. (9,481) (9,481)
-------- -------
Balances, December 31, 1999
(unaudited)......................... $(23,252) $38,876
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 84
ACCRUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(1,969) $(4,201) $(7,601) $(5,437) $(9,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for acquisition of
in-process technology..................... 27 -- -- -- --
Common stock issued for services............ -- -- 167 -- --
Depreciation and amortization............... 41 151 240 167 342
Provision for sales returns and doubtful
accounts.................................. -- 23 237 62 155
Amortization of discount on line of
credit.................................... -- -- -- -- 7
Stock-based compensation expense............ -- -- 1,325 620 3,427
Changes in operating assets and liabilities:
Restricted cash........................... -- -- -- 82 --
Accounts receivable....................... (55) (818) (1,394) (347) (2,500)
Prepaid expenses and other current
assets................................. (37) (20) (131) (41) (354)
Notes receivable.......................... -- -- -- -- (783)
Other assets.............................. (15) 3 (127) -- 75
Accounts payable.......................... 151 137 333 275 612
Accrued liabilities....................... 55 106 486 344 1,513
Accrued costs related to merger and
acquisition............................ -- -- -- -- 598
Deferred revenue.......................... 23 180 922 516 1,529
------- ------- ------- ------- -------
Net cash used in operating
activities........................... (1,779) (4,439) (5,543) (3,759) (4,860)
------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment.......... (460) (291) (531) (377) (1,275)
Purchase of software license................... -- (50) -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (460) (341) (531) (377) (1,275)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net
of issuance costs........................... 5,730 813 7,874 7,364 --
Proceeds from initial public offering, net of
issuance costs.............................. -- -- -- -- 40,815
Proceeds from equipment loan................... -- 406 -- -- 602
Proceeds from issuance of common stock
warrant..................................... 4 -- -- -- --
Proceeds from notes payable.................... -- 500 500 (520) --
Proceeds from stock options exercised.......... -- 31 99 57 694
Proceeds from issuance of common stock......... 22 -- 3 -- --
Repurchase of common stock..................... -- -- (10) -- --
Repayment of equipment loan.................... -- -- (100) (68) (907)
------- ------- ------- ------- -------
Net cash provided by financing
activities........................... 5,756 1,750 8,366 6,833 41,204
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 3,517 (3,030) 2,292 2,697 35,069
Cash and cash equivalents at beginning of
period......................................... 83 3,600 570 479 2,862
------- ------- ------- ------- -------
Cash and cash equivalents at end of period....... $ 3,600 $ 570 $ 2,862 $ 3,176 $37,931
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Notes payable converted to preferred stock..... $ 100 $ -- $ 1,000 $ -- $ --
======= ======= ======= ======= =======
Interest paid.................................. $ 3 $ 18 $ 47 $ -- $ --
======= ======= ======= ======= =======
Unearned compensation related to grants of
stock options............................... $ -- $ -- $ 6,254 $ 5,847 $ 3,652
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 85
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- FORMATION AND BUSINESS OF ACCRUE:
Accrue Software, Inc. ("Accrue") was formed in February 1996 and is a
provider of enterprise e-business analysis solutions. The activity from February
1996 through March 31, 1996 was insignificant. The activity included $8 of
research and development expense and the issuance of a convertible promissory
note as discussed in Note 7. The $8 of research and development expense was
included in fiscal year 1997 results of operations. Accrue's principal products,
Accrue Insight and Accrue Hit List, are an e-business analysis software that
allows organizations to evaluate the effectiveness of their e-business
initiatives by providing data in a format that facilitates strategic
merchandising and marketing decisions. Accrue Insight and Accrue Hit List offer
users detailed Web-site traffic information, visitor data, and content
effectiveness metrics. Web site managers and marketers can analyze this data to
make merchandising and marketing decisions which maximize revenue, profit and
customer retention. Accrue also provides professional services to assist
customers in Accrue product deployment.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Accrue and its
wholly-owned subsidiary. All significant intercompany accounts and transactions
have been eliminated.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The financial statements as of December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the rules of the Securities and Exchange Commission and do not
include all disclosures required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year. The
financial data and other information disclosed in the notes to the financial
statements for these periods are unaudited.
CERTAIN RISKS AND CONCENTRATIONS
Accrue's cash and cash equivalents as of December 31, 1999 are on deposit
with three U.S. financial institutions.
Accrue performs ongoing credit evaluations of its customers and collateral
is not required. Accrue maintains allowances for potential returns and credit
losses.
At March 31, 1998, two customers individually accounted for 11% and 11% of
accounts receivable. At March 31, 1999, one customer individually accounted for
11% of accounts receivable. At December 31, 1999 two customers individually
accounted for 12% and 11% of accounts receivable.
F-7
<PAGE> 86
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The market in which Accrue competes is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
emerging industry standards. Significant technological change could adversely
affect Accrue's operating results and subject Accrue to returns of products.
While Accrue has ongoing programs to minimize the adverse effect of such changes
and considers technological change in estimating its allowance, such estimates
could change in the future.
Accrue licenses technology that is incorporated into its products from
certain third parties. Any significant interruption in the supply or support of
any licensed software could adversely affect Accrue's sales, unless and until
Accrue can replace the functionality provided by this licensed software. Because
Accrue's products incorporate software developed and maintained by third
parties, Accrue depends on such third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. The failure of these third parties to meet these criteria
could adversely impact Accrue's business.
USE OF ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject Accrue to concentrations of
credit risks principally comprise cash and cash equivalents. Cash equivalents
are highly liquid investments with original or remaining maturities of three
months or less as of the date of purchase. Cash equivalents present
insignificant risk of changes in value because of interest rate changes. Accrue
has not experienced significant losses relating to any investment instruments.
The amounts reported for cash equivalents, receivables, notes payable and
long-term debt are considered to approximate fair values based upon comparable
market information available at the balance sheet date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is provided
using the straight-line method over the estimated useful lives of the respective
assets, generally three to seven years. Leasehold improvements are amortized on
a straight line basis over the estimated life of the lease, or the useful life
of the asset, whichever is shorter.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
F-8
<PAGE> 87
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE RECOGNITION
Accrue adopted the provisions of Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition", as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
April 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, Software Revenue
Recognition, and delineates the accounting for software product, products
including software that is not incidental to the product, and maintenance
revenues. Under SOP 97-2, Accrue recognizes product revenues upon shipment if a
signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable.
Accrue generally does not allow product returns; however, in the past, upon
request by a customer and approval of management, certain returns have been
allowed. Therefore, provision for estimated product returns are recorded at the
time the products are shipped.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance, installation and other services), revenue is allocated to
each component of the contract based on objective evidence of its fair value,
which is specific to Accrue, or for products not being sold separately, the
price established by management. Accrue recognizes revenue allocated to
undelivered products when the criteria for product revenue set forth above are
met. Accrue recognizes revenue allocated to maintenance fees, including amounts
allocated from product revenue, for ongoing customer support and product updates
ratably over the period of the maintenance contract. Payments for maintenance
fees are generally made in advance and are non-refundable. For revenue allocated
to consulting services, such as installation and training, Accrue recognizes
revenue as the related services are performed.
Prior to the adoption of SOP 97-2, effective April 1, 1998, Accrue
recognized revenue from the sale of products upon shipment if remaining
obligations were insignificant and collection of the resulting accounts
receivable was probable. Provisions for the estimated product returns were
accrued upon shipment. Revenue from software maintenance contracts, including
amounts unbundled from product sales, were deferred and recognized ratably over
the period of the contract. Consulting services revenue was recognized as the
related services were performed.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. Amounts that could have been
capitalized under Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," have been insignificant and therefore no costs have been capitalized
to date.
ADVERTISING EXPENSE
Accrue accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended March 31, 1997, 1998
and 1999 was $1, $41 and $52, respectively, and for the nine months ended
December 31, 1998 and 1999 was $52 and $171, respectively.
F-9
<PAGE> 88
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The provision for income tax expense is comprised of income taxes payable for
the current period, plus the net change in deferred tax amounts during the
period.
NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrant, shares subject to
repurchase and preferred stock were not included in the computation of diluted
net loss per share because the effect would be antidilutive.
A reconciliation of shares used in the calculation of net loss per share
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET LOSS PER SHARE, BASIC AND DILUTED:
Net loss................................... $(1,969) $(4,201) $(7,601) $(5,437) $(9,481)
======= ======= ======= ======= =======
Weighted average shares of common stock
outstanding............................. 2,690 4,331 5,800 5,717 16,146
Less: Weighted average shares subject to
repurchase.............................. -- (67) (1,130) (1,077) (1,963)
------- ------- ------- ------- -------
Shares used in computing net loss per
share, basic and diluted................ 2,690 4,264 4,670 4,640 14,183
======= ======= ======= ======= =======
Net loss per share, basic and diluted...... $ (0.73) $ (0.99) $ (1.63) $ (1.17) $ (0.67)
======= ======= ======= ======= =======
Antidilutive options, warrant, shares
subject to repurchase and preferred
stock not included in loss per share
calculations............................ 4,844 5,606 14,319 14,765 3,792
======= ======= ======= ======= =======
</TABLE>
STOCK-BASED COMPENSATION
Accrue accounts for its stock-based compensation in accordance with the
provision of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and presents disclosures required by
Statement of Financial Accounting Standard No. 123 ("SFAS No. 123").
F-10
<PAGE> 89
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPREHENSIVE INCOME
Accrue has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. There was no difference between
Accrue's net loss and its total comprehensive loss for the years ended March 31,
1997, 1998, and 1999 and the nine months ended December 31, 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, or ("SOP 98-1"), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or purchased
for internal use, including when such costs should be capitalized. Accrue does
not expect SOP 98-1, which is effective for financial statements for fiscal
years beginning after December 15, 1998, to have a significant effect on its
financial condition or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires companies to
expense the costs of start-up activities and organization costs as incurred. In
general, SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Accrue believes the adoption of SOP 98-5 will not have a material impact
on its results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and hedging activities. SFAS No. 133, as amended, is effective for
the Company's fiscal year ending December 31, 2000. Accrue does not expect SFAS
No. 133 to have a significant effect on its financial condition or results of
operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued Statement of Position 98-9, ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence ("VSOE") of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, and (2)
VSOE of fair value does not exist for one or more of the delivered elements, and
(3) all revenue recognition criteria of SOP 97-2 and SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. Accrue does not expect SOP 98-9 to
have any effect on its results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
F-11
<PAGE> 90
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of Accrue.
NOTE 3 -- ACQUISITION OF MARKETWAVE CORPORATION:
On September 30, 1999, Accrue completed a merger with Marketwave
Corporation ("Marketwave") in which Marketwave became a wholly-owned subsidiary
of Accrue. Approximately 2,880 shares of common stock were issued in exchange
for all the outstanding common stock of Marketwave based on a conversion ratio
of .1858 shares of Accrue common stock for each share of Marketwave.
Accrue also assumed the remaining outstanding Marketwave stock options that
were converted to options to purchase approximately 566 shares of Accrue's
common stock. The transaction was accounted for as a pooling of interests in
fiscal year 2000; therefore, Accrue's financial statements have been restated
for all periods prior to the business combination to include the combined
financial results of Accrue and Marketwave.
The following table shows the historical results of Accrue and Marketwave
for the periods prior to the consummation of the merger of the two entities:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues
Accrue.................................................. $ 182 $ 1,120 $ 2,952
Marketwave.............................................. 248 937 1,732
------- ------- -------
Total................................................ $ 430 $ 2,057 $ 4,684
======= ======= =======
Net loss
Accrue as previously reported........................... $(1,927) $(3,921) $(6,643)
Marketwave as previously reported....................... (42) (280) (958)
------- ------- -------
Total................................................ $(1,969) $(4,201) $(7,601)
======= ======= =======
</TABLE>
NOTE 4 -- BALANCE SHEET COMPONENTS:
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
MARCH 31,
-------------- DECEMBER 31,
1998 1999 1999
---- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable....................................... $873 $2,126 $4,719
Less: Allowance for sales returns and doubtful accounts... (25) (121) (369)
---- ------ ------
$848 $2,005 $4,350
==== ====== ======
</TABLE>
F-12
<PAGE> 91
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1998 1999 1999
----- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................................... $ 541 $ 910 $1,553
Software................................................. 75 167 361
Furniture and fixtures................................... 146 215 517
Leasehold improvements................................... 7 7 97
----- ------ ------
769 1,299 2,528
Less: Accumulated depreciation and amortization.......... (182) (405) (693)
----- ------ ------
$ 587 $ 894 $1,835
===== ====== ======
</TABLE>
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
MARCH 31,
------------ DECEMBER 31,
1998 1999 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation............................................... $ 89 $259 $ 745
Accrued royalties.......................................... 19 206 177
Sales tax.................................................. -- 150 130
Commission payable......................................... 6 147 942
Other...................................................... 191 29 311
---- ---- ------
$305 $791 $2,305
==== ==== ======
</TABLE>
NOTE 5 -- COMMITMENTS:
On April 1, 1999, Accrue entered into a noncancelable operating lease for
its office facility for the three year period April 1, 1999 to March 31, 2002.
Minimum future lease payments under this agreement are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDED MARCH 31, LEASE
-------------------- ---------
<S> <C>
2000........................................................ $ 389
2001........................................................ 403
2002........................................................ 324
------
$1,116
======
</TABLE>
Rent expense was $147, $227, and $293 for the years ended March 31, 1997,
1998 and 1999, respectively, and $215 and $320 for the nine months ended
December 31, 1998 and 1999, respectively.
F-13
<PAGE> 92
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- LONG-TERM DEBT:
In September 1997, Accrue entered into a loan and security agreement with a
financial institution under which Accrue can borrow up to an aggregate amount of
$2,000. The total agreement includes a revolving line of credit (revolving line)
for up to $1,000 and an equipment line of credit (equipment line) for up to
$1,000. The revolving line consists of advances against eligible accounts
receivable in an aggregate amount not to exceed the total of the committed
revolving line or the borrowing base, whichever is less, minus any outstanding
letters of credit. Advances against the revolving line bear interest at the
bank's prime rate (7.75% at March 31, 1999) plus 0.5% and are due in monthly
payments. At March 31, 1999 and December 31, 1999, there have been no advances
against the revolving line.
The equipment line consists of advances for acquisition of equipment
through June 18, 1998. Each advance bears interest at the bank's prime rate
(7.75% at March 31, 1999) plus 1% and is due in 36 monthly principal and
interest payments. The revolving line and equipment line mature on June 18, 2001
and are collateralized by all assets of Accrue, including receivables, equipment
and intellectual property.
Under these agreements, Accrue is required to comply with certain
covenants, among which are minimum quick ratios, debt to net worth ratios,
tangible net worth ratios and profitability. Accrue was not in compliance with
the aforementioned minimum quick ratios or the tangible net worth requirements.
However, the financial institution provided a waiver in perpetuity for these
instances of non-compliance.
On May 25, 1999, Accrue entered into an irrevocable commitment with a
financial institution for a working capital line of credit under which Accrue
can borrow up to an aggregate of $2,000. This line of credit will replace the
$1,000 revolving line discussed above and expires in June 2000. This line of
credit has a borrowing base of the lessor of 80% of eligible accounts receivable
or $2,000. Advances against the line of credit bear interest at prime plus 1% to
prime plus 5%, depending upon certain conditions. In connection with the line of
credit agreement, Accrue has a commitment fee of $15 and has granted the
financial institution a warrant to purchase 14 shares of common stock. The
warrant expires on May 25, 2004. Accrue valued the warrant using the
Black-Scholes method and is amortizing the value as interest expense over the
term of the agreement.
At March 31, 1999, future minimum payments under the equipment line are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
<S> <C>
2000........................................................ $ 136
2001........................................................ 145
2002........................................................ 24
-----
Total principal amounts due................................. 305
Less current portion........................................ (136)
-----
Long-term portion........................................... $ 169
=====
</TABLE>
The balance of the equipment line was paid off in August 1999.
F-14
<PAGE> 93
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- SUBORDINATED CONVERTIBLE NOTES PAYABLE:
In February and April 1996, Accrue issued convertible promissory notes in
the principal amounts of $100 and $50, respectively, to an accredited investor.
On May 3, 1996, the promissory notes were canceled and converted into 214 shares
of Series A preferred stock.
In April 1996, Accrue issued a convertible promissory note in the principal
amount of $100 to an accredited investor. On September 18, 1996, the promissory
note was canceled and converted into 47 shares of Series B preferred stock.
In January 1998, Accrue received commitments to purchase $1,000 of
convertible subordinated promissory notes from venture capitalists. All
principal and accrued interest, at 6% per annum, is due 180 calendar days from
the date of each note. Accrue had the right to draw down the notes in increments
of at least $100 and $1,000 was drawn down. On June 2, 1998 the $1,000
subordinated promissory notes were converted into 461 shares of Series D
preferred stock at $2.17 per share.
NOTE 8 -- STOCKHOLDERS' EQUITY:
CONVERTIBLE PREFERRED STOCK
The following is a summary of Series A-E ("Preferred Stock") convertible
preferred stock authorized, issued and outstanding:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING AT MARCH 31,
SHARES ------------------------
SERIES AUTHORIZED 1997 1998 1999
------ ---------- ----- ----- ------
<S> <C> <C> <C> <C>
A........................................ 750 743 743 743
B........................................ 2,000 1,845 1,845 1,845
C........................................ 550 490 513 513
C.1...................................... 465 -- 293 437
C.2...................................... 929 -- -- 847
D........................................ 1,000 -- -- 929
E........................................ 5,250 -- -- 5,003
------ ----- ----- ------
10,944 3,078 3,394 10,317
====== ===== ===== ======
</TABLE>
Authorized shares of Preferred Stock of 627 remain undesignated.
DIVIDENDS
The holders of shares of Series A, Series B, Series C, Series D and Series
E Preferred Stock are entitled to receive noncumulative dividends at the per
share rate equal to $0.07, $0.22, $0.28, $0.22 and $0.10, respectively per
annum, payable when and as declared by the Board of Directors. The holders of
shares of Series C.1 and Series C.2 preferred stock are entitled to receive a
noncumulative cash dividend, if and when declared by the Board of Directors in
its discretion. For any other dividends or distributions, the outstanding shares
of Preferred Stock shall participate with common stock on an as-converted basis.
No dividends have been declared or paid from inception through March 31, 1999 or
during the nine months ended December 31, 1999.
F-15
<PAGE> 94
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIQUIDATION
In the event of any liquidation, dissolution or winding up of Accrue,
either voluntary or involuntary, the holders of Series A, Series B, Series C,
Series C.1, Series C.2, Series D and Series E preferred stock shall be entitled
to receive, prior and in preference to any distribution of any assets of Accrue
to the holders of common stock, an amount per share equal to the sum of (i)
$0.70, $2.17, $2.80, $2.56, $1.83, $2.17 and $1.00, respectively, for each
outstanding share of Preferred Stock and (ii) an amount equal to declared but
unpaid dividends on such shares. Thereafter, the remaining assets or property
distributable upon such liquidation shall be divided pro rata among the holders
of common stock.
CONVERSION
Each share of Series A, Series B, Series C.1, Series C.2 and Series E
preferred stock is convertible, at the option of the holder, into shares of
common stock at the conversion rate of 1:1. Each share of Series C and Series D
stock is convertible, at the option of the holder, into shares of common stock
at the conversion rate of 1.314:1 and 2.17:1, respectively. Each share of
Preferred Stock shall automatically be converted into shares of common stock
immediately upon the earlier of the closing of a firm commitment of an
underwritten public offering in which the public offering results in not less
than $15,000 to Accrue and the per share price to the public which is at least
$9.00.
VOTING
The holder of each share of Preferred Stock is entitled to the number of
votes equal to the number of shares of common stock into which each share of
Preferred Stock could be converted on the record date for the vote or consent of
shareholders, except as otherwise required by law, and has voting rights and
powers equal to the voting rights and powers of the common stockholders.
COMMON STOCK
In May 1996, Accrue issued 2,686 shares of common stock to a stockholder in
exchange for
in-process technology. The in-process technology consisted of certain software
source and object code which had not yet reached technological feasibility and
for which no future alternative use existed. The historical cost basis of $27
attributable to the in-process technology was recorded as research and
development expense.
Holders of common stock are entitled to dividends as and when declared by
the Board of Directors subject to the prior rights of the preferred
stockholders. Each share of common stock has the right to one vote. No dividends
have been declared or paid as of March 31, 1999 and December 31, 1999.
F-16
<PAGE> 95
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Accrue has reserved common stock for issuance of Preferred Stock as
follows:
<TABLE>
<CAPTION>
SHARES RESERVED AT MARCH 31,
------------------------------
SERIES 1997 1998 1999
------ ------- ------- --------
<S> <C> <C> <C>
A.................................................... 750 750 750
B.................................................... 2,000 2,000 2,000
C.................................................... 550 550 550
C.1.................................................. -- 465 465
C.2.................................................. -- -- 929
D.................................................... -- -- 1,000
E.................................................... -- -- 5,250
----- ----- ------
3,300 3,765 10,944
===== ===== ======
</TABLE>
COMMON STOCK WARRANTS
In May 1996, Accrue issued a warrant to purchase 350 shares of common stock
of Accrue at an exercise price of $0.70 per share for $4 in cash to a
stockholder. The cash proceeds were recorded in additional paid-in capital. The
warrant was exercised at the time of the initial public offering.
On May 23, 1999, Accrue issued an option to purchase 20 shares of common
stock to a director and investment partnership affiliate. The option vests over
4 years and has a life of 10 years. Accrue valued the option using the
Black-Scholes method and is amortizing the value as general and administrative
expense over the term of the option.
INITIAL PUBLIC OFFERING
On May 23, 1999, the Board of Directors authorized Accrue to undertake an
initial public offering ("IPO") of Accrue's common stock. In addition, the
articles of incorporation were amended and restated to provide for (i) the
automatic conversion of Preferred Stock into common stock at an IPO price of at
least $7.00 per share and net proceeds of $15,000 and (ii) concurrently with the
closing of the IPO, the authorization of 75,000 shares of common stock and 5,000
shares of Preferred Stock.
On July 27, 1999, the Company consummated its initial public offering of
common stock, in which it sold 4,485 shares of its common stock at a price of
$10 per share, raising $44,852 in gross proceeds. Offering proceeds to Accrue,
net of approximately $4,040 in aggregate underwriters discounts, commissions and
related offering expenses, were approximately $40,810. Upon closing of the
initial public offering, each outstanding share of Series A, Series B, Series C,
Series D and Series E convertible preferred stock was converted into one share
of common stock, resulting in the issuance of 10,280 shares of common stock.
STOCK OPTION PLANS
Under Accrue's 1996 Stock Option Plan (the "Plan"), as amended, Accrue is
authorized to issue up to 6,130 shares of common stock. Under the Plan,
incentive options to purchase Accrue's
F-17
<PAGE> 96
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
common stock may be granted to employees at prices not lower than fair market
value at the date of grant, as determined by the Board of Directors.
Non-qualified stock options may be granted to employees, directors and
consultants, at prices not lower than 85% of fair market value at the date of
grant, as determined by the Board of Directors. The Board also has the authority
to set the term of the options (no longer than ten years from date of grant).
Options granted generally vest over four years. Unexercised options expire 30
days after termination of employment with Accrue.
On May 23, 1998, the Board of Directors and stockholders approved the 1999
Employee Stock Purchase Plan ("Purchase Plan"), and the 1999 Directors' Option
Plan ("Directors' Plan").
Accrue intends for the Purchase Plan to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 20% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of Accrue's common stock at the beginning or end of the
offering period. Accrue has reserved 500 shares of common stock for issuance
under the Purchase Plan.
The Directors' Plan provides for automatic grant of an option to purchase
50 shares of common stock upon election of each non-employee director and an
additional option to purchase 5 shares of common stock annually thereafter. The
Directors' Plan provides that initial options shall become exercisable in
installments as to 1/48th of the number of shares subject to the option each
month after the date of grant. The exercise price of all stock options granted
under the Directors' Plan shall be equal to the fair market value of Accrue's
common stock on the date of grant of the option. Options granted under the
Directors' Plan have a term of ten years. Accrue reserved 250 shares of common
stock for issuance under the Directors' Plan.
Accrue has, in connection with the purchase of Marketwave, assumed the
stock option plan of Marketwave. A total of 566 shares of Accrue's common stock
have been reserved for issuance under the assumed plan.
During 1999, Accrue granted an immediately exercisable option to purchase
1,606 shares of common stock to an officer. The option was exercised in October
1998. In connection with the exercise, Accrue received a full-recourse
promissory note receivable agreement from the officer for $193. The note bears
interest at 5.06% per annum and is payable in full on October 1, 2002. Under the
terms of the agreement, the shares issued are subject to repurchase by Accrue at
a rate of 1/4 one year subsequent to the date of purchase and 1/48 thereafter.
At March 31, 1999, 1,606 shares were subject to repurchase.
During fiscal year 1999, Accrue issued 53 shares of restricted common stock
to non-employees for consulting services provided. Accrue valued these shares
using the Black-Scholes method. The total estimated fair value was $167 and is
included in general and administrative expense.
F-18
<PAGE> 97
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE AGGREGATE EXERCISE
FOR GRANT OF SHARES PRICE PRICE PRICE
--------- --------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Shares reserved...................... 2,307
Options granted...................... (1,416) 1,416 $0.01 - $0.28 $ 79 $0.06
------ ------ --------
Balances, March 31, 1997............. 891 1,416 $0.01 - $0.28 79 $0.06
Shares reserved...................... 400
Options granted...................... (1,123) 1,123 $0.28 - $0.35 342 $0.30
Options exercised.................... -- (463) $0.01 - $0.35 (30) $0.06
Options canceled..................... 304 (304) $0.01 - $0.35 (51) $0.17
------ ------ --------
Balances, March 31, 1998............. 472 1,772 $0.01 - $0.35 340 $0.19
Shares reserved...................... 4,352
Options granted...................... (3,686) 3,686 $0.12 - $0.75 747 $0.20
Options exercised.................... -- (2,418) $0.01 - $0.35 (332) $0.14
Options canceled..................... 533 (533) $0.01 - $0.35 (112) $0.21
------ ------ --------
Balances, March 31, 1999............. 1,671 2,507 $0.01 - $0.75 $ 643 $0.26
Shares reserved (unaudited).......... 629 -- -- -- --
Options granted (unaudited).......... (2,154) 2,154 $0.44 - $50.81 20,217 $9.39
Options exercised (unaudited)........ -- (1,780) $0.01 - $1.00 (492) $0.28
Options canceled (unaudited)......... 650 (650) $0.12 - $19.44 (1,800) $2.77
------ ------ --------
Balances, December 31, 1999
(unaudited)........................ 796 2,231 $0.12 - $50.81 $ 18,568 $8.32
====== ====== ========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
---------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01 144 9.42 $0.01 39 $0.01
$0.11 - $0.16 1,295 9.34 $0.12 278 $0.12
$0.22 - $0.35 415 9.29 $0.34 89 $0.32
$0.43 - $0.75 653 9.82 $0.56 36 $0.43
----- ---
2,507 442
===== ===
</TABLE>
At March 31, 1997, 1998 and 1999 vested options to purchase zero, 196 and
124 shares of common stock respectively, were unexercised.
F-19
<PAGE> 98
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STOCK-BASED COMPENSATION
During 1999, Accrue issued stock purchase rights and options to certain
employees under the Plan with exercise prices below the deemed fair market value
of Accrue's common stock at the date of grant. In accordance with the
requirements of APB 25, Accrue has recorded unearned compensation for the
differences between the purchase price of stock issued to employees under stock
purchase rights or the exercise price of the stock options and the deemed fair
market value of Accrue's stock at the date of grant. This unearned compensation
is amortized to expense over the period during which Accrue's right to
repurchase the stock lapses or options become exercisable, generally four years.
At December 31, 1999, Accrue has recorded unearned compensation related to these
options in the total amount of $9,906, of which $1,325 had been amortized to
expense during the year ended March 31, 1999 and $620 and $3,427, respectively,
for the nine months ended December 31, 1998 and 1999.
If the stock-based compensation for the periods had been allocated across
the relevant functional expense categories within operating expenses, the
allocation would be as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Research and development...................... $ 486 $229 $1,268
Sales and marketing........................... 384 180 994
General and administrative.................... 455 211 1,165
------ ---- ------
$1,325 $620 $3,427
====== ==== ======
</TABLE>
The following information is presented in accordance with the disclosure
requirements of SFAS 123. The fair value of each option grant to employees has
been estimated on the date of grant using the minimum value method with the
following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates............................ 6.60% 6.19% 4.91%
Expected life....................................... 5 years 5 years 5 years
Expected dividends.................................. -- -- --
</TABLE>
The weighted average fair value of the options granted was $0.01, $0.08 and
$0.14 per share for the years ended March 31, 1997, 1998 and 1999, respectively.
Had compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 1997, 1998 and 1999,
consistent with the provisions of SFAS 123, the pro forma net loss would have
been reported as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss -- as reported........................... $(1,969) $(4,201) $(7,601)
Net loss -- pro forma............................. $(1,970) $(4,236) $(7,710)
Net loss per share -- as reported................. $ (0.73) $ (0.99) $ (1.63)
Net loss per share -- pro forma................... $ (0.73) $ (0.99) $ (1.65)
</TABLE>
F-20
<PAGE> 99
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Such pro forma disclosures may not be representative of future compensation
cost because options generally vest over several years and additional grants are
made each year.
NOTE 9 -- PROFIT SHARING PLAN:
Accrue sponsors a 401(k) Profit Sharing Plan covering all of its domestic
employees. Under this plan, participating employees may elect to contribute up
to 20% of their cash compensation, subject to certain limitations. Accrue may
elect to make contributions to the plan at the discretion of the Board of
Directors. No contributions have been made by Accrue as of December 31, 1999.
All employee contributions are 100% vested.
NOTE 10 -- INCOME TAXES:
There is no provision for income taxes for the years ended March 31, 1997,
1998 and 1999 nor the nine months ended December 31, 1998 and 1999. The
difference between the amount of income tax benefit recorded of zero and the
amount of income tax benefit calculated using the federal statutory rate of 34%
is due to net operating losses being fully offset by a valuation allowance.
At March 31, 1999, Accrue has federal and state net operating loss
carryforwards of approximately $9,970 and $10,260, respectively, available to
offset future regular and alternative minimum taxable income, if any. In
addition, Accrue has federal and state tax credits of approximately $410 and
$180, respectively, to offset future tax liabilities, if any. These operating
loss carryforwards and credits will expire between 2003 to 2014, if not utilized
beforehand.
For federal and state tax purposes, a portion of Accrue's net operating
loss carryforwards may be subject to certain limitations on utilization in case
of a change in ownership, as defined by federal and state tax law.
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets and liabilities:
Net operating loss carry forwards......................... $ 2,147 $ 4,297
Capitalized start up costs................................ 321 541
Research and development credit........................... 369 593
Other..................................................... 17 231
------- -------
2,854 5,662
Valuation allowance......................................... (2,854) (5,662)
------- -------
$ -- $ --
======= =======
</TABLE>
Accrue has recorded a full valuation allowance due to uncertainties
concerning the recovery of the deferred tax assets. The valuation allowance
increased by $957, $1,782 and $2,808 in 1997, 1998 and 1999, respectively.
F-21
<PAGE> 100
ACCRUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION:
Accrue has adopted the Financial Accounting Standards Board's Statements of
Financial Accounting Standards No. 131, ("SFAS 131"), "Disclosure about Segments
of an Enterprise and Related Information," effective for fiscal years beginning
after December 31, 1997.
Accrue has one reportable segment. Management uses one measurement of
profitability for its business. Accrue markets its products and related services
to customers in many industries in the United States and Europe. Revenue by
geographic region is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------ -----------------
1997 1998 1999 1998 1999
---- ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States..................... $430 $2,044 $4,564 $2,425 $ 9,988
Foreign........................... -- 13 120 233 1,365
---- ------ ------ ------ -------
$430 $2,057 $4,684 $2,658 $11,353
==== ====== ====== ====== =======
</TABLE>
Two customers individually accounted for 71% and 10% of revenues in 1997.
No customer individually accounted for more than 10% of revenues in 1998 and
1999 nor the nine months ended December 31, 1998 and 1999.
NOTE 12 -- SUBSEQUENT EVENT (UNAUDITED):
On January 14, 2000, Accrue completed the acquisition of NeoVista Software,
Inc. in exchange for 1,779 shares of Accrue common stock and 550 options and
warrants to acquire Accrue common stock. The acquisition will be accounted for
as a purchase.
F-22
<PAGE> 101
ACCRUE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma combined condensed financial statements
for Accrue Software, Inc. ("Accrue") consist of the Unaudited Pro Forma Combined
Condensed Statement of Operations for the year ended March 31, 1999 and the nine
months ended December 31, 1999, and the Unaudited Pro Forma Combined Condensed
Balance Sheet as of December 31, 1999. These pro forma financial statements give
effect to Accrue's acquisition of NeoVista Software, Inc. ("NeoVista") in a
business combination accounted for as a purchase, which closed January 14, 2000.
In exchange for the acquisition of all of NeoVista's outstanding capital stock,
Accrue issued NeoVista shareholders approximately 1,779 shares of its common
stock and reserved approximately 550 additional shares for issuance upon the
exercise of stock options and warrants of NeoVista which will be converted into
options and warrants to purchase shares of Accrue stock.
The Unaudited Pro Forma Combined Condensed Statement of Operations combine
Accrue's historical results of operations for the year ended March 31, 1999 with
NeoVista's historical results of operations for the year ended December 31, 1998
and Accrue's historical results of operations for the nine months ended December
31, 1999 with NeoVista's historical results of operations for the nine months
ended September 30, 1999. The Unaudited Pro Forma Combined Condensed Balance
Sheet combines Accrue's historical balance sheet at December 31, 1999 and
NeoVista's historical balance sheet at September 30, 1999. The pro forma
financial statements are not necessarily indicative of what the actual operating
results or financial position would have been for the combined company had the
transaction taken place on April 1, 1998, and do not purport to indicate the
results of future operations.
BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements reflect the
NeoVista acquisition accounted for using the purchase method of accounting and
have been prepared on the basis of assumptions described in the notes thereto
including assumptions related to the allocation of the amount of consideration
paid to the assets and liabilities of NeoVista based upon preliminary estimates
of their fair value. The actual allocation of the consideration to be paid may
differ from those assumptions reflected in the pro forma financial statements
after valuations and other procedures to be performed related to the NeoVista
acquisition are completed.
In connection with the acquisition of NeoVista, Accrue expects to record a
charge to operations related to in-process research and development, currently
estimated to be $0.9 million. The Unaudited Pro Forma Combined Condensed Balance
Sheet includes the effect of this charge but the Unaudited Pro Forma Combined
Condensed Statement of Operations does not reflect this charge because of its
nonrecurring nature. The charge related to in-process research and development
will be reflected in Accrue's consolidated financial statements for the year
ending March 31, 2000. The pro forma financial statements do not include the
estimated costs of integration as these costs will affect future operations and
do not qualify as liabilities in connection with a purchase business combination
under EITF 95-3, "Recognition of Liabilities in Connection with A Purchase
Business Combination".
The pro forma financial statements should be read in conjunction with the
related notes included in this document and the audited consolidated financial
statements and notes of Accrue and the audited financial statements and notes of
NeoVista included elsewhere in this prospectus.
F-23
<PAGE> 102
ACCRUE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACCRUE NEOVISTA COMBINED
AS OF AS OF AS OF
DECEMBER 31, SEPTEMBER 30, PRO FORMA DECEMBER 31,
1999 1999 ADJUSTMENTS 1999
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... $ 37,931 $ 425 $ -- $ 38,356
Accounts receivable, net.......... 4,350 667 -- 5,017
Prepaid expenses and other current
assets......................... 542 282 -- 824
-------- -------- -------- --------
Total current assets........... 42,823 1,374 -- 44,197
Property and equipment, net......... 1,835 379 -- 2,214
Intangibles and goodwill............ -- -- 129,039(E) 129,039
Other assets........................ 860 -- -- 860
-------- -------- -------- --------
Total assets.............. $ 45,518 $ 1,753 $129,039 $176,310
======== ======== ======== ========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................. $ 1,081 $ 232 $ -- $ 1,313
Accrued liabilities............... 2,305 423 5,000(A) 7,728
Accrued liabilities, merger....... 597 -- -- 597
Deferred revenue.................. 2,659 635 -- 3,294
Notes and accrued interest payable
to Shareholders................ -- 1,936 -- 1,936
Current portion of long-term
debt........................... -- 457 -- 457
-------- -------- -------- --------
Total current liabilities...... 6,642 3,683 5,000 15,325
Long-term debt, net of current
portion........................... -- 89 -- 89
-------- -------- -------- --------
Total liabilities.............. 6,642 3,772 5,000 15,414
-------- -------- -------- --------
Preferred stock..................... -- 23,869 (23,869)(C) --
-------- -------- -------- --------
Stockholders' Equity
Common stock...................... 25 80,221 (80,219)(B) 27
Additional paid-in capital........ 67,470 -- 122,898(B) 190,368
Notes receivable from
stockholders................... (213) -- -- (213)
Unearned compensation............. (5,154) (20,591) 20,591(G) (5,154)
Accumulated deficit............... (23,252) (85,518) 84,638(D,H) (24,132)
-------- -------- -------- --------
Total stockholders' equity..... 38,876 (25,888) 147,908 160,896
-------- -------- -------- --------
Total liabilities, preferred
stock and stockholders'
equity....................... $ 45,518 $ 1,753 $129,039 $176,310
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed financial statements.
F-24
<PAGE> 103
ACCRUE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ACCRUE NEOVISTA COMBINED
FOR THE NINE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, PRO FORMA DECEMBER 31,
1999 1999 ADJUSTMENTS 1999
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue:
Software license................... $ 9,049 $ 732 $ -- $ 9,781
Maintenance and service............ 2,304 996 -- 3,300
Systems hardware and maintenance... -- 620 -- 620
-------- ------- -------- --------
Total revenue................... 11,353 2,348 -- 13,701
Cost of revenue:
Cost of revenue.................... 1,493 1,908 -- 3,401
-------- ------- -------- --------
Gross profit......................... 9,860 440 -- 10,300
-------- ------- -------- --------
Operating expenses:
Research and development........... 2,815 1,890 -- 4,705
Selling, general and
administrative.................. 10,285 3,462 -- 13,747
Merger costs....................... 3,560 -- -- 3,560
Amortization of intangibles and
goodwill........................ -- -- 32,260(F) 32,260
Stock-based compensation expense... 3,427 1,800 -- 5,227
-------- ------- -------- --------
Total operating expenses........ 20,087 7,152 32,260 59,499
-------- ------- -------- --------
Loss from operations................. (10,227) (6,712) (32,260) (49,199)
Other income, net.................... 788 59 -- 847
Interest expense..................... (42) (145) -- (187)
-------- ------- -------- --------
Net loss........................ $ (9,481) $(6,798) $(32,260) $(48,539)
======== ======= ======== ========
Net loss per share, basic and
diluted............................ $ (0.67) $ (2.02) $ (3.04)
======== ======= ========
Shares used in computing net loss per
share, basic and diluted........... 14,183 3,366 (1,587) 15,962
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed financial statements.
F-25
<PAGE> 104
ACCRUE SOFTWARE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCRUE NEOVISTA
FOR THE YEAR FOR THE YEAR PRO FORMA
ENDED ENDED COMBINED FOR
MARCH 31, DECEMBER 31, PRO FORMA THE YEAR ENDED
1999 1998 ADJUSTMENTS MARCH 31, 1999
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Net revenue:
Software license.............. $ 3,640 $ 1,324 -- $ 4,964
Maintenance and service....... 1,044 1,616 -- 2,660
Systems hardware and
maintenance................ -- 1,392 -- 1,392
------- ------- -------- --------
Total revenue.............. 4,684 4,332 -- 9,016
Cost of revenue:
Cost of revenue............... 469 2,415 -- 2,884
------- ------- -------- --------
Gross profit.................... 4,215 1,917 -- 6,132
------- ------- -------- --------
Operating expenses
Research and development...... 3,166 2,172 5,338
Selling, general and
administrative............. 7,375 3,903 -- 11,278
Merger costs.................. -- -- -- --
Amortization of intangibles
and goodwill............... -- -- 43,015(F) 43,015
Stock-based compensation
expense.................... 1,325 -- -- 1,325
------- ------- -------- --------
Total operating expenses... 11,866 6,075 43,015 60,956
------- ------- -------- --------
Loss from operations............ (7,651) (4,158) (43,015) (54,824)
Other income, net............... 96 129 -- 225
Interest expense................ (46) (160) -- (206)
------- ------- -------- --------
Net loss................... $(7,601) $(4,189) $(43,015) $(54,805)
======= ======= ======== ========
Net loss per share, basic and
diluted....................... $ (1.63) $ (1.26) $ (8.50)
======= ======= ========
Shares used in computing net
loss per share, basic and
diluted....................... 4,670 3,320 (1,541) 6,449
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma
combined condensed financial statements.
F-26
<PAGE> 105
ACCRUE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- BASIS OF PRO FORMA PRESENTATION:
The pro forma financial statements give effect to Accrue's acquisition of
NeoVista, in a business combination to be accounted for as a purchase, which was
consummated on January 14, 2000. Upon the effective date of the acquisition, all
outstanding common and preferred stock of NeoVista were converted into shares of
Accrue common stock, and all outstanding stock options and warrants to purchase
shares of NeoVista common stock were converted into options and warrants to
purchase shares of Accrue stock. The aggregate Accrue shares, options and
warrants to be issued to the NeoVista stockholders, option holders, and warrant
holders will equal 2,329.
The pro forma financial statements have been prepared on the basis of
assumptions described in the following notes and include assumptions relating to
the allocation of the consideration paid for the assets and liabilities of
NeoVista based on preliminary estimates of their fair value. The actual
allocation of the consideration to be paid may differ from those assumptions
reflected in the pro forma financial statements after valuations and other
procedures to be performed related to the NeoVista acquisition have been
completed. Accrue does not expect the final allocation of the purchase price
will differ materially from the preliminary allocation. In the opinion of
Accrue's management, all adjustments necessary to present fairly such pro forma
financial statements have been made based on the terms and structure of the
NeoVista acquisition. The Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended March 31, 1999 and the nine months ended December
31, 1999 gives effect to this transaction as if it had taken place on April 1,
1998. The Unaudited Pro Forma Combined Condensed Balance Sheet as of December
31, 1999 gives effect to the transaction as if it had taken place on December
31, 1999.
The pro forma financial statements are not necessarily indicative of what
the actual financial results would have been had the transaction taken place on
April 1, 1998, and do not purport to indicate the results of future operations.
Accrue issued approximately 1,779 shares of its common stock, valued at
$53.62 per share, the average market price per share of Accrue common stock in a
range three trading days before and after the announcement date (November 17,
1999) of the acquisition. In addition, Accrue issued approximately 550 options
and warrants to purchase shares of its common stock in exchange for all options
and warrants to purchase shares of NeoVista common stock. The value of options
and warrants to be issued by Accrue was determined by estimating their fair
value as of November 17, 1999 using the Black-Scholes option pricing model. The
total estimated consideration including acquisition related expenses is
$127,900.
Tangible assets of NeoVista principally include cash and cash equivalents,
accounts receivable, fixed assets and other assets. Liabilities of NeoVista
assumed principally include accounts payable, accrued liabilities, and long-term
debt.
F-27
<PAGE> 106
ACCRUE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Below is a table of the estimated purchase price allocation and annual
amortization of the intangible assets and goodwill acquired:
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
AMORTIZATION OF
LIFE INTANGIBLES
------------ ------------
<S> <C> <C> <C>
Purchase price allocation:
Tangible net liabilities acquired....................... $ (2,019) -- --
Intangible net assets acquired:
Developed technology.................................. 1,101 3 367
In-process research and development................... 880 -- --
Assembled workforce................................... 1,456 3 485
Sales channel/customer relationships.................. 105 3 35
Trademarks/tradenames................................. 49 3 16
Goodwill.............................................. 126,328 3 42,112
--------
Total.............................................. $127,900
========
</TABLE>
To determine the value of the developed technology, the expected future
cash flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the developed
technology, existing and future markets, and assessments of the stage of the
technology's life cycle. The analysis resulted in a valuation for developed
technology that had reached technological feasibility and therefore was
capitalizable. The developed technology will be amortized on a straight line
basis over three years.
The value allocated to projects identified as in-process research and
development will be charged to expense during the quarter ending March 31, 2000
but has not been reflected in the Accrue Unaudited Pro Forma Combined Condensed
Statement of Operations as it is non-recurring in nature.
The write-off will be necessary because the acquired in-process research
and development has not yet reached technological feasibility and has no future
alternative uses. These products under development may not achieve commercial
viability. The nature of the efforts required to develop the purchased
in-process research and development into commercially viable products
principally relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including functions,
features and technical performance requirements.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to the products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products. These cash flows
were then discounted back to their net present value. The projected net cash
flows from the projects were based on management's estimates of revenues and
operating profits related to the projects.
To determine the revenue attributable to the in-process research
technology, consideration was also given to the contribution of the existing
technology which will be utilized in the development of
F-28
<PAGE> 107
ACCRUE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the in-process technology, referred to as "core technology." The value allocated
to the core technology was determined by assigning a leverage factor to the
estimated projected net cash flows related to the products under development
after analysis of both the effort and work completed as well as the expected
value of the in-process technology. The projected net cash flows from the
products assigned to core technology using the leverage factor were then
discounted back to their net present value. The core technology is being
amortized over its estimated useful life of three years.
The value allocated to the assembled workforce is attributable to the
NeoVista workforce in place after the acquisition which eliminates the need to
hire new replacement employees. The value was determined by estimating the cost
involved in assembling a new workforce including costs of salaries, benefits,
training and recruiting. The value of the assembled workforce will be amortized
on a straight-line basis over three years.
Goodwill is determined based on the residual difference between the amount
of consideration to be paid and the values assigned to identified tangible and
intangible assets. The goodwill will be amortized on a straight line basis over
three years.
NOTE 2 -- PRO FORMA NET LOSS PER SHARE:
Pro forma basic and diluted net loss per share are based on the weighted
average number of shares of Accrue common stock outstanding during the period
and the number of shares of Accrue common stock issued in connection with the
NeoVista acquisition. The following have not been included in the computation of
pro forma diluted net loss per share because their effect would be antidilutive.
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1999
--------- ------------
<S> <C> <C>
Potential common securities:
Accrue options, warrant, shares of common stock
subject to repurchase and preferred stock not
included in loss per share calculations............ 14,319 3,792
Options and warrants to be issued in connection with
the NeoVista acquisition........................... 550 550
------ -----
14,869 4,342
====== =====
</TABLE>
NOTE 3 -- PRO FORMA ADJUSTMENTS:
A. To reflect the accrual of direct acquisition costs arising from the
NeoVista acquisition, including legal, banking, and accounting fees.
B. To eliminate NeoVista's outstanding common stock ($80,219) and
reflect the issuance of approximately 1,779 shares of Accrue's common stock
and approximately 550 options and warrants to purchase Accrue's common
stock in connection with the acquisition ($122,900).
F-29
<PAGE> 108
ACCRUE SOFTWARE, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
C. To eliminate NeoVista's outstanding preferred stock ($23,869).
D. To eliminate NeoVista's accumulated deficit ($85,518).
E. To record acquired intangible assets and goodwill.
F. To record the amortization of acquired intangible assets and
goodwill.
G. To eliminate unearned stock compensation recorded on NeoVista's
financial statements.
H. To record the in-process research and development charge ($880).
F-30
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NeoVista Software, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of NeoVista Software,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
February 18, 2000
F-31
<PAGE> 110
NEOVISTA SOFTWARE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,128 $ 3,512 $ 425
Accounts receivable, net.......................... 979 640 667
Prepaid expenses and other assets................. 128 225 282
-------- -------- --------
Total current assets........................... 2,235 4,377 1,374
Property and equipment, net......................... 397 531 379
-------- -------- --------
Total assets................................... $ 2,632 $ 4,908 $ 1,753
======== ======== ========
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payables................................. $ 231 $ 270 $ 232
Accrued liabilities............................... 977 550 423
Deferred revenue and advances..................... 534 470 635
Notes and accrued interest payable to
shareholders................................... -- -- 1,936
Current portion of long-term debt................. 1,629 430 457
-------- -------- --------
Total current liabilities................. 3,371 1,720 3,683
Long-term debt, net of current portion.............. 171 218 89
-------- -------- --------
Total liabilities.............................. 3,542 1,938 3,772
-------- -------- --------
Commitments and contingencies (Note 5)
Preferred stock:
$0.01 par value; 37,399 authorized; shares
outstanding: 8,876, 19,599 and 19,599 issued
and outstanding in 1997, 1998 and 1999,
respectively................................... 15,813 23,869 23,869
Shareholders' equity (deficit):
Common stock: no par value; 50,000 shares
authorized; 3,273, 3,366 and 3,413 issued and
outstanding in 1997, 1998 and 1999,
respectively................................... 57,802 57,821 80,221
Unearned compensation............................. -- -- (20,591)
Accumulated deficit............................... (74,525) (78,720) (85,518)
-------- -------- --------
Total shareholders' equity (deficit)........... (16,723) (20,899) (25,888)
-------- -------- --------
Total liabilities, preferred stock and
shareholders' equity (deficit)............... $ 2,632 $ 4,908 $ 1,753
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 111
NEOVISTA SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ --------------------
1997 1998 1998 1999
------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses..................................... $ 1,172 $ 1,324 $ 1,122 $ 732
Maintenance and service...................... 1,862 1,616 1,328 996
Systems hardware and maintenance............. 2,371 1,392 1,089 620
------- ------- ------- -------
Total revenues............................ 5,405 4,332 3,539 2,348
------- ------- ------- -------
Operating expenses:
Cost of revenues............................. 2,477 2,415 1,792 1,908
Research and development..................... 1,923 2,172 1,593 1,890
Selling, general and administrative.......... 4,019 3,903 2,692 3,462
Stock-based compensation expense............. -- -- -- 1,800
------- ------- ------- -------
Total operating expenses.................. 8,419 8,490 6,077 9,060
------- ------- ------- -------
Loss from operations........................... (3,014) (4,158) (2,538) (6,712)
------- ------- ------- -------
Other income (expense):
Interest income.............................. 54 125 72 59
Interest expense............................. (201) (160) (135) (145)
Other........................................ (13) 4 4 --
------- ------- ------- -------
Total other income (expense).............. (160) (31) (59) (86)
------- ------- ------- -------
Net loss....................................... $(3,174) $(4,189) $(2,597) $(6,798)
======= ======= ======= =======
Net loss per share, basic and diluted.......... $ (0.98) $ (1.26) $ (0.80) $ (2.02)
======= ======= ======= =======
Shares used in computing net loss per share,
basic and diluted............................ 3,245 3,320 3,239 3,366
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 112
NEOVISTA SOFTWARE, INC.
STATEMENT OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ---------------- UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
------ ------- ------ ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997................... 6,140 $13,133 3,217 $57,791 $ -- $(71,334) $(13,543)
Issuance of Series V preferred stock for
cash, net of costs of $65................. 2,736 2,671 -- -- -- -- --
Dividend on share adjustment................ -- 17 -- -- -- (17) (17)
Series II and III issuance costs............ -- (8) -- -- -- -- --
Common stock issued for services............ -- -- 27 5 -- -- 5
Exercise of stock options for cash.......... -- -- 30 6 -- -- 6
Common stock repurchased.................... -- -- (1) -- -- -- --
Net loss.................................... -- -- -- -- -- (3,174) (3,174)
------ ------- ----- ------- -------- -------- --------
Balances, December 31, 1997................. 8,876 15,813 3,273 57,802 -- (74,525) (16,723)
Issuance of Series V preferred stock for
cash...................................... 246 244 -- -- -- -- --
Issuance of Series VI preferred stock for
cash, net of costs........................ 10,477 7,806 -- -- -- -- --
Exercise of stock options for cash.......... -- -- 93 19 -- -- 19
Accretion on redeemable preferred stock..... -- -- -- -- (6) (6)
Net loss.................................... -- -- -- -- -- (4,189) (4,189)
------ ------- ----- ------- -------- -------- --------
Balances, December 31, 1998................. 19,599 23,869 3,366 57,821 -- (78,720) (20,899)
Unearned compensation related to grants of
stock options............................. -- -- -- 22,391 (22,391) -- --
Exercise of stock options for cash.......... -- -- 47 9 -- -- 9
Amortization of unearned stock
compensation.............................. -- -- -- -- 1,800 -- 1,800
Net loss.................................... -- -- -- -- -- (6,798) (6,798)
------ ------- ----- ------- -------- -------- --------
Balances, September 30, 1999 (unaudited).... 19,599 $23,869 3,413 $80,221 $(20,591) $(85,518) $(25,888)
====== ======= ===== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 113
NEOVISTA SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,174) $(4,189) $(2,597) $(6,798)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 231 296 210 245
Accrued interest on subordinated promissory notes....... 223 -- -- --
Common stock issued for services........................ 5 -- -- --
Stock-based compensation expense........................ -- -- -- 1,800
Loss on disposal of fixed assets........................ -- 2 -- --
Change in assets and liabilities:
Accounts receivables.................................. 152 339 249 (95)
Prepaid expenses and other assets..................... 292 (97) (116) 11
Accounts payables..................................... (3) 39 78 (38)
Accrued liabilities................................... 286 (427) (444) (137)
Deferred revenue and advances......................... (91) (64) (136) 165
------- ------- ------- -------
Net cash used in operating activities.............. (2,079) (4,101) (2,756) (4,847)
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (223) (432) (300) (93)
------- ------- ------- -------
Net cash used in investing activities.............. (223) (432) (300) (93)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit, net...................... 29 104 87 104
Repayments on bank term loans............................. (332) (556) (556) --
Borrowings under subordinated promissory notes............ -- 359 -- --
Repayments on subordinated promissory notes............... (102) (1,024) (733) (175)
Repayments on license agreements.......................... (678) (35) (28) (21)
Repayments on capital lease obligations................... (28) -- -- --
Issuance of preferred stock, net of costs................. 2,663 8,050 7,938 --
Note payable to shareholders.............................. -- -- -- 1,936
Exercise of stock options................................. 6 19 19 9
------- ------- ------- -------
Net cash provided by financing activities.......... 1,558 6,917 6,727 1,853
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (744) 2,384 3,671 (3,087)
Cash and cash equivalents, beginning of period.............. 1,872 1,128 1,128 3,512
------- ------- ------- -------
Cash and cash equivalents, end of period.................... $ 1,128 $ 3,512 $ 4,799 $ 425
======= ======= ======= =======
Noncash investing and financing activities:
Deemed dividend on convertible preferred stock............ $ 17 $ -- $ -- $ --
======= ======= ======= =======
Accretion of redeemable preferred stock................... $ -- $ 6 $ -- $ --
======= ======= ======= =======
Unearned compensation related to grants of stock
options................................................. $ -- $ -- $ -- $22,391
======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 202 $ 272 $ 204 $ 145
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 114
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- NATURE OF OPERATIONS:
NATURE OF OPERATIONS
NeoVista Software, Inc. (the "Company") was incorporated under the name
MasPar Computer Corporation (MasPar) in 1987. MasPar designed, manufactured,
marketed, serviced and supported high-performance data-parallel computer systems
and associated software development tools.
In February of 1996, MasPar announced a restructuring of its operations
resulting in MasPar exiting the high-performance data-parallel computer system
business and refocusing its efforts on the development of software applications.
In connection with the restructuring, the Company renamed the corporation
NeoVista Software, Inc. NeoVista Software, Inc. designs, develops and markets
business intelligence software products, which allows users to discover
meaningful relationships for competitive marketing and business decision
purposes.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the rules of the Securities and Exchange Commission and do not
include all disclosures required by generally accepted accounting principles for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments acquired with
original maturities of ninety days or less to be cash equivalents. The recorded
carrying value of cash equivalents approximates fair market value.
PROPERTY AND EQUIPMENT
Property and equipment including leasehold improvements, are stated at
cost. Depreciation and amortization are computed using the straight-line method
over the shorter of the estimated useful lives, generally two to five years, or
the lease terms, as appropriate.
F-36
<PAGE> 115
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
SOFTWARE DEVELOPMENT COSTS
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Computer Software To Be Sold, Leased or Otherwise Marketed."
To date, the Company has essentially completed its software development
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
REVENUE RECOGNITION
Revenue consists of fees for licenses of the Company's software products,
maintenance and systems sales related to MasPar products.
LICENSE REVENUE
Revenue from software licenses is recognized upon shipment of the software
or delivery of authorization codes if collection of the resulting receivable is
probable, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate a portion of the total fee to any undelivered
elements of the arrangement. Such undelivered elements in these arrangements
typically consist of services.
MAINTENANCE AND SERVICE REVENUE
Maintenance revenue is recognized ratably over the term of the maintenance
contract. If maintenance is included in an arrangement that includes a license
agreement, amounts related to maintenance are allocated based on vendor specific
objective evidence. Revenues from contract services are generally recognized
based upon the attainment of milestones, which approximate the percentage of
completion method of accounting. Revenue from customer training and consulting
services is recognized as the services are performed.
SYSTEMS REVENUE
Systems product revenues are recognized upon shipment.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivables. Cash and cash equivalents are held with one credit-worthy
financial institution. The Company invests primarily in certificates of
F-37
<PAGE> 116
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
deposit. The Company sells its products primarily to large organizations in
diversified industries worldwide and generally does not require its customers to
provide collateral or other security to support accounts receivable. To reduce
credit risk, management performs ongoing credit evaluations of its customers'
financial condition and continually analyzes the allowance for doubtful
accounts. Sales to one customer accounted for 25% of revenue in 1997. Sales to
three customers accounted for 43% of revenue in 1998. Sales to two customers
accounted for 55% of revenue for the nine months ended September 30, 1999. The
Company had three customers in 1997 that accounted for 26%, 24% and 10% of
accounts receivable, four customers in 1998 that accounted for 33%, 18%, 15% and
12% of accounts receivable, and four customers at September 30, 1999 that
accounted for 27%, 17%, 15% and 11% of accounts receivable. Export sales were
$248 and none for the years ending December 31, 1997 and 1998, respectively, and
none and $52 for the nine months ended September 30, 1998 and 1999,
respectively. These sales were primarily to the Pacific Rim.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position or results of operations: advances
and trends in new technologies; competitive pressures in the form of new
products or price reductions on existing products; changes in the overall demand
for products and services offered by the Company; changes in certain strategic
partnerships or customer relationships; litigation or claims against the Company
based on intellectual property, patent, product, regulatory or other factors;
risks associated with changes in domestic and international economic and/or
political conditions or regulations; and the Company's ability to attract and
retain employees necessary to support its growth.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and presents
disclosures required by Statement of Financial Accounting Standard No. 123
("SFAS No. 123").
LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets when events or
circumstances indicate that the carrying value of an asset may not be
recoverable. No such impairments have been identified to date.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The provision for income tax expense is comprised of income taxes payable for
the current period, plus the net change in deferred tax amounts during the
period.
F-38
<PAGE> 117
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options and warrants were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
Antidilutive securities which are excluded in the diluted net loss per
share calculation for the periods:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ------------------
1997 1998 1998 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Common stock options............................... 2,392 2,608 2,488 11,822
Convertible preferred shares....................... 10,354 31,501 31,501 31,501
Common stock warrants.............................. 1,669 1,669 1,669 1,669
Preferred stock warrants........................... 60 60 60 60
------ ------ ------ ------
14,475 35,838 35,718 45,052
====== ====== ====== ======
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs, which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
impact of SOP 98-1 on its financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133, as amended, will be effective for the
Company's fiscal year ending December 31, 2000. Management believes that this
statement will not have a significant impact on the Company's financial
position, results of operations or cash flows.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued Statement of Position 98-9, or SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence, or VSOE, of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, and (2)
VSOE of fair value does not exist for one or more of the delivered elements, and
(3) all revenue recognition criteria of SOP 97-2 and SOP 98-9 will be effective
for transactions that are entered into in fiscal
F-39
<PAGE> 118
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
years beginning after March 15, 1999. Retroactive application is prohibited. The
Company does not expect SOP 98-9 to have any effect on its results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of the Company.
COMPREHENSIVE LOSS
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires that an enterprise report, by major components
and as a single total, the changes in its net assets during the period from
nonowner sources. For the years ended December 31, 1997 and 1998, and the nine
months ended September 30, 1998 and 1999, comprehensive loss was equal to net
loss.
NOTE 3 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable.................................. $ 1,122 $ 880 $ 688
Less: Allowance for doubtful accounts................ (143) (240) (21)
------- ------- -------
$ 979 $ 640 $ 667
======= ======= =======
PROPERTY AND EQUIPMENT:
Machinery and equipment.............................. $ 2,193 $ 1,640 $ 1,721
Demonstration and spares............................. 167 232 232
Purchased software................................... 446 307 318
Furniture and fixtures............................... 171 59 59
Leasehold improvements............................... 161 161 161
------- ------- -------
Total................................................ 3,138 2,399 2,491
Less: Accumulated depreciation and amortization...... (2,741) (1,868) (2,112)
------- ------- -------
Property and equipment, net.......................... $ 397 $ 531 $ 379
======= ======= =======
ACCRUED LIABILITIES:
Compensation and benefits............................ $ 567 $ 341 $ 337
Other................................................ 410 209 86
------- ------- -------
$ 977 $ 550 $ 423
======= ======= =======
</TABLE>
F-40
<PAGE> 119
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- BANK FINANCING ARRANGEMENTS AND LONG-TERM DEBT:
Bank financing arrangements and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------- ----- -------------
<S> <C> <C> <C>
Bank line of credit..................................... $ 68 $ 172 $ 266
Bank term loans......................................... 556 -- --
Notes and accrued interest payable to shareholders...... -- -- 1,936
Subordinated promissory notes........................... 1,110 445 270
License agreement....................................... 66 31 10
------- ----- -------
Total................................................... 1,800 648 2,482
Less: Current portion................................... (1,629) (430) (2,393)
------- ----- -------
Long-term debt.......................................... $ 171 $ 218 $ 89
======= ===== =======
</TABLE>
BANK LINE OF CREDIT AND TERM LOANS
The Company has a Loan and Security Agreement with a domestic bank which
provides for a maximum credit facility of $4,000. The credit facility is limited
to 80% of the Company's eligible receivables, as defined, plus term loans
outstanding with the bank. Borrowings are collateralized by the receivables
balances against which they are borrowed. The Agreement provides for automatic
extensions annually in June, unless terminated by the bank.
Borrowings under the Loan and Security Agreement (both the term loans and
revolving line of credit) bear a total monthly minimum interest charge of $3 or
monthly interest at the highest "LIBOR Rate" (5.1% at December 31, 1998) in
effect during each month plus 5.75% per annum but not less than 9% per annum.
Principal payments are due as defined in the note agreements, generally monthly
over a defined period or upon maturity. Borrowings under the credit facility
totaling $624, $172 and $266 were outstanding at December 31, 1997, December 31,
1998 and September 30, 1999, respectively.
At December 31, 1997, borrowings of $500 under the Loan and Security
Agreement were guaranteed by one of the Company's stockholders. In exchange for
such guarantee, the Company issued the stockholder warrants to purchase common
stock ("the Guarantee Warrants") (see Note 6). Such borrowings were fully repaid
in 1998.
SUBORDINATED PROMISSORY NOTES
As of December 31, 1997, December 31, 1998 and September 30, 1999, the
Company had $1,110, $445 and $270, respectively, outstanding under a line of
credit. The outstanding borrowings are collateralized by the capital equipment
purchases made under the line of credit. In connection therewith, the Company
issued the creditor warrants to purchase Series III preferred stock ("the Loan
and Security Warrants") (see Note 6). The notes bear interest at effective rates
ranging from
F-41
<PAGE> 120
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13.7% to 14.7% per annum. Payments are due in equal monthly installments over a
36-month period, with final payment equal to 10% of the face value of the
respective notes.
NOTES AND ACCRUED INTEREST PAYABLE TO SHAREHOLDERS
In May 1999, the Company obtained financing from various shareholders. The
promissory notes issued to the shareholders bear interest at a rate of 10% per
annum and mature on December 31, 1999. The accrued interest on the notes as at
September 30, 1999 was $70.
LICENSE AGREEMENT
The Company executed a software license and distribution agreement (the
"Software Agreement"). Pursuant to the Software Agreement, the Company acquired
a perpetual license to certain software source code to be integrated into the
Company's products. The Company acquired the source code at a purchase price of
$150 and the issuance of 29 shares of the Company's common stock. The net value
of the cash payments (using a discount rate of 11%) plus the value of the common
stock totaled approximately $208 and was charged to research and development
expense during 1996. At December 31, 1997, December 31, 1998 and September 30,
1999, the Company has outstanding balances of $66, $31 and $10, respectively,
under the Software Agreement.
CREDITOR NOTES
Pursuant to the reorganization (see Note 1), the Company entered into a
Workout Agreement with certain of its creditors. Pursuant to such agreement, the
Company paid approximately $770 and issued promissory notes aggregating
approximately $734 against outstanding obligations. Such borrowings were fully
repaid in fiscal year 1998. In connection with such promissory notes, the
Company also agreed to issue such creditors warrants to purchase common stock
(the "Creditor Warrants") (see Note 6). No value has been assigned to such
warrants as the number of shares and the exercise price has not been determined.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
LEASES
The Company's facilities are leased under a noncancelable operating lease
scheduled to expire in October 1999. Future minimum annual rental payments under
the operating lease are $300 for fiscal year 1999.
Facilities rent expense for the year ended December 31, 1997 and 1998 was
approximately $401 and $357, respectively and for the nine months ended
September 30, 1998 and 1999 was $300 and $270, respectively.
F-42
<PAGE> 121
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JOINT MARKETING AGREEMENT
During 1996, the Company entered into a Joint Marketing Agreement (the
"JMA") for the purpose of providing additional sales opportunities for the
Company's products and enhanced services to its customers. The JMA provides for
discounts and commissions on certain services, as defined, provided by the
Company or its JMA partner and provides the JMA partner with the right, upon
dissolution of the Company, to acquire the defined product for a minimum of
$2,000. The JMA has an initial term of three years and will automatically renew
for successive terms of two years until terminated. In connection with entering
into the JMA, the JMA partner purchased approximately 1,500 shares of the
Company's Series M convertible preferred stock and warrants to purchase 800
shares of common stock (the "JMA Warrant") for $2,500 (see Note 6).
CONTINGENCY
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 6 -- PREFERRED STOCK AND SHAREHOLDERS' EQUITY:
In July 1998, the Company's shareholders authorized additional funding (the
"1998 Funding"). Pursuant to the 1998 funding, the Company issued (i) 10,477
shares of Series VI convertible redeemable preferred stock for net proceeds of
approximately $7,806 (ii) changed the authorized shares of common and preferred
stock to 50,000 and 37,400, respectively, and (iii) increased the number of
shares reserved for issuance under the Stock Option/Purchase Plan to 5,345.
In accordance with the 1997 and 1998 Investors Rights Agreements, the
Company was required to meet certain performance milestones during fiscal years
1997 and 1998. The Company did not meet the milestones and, in accordance with
the agreements, the conversion price of the Series VI convertible redeemable
preferred stock and the Series V convertible preferred stock were subsequently
adjusted where by such shareholders will receive an additional 9,167 and 526
common shares upon conversion, respectively.
F-43
<PAGE> 122
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PREFERRED STOCK
Preferred stock consists of:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------------------------------------------
COMMON
SHARES
ISSUABLE
SHARES CARRYING LIQUIDATION UPON LIQUIDATION
DESIGNATED SHARES AMOUNT PREFERENCE CONVERSION PREFERENCE
---------- ------ -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series I...................... 549 549 $ 5,261 $ 5,490 549 $ 10.0
Series II..................... 1,200 1,200 599 3,000 1,200 2.50
Series II-A................... 1,200 -- -- -- -- --
Series III.................... 5,882 2,920 4,831 4,964 4,504 1.70
Series III-A.................. 5,882 1,471 2,434 2,500 1,923 1.70
Series IV..................... 1,177 -- -- -- -- --
Series IV-A................... 1,177 -- -- -- -- --
Series V...................... 7,000 2,982 2,932 2,982 3,681 1.00
Series VI..................... 13,333 10,477 7,812 7,858 19,644 $ 0.75
------ ------ ------- ------- ------
Total....................... 37,400 19,599 $23,869 $26,794 31,501
====== ====== ======= ======= ======
</TABLE>
Significant terms of the Series I, II, II-A, III, III-A, IV, IV-A and V
convertible preferred stock (collectively, the "preferred stock") are as
follows:
- Each share of Series I, II, II-A, III-A, IV and IV-A convertible
preferred stock is convertible, at the option of the holder, into one
share of common stock (subject to adjustment for events of dilution) and
has the same voting rights as the common stock into which it is
convertible. Each share of Series III and V convertible preferred stock
is convertible, at the option of the holder, into 1.463 and 1.234 shares
of common stock, respectively (subject to adjustments for events of
dilution). and has the same voting rights as the common stock into which
it is convertible. Shares will automatically be converted into common
stock upon the closing of a public offering meeting certain criteria. In
addition, shares will automatically be converted upon written consent of
not less than 67% of the outstanding shares of preferred stock voting
together as a single class.
- In the event of liquidation, dissolution or winding up of the Company,
the preferred shareholders will be entitled to receive, on a pro rata
basis, the liquidation preferences disclosed in the table above plus
declared but unpaid dividends. Upon satisfaction of the Series VI
liquidation preference, such liquidation preferences will be paid first
to holders of Series V, second to holders of Series IV and IV-A, third to
holders of Series III and III-A, fourth to holders of Series II and II-A
and fifth to holders of Series I. Any remaining assets will be
distributed ratably among the holders of preferred stock (up to an
additional 200% of the liquidated preference) and common stock, pro rata,
based on the number of shares of common stock held by each shareholder on
an as-converted basis.
F-44
<PAGE> 123
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- The holders of Series II and II-A, the holders of Series III, III-A, IV
and IV-A, and the holders of Series V are entitled to annual
noncumulative, dividends, prior to payments of dividends declared on
common stock, of $0.05 per share, $0.17 per share and $0. 10 per share,
respectively, as declared by the Board of Directors. Holders of Series V
are entitled to share in dividends paid to common shareholders pro rata
based on the number of shares of common stock held by each shareholder on
an as-converted basis. No dividends were declared in fiscal 1998 and 1997
and the nine months ended September 30, 1999.
- Holders of at least 200 shares of convertible preferred stock ("Major
Investors") have the right of first offer with respect to future sales by
the Company of its shares on a pro rata basis.
Significant terms of the Series VI convertible redeemable preferred stock:
- Each share is convertible, at the option of the holder, into 1.875 shares
of common stock (subject to adjustment for events of dilution) on or
prior to the redemption date. Shares will automatically be converted into
common stock upon the closing of a public offering meeting certain
criteria. In addition, shares will automatically be converted upon
written consent of not less than 67% if the outstanding shares of
preferred stock voting together as a single class.
- In the event of liquidation, dissolution or winding up of the Company,
the preferred shareholders will be entitled to receive, prior in
preference, $0.75 per share plus declared but unpaid dividends. Upon
satisfaction of the Series I, II, II-A, III, III-A, IV, IV-A and V
convertible preferred stock, any remaining assets will be distributed
ratably among the holders of preferred stock (up an additional 200% of
the liquidation preference) and common stock, pro rata, based on the
number of shares of common stock held by each shareholder on an as-
converted basis.
- The holders of Series VI are entitled to annual noncumulative dividends,
prior to any payments dividends declared on common stock of $0.075 per
share. No dividends were declared in fiscal 1997 and 1998 and the nine
months ended September 30, 1999.
- Holders of at least 200 shares of convertible preferred stock ("Major
Investors') have the right to first offer with respect of future sales by
the Company of its shares on a pro rata basis.
- At the option of the shareholders, beginning on July 30, 2002, the Series
VI preferred shareholders shall receive the price paid plus an amount
equal to the declared but unpaid dividends. Such payments shall be made
in four semi-annual installments beginning on the fourth anniversary
date. Issuance costs are being amortized over a four-year period to
accrete the carrying value of the stock to $7,858.
GUARANTEE WARRANTS
In connection with the Loan and Security Agreement (see Note 4) a guarantee
was provided by one of the Company's stockholders. In exchange for such
guarantee, and extension thereof, the Company issued the stockholder warrants to
purchase an aggregate of 1,600 shares of common stock. The warrants are
exercisable at $0.20 per share and expire through November 2000, or earlier in
the
F-45
<PAGE> 124
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
event of an initial registered public offering, as defined. The value of such
warrants, aggregating approximately $415 was recorded as additional interest
expense in the periods issued.
LOAN AND SECURITY WARRANTS
In connection with the Capital Equipment Line of Credit (see Note 4), the
Company issued warrants to purchase 60 shares of Series III preferred stock
(convertible into 71 shares of common stock due to certain anti-dilution
adjustments). The warrants are exercisable at $1.00 per share and expire on
December 2, 2006. The aggregate value of warrants issued totaled approximately
$43 and was charged to interest expense in the period issued.
CREDITOR WARRANTS
In connection with the Creditor Notes (see Note 4) the Company has an
obligation to issue warrants to purchase common stock. The number of warrants
and the exercise price are to be determined, as defined, by the per share
offering price in an initial public offering. The warrants are exercisable upon
the initial public offering.
JMA WARRANTS
In connection with the Joint Marketing Agreement (see Note 5), the Company
issued warrants to purchase 800 shares of common stock. The warrants expire at
the earlier of the acquisition of the Company by another entity, the closing of
an initial public offering by the Company, as defined, or May 1999. The exercise
price ranges from $0.75 per share to $1.70 per share based on the percentage of
the Company's revenue attributable to its JMA partner, as defined. The warrants
become exercisable upon the attainment of certain sales levels by the Company,
as defined. As of September 30, 1999, the warrants were not exercisable.
OTHER WARRANTS
In connection with the Series III convertible preferred stock sale, the
Company issued warrants to its placement agent for the purchase of 69 shares of
common stock. The warrants are exercisable at $1.70 per share and expire on May
9, 2001, or earlier in the event of an initial registered public offering, as
defined.
STOCK OPTION/PURCHASE PLAN
Under the Company's 1991 Incentive and Non-Qualified Stock Option Plans,
the Board of Directors is authorized to grant to employees, consultants and
others at fair market value, or a defined discount therefrom, rights to
ownership of up to 5,345 shares of common stock either though issuance of non
qualified or incentive stock options, purchase of restricted stock or a
combination of these alternatives. Such options and restricted stock are
exercisable immediately, generally vest over 50 months for employees and over
the service term for consultants and expire ten years after the date of grant.
Should an employee or consultant terminate, any unvested restricted stock grant
shares
F-46
<PAGE> 125
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
acquired may be repurchased by the Company at the initial issuance price. At
December 31, 1998, no restricted stock grant shares were subject to repurchase.
The Company has the right of first refusal on the sale of any stock purchase
pursuant to the Plans.
A summary of stock option activity is as follow:
<TABLE>
<CAPTION>
OUTSTANDING
------------------
NUMBER WEIGHTED
OF AVERAGE
SHARES PRICE
------ --------
<S> <C> <C>
Balances, January 1, 1997................................... 1,651 $0.20
Granted (weighted average fair value of $0.06)............ 943 0.20
Exercised................................................. (30) 0.20
Canceled.................................................. (172) 0.20
------
Balances, December 31, 1997................................. 2,392 0.20
Granted (weighted average fair value of $0.04)............ 837 0.20
Exercised................................................. (93) 0.20
Canceled.................................................. (528) 0.20
------
Balances, December 31, 1998................................. 2,608 $0.20
Granted (weighted average fair value of $2.15)
(unaudited)............................................ 10,997 0.20
Exercised (unaudited)..................................... (47) 0.20
Canceled (unaudited)...................................... (1,736) 0.20
------
Balances, September 30, 1999 (unaudited).................... 11,822 $0.20
======
</TABLE>
Additional information regarding options outstanding and exercisable as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTURAL EXERCISE
PRICES OF SHARES LIFE (YEARS) PRICE
-------- --------- ------------ --------
<S> <C> <C> <C>
0$.20.. 2,608 8.2 $0.20
</TABLE>
At December 31, 1998, options for 1,561 shares were exercisable at a
weighted average price of $0.20 and options to purchase 2,567 shares of common
stock were available for future grant under the plans.
STOCK-BASED COMPENSATION
During 1999, the Company issued stock purchase rights and options to
certain employees under the Plan with exercise prices below the deemed fair
market value of the Company's common stock at the date of grant. In accordance
with the requirements of APB 25, the Company has recorded unearned compensation
for the differences between the purchase price of stock issued to employees
F-47
<PAGE> 126
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
under stock purchase rights or the exercise price of the stock options and the
deemed fair market value of the Company's stock at the date of grant. This
unearned compensation is amortized to expense over the period during which the
Company's right to repurchase the stock lapses or options become exercisable,
generally four years. At September 30, 1999, the Company has recorded unearned
compensation related to these options in the total amount of $22,391, of which
$1,800 had been amortized to expense during the nine months ended September 30,
1999.
The following information is presented in accordance with the disclosure
requirements of SFAS 123. The fair value of each option grant to employees has
been estimated on the date of grant using the minimum value method with the
following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Risk-free interest rates.................................... 6.60% 6.19%
Expected life............................................... 5 years 5 years
Expected dividends.......................................... -- --
</TABLE>
The weighted average fair value of the options granted was $0.06 and $0.04
per share for the years ended December 31, 1997 and 1998, respectively.
Had compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 1997 and 1998, consistent
with the provisions of SFAS 123, the pro forma net loss would have been reported
as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C> <C>
Net loss -- as reported........................... $(3,174) $(4,189)
Net loss -- pro forma............................. $(3,202) $(4,220)
Net loss per share -- as reported................. $ (0.98) $ (1.26)
Net loss per share -- pro forma................... $ (0.99) $ (1.27)
</TABLE>
COMMON SHARES RESERVED FOR ISSUANCE
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of Series I preferred stock...................... 549
Conversion of Series II preferred stock..................... 1,200
Conversion of Series III preferred stock.................... 6,427
Exercise and conversion of Series III preferred stock
warrants.................................................. 71
Conversion of Series V preferred stock...................... 3,681
Conversion of Series VI redeemable preferred stock.......... 19,644
Exercise of common stock warrants........................... 2,469
Exercise of common stock options............................ 5,176
------
Total..................................................... 39,217
======
</TABLE>
F-48
<PAGE> 127
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to accounting for income taxes.
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 17,479 $ 17,874
Research and development credits.......................... 2,962 3,172
Capitalized license fee................................... 238 14
Tax basis depreciation.................................... 39 29
Inventory and receivable reserves recognized in different
periods................................................. 2,590 2,958
Accruals recognized in different periods.................. 288 171
Capitalized research and development...................... 2,510 3,148
Valuation allowance....................................... (26,106) (27,366)
-------- --------
Total................................................... $ -- $ --
======== ========
</TABLE>
At December 31, 1998, the Company had net operating loss and research and
development credit carryforwards which expire as follows:
<TABLE>
<CAPTION>
NET RESEARCH
OPERATING AND
EXPIRATION YEARS LOSS CREDITS
---------------- --------- -----------
<S> <C> <C>
2002...................................................... $ 505 $ 20
2003...................................................... 5,294 243
2004...................................................... 10,315 328
2005...................................................... 10,013 259
2006...................................................... 649 139
2007...................................................... 3,950 268
2008...................................................... 5,703 213
2009...................................................... 3,425 242
2010...................................................... 917 99
2011...................................................... 5,150 85
2012...................................................... 2,960 118
2013...................................................... 3,728 2,132
------- ------
$52,609 $4,146
======= ======
</TABLE>
F-49
<PAGE> 128
NEOVISTA SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CALIFORNIA STATE
------------------------
NET RESEARCH AND
OPERATING DEVELOPMENT
EXPIRATION YEARS LOSS CREDITS
---------------- --------- ------------
<S> <C> <C>
1999..................................................... $ 3,340 $ --
2000..................................................... 2,374 --
2001..................................................... 1,727 --
2002..................................................... 2,890 --
2003..................................................... 1,492 --
2004..................................................... 1,964 --
No expiration date....................................... -- 1,040
------- ------
$13,787 $1,040
======= ======
</TABLE>
The California tax return net operating loss differs from the federal
primarily due to capitalization of certain research and development costs and
limitations on the use of tax loss carryforwards under California Law.
Current federal and California tax laws include provisions limiting the
annual use of net operating loss carryforwards in the event of certain defined
changes in stock ownership. The Company's capitalization described herein may
have resulted in such a change. Accordingly, the annual use of the Company's net
operating loss carryforwards will be limited according to these provisions.
Management has not yet determined the extent of such limitation. Such limitation
may result in the loss of carryforward benefits due to their expiration.
NOTE 8 -- EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute between 2% and 20% of their eligible compensation,
subject to certain limitations. Company contributions are at the discretion of
the Board of Directors. No Company contributions have been made since the
inception of the plan.
NOTE 9 -- SUBSEQUENT EVENTS
In October 1999, the Company obtained financing of $795 from various
shareholders. The promissory notes issued to the shareholders bear interest at
10% per annum. The promissory notes mature on April 21, 2000.
In November 1999, the Company entered into an agreement with Accrue
Software, Inc. ("Accrue") in which Accrue will purchase all of the Company's
outstanding common and preferred stock. The transaction was consummated on
January 14, 2000.
F-50
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS
October 14, 1999
Board of Directors
Marketwave Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Marketwave
Corporation at March 31, 1998 and 1999, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
F-51
<PAGE> 130
MARKETWAVE CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
--------------- SEPTEMBER 30,
1998 1999 1999
----- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 262 $ 1,262 $ 355
Restricted cash........................................... 92
Accounts receivable, net.................................. 104 369 1,154
Prepaid expenses and other current assets................. 29 44 69
----- ------- -------
Total current assets................................. 487 1,675 1,578
Property and equipment, net................................. 104 197 266
Other assets, net of accumulated amortization of $12, $29
and $37 (unaudited)....................................... 50 33 25
----- ------- -------
Total assets......................................... $ 641 $ 1,905 $ 1,869
===== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 81 $ 180 $ 318
Accrued liabilities....................................... 62 146 204
Deferred revenue.......................................... 43 156 816
----- ------- -------
Total current liabilities............................ 186 482 1,338
----- ------- -------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Series A convertible preferred stock, $0.001 par value;
2,500 shares authorized; issued and outstanding, 1,576,
2,353 and 2,353 shares (preference in liquidation of
$750, $1,120 and $1,120)............................... 750 1,120 1,120
Series B convertible preferred stock, $0.001 par value;
5,000 shares authorized; issued and outstanding, none,
4,559 and 4,559 shares (preference in liquidation of
$1,550)................................................ 1,521 1,521
Common stock, $0.001 par value; 22,500 shares authorized;
issued and outstanding, 7,753, 7,816, 8,398 shares..... 8 8 8
Additional paid-in capital................................ 20 259 450
Unearned compensation..................................... (204) (349)
Accumulated deficit....................................... (323) (1,281) (2,219)
----- ------- -------
Total shareholders' equity........................... 455 1,423 531
----- ------- -------
Total liabilities and shareholders' equity........... $ 641 $ 1,905 $ 1,869
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 131
MARKETWAVE CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
---------------- -----------------
1998 1999 1998 1999
------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue
Software revenue.................................. $ 879 $1,448 $ 591 $1,826
Maintenance and service........................... 58 284 95 411
------ ------ ----- ------
Total revenue.................................. 937 1,732 686 2,237
Cost of revenue..................................... 87 242 100 180
------ ------ ----- ------
Gross profit...................................... 850 1,490 586 2,057
------ ------ ----- ------
Operating expenses
Research and development.......................... 171 279 144 385
Sales and marketing............................... 783 1,552 617 2,040
General and administrative........................ 190 601 223 555
Amortization of unearned compensation............. 31 29
------ ------ ----- ------
Total operating expenses....................... 1,144 2,463 984 3,009
------ ------ ----- ------
Loss from operations................................ (294) (973) (398) (952)
Other income (expense), net......................... 13 15 3 14
------ ------ ----- ------
Net loss.......................................... $ (281) $ (958) $(395) $ (938)
====== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 132
MARKETWAVE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ---------- --------- ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997............... -- $ -- -- $ -- 7,500 $ 8 $ 15
Exercise of stock options........... 253 -- 5
Issuance of Series A preferred
stock............................. 1,576 750
Net loss............................
--------- ---------- --------- ---------- --------- ------ --------
Balance, March 31, 1998.............. 1,576 750 7,753 8 20
Issuance of common stock............ 38 -- 3
Issuance of Series A preferred
stock............................. 777 370
Exercise of stock options........... 484 -- 11
Repurchase of common stock.......... (459) -- (9)
Issuance of Series B preferred
stock, net of offering costs of
$29,021........................... 4,559 1,521
Unearned compensation related to
grants of stock options........... 234
Amortization of unearned
compensation......................
Net loss............................
--------- ---------- --------- ---------- --------- ------ --------
Balance, March 31, 1999.............. 2,353 1,120 4,559 1,521 7,816 8 259
Unearned compensation related to
grants of stock options
(unaudited)....................... 174
Exercise of stock options
(unaudited)....................... 582 -- 17
Amortization of unearned
compensation (unaudited)..........
Net loss (unaudited)................
--------- ---------- --------- ---------- --------- ------ --------
Balance, September 30, 1999
(unaudited)......................... 2,353 $ 1,120 4,559 $ 1,521 8,398 $ 8 $ 450
========= ========== ========= ========== ========= ====== ========
<CAPTION>
UNEARNED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- ----------
<S> <C> <C> <C>
Balance, April 1, 1997............... $ -- $ (42) $ (19)
Exercise of stock options........... 5
Issuance of Series A preferred
stock............................. 750
Net loss............................ (281) (281)
--------- ----------- ----------
Balance, March 31, 1998.............. (323) 455
Issuance of common stock............ -- 3
Issuance of Series A preferred
stock............................. 370
Exercise of stock options........... 11
Repurchase of common stock.......... (9)
Issuance of Series B preferred
stock, net of offering costs of
$29,021........................... 1,521
Unearned compensation related to
grants of stock options........... (234) --
Amortization of unearned
compensation...................... 30 30
Net loss............................ (958) (958)
--------- ----------- ----------
Balance, March 31, 1999.............. (204) (1,281) 1,423
Unearned compensation related to
grants of stock options
(unaudited)....................... (174) --
Exercise of stock options
(unaudited)....................... 17
Amortization of unearned
compensation (unaudited).......... 29 29
Net loss (unaudited)................ (938) (938)
--------- ----------- ----------
Balance, September 30, 1999
(unaudited)......................... $ (349) $ (2,219) $ 531
========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 133
MARKETWAVE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
--------------- ----------------
1998 1999 1998 1999
----- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss........................................... $(281) $ (958) $(395) $(938)
Adjustments to reconcile net loss to net cash used
in operating activities Depreciation and
amortization.................................... 33 69 27 67
Amortization of unearned compensation........... -- 31 -- 29
Changes in assets and liabilities
Restricted cash............................... (92) 92 37 --
Accounts receivable........................... (92) (265) (90) (785)
Prepaid expenses and other current assets..... (29) (15) 26 (25)
Other assets.................................. (12) -- -- --
Accounts payable.............................. 51 99 (2) 138
Accrued expenses.............................. 49 84 6 58
Deferred revenue.............................. 33 113 19 660
----- ------ ----- -----
Net cash used in operating activities...... (340) (750) (372) (796)
----- ------ ----- -----
Cash flows from investing activities
Purchase of property and equipment................. (104) (145) (50) (128)
Purchase of software license....................... (50) -- -- --
----- ------ ----- -----
Net cash used in investing activities...... (154) (145) (50) (128)
----- ------ ----- -----
Cash flows from financing activities
Proceeds from issuance of common stock............. -- 3 3 --
Repurchase of common stock......................... -- (10) -- --
Proceeds from issuance of Series A preferred
stock........................................... 750 370 370 --
Proceeds from issuance of Series B preferred
stock........................................... -- 1,521 -- --
Exercise of stock options.......................... 5 11 1 17
----- ------ ----- -----
Net cash provided by financing
activities.............................. 755 1,895 374 17
----- ------ ----- -----
Net increase (decrease) in cash and cash
equivalents........................................ 261 1,000 (48) (907)
Cash and cash equivalents
Beginning of period................................ 1 262 262 1,262
----- ------ ----- -----
End of period...................................... $ 262 $1,262 $ 214 $ 355
===== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 134
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Marketwave Corporation (the "Company") was originally incorporated in the
State of Washington as a limited liability company ("LLC") on May 6, 1996. On
August 19, 1997, the Company was re-incorporated in the State of Washington as a
C Corporation without changing its ownership. The Company develops and sells
computer software designed to monitor and analyze Internet and intranet traffic.
The Company's products allow web marketers and webmasters to identify and
examine how their Internet and intranet web sites are being used by visitors.
This is accomplished by providing information about how visitors found the site,
what paths visitors use once at the site, what type of information visitors are
searching for when at the site, and which parts of the site are getting the most
traffic.
CERTAIN RISKS AND CONCENTRATIONS
The market in which the Company competes is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and emerging industry standards. Significant technological change
could adversely affect the Company's operating results and subject the Company
to returns of products. While the Company has ongoing programs to minimize the
adverse affect of such changes and considers technological changes in estimating
its allowance, such estimates could change in the future.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original or remaining maturity of three months or less at the date of purchase
to be cash equivalents.
RESTRICTED CASH
Restricted cash represents funds set aside in a certificate of deposit to
secure an irrevocable letter of credit obtained by the Company in connection
with a sublease agreement. The letter of credit expired January 31, 1999.
F-56
<PAGE> 135
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts, based on specific identification of
balances and included in accounts receivable was $2, $16 and $24 (unaudited) as
of March 31, 1998, 1999 and September 30, 1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is recorded
using the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. When assets are sold or retired, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
OTHER ASSETS
Other assets consist of purchased software as well as rental and security
deposits. Software in the amount of $50 was purchased from the founder of the
Company in 1997 and is being amortized over three years.
REVENUE RECOGNITION
The Company adopted the provisions of Statement of Position 97-2, or SOP
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, Software
Revenue Recognition, effective April 1, 1998. SOP 97-2 supersedes Statement of
Position 91-1, Software Revenue Recognition, and delineates the accounting for
software product, products including software that is not incidental to the
product, and maintenance revenues. Under SOP 97-2, the Company recognizes
product revenues upon shipment if a signed contract exists, the fee is fixed and
determinable, collection of the resulting receivables is probable and product
returns are reasonably estimable. The Company allows for product returns for 30
days following the purchase of a software license. Therefore, provision for
estimated product returns are recorded at the time the products are shipped.
For contracts with multiple obligations (e.g. software licenses and
training), revenue is allocated to each component of the contract based on
objective evidence of its fair value, which is specific to the Company. The
Company recognizes revenue allocated to undelivered products when the criteria
for product revenue set forth above are met. The Company recognizes revenue for
annual upgrades and support (AUS) ratably over the service period. Payments for
AUS are generally made in advance and are non-refundable. For revenue allocated
to consulting services, such as installation and training, the Company
recognizes revenue as the related services are performed.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. Amounts that could have been
capitalized under Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of
F-57
<PAGE> 136
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Computer Software to be Sold, Leased or Otherwise Marketed, have been
insignificant and therefore no costs have been capitalized to date.
ADVERTISING EXPENSE
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expense for the fiscal years ended March
31, 1998 and 1999 was $27 and $52, respectively. For the six months ended
September 30, 1998 and 1999, the advertising expense was $52 and $169
(unaudited).
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial
Accountings Standards No. 130, "Reporting Comprehensive Income", or SFAS No.
130, effective March 31, 1998. SFAS No. 130 requires the disclosure of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is the change in equity from
transactions and other events and circumstances other than those resulting from
investments by owners and distributions to owners. SFAS No. 130 had no impact on
the Company, and accordingly, a separate statement of comprehensive income has
not been presented.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, or APB 25, Accounting for Stock Issued to Employees.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of September 30, 1999 and for the six months
ended September 30, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of September 30, 1999 and the results of its operations for the six
months ended September 30, 1998 and 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate fair value due to the relatively short maturity period.
F-58
<PAGE> 137
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." This statement requires that
once certain capitalization criteria have been met, the direct costs of
developing or obtaining computer software for internal use be capitalized. The
statement will be effective for fiscal years beginning after December 15, 1998.
On April 1, 1999, the Company adopted this statement. As of September 30, 1999,
the Company had capitalized computer software costs of $26 and recognized the
related amortization expense $5 for the six months ended September 30, 1999
(unaudited).
In April 1998, the AICPA issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires companies to
expense the costs of start-up activities and organization costs as incurred. In
general, SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company believes the adoption of SOP 98-5 will not have a material
impact on its results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, or SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instrument embedded in other contracts, and hedging activities SFAS
No. 133 is effective for all fiscal quarters beginning after June 15, 2000. The
Company does not expect SFAS No. 133 to have significant effect on its financial
condition or results of operations.
In December 1998, the AICPA, issued Statement of Position 98-9, or SOP
98-9, "Modification of SOP 97-2, 'Software Revenue Recognition,' With Respect to
Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence, or VSOE, of the
fair value of all the undelivered elements that are not accounted for by means
of long-term contract accounting, and (2) VSOE of fair value does not exist for
one or more of the delivered elements, and (3) all the revenue recognition
criteria of SOP 97-2 have been met. SOP 98-9 will be effective for transactions
that are entered into in fiscal years beginning after March 15, 1999.
Retroactive application is prohibited. The Company does not expect SOP 98-9 to
have any effect on its results of operations.
F-59
<PAGE> 138
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
MARCH 31,
------------ SEPTEMBER 30,
1998 1999 1999
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment......................................... $115 $210 $ 324
Equipment.................................................. 6 23 36
Furniture and fixtures..................................... 6 39 40
---- ---- -----
127 272 400
Accumulated depreciation................................... (23) (75) (134)
---- ---- -----
$104 $197 $ 266
==== ==== =====
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at:
<TABLE>
<CAPTION>
MARCH 31,
------------ SEPTEMBER 30,
1998 1999 1999
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued commissions......................................... $ 6 $ 25 $ 98
Technical support........................................... 30 30 10
Accrued vacation............................................ 8 38 21
Other....................................................... 18 53 75
--- ---- ----
$62 $146 $204
=== ==== ====
</TABLE>
4. INCOME TAXES
Upon inception, the Company's shareholders elected to file income taxes as
a Limited Liability Corporation. On August 19, 1997, the Company changed its
status from a LLC to a C corporation and from a cash-basis to an accrual-basis
taxpayer. The cash-to-accrual adjustment increased the book loss for tax
purposes. The Company's total deferred taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial statement purposes and
F-60
<PAGE> 139
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the amounts used for federal income tax purposes. The Company's deferred tax
assets at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Depreciation and amortization............................... $ 2 $ 4
Other accruals and allowances............................... 13 28
Federal net operating loss carryforwards.................... 91 386
Federal tax credit carryforwards............................ 9 29
----- -----
115 447
Less: Valuation allowance................................... (115) (447)
----- -----
Net deferred tax assets..................................... $ -- $ --
===== =====
</TABLE>
The Company has fully reserved for any benefit from temporary differences
and net operating loss or tax credit carryforwards as realization of such
benefits is not reasonably assured. The Company's net operating loss and tax
credit carryforward expires in 2012 through 2019.
5. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
There are 30,000 shares authorized in total, of which 22,500 have been
designated as common stock, 2,500 as Series A preferred stock, and 5,000 as
Series B preferred stock.
On August 19, 1997, the Board of Directors amended the Company's
certificate of incorporation and changed its status from a limited liability
corporation to a C corporation. The change was effected in the form of issuance
of 15 shares of common stock in exchange for each unit of Marketwave, LLC. The
unit information in the statement of shareholders' equity (deficit) and in Note
6 to the financial statements has been restated to reflect this exchange.
STOCK SPLIT
On October 5, 1998, the Board of Directors authorized a four-for-one common
and preferred stock split. Each holder of common and preferred stock received
four shares of their respective stock for each share of stock issued and
outstanding. This stock split was effected in the form of a stock dividend. All
applicable share and per share data has been retroactively adjusted for this
stock split.
CONVERTIBLE PREFERRED STOCK
The convertible preferred stock is issuable in one or more series, each
with such designations, rights, qualifications, limitations and restrictions as
the Board of Directors of the Company may determine at the time of issuance. The
terms of the Company's convertible preferred stock are as follows:
Conversion: Each share of preferred stock is convertible at the option of
the holder into such number of common stock as is determined by dividing
the original issue price by the conversion price in effect at the time of
conversion. Under the terms of the agreement, preferred stock will
F-61
<PAGE> 140
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
be automatically converted into shares of common stock upon the closing of
a public offering at not less than $5.00 per share ($7.15 per share prior
to amendment of articles of incorporation on October 9, 1998) or at least
$15,000 in the aggregate or the date specified by agreement of the holders
of a majority of the then outstanding Series A and Series B preferred
stock.
Liquidation: In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A and
Series B preferred stock will be entitled to receive, prior to and in
preference to any distribution of any of the assets of the Company to the
holders of the common stock, the amount of $0.476 and $0.34 per share,
respectively plus an amount equal to all declared but unpaid dividends on
the Series A and Series B convertible preferred stock. After such
distributions have been made and assets still remain in the Company, the
shareholders of the common stock will receive the remaining assets based
upon their pro-rata ownership.
Dividends: The holders of record of outstanding shares of preferred stock
shall be entitled to receive a noncumulative cash dividend, if and when
declared by the Board of Directors in its discretion. No dividend may be
declared or paid on common stock if the net assets of the Company after
such an event would be insufficient to make the liquidation payment.
Voting: Each holder of shares of Series A and Series B preferred stock has
one vote for each full share of common stock into which its respective
shares of Series A and Series preferred stock would be convertible on the
record date for the vote. The holders of Series A and Series B convertible
preferred stock have certain registration rights.
6. STOCK OPTION PLAN
On August 19, 1997, the Company adopted a stock option plan (the Plan)
which provides for the issuance of up to 4,750 shares of common stock to
employees, directors, and officers of the Company. This stock option plan
replaced a unit option plan established in 1996 for Marketwave, LLC. Under the
Plan, the term of each option is ten years from the date of grant. The options
may be incentive or non-statutory options and vest ratably over periods from one
to four years.
The Company accounts for stock-based employee compensation in accordance
with APB 25. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the fair value of the Company's stock at the date of grant
over the exercise price. During fiscal year 1999, the Company issued stock
options to certain employees under the Plan with exercise prices below the
deemed fair market value of the Company's common stock at the date of grant. The
Company has recorded unearned compensation for the differences between the
exercise price of the stock options and the deemed fair market value of the
Company's stock at the grant date. This unearned compensation is amortized to
expense over the period during which the options become exercisable. At March
31, 1999, the Company recorded unearned compensation related to these options in
the total amount of $234, of which $30 had been amortized during the fiscal year
ended March 31, 1999.
F-62
<PAGE> 141
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------------------------
SHARES WEIGHTED-
AVAILABLE NUMBER AVERAGE
FOR OF EXERCISE AGGREGATE EXERCISE
GRANT SHARES PRICE PRICE PRICE
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances, April 1, 1997.......... 825 2,175 $.02 - $.03 $ 49 $0.02
Options exercised................ (253) $0.02 (6) $0.02
Options granted.................. (505) 505 $.05 - $.08 27 $0.03
Options canceled................. 141 (141) $.02 - $.03 (3) $0.02
------ ------ ----
Balances, March 31, 1998......... 461 2,286 $.02 - $.08 67 $0.03
Shares reserved.................. 2,003
Options granted.................. (1,712) 1,712 $.07 - $.08 136 $0.08
Options exercised................ (484) $.02 - $.05 (11) $0.02
Options canceled................. 78 (78) $.05 - $.08 (5) $0.06
------ ------ ----
Balances, March 31, 1999......... 830 3,436 $.02 - $.08 $187 $0.05
====== ====== ====
</TABLE>
The following table summarizes information with respect to stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED-
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.02... 1,247 8.39 1,247
$0.03... 75 8.39 66
$0.05... 370 8.56 161
$0.07... 50 9.06 46
$0.08... 1,694 9.67 194
--------- ---------
3,436 1,714
========= =========
</TABLE>
At March 31, 1998 and 1999, options to purchase 1,392 and 1,714 shares of
common stock, respectively, were exercisable.
The following information is presented in accordance with the disclosure
requirements of Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation. The fair value of each option grant to employees
has been estimated on the date of grant using the
F-63
<PAGE> 142
MARKETWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
minimum value method allowed for non-public companies and using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Risk-free interest rates.................................... 6.04% 5.18%
Expected life............................................... 5 years 5 years
Expected dividends.......................................... 0 0
</TABLE>
The weighted-average fair value of the options granted was $0.01 and $0.04
per share for the years ended March 31, 1998 and 1999, respectively.
Had compensation expense for the stock option plans been determined based
on the fair value at the grant date for options granted in 1998 and 1999, the
pro forma net loss would have been $305 and $1,031, respectively.
During 1999, options to purchase 1,106 shares of the Company's stock, with
a weighted average exercise price of $0.08 per share and a weighted average fair
value of $0.04 per share were granted with an exercise price below the estimated
market value at the date of the grant.
7. COMMITMENTS
The Company has operating leases for corporate facilities and various
equipment. The lease for corporate facilities expires June 30, 2001. Rental
expense is amortized on a straight-line basis over the periods in which benefit
from the property is derived. Rent expense under the operating leases was $49
and $115 for the years ended March 31, 1998 and 1999, respectively. Rent expense
for the six months ended September 30, 1998 and 1999 was $54 (unaudited) and $65
(unaudited).
Future minimum rental payments required under the noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
<S> <C>
2000........................................................ $125
2001........................................................ 125
2002........................................................ 32
----
$282
====
</TABLE>
8. RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors entered into a consulting
contract with the Company to provide general consulting services relating to
sales, marketing, operational and business development issues for the period
from July 16, 1998 through November 30, 1998. Total cash payments to the
director for this period was $15. The arrangement also provided for additional
compensation of $3 in the form of 38 shares of the Company's common stock and a
grant of nonqualified options to purchase an additional 125 shares of common
stock at an exercise price of $0.08 per share.
9. SUBSEQUENT EVENTS
On September 30, 1999, the Company entered into a business combination
agreement that was accounted for by the acquirer using the pooling of interests
accounting method.
F-64
<PAGE> 143
LOGO
EACH SELLING STOCKHOLDER THAT EFFECTS TRANSACTIONS IN THESE SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE SELLING STOCKHOLDERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD SHARES
REGISTERED PURSUANT TO THIS PROSPECTUS.
<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 46,360
Printing and engraving expenses............................. 75,000
Legal fees and expenses..................................... 50,000
Accounting fees and expenses................................ 200,000
Transfer Agent and Registrar fees........................... 640
Miscellaneous fees and expenses............................. 5,000
--------
Total............................................. $377,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article XI of our Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of Accrue's Bylaws (Exhibit
3.3 hereto) provide for indemnification of our directors, officers, employees
and other agents to the maximum extent permitted by Delaware Law. In addition,
we have entered into Indemnification Agreements (Exhibit 10.7 hereto) with our
officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides
for cross-indemnification among us and the Underwriters with respect to certain
matters concerning our initial public offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in February 1996, we have sold and issued the
following unregistered securities:
1. On February 21, 1996, we issued a convertible promissory note in
the principal amount of $100,000 to one accredited investor. The note was
canceled and converted into shares of Series A preferred stock on May 3,
1996.
2. On April 4, 1996, we issued a convertible promissory note in the
principal amount of $50,000 to one accredited investor. The note was
canceled and converted into shares of Series A preferred stock on May 3,
1996.
3. On May 3, 1996, we issued to Organic Online, Inc. 2,685,714 shares
of common stock in connection with the transfer by Organic of certain
intellectual property to us.
4. On May 3, 1996, we issued 742,857 shares of our Series A preferred
stock to ten accredited investors for an aggregate cash consideration of
$519,999.90, which included
II-1
<PAGE> 145
conversion of the convertible promissory notes described in items 1 and 2
above into a total of 214,285 shares of our Series A preferred stock.
5. On May 3, 1996, we issued a warrant to purchase 350,000 shares of
our common stock to one accredited investor for an aggregate cash
consideration of $3,500.
6. On September 18, 1996, we issued 922,586 shares of our Series B
preferred stock to eight accredited investors for an aggregate cash
consideration of $1,900,002.09 and conversion of indebtedness in the
principal amount of $100,000.
7. On November 27, 1996, we issued 922,586 shares of our Series B
preferred stock and 490,367 shares of our Series C preferred stock to two
accredited investors for an aggregate cash consideration of $3,375,039.22.
8. On November 26, 1996, we issued 22,500 shares of our Series C
preferred stock to one accredited investor for an aggregate cash
consideration of $63,000.
9. On March 2, 1998, we issued subordinated convertible promissory
notes in the aggregate principal amount of $100,000 to two accredited
investors. The notes were canceled and converted into shares of our Series
D preferred stock on June 2, 1998.
10. On March 24, 1998, we issued subordinated convertible promissory
notes in the aggregate principal amount of $400,000 to two accredited
investors. The notes were canceled and converted into shares of our Series
D preferred stock on June 2, 1998.
11. On April 14, 1998, we issued subordinated convertible promissory
notes in the aggregate principal amount of $100,000 to two accredited
investors. The notes were canceled and converted into shares of our Series
D preferred stock on June 2, 1998.
12. On April 28, 1998, we issued subordinated convertible promissory
notes in the aggregate principal amount of $300,000 to two accredited
investors. The notes were canceled and converted into shares of our Series
D preferred stock on June 2, 1998.
13. On May 27, 1998, we issued subordinated convertible promissory
notes in the aggregate principal amount of $100,000 to two accredited
investors. The notes were canceled and converted into shares of our Series
D preferred stock on June 2, 1998.
14. On June 2, 1998, we issued 695,902 shares of our Series D
preferred stock to four accredited investors for an aggregate cash
consideration of $1,510,107.34, which includes conversion of the
subordinated convertible promissory notes described in items 10-14 above
into a total of 460,829 shares of our Series D preferred stock.
15. On July 10, 1998, we issued 232,719 shares of our Series D
preferred stock to two accredited investors for an aggregate cash
consideration of $505,000.23.
16. On August 17, 1998, we issued 5,003,017 shares of our Series E
preferred stock to seven accredited investors for an aggregate cash
consideration of $5,003,017.
17. On May 25, 1999, we issued a warrant to purchase 15,556 shares of
our common stock to a financial institution in connection with a working
line of credit.
18. On September 30, 1999, we issued 2,880,475 shares of our common
stock to the former shareholders of Marketwave Corporation in connection
with our acquisition of Marketwave.
19. On January 14, 2000, we issued 1,779,258 shares of our common
stock to the former shareholders of NeoVista Software, Inc. in connection
with our acquisition of NeoVista.
II-2
<PAGE> 146
20. Since inception through January 15, 2000 we have granted options
and stock purchase rights to purchase a total of 6,646,583 shares of our
common stock, excluding options returned to our stock plans and excluding
grants made by NeoVista Software, Inc. prior to our acquisition of NeoVista
in January 2000, with a weighted average price of approximately $2.95 per
share to a number of our employees, directors and consultants.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 20 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with Accrue, to information about Accrue.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1+ Underwriting Agreement dated July 29, 1999 from our initial
public offering.
2.1++ Form of Agreement and Plan of Merger and Reorganization
dated as of September 14, 1999, among Accrue, Marketwave
Acquisition Corp., Marketwave Corporation and Shareholders
of Marketwave Corporation.
2.2+++ Form of Agreement and Plan of Merger and Reorganization
dated as of November 17, 1999, among Accrue, NeoVista
Acquisition Corp. and NeoVista Software, Inc.
3.1+ Amended and Restated Certificate of Incorporation of Accrue.
3.2+ Amended and Restated Certificate of Incorporation of Accrue
(proposed).
3.3+ Amended and Restated Bylaws of Accrue.
4.1+ Specimen Stock Certificate.
4.2++ Form of Investor Rights Agreement, dated September 30, 1999,
among Accrue and the Shareholders of Marketwave Corporation.
4.3++++ Marketwave Corporation 1997 Stock Option Plan.
4.4++++ NeoVista Software, Inc. 1991 Incentive Stock Option Plan.
4.5++++ NeoVista Software, Inc. 1991 Non-Qualified Stock Option
Plan.
5.1+++++ Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1+ Form of Indemnification Agreement between Accrue and each of
its officers and directors.
10.2+ Common Stock Purchase Warrant issued to Sterling Payot
Company on May 3, 1996, exercisable for 350,000 shares of
Common Stock and letter amendment dated May 23, 1999 between
Accrue and Sterling Payot Company.
10.3+ 1996 Stock Plan, as amended August 13, 1998 and May 23,
1999, and form of agreement thereunder.
10.4+ Employment letter agreement effective February 1996 between
Accrue and Bob Page.
10.5+** Software License Agreement dated July 1, 1997 between Accrue
and VI/ Visualize, Inc.
</TABLE>
II-3
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.6+ Loan and Security Agreement dated September 19, 1997 between
Accrue and Silicon Valley Bank, as amended by the Loan
Modification Agreement dated April 9, 1999.
10.7+ Settlement Agreement dated March 3, 1998 between Accrue and
Simon Roy, as amended by Amendment No. 1 dated April 29,
1998.
10.8+ Settlement Agreement and Mutual Release dated May 13, 1998
between Accrue and William R. Stein.
10.9+ Employment letter agreement dated June 16, 1998 between
Accrue and Richard D. Kreysar.
10.10+ Second Amended and Restated Investor Rights Agreement dated
August 13, 1998.
10.11+ Employment letter agreement dated November 5, 1998 between
Accrue and Brett Kilpatrick.
10.12+ Standard Sublease dated February 25, 1999 between Accrue and
Premisys Communications, Inc., as sublessor, and Lease
Agreement dated June 4, 1998 between Premisys
Communications, Inc. and Aetna Life Insurance Company, as
master landlord, for 48634 Milmont Drive, Fremont, CA 94538.
10.13+** OEM Agreement dated March 29, 1999 between Accrue and
Informix Software, Inc.
10.14+ 1999 Employee Stock Purchase Plan dated May 23, 1999 and
form of agreement thereunder.
10.15+ 1999 Directors' Stock Option Plan dated May 23, 1999 and
form of agreement thereunder.
10.16+ Loan Modification Agreement with Silicon Valley Bank dated
June 22, 1999.
10.17+ Warrant Purchase Agreement with Silicon Valley Bank dated
May 25, 1999.
10.18+ Employment letter agreement dated March 3, 1999 between
Accrue and Gregory C. Walker
23.1 Consent of Independent Accountants
23.2 Consent of Attorney (included in Exhibit 5.1)
24.1+++++ Power of Attorney
27.1+++++ Financial Data Schedule
</TABLE>
-------------------------
+ Previously filed with our Registration Statement on Form S-1 (#333-79491)
and incorporated herein by reference.
++ Previously filed with our Current Report on Form 8-K dated September 30,
1999, and incorporated herein by reference.
+++ Previously filed with our Current Report on Form 8-K dated January 14,
2000, and incorporated herein by reference.
++++ Previously filed with our Registration Statement on Form S-8 (#333-95903)
and incorporated herein by reference.
+++++ Previously filed with our Registration Statement on Form S-1 (#333-32066)
and incorporated herein by reference.
** Confidential treatment has been granted with respect to certain portions
of this Exhibit which has been filed separately with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
II-4
<PAGE> 148
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this post-effective amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Fremont, State of California on July 17, 2000.
ACCRUE SOFTWARE, INC.
By: /s/ RICHARD D. KREYSAR
---------------------------------------
Richard D. Kreysar
President and Chief Executive Officer
By: /s/ GREGORY C. WALKER
---------------------------------------
Gregory C. Walker
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ RICHARD D. KREYSAR President and Chief Executive July 17, 2000
------------------------------------ Officer (Principal Executive
Richard D. Kreysar Officer)
/s/ GREGORY C. WALKER Chief Financial Officer July 17, 2000
------------------------------------ (Principal Financial and Accounting
Gregory C. Walker Officer)
* Director July 17, 2000
------------------------------------
David Folkman
* Director July 17, 2000
------------------------------------
Max D. Hopper
* Director July 17, 2000
------------------------------------
A. Brooke Seawell
* Chairman of the Board of Directors July 17, 2000
------------------------------------
Robert Smelick
*By: /s/ GREGORY C. WALKER
------------------------------------
Gregory C. Walker
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 150
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Accrue Software, Inc.
In connection with our audits of the financial statements of Accrue
Software, Inc. as of March 31, 1998 and 1999, and for each of the three years in
the period ended March 31, 1999, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in Item
16(b) herein. In our opinion, this financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
San Jose, California
May 25, 1999, except note 3, as to the
pooling of interests with Marketwave Corporation
which is as of September 30, 1999.
S-1
<PAGE> 151
SCHEDULE II
ACCRUE SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF YEAR ADDITIONS WRITE-OFFS END OF YEAR
----------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for sales returns and
doubtful accounts:
Year end March 31, 1997........... $ -- $ -- $ -- $ --
Year end March 31, 1998........... -- 25 -- 25
Year end March 31, 1999........... 25 251 (155) 121
Valuation allowance for deferred tax
assets:
Year end March 31, 1997........... $ -- $ 957 $ -- $ 957
Year end March 31, 1998........... 957 1,782 -- 2,739
Year end March 31, 1999........... 2,739 2,808 -- 5,547
</TABLE>
S-2
<PAGE> 152
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1+ Underwriting Agreement dated July 29, 1999 from our initial
public offering.
2.1++ Form of Agreement and Plan of Merger and Reorganization
dated as of September 14, 1999, among Accrue, Marketwave
Acquisition Corp., Marketwave Corporation and Shareholders
of Marketwave Corporation.
2.2+++ Form of Agreement and Plan of Merger and Reorganization
dated as of November 17, 1999, among Accrue, NeoVista
Acquisition Corp. and NeoVista Software, Inc.
3.1+ Amended and Restated Certificate of Incorporation of Accrue.
3.2+ Amended and Restated Certificate of Incorporation of Accrue
(proposed).
3.3+ Amended and Restated Bylaws of Accrue.
4.1+ Specimen Stock Certificate.
4.2++ Form of Investor Rights Agreement, dated September 30, 1999,
among Accrue and the Shareholders of Marketwave Corporation.
4.3++++ Marketwave Corporation 1997 Stock Option Plan.
4.4++++ NeoVista Software, Inc. 1991 Incentive Stock Option Plan.
4.5++++ NeoVista Software, Inc. 1991 Non-Qualified Stock Option
Plan.
5.1+++++ Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1+ Form of Indemnification Agreement between Accrue and each of
its officers and directors.
10.2+ Common Stock Purchase Warrant issued to Sterling Payot
Company on May 3, 1996, exercisable for 350,000 shares of
Common Stock and letter amendment dated May 23, 1999 between
Accrue and Sterling Payot Company.
10.3+ 1996 Stock Plan, as amended August 13, 1998 and May 23,
1999, and form of agreement thereunder.
10.4+ Employment letter agreement effective February 1996 between
Accrue and Bob Page.
10.5+** Software License Agreement dated July 1, 1997 between Accrue
and VI/Visualize, Inc.
10.6+ Loan and Security Agreement dated September 19, 1997 between
Accrue and Silicon Valley Bank, as amended by the Loan
Modification Agreement dated April 9, 1999.
10.7+ Settlement Agreement dated March 3, 1998 between Accrue and
Simon Roy, as amended by Amendment No. 1 dated April 29,
1998.
10.8+ Settlement Agreement and Mutual Release dated May 13, 1998
between Accrue and William R. Stein.
10.9+ Employment letter agreement dated June 16, 1998 between
Accrue and Richard D. Kreysar.
10.10+ Second Amended and Restated Investor Rights Agreement dated
August 13, 1998.
10.11+ Employment letter agreement dated November 5, 1998 between
Accrue and Brett Kilpatrick.
10.12+ Standard Sublease dated February 25, 1999 between Accrue and
Premisys Communications, Inc., as sublessor, and Lease
Agreement dated June 4, 1998 between Premisys
Communications, Inc. and Aetna Life Insurance Company, as
master landlord, for 48634 Milmont Drive, Fremont, CA 94538.
10.13+** OEM Agreement dated March 29, 1999 between Accrue and
Informix Software, Inc.
10.14+ 1999 Employee Stock Purchase Plan dated May 23, 1999 and
form of agreement thereunder.
10.15+ 1999 Directors' Stock Option Plan dated May 23, 1999 and
form of agreement thereunder.
10.16+ Loan Modification Agreement with Silicon Valley Bank dated
June 22, 1999.
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17+ Warrant Purchase Agreement with Silicon Valley Bank dated
May 25, 1999.
10.18+ Employment letter agreement dated March 3, 1999 between
Accrue and Gregory C. Walker.
23.1 Consent of Independent Accountants
23.2 Consent of Attorney (included in Exhibit 5.1)
24.1+++++ Power of Attorney
27.1+++++ Financial Data Schedule
</TABLE>
-------------------------
+ Previously filed with our Registration Statement on Form S-1 (#333-79491)
and incorporated herein by reference.
++ Previously filed with our Current Report on Form 8-K dated September 30,
1999, and incorporated herein by reference.
+++ Previously filed with our Current Report on Form 8-K dated January 14,
2000, and incorporated herein by reference.
++++ Previously filed with our Registration Statement on Form S-8 (#333-95903)
and incorporated herein by reference.
+++++ Previously filed with our Registration Statement on Form S-1 (#333-32066)
and incorporated herein by reference.
** Confidential treatment has been granted with respect to certain portions
of this Exhibit which has been filed separately with the Commission.
