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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-26437
================================================================================
ACCRUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3238684
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48634 MILMONT DRIVE
FREMONT, CA 94538-7353
(Address of principal executive offices, including zip code)
(510) 580-4500
(Registrant's telephone number, including area code)
[FORMER NAME OR FORMER ADDRESS, IF APPLICABLE]
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2000, there were 29,244,373 shares of the registrant's
Common Stock outstanding.
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ACCRUE SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2000 AND MARCH 31, 2000 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 23
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 31,971 $ 31,754
Accounts receivable, net .......................... 8,222 6,279
Prepaid expenses and other current assets ......... 350 1,032
--------- ---------
Total current assets ........................... 40,543 39,065
Property and equipment, net ......................... 2,551 2,253
Goodwill and intangibles, net ....................... 108,591 119,450
Other assets ........................................ 81 131
--------- ---------
Total assets ................................... $ 151,766 $ 160,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 1,118 $ 429
Accrued liabilities ............................... 3,516 2,781
Accrued liabilities, merger ....................... 1,282 2,421
Deferred revenue .................................. 2,812 3,095
Current portion long term debt .................... 129 147
--------- ---------
Total current liabilities ...................... 8,857 8,873
Long term debt, net of current portion .............. 9 39
--------- ---------
Total liabilities .............................. 8,866 8,912
--------- ---------
Stockholders' equity
Common stock, $0.001 par value ...................... 27 27
Additional paid-in capital .......................... 191,695 191,300
Notes receivable from stockholders .................. (213) (213)
Unearned compensation ............................... (3,488) (4,237)
Accumulated deficit ................................. (45,121) (34,890)
--------- ---------
Total stockholders' equity ..................... 142,900 151,987
--------- ---------
Total liabilities and stockholders' equity ..... $ 151,766 $ 160,899
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
Net revenue:
Software license $ 6,923 $ 2,611
Maintenance and service 2,827 573
-------- --------
Total revenue 9,750 3,184
-------- --------
Cost of revenues
Software license 381 98
Maintenance and service 1,439 236
-------- --------
Total cost of revenues 1,820 334
-------- --------
Gross profit 7,930 2,850
-------- --------
Operating expenses:
Research and development 1,936 794
Sales and marketing 4,149 2,334
General and administrative 904 537
Amortization of intangibles 10,859 --
Stock-based compensation expense 749 1,260
-------- --------
Total operating expenses 18,597 4,925
-------- --------
Loss from operations (10,667) (2,075)
Other income (expense) 405 (44)
-------- --------
Net loss $(10,262) $ (2,119)
======== ========
Net loss per share, basic and diluted $ (0.40) $ (0.15)
======== ========
Shares used in computing net loss per
share, basic and diluted 25,578 14,124
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $(10,262) $ (2,119)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 11,048 101
Provision for sales returns and doubtful accounts ............ 189 50
Amortization of discount on line of credit ................... -- 7
Stock-based compensation expense ............................. 749 1,260
Changes in operating assets and liabilities:
Accounts receivable ........................................ (2,106) (1,840)
Prepaid expenses and other current assets .................. 683 (64)
Other assets ............................................... 49 (161)
Accounts payable ........................................... 689 520
Accrued liabilities ........................................ 735 30
Accrued costs related to merger and acquisition ............ (1,139) --
Deferred revenue ........................................... (283) 575
-------- --------
Net cash provided by (used in) operating activities ..... 352 (1,641)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment ........................... (487) (572)
-------- --------
Net cash used in investing activities ................... (487) (572)
-------- --------
Cash flows from financing activities:
Proceeds from equipment loan .................................... -- 602
Proceeds from stock options exercised ........................... 492 264
Treasury stock .................................................. (76) --
Repurchase of common stock ...................................... (16) --
Repayment of equipment loan ..................................... (48) (34)
-------- --------
Net cash provided by financing activities ............... 352 832
-------- --------
Net increase (decrease) in cash and cash equivalents .............. 217 (1,381)
Cash and cash equivalents at beginning of period .................. 31,754 2,862
-------- --------
Cash and cash equivalents at end of period ........................ $ 31,971 $ 1,481
======== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 4 $ 20
======== ========
Unearned compensation related to grants of
stock options ................................................ $ 3,488 $ 7,485
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown. The balance sheet as of March 31, 2000 was
derived from audited financial statements, but does not include all required
disclosures required by generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in our Annual Report on
Form 10-K/A for the fiscal year ended March 31, 2000. The condensed consolidated
statement of operations and the condensed consolidated statement of cash flows
for the three months ended June 30, 1999 have been restated to reflect the
September 1999 acquisition of Marketwave Corporation, which was accounted for as
a pooling of interests.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.
NOTE 2 - NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Convertible preferred stock, options,
warrants and shares subject to repurchase were not included in the computation
of diluted net loss per share because the effect would be anti-dilutive.
Net loss per share for the quarter ended June 30, 1999 does not include the
effect of approximately 10,280,000 shares of convertible preferred stock
outstanding, 1,857,000 stock options outstanding, approximately 364,000 common
stock warrants outstanding, or approximately 2,605,000 shares of common stock
issued and subject to repurchase by us, because their effects are anti-dilutive.
Net loss per share for the quarter ended June 30, 2000 does not include the
effect of approximately 3,617,000 stock options outstanding, or approximately
1,621,000 shares of common stock issued and subject to repurchase by us, because
their effects are anti-dilutive.
A reconciliation of shares used in the calculation of net loss per share
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
NET LOSS PER SHARE, BASIC AND DILUTED:
Net loss ................................................. $(10,262) $ (2,119)
======== ========
Shares used in computing net loss per
share, basic and diluted .............................. 25,578 14,124
======== ========
Net loss per share, basic and diluted .................... $ (0.40) $ (0.15)
======== ========
Antidilutive shares of convertible preferred stock,
options, warrant and shares subject to repurchase not
included in loss per share calculations .................. 5,238 15,106
======== ========
</TABLE>
NOTE 3 - EQUITY TRANSACTIONS
For the three months ended June 30, 1999 and 2000, we recorded unearned
stock-based compensation expense of $3.7 million and $0, respectively, for the
difference at the grant date between the exercise price and the deemed fair
value of the common stock underlying the options granted during that period.
Amortization of unearned compensation recognized for the three months
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ended June 30, 1999 and 2000 was $1.3 million and $0.7 million, respectively.
During the three months ended June 30, 2000, we granted options to purchase an
aggregate of 1,794,574 shares of common stock pursuant to our stock option plans
Also 243,652 shares of common stock were exercised pursuant to our stock option
plans.
NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Revenue by geographic region is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
2000 1999
------ ------
<S> <C> <C>
United States $8,287 $2,872
Foreign 1,463 312
------ ------
$9,750 $3,184
====== ======
</TABLE>
No one customer accounted for more than 10% of revenue for the three months
ended June 30, 1999 and 2000.
NOTE 5 - SUBSEQUENT EVENT
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. Tantau Software International, Inc. is a provider of software
solutions for enterprises to conduct mobile e-commerce. The acquisition will be
accounted for as a purchase.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
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 March 31, 2002. Accrue does not expect SFAS No.
133 to have a significant effect on its financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. Accrue
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN
EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RICK FACTORS" IN
ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS
INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL
RISKS AND UNCERTAINTIES.
7
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OVERVIEW
Accrue Software was founded in 1996 and is headquartered in Fremont, California
with regional sales offices throughout the US, and an international office in
London, England. Our products, Accrue Insight, Hit List and Decision Series are
comprehensive solutions that we believe help Internet businesses increase the
number of visitors to their respective websites, customer loyalty and online
sales by collecting, storing, analyzing and reporting Web site activity data at
a level of detail and accuracy that distinguishes our technology from others. We
offer our products to customers for a license fee and also provide related
maintenance services. In addition, we provide professional services to assist
customers at every stage in their deployment of Accrue products, from
identification of their specific business needs through enterprise integration
and customization of e-business analysis reporting, to delivery of a rapid and
effective implementation. We also offer an application hosting service, Accrue
Site Knowledge (ASK) Service, that enables customers to outsource system
administration responsibilities in connection with their purchase of Accrue
Insight.
Substantially all of our product revenues through June 30, 2000 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.
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 its 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 such 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
approximately 15% of our total revenue to date. We expect that sales 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 including usage-based,
server-based and CPU-based, allowing for additional revenue as a customer's
e-business expands. License fees for our products have typically ranged from ten
to several hundred thousand dollars. Annual support and maintenance contracts,
which are purchased with initial product licenses, entitle customers to
telephone support and upgrades, when and if available. The price for our support
and maintenance program is based on a percentage of list price and is paid in
advance. Consulting fees for implementation services and training are charged on
a time-and-materials basis or a fixed-fee basis for package services.
RESULTS OF OPERATIONS
Revenue. Total revenue was $9.8 million for the three months ended June 30,
2000, an increase of 206% from $3.2 million for the quarter ended June 30, 1999.
No one customer accounted for more than 10% of revenue for the quarters ended
June 30, 1999 and 2000.
Software license revenue. Revenue from software licenses was $6.9 million for
the three months ended June 30, 2000, an increase of $4.3 million, or 165%, over
$2.6 million for the three months ended June 30, 1999. The majority of the
growth in product revenue is 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 $2.8
million for the three months ended June 30, 2000, representing an increase of
393% from $0.6 million from the corresponding period in fiscal 2000. 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.
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Cost of revenues. Cost of revenues consists of royalties paid to third parties
and the salaries and related expenses for maintenance and service personnel.
These costs were $1.8 million or 19% of revenue, for the three months ended June
30, 2000, as compared to $0.3 million or 10% of revenue in the corresponding
period in fiscal 2000. The increase of cost of revenues reflects the higher
volumes of product shipped, increased third-party royalties and a substantial
increase in maintenance and service personnel headcount.
Gross profit. Gross profits were 81% and 90% of revenue for the three months
ended June 30, 2000 and 1999, respectively. In the future, we expect that
royalties paid to third parties will increase in absolute dollars. In addition,
we expect that sales derived through indirect channels will increase as a
percentage of total revenue. We also expect that maintenance and service revenue
will increase as a percentage of total revenue as we expand our service
offerings and maintain our maintenance contract renewal rates with customers.
Maintenance and service revenue has lower gross margins than product revenue.
For all of these reasons, we expect that our gross margins will decline over
time.
Operating expenses. Total operating expenses were $18.6 million for the quarter
ended June 30, 2000, or 191% of revenues as compared to $4.9 million or 155% of
revenues for the quarter ended June 30, 1999. The increase is largely due to
increased salaries, commissions and related expenses associated with newly hired
employees, merger related costs and amortization of intangibles as a result of
the acquisition of NeoVista Software, Inc.
Research and development expenses. Research and development expenses consist
primarily of salaries and related costs associated with the development of new
products, the enhancement of existing products, and the performance of quality
assurance and documentation activities. Research and development expenses were
$1.9 million for the quarter ended June 30, 2000, or 20% of revenue, as compared
to $0.8 million, or 25% of revenue for the quarter ended June 30, 1999. The
increase is primarily attributable to increased staffing and associated support
for software engineers required to expand and enhance our product and services
offerings. We believe that research and development expenses will increase in
dollar amount but remain constant as a 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 $4.1 million, or 43% of
revenue, for the quarter ended June 30, 2000, compared to $2.3 million, or 73%
of revenue for the quarter ended June 30, 1999. The increase is primarily due to
increased headcount, commission expense, and marketing expenditures in our sales
and marketing departments. We believe that sales and marketing expenses will
increase in dollar amount but continue to decrease as a percentage of total
revenue in the future.
General and administrative expenses. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive,
financial, human resource, business development, and other related
administrative functions, as well as legal and accounting costs. General and
administrative expenses were $0.9 million, or 9% of revenue, for the quarter
ended June 30, 2000, as compared to $0.5 million, or 17% of revenue for the
quarter ended June 30, 1999. The increase is 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.
Amortization of Intangibles. Amortization of intangibles represents the
amortization of goodwill and intangibles associated with the acquisition of
NeoVista Software, Inc. in the fourth quarter of fiscal 2000 and is being
amortized over the estimated useful life of three years. Amortization of
intangibles charged to operations for the three months ended June 30, 2000 was
$10.9 million, or 111% of revenue.
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Stock-based compensation. Total stock-based compensation of approximately $0.7
million, or 8% of revenue was amortized for the three months ended June 30,
2000. Total stock-based compensation of approximately $1.3 million, or 40% of
revenue was amortized for the quarter ended June 30, 1999. The remaining balance
of $3.5 million 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 $405,000 for the quarter ended June 30, 2000 and $(44,000)
for the quarter ended June 30, 1999. The increase is primarily due to interest
on proceeds from the funds raised in our initial public offering and funds
generated from operations.
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, our initial public
offering with net proceeds of $40.8 million, and cash generated from operations.
We used cash primarily to fund our net losses from operations and to pay for
acquisition related expenses.
Operating activities provided cash of $0.4 million in the three months ended
June 30, 2000 and utilized cash of $1.6 million in the three months ended June
30, 1999. Cash provided by operating activities during the three months ended
June 30, 2000 resulted primarily from depreciation and amortization expenses of
$11.0 million, stock-based compensation expense of $0.7 million, provision for
sales returns and doubtful accounts of $0.2 million, a decrease in prepaid
expenses and other current assets of $0.7 million, an increase in accounts
payable and accrued liabilities of $0.7 million and $0.7 million, respectively,
offset in part by a net loss of $10.3 million, an increase in accounts
receivable of $2.1 million, a decrease in accrued expenses related to mergers
and acquisitions of $1.1 million and a decrease in deferred revenue of $0.3
million. We had net accounts receivable of $8.2 million at June 30, 2000, which
represented 76 days of sales outstanding ("DSOs") compared to 107 days at June
30, 1999.
Investing activities utilized cash of $0.5 million and $0.6 million in the three
months ended June 30, 2000 and 1999, respectively. The activity in both periods
is primarily a result of capital expenditures. Our capital expenditures consist
primarily of purchases of property and equipment, including computer equipment
and software.
Financing activities provided cash of $0.4 million and $0.8 million during the
three months ended June 30, 2000 and 1999, respectively. The 2000 activity
consists primarily of proceeds from stock options exercised, treasury stock
issuance and repayment of an equipment loan. The 1999 activity consists
primarily of proceeds from an equipment loan and proceeds from stock options
exercised.
We have a $2.0 million working capital line of credit with Silicon Valley Bank,
which expires in June 2001. Interest is payable monthly. There were no amounts
outstanding under the line as of June 30, 2000.
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. The acquisition will be accounted for as a purchase. The
purchase price will be allocated to certain intangible assets based on their
fair market values. The excess of the purchase price over the fair value of the
assets acquired will be recorded as goodwill.
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 our cash and cash equivalents, investments in
marketable securities, available borrowings under the bank line of credit and
funds generated from operations will provide adequate liquidity to meet our
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normal operating requirements for at least the next twelve months. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 March 31, 2002. Accrue does not expect SFAS No.
133 to have a significant effect on its financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. Accrue
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations.
YEAR 2000 READINESS
"Year 2000 Issues" refer generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the June 30, 2000 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 June 30, 2000, we have not experienced any significant issues as a
result of Year 2000 problems and do not anticipate incurring material
incremental costs in future periods due to such issues.
RISK FACTORS
The following is a discussion of certain factors which currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our capital stock or other securities is
cautioned to carefully consider these factors, along with the factors discussed
in our Registration Statement on Form S-1 (File No. 333-79491) and its periodic
reports filed pursuant to the Exchange Act.
WE HAVE A LIMITED OPERATING HISTORY, 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 years ended March 31,
1998, 1999 and 2000, we generated $2.1 million, $4.7 million and $18.9 million
in revenue, respectively. For the three months ended June 2000, we generated
$9.8 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
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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.
WE HAVE INCURRED SUBSTANTIAL LOSSES
We have not achieved profitability. We incurred net losses of $4.2 million for
the fiscal year ended March 31, 1998, $7.6 million for the fiscal year ended
March 31, 1999, $21.1 million for the fiscal year ended March 31, 2000, and
$10.3 million for the three months ended June 30, 2000. As of June 30, 2000, we
had an accumulated deficit of $45.1 million. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis in the future, or at all.
WE EXPECT OPERATING EXPENSES TO INCREASE, WHICH MAY IMPEDE OUR ABILITY TO
ACHIEVE PROFITABILITY
As we grow our business we expect operating expenses to increase significantly,
and as a result, we will need to generate increased quarterly revenue to achieve
and maintain profitability. In particular, we expect to incur additional costs
and expenses related to:
- the expansion of our sales force and distribution channels;
- the expansion of our product and services offerings;
- development of relationships with strategic business partners;
- the expansion of management and infrastructure; and
- brand development, marketing and other promotional activities.
IF WE CANNOT FUND OPERATIONS FROM CASH GENERATED BY OUR BUSINESS, WE MAY BE
REQUIRED TO SELL ADDITIONAL STOCK, WHICH COULD DEPRESS OUR COMMON STOCK PRICE
To date, we have been unable to fund operations from cash generated by our
business and have funded operations primarily by selling securities. If our
revenue fails to offset operating expenses, we may be required to fund future
operations through the sale of additional common stock, which could cause our
common stock price to decline.
FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK
Our annual and quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, particularly
as a result of the risks we describe in this section. Because our operating
results are volatile and difficult to predict, you should not rely on the
results of one quarter as an indication of future performance. It is likely that
in some future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock may fall significantly.
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
Technical Officer.
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Messrs. Kreysar and Page do not have employment or non-competition agreements
and could therefore terminate their employment with us at any time without
penalty. We do not maintain key person life insurance policies on any of our
employees.
WE FACE INTENSE COMPETITION WHICH COULD MAKE IT DIFFICULT 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.
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 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
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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 June 30, 2000, our direct sales and support organization
consisted of 62 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 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 the United State for the
three months ended June 30, 2000 and 1999 were 15% and 10% of our total revenue,
respectively. We expect international revenue to account for an increasing
percentage of total revenue in the future. We believe that we must expand our
international sales activities in order to be successful. We initiated
operations in selected international markets in the 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. As of June
30, 2000, we had non-exclusive alliances with
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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. Although from time to time
we engage in discussions regarding the acquisition of complimentary assets or
businesses or investments in complimentary businesses, we cannot be certain that
we will be able to rapidly expand our product and services offerings through
these acquisitions or investments. Some of the risks we may encounter include:
- complementary products and services may not be available on commercially
reasonable terms;
- we may be unable to compete for acquisitions of products and services
with many of our competitors who have greater financial resources than
we do;
- acquired products and services may not meet the needs of our customers;
- we may incur difficulties associated with the integration of the
personnel and operations of an acquired company with our personnel and
operations;
- we may incur difficulties in assimilating acquired products, services or
technologies, with our existing products, services and technologies; and
- integration of acquired and existing products and services may result in
decreases in revenue from existing products and services.
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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 2000,
approximately 15 - 20% and 25 - 30% of our revenue, respectively, was derived
from sales of products and services to existing customers. For the three months
ended June 30, 2000, approximately 40% 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 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
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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, to 133 at March 31, 2000 and to 140 at June 30, 2000. 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 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.
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
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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 or enhancements after the products or
enhancements are delivered to customers.
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, NEOVISTA
SOFTWARE, INC. AND/OR ASSETS ACQUIRED FROM TANTAU SOFTWARE, INC. AND TANTAU
SOFTWARE INTERNATIONAL, 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. Similarly, our acquisition of certain assets
from Tantau Software, Inc. and Tantau Software International, Inc., which was
completed in July 2000, will require integrating new technology into our
business. We may not be able to successfully assimilate the personnel,
technology, operations and customers of Marketwave, NeoVista and/or Tantau into
our business. In addition, we may fail to achieve the anticipated synergies from
these acquisitions, including marketing, product development, distribution and
other operational synergies. The integration process of these businesses and
assets 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
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managing significant facilities or operations in geographically distant areas.
Finally, we cannot be certain that we will be able to retain Marketwave,
NeoVista and/or Tantau 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.
EVOLVING REGULATION OF THE INTERNET MAY HARM OUR BUSINESS
As e-commerce continues to evolve, increasing regulation by federal, state, or
foreign agencies becomes more likely. This regulation is likely in the areas of
user privacy, pricing, content, quality of products and services, taxation,
advertising, intellectual property rights, and information security. In
particular, laws and regulations applying to the solicitation, collection, or
processing of personal or consumer information could negatively affect our
activities. Typically, our products capture traffic data when consumers,
business customers or employees visit a Web site. The perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the data
captured after visiting Web sites may be used by marketing entities to
unilaterally direct product promotion and advertising to that user. We are not
aware of any similar legislation or regulatory requirements currently in effect
in the United States. Other countries and political entities, such as the
European Economic Community, have adopted legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business could be harmed. Moreover, the applicability to the Internet of
existing laws governing issues such as intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity and libel is
uncertain and developing. Furthermore, any regulation imposing fees or assessing
taxes for Internet use could result in a decline in the use of the Internet and
the viability of e-commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet, may impose additional burdens on e-commerce
or may require us to alter how we conduct our business. This could decrease the
demand for our products and services, increase our cost of doing business,
increase the costs of products sold through the Internet or otherwise have a
negative effect on our business, results of operations and financial condition.
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET
Continued expansion in the sales of our e-business analysis solutions will
depend upon the continued growth of the Internet as a widely used medium for
commerce and communication. Rapid growth in the use of the Internet is a recent
phenomenon. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of customers may not adopt or continue to use the
Internet and online services as a medium of commerce and communication. Demand
and market acceptance for recently introduced products and services relating to
the Internet are subject to a high level of uncertainty and few proven products
and services exist. If the Internet does not continue to grow as a widespread
communications medium and commercial marketplace, the demand for our e-business
analysis solutions could be significantly reduced. The Internet may not prove to
be a
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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.
BECAUSE ACCRUE'S OFFICERS AND DIRECTORS OWN APPROXIMATELY 15.1% OF THE
OUTSTANDING COMMON STOCK, YOU AND OTHER INVESTORS WILL HAVE MINIMAL INFLUENCE ON
STOCKHOLDER DECISIONS
As of May 31, 2000, our officers and directors beneficially owned
approximately 15.1% of our outstanding common stock. 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 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.
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 acquirer, 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. 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.
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 has 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.
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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 August 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 following
June 30, 2000. 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.
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, 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. As of July 31, 2000, we had 29,244,373 shares of
common stock outstanding. 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. 3,225,261 shares of our common stock were issued to the stockholders of
Marketwave Corporation in connection with our acquisition of that company, and
such shares were subsequently registered with the Securities and Exchange
Commission in March 2000. 1,666,667 shares of our common stock were issued to
Tantau Software, Inc. in connection with our purchase of certain assets from
Tantau and its wholly owned subsidiary, Tantau Software International, Inc., and
a registration statement on Form S-3 was filed with the Securities and Exchange
Commission on August 1, 2000, which upon effectiveness will enable such shares
to be resold. The foregoing shares issued to the Marketwave shareholders and to
Tantau, upon effectiveness of the registration statement, may be sold without
restriction or further registration under the federal securities laws unless
held by our "affiliates" as that term is defined in Rule 144 while the
respective registration statements remain effective. The remaining 19,867,445
shares of common stock outstanding 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, we have registered a total of 11,274,407
shares of our common stock under our existing stock option and employee stock
purchase plans, including options originally granted under stock option plans of
Marketwave Corporation and NeoVista Software, Inc., which options are now
exercisable for shares of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuation, and changes in the market values of it investments.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates primarily
to credit facilities, which are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. If market rates
were to increase immediately and uniformly by 10% from levels as of June 30,
1999 and 2000, the decline in fair value of the portfolio would not be material.
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.
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FOREIGN CURRENCY RISK
To date, international sales are made by our direct sales force or through
international alliances and are all transacted in U.S. dollars. However, as we
continue to increase our international business we could be subject to risks
typical of an international business, including but not limited to differing
economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors.
We do not use derivative financial instruments for speculative trading purposes,
nor do we hedge any foreign currency exposure in a manner that entirely offsets
the effects of changes in foreign exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that are material to our business
or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Securities sold during the quarter ended June 30, 2000 that were not
registered under the Securities Act.
None.
d. Use of proceeds from sale of Registered Securities.
On August 4, 1999, we completed an initial public offering of our Common Stock,
$0.001 par value. The managing underwriters in the offering were BancBoston
Robertson Stephens and Thomas Weisel Partners, LLC, (the "Underwriters"). The
shares of Common Stock sold in the offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-1 (the
"Registration Statement") (Reg. No. 333-79491) that was declared effective by
the SEC on July 29, 1999. The offering commenced on July 30, 1999, on which date
3,900,000 shares of Common Stock registered under the Registration Statement
were sold at a price of $10.00 per share. The Underwriters also had an
overallotment option to purchase 585,000 shares,
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which closed on August 26, 1999. The aggregate price of the entire offering
(including the Underwriters' overallotment) was $44,850,000. The aggregate
underwriting discounts and commissions to the Underwriters was $3,139,500 and
the aggregate net proceeds to us was approximately $40.8 million after deducting
offering expenses of $856,000.
We currently expect to use the net proceeds primarily for working capital and
general corporate purposes, including funding product development and expanding
the sales and marketing organization. We have not yet determined the actual
expected expenditures and thus cannot estimate the amounts to be used for each
of these purposes. The amounts and timing of these expenditures will vary
depending on a number of factors, including the amount of cash generated by our
operations, competitive and technological developments and the rate of growth,
if any, of our business. In addition, we have used a portion and may continue to
use a portion of the net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses. On September 30,
1999, we acquired Marketwave Corporation. Approximately $3.3 million of cash was
used to pay for the acquisition related expenses. On January 14, 2000, we
acquired NeoVista Software, Inc. Approximately $5.0 million of cash was used to
pay for the acquisition related expense. On July 14, 2000, we acquired certain
assets of the Infocharger division of Tantau Software, Inc. and approximately
$5.1 million of cash was used to pay for the acquisition related expenses.
None of our net proceeds of the offering were paid directly or indirectly to any
director, officer, general partner of Accrue or their associates, persons owning
10% or more of any class of equity securities of Accrue, or an affiliate of
Accrue.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are attached hereto:
10.19 Employment letter agreement dated September 22, 1999 between
Accrue and Bob Wyman.
10.20 Employment letter agreement dated November 28, 1999 between
Accrue and Jonathan Becher.
10.21 Employment letter agreement dated May 26, 2000 between
Accrue and Ron Yu.
27.1 Financial Data Schedule
b. A current report on Form 8-K was filed with the Securities and Exchange
Commission by us on July 26, 2000 to report the announcement of the
signing of a purchase agreement to acquire certain assets of the
Infocharger division of Tantau Software, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCRUE SOFTWARE, INC.
By: /s/ GREGORY C. WALKER
------------------------------------
GREGORY C. WALKER
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCE
OFFICER)
Date: August 14, 2000
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Exhibit Index
10.19 Employment letter agreement dated September 22, 1999 between
Accrue and Bob Wyman.
10.20 Employment letter agreement dated November 28, 1999 between
Accrue and Jonathan Becher.
10.21 Employment letter agreement dated May 26, 2000 between
Accrue and Ron Yu.
27.1 Financial Data Schedule
