<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1999
REGISTRATION NO. 333-82799
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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E.PIPHANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 77-0443392
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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2300 GENG ROAD, SUITE 200
PALO ALTO, CALIFORNIA 94303
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROGER S. SIBONI
CHIEF EXECUTIVE OFFICER
2300 GENG ROAD, SUITE 200
PALO ALTO, CALIFORNIA 94303
(650) 496-2430
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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AARON J. ALTER, ESQ. WILLIAM D. SHERMAN, ESQ.
N. ANTHONY JEFFRIES, ESQ. CORI M. ALLEN, ESQ.
BRADLEY L. FINKELSTEIN, ESQ. COREY A. LEVENS, ESQ.
DAVID R. BOWMAN, ESQ. MORRISON & FOERSTER LLP
WILSON SONSINI GOODRICH & ROSATI 755 PAGE MILL ROAD
PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94304
650 PAGE MILL ROAD (650) 813-5600
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
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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, 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES PROPOSED AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, par value
$.0001 per share..... 4,772,500 shares $11.00 $52,497,500 $14,595
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(1) Includes 622,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) $13,900 was previously paid with the registrant's initial filing of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1999
4,150,000 Shares
LOGO
Common Stock
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $9.00 and $11.00 per share. Our common stock has been approved for
listing on The Nasdaq Stock Market's National Market under the symbol "EPNY."
The underwriters have an option to purchase a maximum of 622,500 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS E.PIPHANY
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<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
The date of this prospectus is , 1999.
<PAGE> 3
[INSIDE FRONT COVER OF PROSPECTUS]
The gatefold page begins with our logo and the title "E.piphany Software
Solutions" and includes language as follows:
"Identify... California State Automobile Association employees use their
E.piphany Reporting & Analysis software solutions to independently profile
customers and then manage marketing campaigns across the company's travel and
general membership services."
Below this language is California State Automobile Associations's logo along
with a graphic depicting an example of a screen relating to the described
software solution.
"Customize... Visio employees use their E.piphany E-commerce software
solutions to discern how the company's Internet commerce initiatives are
affecting business in the company's traditional sales, marketing and
distribution channels, and analyze customer preference data captured on their
Internet commerce site to refine their products."
Below this language is Visio's logo along with a graphic depicting an example of
a screen relating to the described software solution.
"Differentiate... Capital BlueCross employees use their E.piphany Reporting &
Analysis software solutions to analyze enrollment histories and other patient
information to better understand member activity while working to improve the
profitability of the company's insurance product offerings."
Below this language is Capital BlueCross' logo along with a graphic depicting an
example of a screen relating to the described software solution.
"Interact... Hilton employees use their E.piphany Distributed Database Marketing
software solutions to gather and analyze guest behavior information and then
work with this information to provide better services to their guests."
Below this language is Hilton's logo along with a graphic depicting
an example of a screen relating to the described software solution.
<PAGE> 4
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
YOU SHOULD NOT RELY ON FORWARD-
LOOKING STATEMENTS.................. 19
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED FINANCIAL DATA............... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
BUSINESS.............................. 35
MANAGEMENT............................ 48
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PAGE
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CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 57
PRINCIPAL STOCKHOLDERS................ 59
DESCRIPTION OF CAPITAL STOCK.......... 61
SHARES ELIGIBLE FOR FUTURE SALE....... 64
ADDITIONAL INFORMATION................ 66
UNDERWRITING.......................... 67
NOTICE TO CANADIAN RESIDENTS.......... 70
LEGAL MATTERS......................... 71
EXPERTS............................... 71
CHANGE IN INDEPENDENT PUBLIC
ACCOUNTANTS......................... 71
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the risk factors
beginning on page 6.
E.PIPHANY, INC.
We develop and market software that companies can use to establish,
maintain and continually improve customer relationships across both Internet and
traditional sales, marketing and distribution channels. Our E.piphany E.4 System
is an integrated set of software solutions that provide capabilities for
analysis of customer data and marketing campaign management. Companies can
implement the E.piphany E.4 System to collect and analyze data from their
existing software systems, and from third party data providers, to profile their
customers' characteristics and preferences. Business users within these
companies can then act on this information by using the E.piphany E.4 System to
design and execute marketing campaigns as well as customize products and
services. By using our software to address the unique characteristics and
preferences of each customer, we believe companies are able to improve the
longevity and profitability of their customer relationships. We believe that the
E.piphany E.4 System differs from other software through its combination of the
following characteristics:
- Our software solutions are designed to help companies establish, maintain
and improve customer relationships. The analytic capabilities of the
E.piphany E.4 System help businesses identify and differentiate their
customers. The marketing campaign capabilities of the systems are then
used to customize products and services based on customer characteristics
and preferences.
- Our software solutions utilize a Web-based design to promote ease of use
and wide-scale implementation. The E.piphany E.4 System offers an easy to
use interface that is similar to those used on most Web sites. This
interface is accessed by business users throughout a company across a
computer network or the Internet using only a standard Web browser. This
Web-based design does not require our software to be installed on each
user's computer, but only in a single location, which reduces the costs
of implementing and maintaining the software.
- Our software solutions are packaged for faster and less expensive
implementation. The E.piphany E.4 System includes software solutions that
extract, manage, analyze and act on customer data. Because these software
solutions are integrated, they can work together as soon as they are
implemented. As a result, companies do not need to try to combine
multiple vendors' software tools, each of which offers only limited
capabilities, into a single software solution and then customize this
software solution to meet their needs. Our software solutions can
generally be implemented in 16 weeks or less.
We generate revenue by licensing our software to large and medium sized
businesses and by providing related consulting, implementation and maintenance
services. We market our products through our direct sales force, and indirectly
through agreements with third parties to resell our software. As of June 30,
1999, we have licensed our products to Acxiom, Agilent Technologies, Autodesk,
California State Automobile Association, Capital BlueCross, Charles Schwab,
DIRECTV, Envision, Fair, Isaac, FileNET, Hewlett-Packard, Hilton Hotels, KPMG,
Lucent Technologies, Macromedia, Microsoft, Nissan North America, Sallie Mae,
Visio and Wells Fargo, among others. Each of these customers has entered into
agreements to purchase in excess of $300,000 of software and related services
from us.
Our revenue increased from $3.4 million in 1998 to $5.1 million in the
first six months of 1999. We have a limited operating history and have incurred
significant losses, including a loss of $9.3 million for the six months ended
June 30, 1999. We had an accumulated deficit of $22.8 million as of June 30,
1999. We expect to incur losses in the foreseeable future, and these losses may
be substantial. The market in which we compete is highly competitive.
We were incorporated in Delaware in November 1996 as Epiphany Marketing
Automation, Inc. In March 1997, we changed our name to Epiphany Marketing
Software, Inc., and in April 1999, we changed our name to E.piphany, Inc. Our
principal executive offices are located at 2300 Geng Road, Suite 200, Palo Alto,
California 94303. Our telephone number is (650) 496-2430. Our World Wide Web
site is located at http://www.epiphany.com. Information contained on our World
Wide Web site does not constitute part of this prospectus.
Adaptive Schema Generator, E.4, EpiCenter, E.piphany E.4 System, E.piphany
and the E.piphany and the E.4 logos are our trademarks. Other trademarks or
service marks appearing in this prospectus are trademarks or service marks of
the companies that use them.
3
<PAGE> 6
THE OFFERING
Common stock offered................ 4,150,000 shares
Common stock to be outstanding after
this offering....................... 25,833,984 shares
Use of proceeds..................... For general corporate purposes,
principally working capital and capital
expenditures
Nasdaq National Market symbol....... EPNY
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The share amounts in this table are based on shares outstanding as of August 31,
1999. This table excludes:
- 3,721,346 shares of common stock reserved for issuance under our 1997
stock plan, of which 2,898,983 shares are subject to outstanding options
- 3,500,000 shares of common stock reserved for issuance under our 1999
stock plan
- 2,000,000 shares available for issuance under our 1999 employee stock
purchase plan, and
- 128,374 shares of common stock issuable upon exercise of outstanding
warrants.
------------------
Except as otherwise indicated, information in this prospectus is based on the
following assumptions:
- a one-for-two reverse stock split of the common stock immediately prior
to the effectiveness of this offering
- the conversion of all outstanding shares of our convertible preferred
stock into 11,911,555 shares of common stock upon the closing of this
offering
- the filing of an amended and restated certificate of incorporation after
the closing of this offering, and
- no exercise of the underwriters' over-allotment option to purchase
622,500 shares.
4
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1997 1998 1998 1999
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(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Total revenues................................... $ -- $ 3,377 $ 863 $ 5,124
Cost of revenues................................. -- 1,400 370 2,513
Gross profit..................................... -- 1,977 493 2,611
Loss from operations............................. (3,220) (10,613) (4,022) (9,461)
Net loss......................................... (3,149) (10,330) (3,893) (9,346)
Basic and diluted net loss per share............. $ (2.90) $ (7.19) $ (1.82) $ (1.87)
Shares used in computing basic and diluted net
loss per share................................ 1,087 1,437 2,136 5,005
Pro forma basic and diluted net loss per share
(unaudited)................................... $ (1.17) $ (0.60)
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........ 8,833 15,679
</TABLE>
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JUNE 30, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $19,852 $57,547
Working capital........................................... 18,289 55,984
Total assets.............................................. 24,759 62,454
Long-term obligations, net of current portion............. 8,095 8,095
Total stockholders' equity................................ 12,605 50,300
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The statement of operations for the year ended December 31, 1997 is
presented for the period from inception in November 1996 to December 31, 1997.
Operating expenses totaled $12,000 for the period from inception in November
1996 to December 31, 1996.
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The as adjusted amounts reflect the conversion of the preferred stock and
the receipt of the net proceeds from the sale of the 4,150,000 shares of common
stock offered hereby by E.piphany at an assumed initial public offering price of
$10.00 per share, after deducting the underwriting discount and estimated
offering expenses payable by E.piphany.
5
<PAGE> 8
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks described below, together with all of the other information
included in this prospectus, before buying shares in this offering.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES IN THE FUTURE AND WE MAY NOT EVER
BECOME PROFITABLE
We incurred net losses of $9.3 million in the six months ended June 30,
1999, $10.3 million in 1998 and $3.1 million in 1997. We had an accumulated
deficit of $22.8 million as of June 30, 1999. We expect to incur losses in the
foreseeable future. These losses may be substantial, and we may not ever become
profitable. In addition, we expect to significantly increase our expenses in the
near term, especially research and development and sales and marketing expenses.
Therefore, our operating results will be harmed if our revenue does not keep
pace with our expected increase in expenses or is not sufficient for us to
achieve profitability. If we do achieve profitability in any period, we cannot
be certain that we will sustain or increase profitability on a quarterly or
annual basis.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR
BUSINESS DIFFICULT
We were founded in November 1996, and our limited operating history makes
it difficult to forecast our future operating results. Our revenue and income
potential is unproven. We received our first revenues from licensing our
software and performing related services in early 1998, and we began shipping
our most recent product in June 1999. Since we do not have a long history upon
which to base forecasts of future operating results, any predictions about our
future revenues and expenses may not be as accurate as they would be if we had a
longer business history.
VARIATIONS IN QUARTERLY OPERATING RESULTS DUE TO SUCH FACTORS AS CHANGES IN
DEMAND FOR OUR PRODUCTS AND CHANGES IN OUR MIX OF REVENUES MAY CAUSE OUR STOCK
PRICE TO DECLINE
We expect our quarterly operating results to fluctuate. We therefore
believe that quarter-to-quarter comparisons of our operating results may not be
a good indication of our future performance, and you should not rely on them to
predict our future performance or the future performance of our stock price. Our
short-term expense levels are relatively fixed and are based on our expectations
of future revenues. As a result, a reduction in revenues in a quarter may harm
our operating results for that quarter. Our quarterly revenues, expenses and
operating results could vary significantly from quarter-to-quarter. If our
operating results in future quarters fall below the expectations of market
analysts and investors, the trading price of our common stock will fall. Factors
that may cause our operating results to fluctuate on a quarterly basis are:
- varying size timing and contractual terms of orders for our products
- our ability to timely complete our service obligations related to product
sales
- Changes in the mix of revenue attributable to higher-margin product
license revenue as opposed to substantially lower-margin service revenue
- customers' decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next, including
decisions to defer related to year 2000 concerns
- changes in demand for our E.piphany E.4 System software or for enterprise
software solutions generally
- announcements or introductions of new products by our competitors
- software defects and other product quality problems, and
- any increase in our need to supplement our professional services
organization by subcontracting to more expensive third-party consultants
to help provide implementation, support and training services when our
own capacity is constrained.
6
<PAGE> 9
IF WE FAIL TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION, OUR REVENUES AND
PROFITABILITY WOULD BE HARMED
Our professional services organization, which currently employs a staff of
41, provides assistance with consulting, implementation, maintenance and
training. Customers that license our products typically require these services.
When we sell our software, we frequently enter into contracts for these services
and recognize revenue from the licensing of our software products as the
implementation services are performed. If our professional services organization
does not effectively implement and support our products or if we are unable to
expand our professional services organization, our ability to sell software and
accordingly our revenues will be harmed.
In addition, when we sell licenses together with professional services for
implementation, we generally recognize the revenue from both the license and the
services as we perform the implementation services. Therefore, delays in
providing implementation services will delay our recognition of revenue. If we
are unable to expand our professional services organization to keep pace with
sales, we will be required to increase our use of subcontractors to help meet
our implementation and service obligations, which will result in lower gross
margins.
IF CUSTOMERS DO NOT CONTRACT DIRECTLY WITH THIRD PARTIES TO IMPLEMENT AND
SUPPORT OUR PRODUCTS, OUR REVENUES AND PROFITABILITY MAY BE HARMED BECAUSE OUR
MARGINS ON SERVICES REVENUE ARE SUBSTANTIALLY LOWER THAN OUR MARGINS ON LICENSE
REVENUE
Our principal focus has been to be a provider of software solutions rather
than consulting services. Our license revenues have a substantially higher
margin than our service revenues. As a result, we encourage our customers to
purchase consulting, implementation, maintenance and training services directly
from third-party consulting organizations, in addition to offering these
services directly to our customers through our professional services
organization. While we do not receive any fees directly from these third-party
consulting organizations, we believe that using third-party consulting
organizations to provide support to our customers is necessary for us to
increase software sales and improve our margins by allowing us to focus on
software development and licensing. If these third-party consulting
organizations are unwilling or unable to provide these services or if customers
are unwilling to use these third-party consulting organizations, our revenues
and profitability will be harmed. Since we may not grow our professional
services organization as quickly as our software development organization, we
must effectively enter into, develop and manage relationships with these third
party consulting organizations. We need to identify third parties who can
effectively promote our products, negotiate favorable agreements with these
third parties and provide proper incentives for these third parties to promote
our products, including delivering quality products and providing adequate
support for our products.
OUR SERVICES REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR PRODUCT
REVENUES, AND AN INCREASE IN SERVICE REVENUES RELATIVE TO LICENSE REVENUES COULD
HARM OUR PROFITABILITY
Services revenues, which includes fees for consulting, implementation,
maintenance and training, were 43% of our revenues for the six months ended June
30, 1999 and 34% of our revenues for the year ended December 31, 1998. Our
services revenues have a substantially lower gross margin than license revenues.
Our cost of services revenues for the six months ended June 30, 1999 was 113% of
our services revenues. An increase in the percentage of total revenues
represented by services revenues could adversely affect our overall gross
margins and operating results.
Services revenues as a percentage of total revenues and cost of services
revenues as a percentage of total revenues have varied significantly from
quarter to quarter due to our relatively early stage of development. The
relative amount of services revenues as compared to license revenues has varied
based on the volume of software solution orders compared to the volume of
additional user orders. In addition, the amount and profitability of services
can depend in large part on:
- the software solution which has been licensed
- the complexity of the customers' information technology environment
7
<PAGE> 10
- the resources directed by customers to their implementation projects
- the number of users licensed, and
- the extent to which our strategic third party integrators provide
services directly to customers.
NEW PRODUCT INTRODUCTIONS AND PRICING STRATEGIES BY OUR COMPETITORS COULD
ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND COULD RESULT IN PRESSURE
TO PRICE OUR PRODUCTS IN A MANNER THAT REDUCES OUR MARGINS
Competitive pressures could prevent us from growing, reduce our market
share or require us to reduce prices on our products and services, any of which
could harm our business.
We compete principally with vendors of:
- decision support and data warehousing software, such as Brio Technology,
Business Objects, Cognos, Informatica and Sagent Technology
- enterprise application software, such as i2 Technologies, Oracle,
PeopleSoft, SAP and Siebel Systems, and
- campaign management software, such as Exchange Applications and Prime
Response.
Many of these companies have significantly greater financial, technical,
marketing, service and other resources. Many of these companies also have a
larger installed base of users, have been in business longer or have greater
name recognition than we do. For example, in fiscal 1998 the annual revenue of
Oracle exceeded $7.1 billion, and the annual revenue of Siebel Systems exceeded
$350 million. Some large companies may attempt to build capabilities into their
products that are similar to the capabilities of our products. Some of our
competitors' products may be more effective than our products at performing
particular functions or be more customized for particular needs. Even if these
functions are more limited than those provided by our products, our competitors'
software products could discourage potential customers from purchasing our
products. For example, our competitors' software products may incorporate other
capabilities, such as recording accounting transactions, customer orders or
inventory management data. A software product that performs these functions, as
well as some of the functions of our software solutions, may be appealing to
some customers because it would reduce the number of different types of software
necessary to effectively run their business. Further, our competitors may be
able to respond more quickly than we can to changes in customer requirements.
In addition, our products must integrate with software solutions provided
by a number of our existing or potential competitors. These competitors could
alter their products so that our products no longer integrate well with them, or
they could deny or delay access by us to advance software releases that allow us
to timely adapt our products to integrate with their products.
Our competitors have made and may also continue to make strategic
acquisitions or establish cooperative relationships among themselves or with
other software vendors. This may increase the ability of their products to
address the need for software solutions such as ours which provide both the
ability to collect data from multiple sources and analyze that data to profile
customer characteristics and preferences. Our competitors may also establish or
strengthen cooperative relationships with our current or future distributors or
other parties with whom we have relationships, thereby limiting our ability to
sell through these channels.
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OUR REVENUES MIGHT BE HARMED BY RESISTANCE TO ADOPTION OF OUR SOFTWARE BY
INFORMATION TECHNOLOGY DEPARTMENTS
Some businesses may have already made a substantial investment in other
third party or internally developed software designed to integrate data from
disparate sources and analyze this data or manage marketing campaigns. These
companies may be reluctant to abandon these investments in favor of our
software. In addition, information technology departments of potential customers
may resist purchasing our software solutions for a variety of other reasons,
particularly the potential displacement of their historical role in creating and
running software and concerns that packaged software products are not
sufficiently customizable for their enterprises. If the market for our products
does not grow for any of these reasons, our revenues may be harmed.
IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, OUR REVENUES WILL BE REDUCED
If the market for software that enables companies to establish, maintain
and continually improve customer relationships by collecting and analyzing data
to design and manage marketing campaigns and customize products and services
does not grow as quickly or become as large as we anticipate, our revenues will
be reduced. Our market is still emerging, and our success depends on its growth.
Our potential customers may:
- not understand or see the benefits of using these products
- not achieve favorable results using these products
- experience technical difficulty in implementing or using these products,
or
- use alternative methods to solve the same business problems.
In addition, because our products can be used in connection with Internet
commerce and we are currently developing additional Internet commerce solutions,
if the Internet commerce market does not grow as quickly as we anticipate, we
may experience sales which are lower than our expectations.
IF WE FAIL TO DEVELOP NEW PRODUCTS OR IMPROVE OUR EXISTING PRODUCTS TO MEET OR
ADAPT TO THE CHANGING NEEDS AND STANDARDS OF OUR INDUSTRY, SALES OF OUR PRODUCTS
MAY DECLINE
Our future success depends on our ability to address the rapidly changing
needs of our customers and potential customers. We must maintain and improve our
E.piphany E.4 System and develop new products that include new technological
developments, keep pace with products of our competitors and satisfy the
changing requirements of our customers. If we do not, we may not achieve market
acceptance and we may be unable to attract new customers. We may also lose
existing customers, to whom we seek to sell additional software solutions and
professional services.
To achieve increased market acceptance of our products, we must, among
other things, continue to:
- improve and introduce new software solutions for reporting and analysis,
distributed database marketing and e-commerce
- improve the effectiveness of our software, particularly in
implementations involving very large databases and large numbers of
simultaneous users
- enhance our software's ease of administration
- improve our software's ability to extract data from existing software
systems, and
- adapt to rapidly changing computer operating system and database
standards and Internet technology.
We may not be successful in developing and marketing these or other new or
improved products. If we are not successful, we may lose sales to competitors.
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In addition, we have entered into customer contracts which contain specific
performance goals relating to new product releases or enhancements, and if we
are not able to meet these goals, we may be required to, among other things,
return fees, pay damages and offer discounts.
IF OUR PRODUCTS DO NOT STAY COMPATIBLE WITH CURRENTLY POPULAR SOFTWARE PROGRAMS,
WE MAY LOSE SALES AND REVENUES
Our E.piphany E.4 System must work with commercially available software
programs that are currently popular. If these software programs do not remain
popular, or we do not update our software to be compatible with newer versions
of these programs, we may lose customers.
In order to operate the E.piphany E.4 System, it must be installed on both
a computer server running the Microsoft Windows NT computer operating system,
and a computer server running database software from Microsoft or Oracle. In
addition, users access the E.piphany E.4 System through standard Internet
browsers such as Microsoft Internet Explorer. If we fail to obtain access to
developer versions of these software products, we may be unable to build and
enhance our products on schedule.
After installation, the E.piphany E.4 System collects and analyzes data to
profile customers' characteristics and preferences. This data may be stored in a
variety of our customers' existing software systems, including leading systems
from Oracle, PeopleSoft, Siebel Systems and SAP, running on a variety of
computer operating systems. If we fail to enhance our software to collect data
from new versions of these products, we may lose potential customers. If we lose
customers, our revenues and profitability may be harmed.
IF DATABASE ACCESS BECOMES STANDARDIZED, DEMAND FOR OUR PRODUCTS WILL BE REDUCED
Our products are useful for integrating data from a variety of disparate
data sources. Adoption of uniform, industry-wide standards across various
database and analytic software programs could minimize the importance of the
data integration capabilities of our products. This, in turn, could adversely
affect the competitiveness and market acceptance of our products. Also, a single
competitor in the market for database and analytic software programs may become
dominant, even if there is no formal industry-wide standard. If large numbers of
our customers adopt a single standard, this would similarly reduce demand for
our product. If we lose customers because of the adoption of standards, we may
have lower revenues and profitability.
OUR PRODUCTS HAVE A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PLAN OUR
EXPENSES AND FORECAST OUR RESULTS
It takes us between three and six months to complete the majority of our
sales, but it can take us up to one year or longer. It is therefore difficult to
predict the quarter in which a particular sale will occur and to plan our
expenditures accordingly. The period between our initial contact with a
potential customer and their purchase of our products and services is relatively
long due to several factors, including:
- the complex nature of our products
- our need to educate potential customers about the uses and benefits of
our products
- the purchase of our products requires a significant investment of
resources by a customer
- our customers have budget cycles which affect the timing of purchases
- many of our customers require competitive evaluation and internal
approval before purchasing our products
- potential customers may delay purchases due to announcements or planned
introductions of new products by us or our competitors, and
- many of our customers are large organizations which may require a long
time to make decisions.
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The delay or failure to complete sales in a particular quarter could reduce
our revenues in that quarter, as well as subsequent quarters over which revenues
for the sale would likely be recognized. If our sales cycle unexpectedly
lengthens in general or for one or more large orders, it would adversely affect
the timing of our revenues. If we were to experience a delay of several weeks on
a large order, it could harm our ability to meet our forecasts for a given
quarter.
IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR RELATIONSHIPS WITH THIRD
PARTIES, OUR ABILITY TO GROW REVENUES COULD BE HARMED
In order to grow our business, we must generate, retain and strengthen
relationships with third parties. To date, we have established relationships
with several companies, including system integrators and consultants that
implement our software, including Cambridge Technology Partners, Ernst & Young
and KPMG; resellers, including Acxiom and Harte Hanks; and an application
service provider that provides access to our software to its customers over the
Internet, Exactis.com. If the third parties with whom we have relationships do
not provide sufficient, high-quality service or integrate and support our
software correctly, our revenues may be harmed. In addition, the third parties
with whom we have relationships may offer products of other companies, including
products that compete with our products. We typically enter into contracts with
third parties that generally set out the nature of our relationships. However,
our contracts do not require these third parties to devote resources to
promoting, selling and supporting our products. Therefore we have little control
over these third parties. We cannot assure you that we can generate and maintain
relationships that offset the significant time and effort that are necessary to
develop these relationships.
We must also effectively take advantage of the resources and expertise of
third parties to help us develop additional E.piphany E.4 System software. Our
agreements with third parties do not require them to help us develop new
software. If we fail to effectively work with third parties, our ability to
increase revenues by broadening our software solution offerings, particularly in
additional specific industries, will be limited.
IF WE FAIL TO EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE WILL NOT BE ABLE
TO INCREASE REVENUES
In order to grow our business, we need to increase market awareness and
sales of our products and services. To achieve this goal, we need to increase
both our direct and indirect sales channels. If we fail to do so, this failure
could harm our ability to increase revenues. We currently receive substantially
all of our revenues from direct sales, but intend to increase sales through
indirect sales channels in the future. We need to expand our direct sales force
by hiring additional salespersons and sales management.
We intend to derive our revenues from our indirect sales channel by selling
our software through value added resellers. These resellers offer our software
products to their customers together with consulting and implementation services
or integrate our software solutions with other software. We also intend to offer
our software through application service providers, who will install our
software on their own computer servers and charge their customers for access to
our software. We need to expand our indirect sales channel by entering into
additional relationships with these third parties.
We have not derived a material amount of revenues from international sales
to date, but we expect as part of our strategy to increase international sales
principally through the use of indirect sales channels. We will be even more
dependent on indirect channels in the future due to our international strategy.
We also plan to use international direct sales personnel and therefore must hire
additional sales personnel outside the United States. Our ability to develop and
maintain these channels will significantly affect our ability to penetrate
international markets.
OUR REVENUES DEPEND ON A SMALL NUMBER OF LARGE ORDERS FROM OUR TOP CUSTOMERS AND
IF WE FAIL TO COMPLETE ONE OR MORE LARGE ORDERS, OUR REVENUES WILL BE REDUCED
To date, we have received a significant portion of our revenues from a
small number of large orders. In the first half of 1999, orders from our top
four customers accounted for approximately 55% of our
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revenues. In 1998, orders from our top five customers accounted for
approximately 85% of our revenues. Our operating results may be harmed if we are
not able to complete one or more substantial product sales in any future period
or attract new customers.
IF CUSTOMERS DELAY INSTALLATIONS OR PURCHASES OF OUR PRODUCTS TO AVOID HAVING TO
PERFORM ADDITIONAL TESTS ON THEIR EXISTING SYSTEMS RELATED TO YEAR 2000
COMPLIANCE, OUR REVENUES WILL BE REDUCED IN THE NEAR TERM
Many currently installed computer systems and software were written to
accept and process only two digits to represent the year when storing dates.
Beginning with the year 2000, these systems will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software products used by many companies may need to be
upgraded to solve this problem to avoid incorrect or lost data. In 1999, a
significant number of companies, including some of our current customers, may be
required to devote a substantial amount of their information technology
resources to testing systems for year 2000 compliance and fixing existing year
2000 problems. Some companies may delay installation of new systems during the
remainder of 1999 and possibly into early 2000 to avoid having to perform
additional tests on their existing systems. If these customers also defer
purchases of our products until their year 2000 problems have been resolved, it
will reduce our sales in the near term.
WE HAVE GROWN VERY QUICKLY AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
GENERATE NEW REVENUES AND ACHIEVE PROFITABILITY WOULD BE HARMED
We have grown significantly since our inception and need to grow quickly in
the future. Any failure to manage this growth could impede our ability to
increase revenues and achieve profitability. We have increased our number of
employees from 21 at December 31, 1997 to 115 at June 30, 1999. Future expansion
could be expensive and strain our management and other resources. In order to
manage growth effectively, we must:
- hire, train and integrate new personnel
- augment our financial and accounting systems
- manage our sales operations, which are in several locations, and
- expand our facilities.
THE LOSS OF KEY PERSONNEL, INCLUDING OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ROGER SIBONI, OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL COULD
AFFECT OUR ABILITY TO SUCCESSFULLY GROW OUR BUSINESS
Our future success will depend in large part on our ability to hire and
retain a sufficient number of qualified personnel, particularly in sales,
marketing, research and development, service and support. If we are unable to do
so, this inability could affect our ability to grow our business. Competition
for qualified personnel in high technology is intense, particularly in the
Silicon Valley region of Northern California where our principal offices are
located. Our future success also depends upon the continued service of our
executive officers, in particular our President and Chief Executive Officer,
Roger Siboni, and other key sales, engineering and technical staff. The loss of
the services of our executive officers and other key personnel would harm our
operations. None of our officers or key personnel is bound by an employment
agreement, and we do not maintain key person insurance on any of our employees.
We would also be harmed if one or more of our officers or key employees decided
to join a competitor or otherwise compete with us.
IF OTHERS CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, WE COULD
INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM SELLING OUR PRODUCTS
We cannot assure you that others will not claim that we are infringing
their intellectual property rights or that we do not in fact infringe those
intellectual property rights. We have not conducted a search
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for existing intellectual property registrations and we may be unaware of
intellectual property rights of others that may cover some of our technology.
We have recently been contacted by a company who has asked us to evaluate
the need for a license of a patent it holds directed to data extraction
technology. This company has filed litigation alleging infringement of its
patent against three of our competitors. We cannot assure you that the holder of
the patent will not file litigation against us or that we would prevail in the
case of such litigation. In addition, the patent holder has informed us that it
has applications pending in numerous foreign countries. The patent holder may
also have applications on file in the United States covering related subject
matter, which are confidential until the patent is issued.
Any litigation regarding this patent or other intellectual property could
be costly and time-consuming and divert the attention of our management and key
personnel from our business operations. The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement might also require us to
enter into costly royalty or license agreements. However, we may not be able to
obtain royalty or licenses agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or an injunction against use of our
products. A successful claim of patent or other intellectual property
infringement against us would have an immediate material adverse effect on our
business and financial condition.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THIS INABILITY
COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUES AND INCREASE OUR
COSTS
Our success depends in large part on our proprietary technology. We rely on
a combination of patent, copyright, trademark and trade secrets, confidentiality
procedures and licensing arrangements to establish and protect our proprietary
rights. We may be required to spend significant resources to monitor and police
our intellectual property rights. If we fail to successfully enforce our
intellectual property rights, our competitive position may be harmed.
Our pending patent and trademark registration applications may not be
allowed or competitors may successfully challenge the validity or scope of these
registrations. In addition, our patents may not provide us a significant
competitive advantage.
Other software providers could copy or otherwise obtain and use our
products or technology without authorization. They also could develop similar
technology independently which may infringe our proprietary rights. We may not
be able to detect infringement and may lose a competitive position in the market
before we do so. In addition, competitors may design around our technology or
develop competing technologies. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States.
In addition, one of the ways in which we charge for our software is based
on the number of users at a particular site that will be permitted to use our
software. Organizations that have a site license for a fixed number of users for
our products may allow unauthorized use of our software by unlicensed users.
Unauthorized use is difficult to detect and, to the extent that our software is
used without authorization, we may lose potential license fees.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL SYSTEMS, OUR SOFTWARE PRODUCTS OR
THE PRODUCTS WITH WHICH OUR SOFTWARE INTEGRATES COULD ADVERSELY AFFECT OUR
BUSINESS
We cannot assure you that we will not experience unanticipated negative
consequences relating to problems of computer systems in processing dates after
January 1, 2000. These negative consequences include costs associated with:
- problems with our products
- problems of the interaction of our products with other software, and
- loss of data in our internal systems.
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We have tested our E.piphany E.4 System and our prior products and believe
that they are year 2000 compliant. We have also inquired of significant vendors
of our internal accounting, management and product development systems as to
their year 2000 readiness, and we have also tested our material internal
systems. We believe that, based on these tests and assurances of our vendors, we
will not incur material costs to resolve year 2000 issues for our products and
internal systems. If our tests and inquiries did not uncover all year 2000
problems, we could be exposed to damages resulting from year 2000 failures and
claims resulting from damages caused by any incorrect data produced by our
software, whether through a claim of breach of warranty, product defect or
otherwise.
If our professional services organization does not adequately address
existing year 2000 issues of our customers, or there are preexisting errors in
our customer databases, the usefulness of our software may be impaired. Although
we cannot control the year 2000 compliance of our customers and their
third-party vendors, we may still be subject to claims and liability based on
the fact that our products provided incorrect data. These claims could divert
significant management, financial and other resources and we may not have
adequate commercial insurance to cover these claims.
If it comes to our attention that there are any year 2000 problems with our
products or that some of our third-party hardware and software used in our
internal systems or our products is not year 2000 compliant, then we will
endeavor to make modifications to our products and internal systems, or purchase
new internal systems, before year 2000 problems arise. Although we do not
believe that the cost of these modifications and replacements, if any, will
materially affect our operating results, we have no other contingency plan to
address effects of year 2000 problems with our products and internal systems. We
may not be able to resolve problems that we discover before we suffer losses. We
cannot assure you that our products and systems will be year 2000 compliant or
that we will not incur material expenses or liability relating to the year 2000
problem.
OUR PRODUCTS ARE NEW, AND IF THEY CONTAIN DEFECTS OR OUR SERVICES ARE NOT
PERCEIVED AS HIGH QUALITY, WE COULD LOSE POTENTIAL CUSTOMERS OR BE SUBJECT TO
DAMAGES
We recently began shipping our first products in early 1998, and in June
1999, we began shipping our E.piphany E.4 System software. These products are
complex and may contain errors, defects or failures, particularly since they are
new and recently released. In the past we have discovered software errors in
some of our products after introduction. We may not be able to detect and
correct errors before releasing our products commercially. If our commercial
products contain errors, we may be required to:
- expend significant resources to locate and correct the error
- delay introduction of new products or commercial shipment of products, or
- experience reduced sales and harm to our reputation from dissatisfied
customers.
Our customers also may encounter system configuration problems which require us
to spend additional consulting or support resources to resolve these problems.
In addition, our customers generally store their data across computer
networks, which are often connected to the Internet. Our software operates
across our customers' computer networks and can, at the customer's option, be
accessed through an Internet connection. Our software contains technology
designed to prevent theft or loss of data. Nevertheless, customers may encounter
security issues with their existing databases installed across networks,
particularly the Internet, or with our software. A security breach involving our
software, or a widely publicized security breach involving the Internet
generally, could harm our sales. A security breach involving our software could
also expose us to claims for damages.
Because our software products are used for important decision-making
processes by our customers, product defects may also give rise to product
liability claims. Although our license agreements with customers typically
contain provisions designed to limit our exposure, some courts may not enforce
all or
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part of these limitations. Although we have not experienced any product
liability claims to date, we may encounter these claims in the future. Product
liability claims, whether or not successful, could:
- divert the attention of our management and key personnel from our
business
- be expensive to defend, and
- result in large damage awards.
Our product liability insurance may not be adequate to cover all of the expenses
resulting from a claim. In addition, if our customers do not find our services
to be of high quality, they may elect to use other training, consulting and
product integration firms rather than contract for our services. If customers
are dissatisfied with our services, we may lose revenues.
IF WE NEED ADDITIONAL FINANCING TO MAINTAIN AND EXPAND OUR BUSINESS, FINANCING
MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL
We expect to incur net losses for the foreseeable future. We may need
additional funds to expand or meet all of our operating needs. If we need
additional financing, we cannot be certain that it will be available on
favorable terms, if at all. Further, if we issue common stock after this
offering, stockholders will experience additional dilution. If we need funds and
cannot raise them on acceptable terms, we may not be able to:
- develop or enhance our products
- take advantage of future opportunities, or
- respond to customers and competition.
WE INTEND TO EXPAND OUR INTERNATIONAL SALES EFFORTS BUT DO NOT HAVE SUBSTANTIAL
EXPERIENCE IN INTERNATIONAL MARKETS
Although our international sales have been immaterial to date, we intend to
expand our international sales efforts in the future. We have very limited
experience in marketing, selling and supporting our products and services
abroad. If we are unable to grow our international operations successfully and
in a timely manner, our business and operating results could be seriously
harmed. In addition, doing business internationally involves greater expense and
many additional risks, particularly:
- unexpected changes in regulatory requirements, taxes, trade laws and
tariffs
- differing intellectual property rights
- differing labor regulations
- unexpected changes in regulatory requirements
- changes in a specific country's or region's political or economic
conditions
- greater difficulty in staffing and managing foreign operations, and
- fluctuating exchange rates.
We plan to expand our international operations in the near future, and this
will require a significant amount of attention from our management and
substantial financial resources. We have begun our efforts at international
expansion in Europe and currently have one sales and marketing professional
located in the United Kingdom. We are also exploring other regions for future
expansion.
IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY COULD PROVE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND
ADVERSELY AFFECT OUR OPERATING RESULTS
We may acquire or make investments in complementary companies, services and
technologies in the future. We have not made any acquisitions or investments to
date, and therefore our ability as an organization to conduct acquisitions or
investments is unproven. If we fail to properly evaluate and execute
acquisitions and investments, they may seriously harm our business and
prospects. To successfully complete an acquisition, we must:
- properly evaluate the technology
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<PAGE> 18
- accurately forecast the financial impact of the transaction, including
accounting charges and transactions expenses
- integrate and retain personnel
- combine potentially different corporate cultures, and
- effectively integrate products and research and development, sales,
marketing and support operations.
If we fail to do any of these, we may suffer losses or our management may
be distracted from our day-to-day operations. In addition, if we conduct
acquisitions using convertible debt or equity securities, existing stockholders
may be diluted which could affect the market price of our stock.
SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE MAY AFFECT OUR QUARTERLY REVENUES
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenue growth. We believe that these
fluctuations are caused in part by customer buying patterns, which are
influenced by year-end budgetary pressures and by sales force commission
structures. As our revenues grow, we may experience seasonal fluctuations in our
revenues.
BECAUSE SOME EXISTING STOCKHOLDERS WILL TOGETHER OWN 47.9% OF OUR STOCK, THE
VOTING POWER OF OTHER STOCKHOLDERS, INCLUDING PURCHASERS IN THIS OFFERING, MAY
BE LIMITED
After this offering, it is anticipated that our officers, directors and
five percent or greater stockholders will beneficially own or control, directly
or indirectly, 12,776,303 shares of common stock, which in the aggregate will
represent approximately 47.9% of the outstanding shares of common stock. As a
result, if some of these 12 persons or entities act together, they will have the
ability to control all matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any business
combination. This may delay or prevent an acquisition or cause the market price
of our stock to decline. Some of these persons or entities may have interests
different than yours. For example, they may be more interested in selling
E.piphany to an acquiror than other investors or may want us to pursue
strategies that are different from the wishes of other investors.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE PURCHASED IN THIS OFFERING,
MAY DEPRESS OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Shares issued upon the exercise of outstanding options may also be
sold in the public market. In addition, such sales could create the perception
to the public of difficulties or problems with our products and services. As a
result, these sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of this offering, we will have outstanding 25,833,984
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options after August 31, 1999. Of these
shares, the shares sold in this offering are freely tradable. The remaining
21,683,984 shares will become eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES DATE
--------- ----
<C> <S>
0 At the date of this prospectus
20,394,921 181 days after the date of this prospectus
937,500 At June 16, 2000
351,563 At August 19, 2000
</TABLE>
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The above table includes the effect of lock-up arrangements with the
underwriters and us which prevent our directors, officers and other existing
stockholders from selling or otherwise disposing of their shares of common stock
prior to 181 days after this offering. The underwriters may remove these lock-up
restrictions prior to 181 days after this offering without prior notice. In
addition, as of August 31, 1999, we have 2,898,983 outstanding options with a
weighted average exercise price of $4.07. Of these options, 188,440 are vested
and exercisable as of August 31, 1999 and will be resellable 181 days after the
offering.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE, OR ANY, RETURN FOR US AND YOU MAY LOSE THE
ENTIRE AMOUNT OF YOUR INVESTMENT
The net proceeds of this offering are not allocated for specific uses other
than working capital and general corporate purposes. Thus, our management has
broad discretion over how these proceeds are used and could spend the proceeds
in ways with which you may not agree. We cannot assure you that the proceeds
will be invested in a way that yields a favorable, or any, return for us.
BECAUSE THIS IS OUR INITIAL PUBLIC OFFERING OUR SECURITIES HAVE NO PRIOR MARKET
AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THE
OFFERING
Before this initial public offering of our stock, there has not been a
public market for our common stock and an active public market for our common
stock may not develop or be sustained after this offering. Further, the trading
market price of our common stock may decline below our initial public offering
price. The initial public offering price will be determined by negotiations
between the representatives of the underwriters and us. This price may not
directly relate to our book value, assets, past operating results, financial
condition or other established criteria of value.
WE DO NOT INTEND TO PAY DIVIDENDS, AND YOU WILL NOT RECEIVE FUNDS WITHOUT
SELLING SHARES AND YOU MAY LOSE THE ENTIRE AMOUNT OF YOUR INVESTMENT
We have never declared or paid any cash dividends on our capital stock and
do not intend to pay dividends in the foreseeable future. We intend to invest
our future earnings, if any, to fund our growth. Therefore, you will not receive
any funds without selling your shares. We further cannot assure you that you
will receive a return on your investment when you sell your shares or that you
will not lose the entire amount of your investment.
AS A NEW INVESTOR YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution of $8.01 per share in pro forma
net tangible book value based on our book value as of June 30, 1999. If the
holders of outstanding options or warrants exercise their options or warrants,
you will experience further dilution of $0.23 per share.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Our certificate of incorporation and bylaws contain provisions which could
make it harder for a third party to acquire us without the consent of our board
of directors. For example, if a potential acquiror were to make a hostile bid
for us, the acquiror would not be able to call a special meeting of stockholders
to remove our board of directors or act by written consent without a meeting. In
addition, our board of directors have staggered terms which makes it difficult
to remove them all at once. The acquiror would also be required to provide
advance notice of its proposal to remove directors at an annual meeting. The
acquiror also will not be able to cumulate votes at a meeting, which will
require the acquiror to hold more shares to gain representation on the board of
directors than if cumulative voting were permitted.
Our board of directors also has the ability to issue preferred stock which
would significantly dilute the ownership of a hostile acquiror. In addition,
Section 203 of the Delaware General Corporation Law limits business combination
transactions with 15% stockholders that have not been approved by the board of
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directors. These provisions and other similar provisions make it more difficult
for a third party to acquire us without negotiation. These provisions may apply
even if the offer may be considered beneficial by some stockholders.
Our board of directors could choose not to negotiate with an acquiror that
it did not feel was in the strategic interests of E.piphany. If the acquiror was
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition by the antitakeover measures, you could lose
the opportunity to sell your shares at a favorable price.
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YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
You should not rely on forward-looking statements in this prospectus. 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 such
forward-looking statements. 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
described above and elsewhere in this prospectus.
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USE OF PROCEEDS
The net proceeds to us from the sale of the 4,150,000 shares of common
stock offered by us are estimated to be $37.7 million, after deducting the
underwriting discount and estimated offering expenses and assuming no exercise
of the underwriters' over-allotment option to purchase 622,500 shares from us.
The principal purposes of this offering are to obtain additional working
capital, to create a public market for our common stock and to facilitate future
access by us to public markets. We expect to use the net proceeds of this
offering for working capital and general corporate purposes. In addition, we may
use a portion of the net proceeds to acquire complementary products,
technologies or businesses; however, we currently have no commitments or
agreements and are not involved in any negotiations to do so. Pending use of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our existing lines of credit prohibit the payment of cash
dividends.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of E.piphany as of June 30, 1999, and
- the as adjusted capitalization of E.piphany to give effect to the
conversion of all outstanding shares of convertible preferred stock into
shares of common stock and the sale of 4,150,000 shares of common stock
at an assumed initial public offering price of $10.00 per share in this
offering, less underwriting discounts and commissions and estimated
offering expenses payable by E.piphany.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, net of current portion............... $ 8,095 $ 8,095
Stockholders' equity:
Convertible preferred stock; issuable in series, $.0001
par value; 12,702,863 shares authorized, 11,559,992
shares issued and outstanding,
actual; no shares authorized, issued or outstanding, as
adjusted............................................... 3 --
Preferred stock; $.0001 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding, as
adjusted............................................... -- --
Common stock, $.0001 par value; 25,000,000 shares
authorized, 9,521,798 shares issued and outstanding,
actual; 100,000,000 shares authorized, 25,231,790
shares issued and outstanding, as adjusted............. 2 3
Additional paid-in capital.................................. 39,375 77,072
Warrants to purchase stock.................................. 532 532
Note receivable............................................. (640) (640)
Deferred compensation....................................... (3,842) (3,842)
Accumulated deficit......................................... (22,825) (22,825)
-------- --------
Total stockholders' equity............................. 12,605 50,300
-------- --------
Total capitalization.............................. $ 20,700 $ 58,395
======== ========
</TABLE>
This table excludes, as of June 30, 1999:
- 3,471,977 shares of common stock reserved for issuance under our 1997
stock plan, of which 2,791,356 shares are subject to outstanding options
- 3,500,000 shares of common stock reserved for issuance under our 1999
stock plan
- 2,000,000 shares available for issuance under our 1999 employee stock
purchase plan, and
- 479,937 shares of common stock issuable upon exercise of outstanding
warrants and stock purchase rights.
21
<PAGE> 24
DILUTION
The net tangible book value of our common stock (assuming conversion of all
outstanding shares of our convertible preferred stock on June 30, 1999) was
$12.6 million, or approximately $0.60 per share. Net tangible book value per
share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common and convertible preferred stock
outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to our sale of
4,150,000 shares of common stock offered by this prospectus at an assumed
initial public offering price of $10.00 per share and after deducting the
underwriting discount and estimated offering expenses payable by us, our net
tangible book value would have been approximately $50.3 million, or $1.99 per
share. This represents an immediate increase in net tangible book value of $1.39
per share to existing stockholders and an immediate dilution in net tangible
book value of $8.01 per share to new investors purchasing shares of common stock
in this offering. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.60
Increase per share attributable to new investors.......... 1.39
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.99
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.01
======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Notes 5 and 6 to Notes to Financial
Statements for more information about these options and warrants. The exercise
of outstanding options and warrants would increase the dilutive effect to new
investors by $0.23 per share.
The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price, before deducting the underwriting discount and
estimated offering expenses payable by us, of $10.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 21,081,790 83.6% $35,430,000 46.0% $ 1.68
New investors......................... 4,150,000 16.4 41,500,000 54.0 $10.00
---------- ----- ----------- -----
Total....................... 25,231,790 100.0% $76,963,000 100.0%
---------- ----- ----------- -----
</TABLE>
If the underwriters over-allotment option is exercised in full, the
following will occur:
- the percentage of the total number of shares of common stock held by
existing stockholders will decrease to 81.5% after the offering, and
- the number of shares held by new public investors will be increased to
4,772,500 or approximately 18.5% of the total number of shares of our
common stock outstanding after this offering.
22
<PAGE> 25
SELECTED FINANCIAL DATA
The following selected financial data and other operating information as of
and for the years ended December 31, 1997 and 1998, are derived from our
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this prospectus.
The financial data as of and for the six months ended June 30, 1998 and 1999 are
derived from unaudited financial statements included elsewhere in this
prospectus. We have prepared this unaudited information on the same basis as the
audited financial statements and have included all adjustments, consisting only
of normal recurring adjustments that we consider necessary for a fair
presentation of our financial position and operating results for such periods.
When you read this selected financial data, it is important that you also read
the historical financial statements and related notes included in this
prospectus, as well as the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ------------------
1997 1998 1998 1999
------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product license.................................. $ -- $ 2,216 $ 533 $ 2,929
Services......................................... -- 1,161 330 2,195
------- -------- ------- -------
Total revenues........................... -- 3,377 863 5,124
------- -------- ------- -------
Cost of revenues:
Product license.................................. -- 4 -- 25
Services......................................... -- 1,396 370 2,488
------- -------- ------- -------
Total cost of revenues................... -- 1,400 370 2,513
------- -------- ------- -------
Gross profit....................................... -- 1,977 493 2,611
------- -------- ------- -------
Operating expenses:
Research and development......................... 1,646 3,769 1,644 2,865
Sales and marketing.............................. 1,200 6,519 2,260 6,351
General and administrative....................... 373 1,503 609 1,284
Stock-based compensation......................... 1 799 2 1,572
------- -------- ------- -------
Total operating expenses................. 3,220 12,590 4,515 12,072
------- -------- ------- -------
Loss from operations............................... (3,220) (10,613) (4,022) (9,461)
Interest income, net............................... 71 283 129 115
------- -------- ------- -------
Net loss........................................... $(3,149) $(10,330) $(3,893) $(9,346)
======= ======== ======= =======
Basic and diluted net loss per share............... $ (2.90) $ (7.19) $ (1.82) $ (1.87)
======= ======== ======= =======
Shares used in calculation of basic and diluted net
loss per share................................... 1,087 1,437 2,136 5,005
======= ======== ======= =======
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (1.17) $ (0.60)
======== =======
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 8,833 15,679
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- -----------
1997 1998 1999
---- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $369 $13,595 $19,852
Working capital............................................. 131 12,601 18,289
Total assets................................................ 801 16,364 24,759
Long term obligations, net of current portion............... -- 333 8,095
Total stockholders' equity.................................. 468 13,440 12,605
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to, those discussed in "Risk Factors" starting on page
6 and elsewhere in this prospectus.
OVERVIEW
Our E.piphany E.4 System is an integrated family of software solutions that
companies can deploy to collect and analyze data from their existing software
systems, and from third party data providers, to profile their customers'
characteristics and preferences. Business users use our software to design and
execute marketing campaigns as well as customize products, services and related
customer interactions.
E.piphany was founded in November 1996. From our founding through the end
of 1997, we primarily engaged in research activities, developing our products
and building our business infrastructure. We began shipping our first software
product and first generated revenues from software license fees, implementation
and consulting fees, and maintenance fees in early 1998. During 1998, we
introduced several other software products, and in June 1999, we shipped our
E.piphany E.4 System software solutions. Although our revenues consistently
increased from quarter to quarter during 1998, we incurred significant costs to
develop our technology and products, to continue the recruitment of research and
development personnel, to build a direct sales force and a professional services
organization, and to expand our general and administrative infrastructure. Our
total headcount has increased from 21 at December 31, 1997 to 115 at June 30,
1999. Our revenues were $3.4 million in 1998 and $5.1 million in the six months
ended June 30, 1999. We had net losses of $3.1 million in 1997, $10.3 million in
1998 and $9.3 million in the six months ended June 30, 1999.
SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY
We generate revenues principally from licensing our software products
directly to customers and providing related professional services including
implementation, consulting, support and training. Through June 1999,
substantially all of our revenues have been derived from sales within the United
States through our direct sales force. Our license agreements generally provide
that customers pay a software license fee for one or more software solutions for
a specified number of users. The amount of the license fee varies based on which
software solution is purchased, the number of software solutions purchased and
the number of users licensed. Customers can subsequently pay additional license
fees to allow additional users to use previously purchased software solutions or
to purchase additional software solutions. Each software solution included in
the E.piphany E.4 System contains the same core technology, allowing for easy
integration of additional software solutions as they are purchased from us.
Customers that purchase software solutions receive the software on compact disc
or via Internet delivery.
Customers generally require consulting and implementation services which
include evaluating their business needs, identifying the data sources necessary
to meet these needs and installing the software solution in a manner which
fulfills their needs. Customers have generally purchased these services directly
from us through our internal professional services organization on either a
fixed fee or a time and expense basis. We have historically supplemented the
capacity of our internal professional services organization by subcontracting
some of these services to third-party consulting organizations, especially to
those organizations with which we have relationships such as KPMG, Cambridge
Technology Partners and Ernst & Young. However, we intend to increasingly
encourage customers to purchase services directly from these third party
consulting organizations. We believe that this would increase the number of
consultants which can provide consulting and implementation services related to
our software products and that it would increase our overall gross margins by
increasing our percentage of license revenue, which has
24
<PAGE> 27
substantially higher gross margins than services revenue, as a percentage of
total revenue. We also believe that it will encourage third party consulting
organizations to generate sales leads within their customer base.
Customers also generally purchase maintenance contracts which provide
software upgrades and technical support over a stated term, generally twelve
months. Revenue on software upgrades and technical support is recognized ratably
over the term of the maintenance contract.
We recognize product license revenues in accordance with the provisions of
American Institute of Certified Public Accounts (AICPA) Statement of Position
97-2, "Software Revenue Recognition." Pursuant to the requirements of Statement
of Position 97-2, we recognize product license revenues when all of the
following conditions are met:
- we have signed a noncancellable license agreement with the customer
- we have delivered the software product to the customer
- the amount of fees to be paid by the customer is fixed or determinable,
and
- we believe that collection of these fees is probable.
To date, when we manage the implementation process for our customers, the
implementation services have been considered essential to the functionality of
the software products. Accordingly, both the product license revenues and
services revenues are recognized in accordance with the provisions of AICPA
Statement of Position 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." Prior to 1999, we recognized substantially
all of our revenues using the completed contract method as estimates of costs
and efforts necessary to complete the implementation were generally not reliable
given our lack of history with implementing our products. In 1999 and future
periods, we expect to recognize most of our revenues using the percentage of
completion method, and therefore both product license and services revenues are
recognized as work progresses. While our software solutions can generally be
implemented in less than 16 weeks, implementation can take longer depending on
the solution which has been licensed, the number of software solutions licensed,
the complexity of the customer's information technology environment and the
resources directed by customers to the implementation projects. To date, we have
managed the implementation of our solutions for the substantial majority of our
customers. When we subcontract services to third parties, we are responsible for
managing the implementation. To the extent that customers contract directly with
third parties to provide implementation services, we do not manage the
implementation, and license revenues are recognized when the relevant conditions
of Statement of Position 97-2 are met. Some of our contracts provide for the
delivery of unspecified future products over a period of time. Accordingly,
payments received from our customers upon the signing of these agreements are
deferred and the revenues are recognized ratably over the contract period.
Revenue allocated to training and other services is recognized as the
services are performed.
COST OF REVENUES AND OPERATING EXPENSES
Our cost of license revenues primarily consists of license fees due to
third parties for integrated technology. Our cost of services revenues includes
salaries and related expenses for our implementation, consulting support and
training organizations, costs of subcontracting to third parties to provide
consulting services to customers and an allocation of facilities, communications
and depreciation expenses. Our operating expenses are classified into three
general categories: sales and marketing, research and development, and general
and administrative. We classify all charges to these operating expense
categories based on the nature of the expenditures. We allocate the costs for
overhead and facilities to each of the functional areas that use the overhead
and facilities services based on their headcount. These allocated charges
include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment.
25
<PAGE> 28
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development costs as
incurred. Since license revenues from our software solutions are not recognized
until after technological feasibility has been established, software development
costs are not generally expensed in the same period in which license revenues
for the developed products are recognized.
We had 115 full-time employees as of June 30, 1999 and intend to hire a
significant number of employees in the future. This expansion places significant
demands on our management and operational resources. To manage rapid growth and
increased demand, we must continue to invest in and implement additional
operational systems, procedures and controls.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Total revenues increased to $5.1 million for the six months ended June 30,
1999, from $0.9 million for the six months ended June 30, 1998. This rapid
growth in revenues reflects our relatively early stage of development, and we do
not expect revenues to increase at the same rate in the future. For the six
months ended June 30, 1999, Sallie Mae, CSAA, KPMG and Fair, Isaac accounted for
20%, 13%, 11% and 11% of our total revenues, respectively. For the six months
ended June 30, 1998, Autodesk, Visio and Macromedia accounted for 57%, 21% and
16% of our total revenues, respectively.
Product license revenues increased to $2.9 million, or 57% of total
revenues, for the six months ended June 30, 1999 from $0.5 million, or 62% of
total revenues, for the six months ended June 30, 1998. The increase in dollar
amount of product license revenues was due to both an increase in the number of
licenses sold and the average size of the licenses, and resulted primarily from
the growth of our direct sales force and the introduction and shipment of new
products. Product license revenues declined as a percentage of total revenues
primarily because of increased maintenance revenues due to the growth in our
customer base.
Services revenues increased to $2.2 million, or 43% of total revenues, for
the six months ended June 30, 1999 from $0.3 million, or 38% of revenues, for
the six months ended June 30, 1998. The increase was primarily attributable to
increased implementation and consulting services performed in connection with
increased license sales and to maintenance contracts sold to E.piphany's new
customers. Because services revenues have substantially lower margins relative
to product license revenues, to the extent that services revenues become a
greater percentage of our total revenues, our overall gross profits will
decline. This is especially true when we are required to subcontract with third
parties to supplement our internal professional services organization. It
generally costs us more to subcontract with third parties to provide these
services than to provide these services ourselves. To offset the effect that
providing services ourselves or through subcontractors has on our overall sales
margins, we intend to further encourage customers to contract directly with
third-party integrators for implementation and consulting services. Encouraging
direct contracts between our customers and third-party integrators may also
increase the overall amount of services available to customers and generate
sales leads. We do not receive any services revenues when customers contract
directly with third-party integrators for implementation and consulting
services.
COST OF REVENUES
Total cost of revenues increased to $2.5 million for the six months ended
June 30, 1999 from $0.4 million for the six months ended June 30, 1998.
Cost of product license revenues consists primarily of license fees paid to
third parties under technology license arrangements and have not been
significant to date.
Cost of services revenues consists primarily of the costs of consulting and
customer service and support. Cost of services revenues increased to $2.5
million, or 113% of services revenues, for the six
26
<PAGE> 29
months ended June 30, 1999 from $0.4 million, or 112% of services revenues, for
the six months ended June 30, 1998. The increase in cost of services revenues in
absolute dollars resulted primarily from the hiring of additional employees and
the use of third party subcontractors to support increased customer demand for
consulting services. Cost of services revenues has exceeded services revenues
due to the rapid growth of our services organization from 5 employees at June
30, 1998 to 28 employees at June 30, 1999 and our investment in experienced
management in anticipation of future revenue growth.
OPERATING EXPENSES
Research and Development
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses increased to $2.9 million for the six months ended June 30,
1999 from $1.6 million for the six months ended June 30, 1998. The increase in
absolute dollars was primarily due to an increase in the number of employees
engaged in research and development from 18 employees as of June 30, 1998 to 36
employees as of June 30, 1999. Research and development expenses as a percentage
of total revenues decreased from 190% to 56% due primarily to growth in our
revenues. We believe that investments in product development are essential to
our future success and expect that the absolute dollar amount of research and
development expenses will increase in future periods.
Sales and Marketing
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $6.4 million for the six months ended June 30, 1999 from $2.3
million for the six months ended June 30, 1998. Sales and marketing expenses as
a percentage of total revenues decreased from 262% to 124% due primarily to
growth in our revenues. The increase in absolute dollars was primarily
attributable to an increase in the number of direct sales, pre-sales support and
marketing employees from 16 employees as of June 30, 1998 to 38 employees as of
June 30, 1999. We expect that the absolute dollar amount of sales and marketing
expenses will continue to increase due to the planned growth of our sales force,
including the establishment of sales offices in additional domestic and
international locations including Europe and Asia, and due to expected
additional increases in advertising and marketing programs and other promotional
activities.
General and Administrative
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $1.3 million for the six months
ended June 30, 1999 from $0.6 million for the six months ended June 30, 1998.
General and administrative expenses as a percentage of total revenues decreased
from 71% to 25% due primarily to growth in our revenues. The increase in
absolute dollars was primarily attributable to increased salary and related
expenses in the executive, finance and administrative functions to manage our
growth. We expect general and administrative expenses to increase in absolute
dollars in future periods.
Stock-Based Compensation
Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of our common stock
and compensation related to equity instruments issued to non-employees for
services rendered. In 1998 and the six months ended June 30, 1999, we recorded
aggregate deferred compensation of $5.9 million related to stock-based
compensation to employees. This amount is being amortized over the respective
vesting periods of these equity instruments in a manner consistent with
Financial Accounting Standards Board Interpretation No. 28. Of the total
deferred compensation, $1.3 million was amortized in the six months ended June
30, 1999. We expect amortization of approximately $1,182,000, $1,525,000,
27
<PAGE> 30
$794,000, $315,000, and $26,000 in the second half of 1999, the years ended
December 31, 2000, 2001, 2002, and the first half of 2003, respectively. Total
stock-based compensation was $1.6 million for the six months ended June 30,
1999. See Note 6 to Notes to Financial Statements for further discussion
regarding the accounting treatment for stock-based compensation.
INTEREST INCOME, NET
The decrease in interest income, net of interest expense, for the six
months ended June 30, 1999 was not significant when compared to the same period
in the prior year.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Our total revenues were $3.4 million in 1998 and were comprised of the
first commercial sales of software products and related services fees from
implementation, training and support. Product license revenues were $2.2 million
in 1998. Services revenues were $1.2 million in 1998. For 1998, product license
revenues and services revenues accounted for 66% and 34% of revenues,
respectively. We did not recognize any revenues in 1997.
In 1998, Autodesk, Charles Schwab, Hewlett-Packard, KPMG and Macromedia,
accounted for 30%, 17%, 16%, 11% and 11% of total revenues, respectively.
COST OF REVENUES
Cost of revenues was $1.4 million in 1998. Cost of services revenues as a
percentage of services revenues was 120%. The increase in cost of services
revenues in 1998 resulted primarily from the hiring of employees and, to a
lesser extent, the use of third-party integrators to support customer demand for
consulting and maintenance services. We did not have any revenues in 1997 and
thus had no cost of revenues in 1997.
OPERATING EXPENSES
Research and Development
Research and development expenses increased to $3.8 million in 1998 from
$1.6 million in 1997. The increase in research and development expenses was
related primarily to an increase in the number of employees engaged in research
and development to support the development of new products.
Sales and Marketing
Sales and marketing expenses increased to $6.5 million in 1998 from $1.2
million in 1997. The increase in sales and marketing expenses resulted primarily
from building a direct sales force and investing in sales and marketing
infrastructure which included significant personnel-related expenses, recruiting
fees, travel expenses, and related facility and equipment costs, as well as
increased marketing activities, including trade shows, public relations, direct
mail campaigns and other promotional expenses.
General and Administrative
General and administrative expenses increased to $1.5 million in 1998 from
$0.4 million in 1997. The increase in dollar amount of general and
administrative expenses resulted primarily from the addition of executive,
finance and administrative personnel to support the growth of our business.
Stock-Based Compensation
In 1998, stock-based compensation consisted of amortization of deferred
compensation in connection with certain stock option grants and sales of stock
to employees at exercise or sales prices below the deemed fair market value of
our common stock and compensation related to equity instruments issued to
non-employees. We recorded aggregate deferred compensation of $3.2 million in
1998 related to stock
28
<PAGE> 31
transactions with employees. Of the deferred compensation, $0.7 million was
amortized in 1998. Total stock-based compensation was $0.8 million in 1998. See
Note 6 to Notes to Financial Statements for further discussion regarding the
accounting treatment for stock-based compensation.
INTEREST INCOME, NET
Interest income, net of interest expense, increased to $0.3 million from
$0.1 million as a result of higher interest income due to higher average cash
balances related to capital financing activities, partially offset by higher
interest expense due to bank borrowings.
PROVISION FOR INCOME TAXES
From inception through December 31, 1998, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of December 31, 1998, we had $11.7 million of federal and state net
operating loss carryforwards to offset future taxable income. The federal net
operating loss carryforwards begin to expire on varying dates beginning in 2012
through 2018 and the state operating loss carryforwards begin to expire in 2004.
Given our limited operating history, our losses incurred to date and the
difficulty in accurately forecasting our future results, management does not
believe that the realization of the related deferred income tax asset meets the
criteria required by generally accepted accounting principles. Therefore, we
have recorded a 100% valuation allowance against the deferred income tax asset.
See Note 7 of Notes to Financial Statements for the components of the deferred
income tax asset.
29
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
unaudited quarterly financial results for the six quarters ended June 30, 1999.
The statement of operations data has been derived from our unaudited financial
statements. In management's opinion, these statements have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with the financial statements and
notes thereto included elsewhere in this prospectus. We have experienced and
expect to continue to experience fluctuations in operating results from quarter
to quarter. Historical operating results are not necessarily indicative of the
results that may be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Product license............. $ 137 $ 396 $ 737 $ 946 $ 1,136 $ 1,793
Services.................... 90 240 375 456 758 1,437
------- ------- ------- ------- ------- -------
Total revenues....... 227 636 1,112 1,402 1,894 3,230
------- ------- ------- ------- ------- -------
Cost of revenues:
Product license............. -- -- 3 1 5 20
Services.................... 127 243 477 549 827 1,661
------- ------- ------- ------- ------- -------
Total cost of
revenues........... 127 243 480 550 832 1,681
------- ------- ------- ------- ------- -------
Gross profit.................. 100 393 632 852 1,062 1,549
------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.... 724 920 973 1,152 1,294 1,571
Sales and marketing......... 862 1,398 1,818 2,441 2,763 3,588
General and
administrative............ 172 437 378 516 456 828
Stock-based compensation.... -- 2 393 404 603 969
------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,758 2,757 3,562 4,513 5,116 6,956
------- ------- ------- ------- ------- -------
Loss from operations.......... (1,658) (2,364) (2,930) (3,661) (4,054) (5,407)
Interest income, net.......... 63 66 24 130 95 20
------- ------- ------- ------- ------- -------
Net loss...................... $(1,595) $(2,298) $(2,906) $(3,531) $(3,959) $(5,387)
======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES
Revenues:
Product license............. 60% 62% 66% 67% 60% 56%
Services.................... 40 38 34 33 40 44
------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100
------- ------- ------- ------- ------- -------
Cost of revenues:
Product license............. -- -- -- -- -- 1
Services.................... 56 38 43 39 44 51
------- ------- ------- ------- ------- -------
Total cost of
revenues........... 56 38 43 39 44 52
------- ------- ------- ------- ------- -------
Gross profit.................. 44 62 57 61 56 48
------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.... 319 145 88 82 68 49
Sales and marketing......... 380 220 163 174 146 111
General and
administrative............ 76 69 34 37 24 26
Stock-based compensation.... -- -- 35 29 32 30
------- ------- ------- ------- ------- -------
Total operating
expenses........... 775 434 320 322 270 216
------- ------- ------- ------- ------- -------
Loss from operations.......... (731) (372) (263) (261) (214) (168)
Interest income, net.......... 28 10 2 9 5 1
------- ------- ------- ------- ------- -------
Net loss...................... (703)% (362)% (261)% (252)% (209)% (167)%
======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 33
Our quarterly revenues increased throughout 1998 and the first two quarters
of 1999 primarily as a result of the introduction of our first commercially
available software products and the growth of our direct sales force. Cost of
revenues has increased in each of these quarters as a result of the hiring of
employees and the cost of subcontracting with third-party integrators to support
customer demand for consulting and maintenance services. Total operating
expenses increased in each quarter primarily due to increased expenses
associated with building a sales and marketing infrastructure including the
development of a direct sales force, increased spending on research and
development to support new product introductions and an increase in general and
administrative expenses to manage our expanding operations.
Services revenues as a percentage of total revenues has varied
significantly from quarter to quarter due to our relatively early stage of
development. The relative amount of services revenues as compared to license
revenues has varied based on the volume of license fees for software solutions
compared to the volume of license fees for additional users, which generally do
not require services. In addition, the amount of services we provide for a
software solution can depend in large part on the solution which has been
licensed, the complexity of the customers' information technology environment,
the resources directed by customers to their implementation projects, the number
of users licensed and the extent to which our third-party integrators provide
services directly to customers. Services revenues as a percentage of total
revenues has increased for each of the last two quarters primarily due to growth
of our new customer base which has resulted in a higher percentage of new
software solution license sales compared to additional user license sales.
Cost of services revenues as a percentage of total revenues has increased
each of the last two quarters, primarily as a result of the increased services
revenues as a percentage of total revenues. Cost of services revenues can also
depend on the extent to which we subcontract to third party organizations to
provide services to our customers, which is generally more expensive than
performing such services with internal resources. Our operating expenses as a
percentage of total revenues have generally decreased from quarter to quarter
due to our relatively early stage of development and our historical rapid
revenue growth.
Although we have a limited operating history, we believe that quarterly
operating results may experience seasonal fluctuations in the future. For
instance, quarterly results may fluctuate based on client calendar year
budgeting cycles, slow summer purchasing patterns in Europe and our compensation
policies that tend to compensate sales personnel, typically in the latter half
of the year, for achieving annual quotas.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through private placements
of equity securities and, to a lesser extent, debt financing and revenues.
Through June 30, 1999, we have raised $32.5 million through equity financing.
Under a senior credit facility, we maintain a $1.0 million revolving line
of credit with Silicon Valley Bank that expires December 1, 1999 and bears
variable interest at the bank's prime rate, currently 8.0%. As of June 30, 1999,
we had not borrowed against this line of credit. We also have a $3.0 million
term loan under this senior credit facility that is repayable ratably over a 36
month period beginning March 1, 2000. The term loan bears variable interest at
the bank's prime rate plus 0.5%, currently 8.5%. As of June 30, 1999, we had
borrowed $3.0 million against this term loan. Both of these loans are secured by
essentially all of our assets.
In addition, we have a subordinated debt facility with Comdisco under which
we are entitled to borrow up to $10.0 million, of which $5.0 million is
currently outstanding, over 42 months beginning June 1999 at a fixed interest
rate of 10.0%. All borrowings under the subordinated facility are secured by
essentially all of our assets after the rights of senior creditors, and we
cannot maintain more than $5.0 million of senior debt without approval of the
lender. We also have a $2.0 million equipment lease line with Comdisco. Under
the equipment lease line, we are entitled to lease equipment with payment terms
extending over 42 months. The ability to lease new equipment expires on May 31,
2000 and borrowings bear interest at 8.5% for the first six months of the lease.
We did not have any obligations
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<PAGE> 34
under this lease line as of June 30, 1999.Net cash used in operating activities
totaled $2.9 million in 1997, $8.7 million in 1998 and $7.2 million during the
six months ended June 30, 1999. Cash used in operating activities for each
period resulted primarily from net losses in those periods.
Net cash used in investing activities totaled $0.4 million in 1997, $1.1
million in 1998 and $0.8 million for the six months ended June 30, 1999. The
increases in each period resulted primarily from the purchase of furniture and
equipment, consisting largely of computer servers and workstations.
Net cash provided by financing activities totaled $3.6 million in 1997,
$23.0 million in 1998 and $14.3 million for the six months ended June 30, 1999.
The increases in each period resulted primarily from the net proceeds from
issuances of convertible preferred stock, the issuance of subordinated
convertible debt, and bank borrowings.
As of June 30, 1999, our principal sources of liquidity included $19.9
million of cash and cash-equivalents. We anticipate a substantial increase in
our capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. As of June 30, 1999, future
lease commitments for our office facility were $0.6 million in 1999, $1.3
million in 2000, $1.3 million in 2001, $1.3 million in 2002 and $1.0 million in
2003.
We believe that the net proceeds from this offering, combined with current
cash balances and short-term investments, will be sufficient to meet our
anticipated liquidity needs for working capital and capital expenditures for at
least 12 months from the date of this prospectus. Our forecast of the period of
time through which our financial resources will be adequate to support
operations is a forward-looking statement that involves risks and uncertainties,
and actual results could vary materially as a result of the factors described
above.
After the next 12 months, we expect to continue to incur net losses for the
foreseeable future and we may need additional funds to expand or meet all of our
operating needs.
If we require additional capital resources to grow our business internally
or to acquire complementary technologies and businesses at any time in the
future, we may seek to sell additional equity or debt securities or secure an
additional bank line of credit. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders. We
cannot assure you that any financing arrangements will be available in amounts
or on terms acceptable to us.
YEAR 2000 ISSUES
We are aware of the issues surrounding the year 2000 and problems relating
to computers and computer software incorrectly distinguishing between 21st and
20th century dates. Year 2000 issues could affect both our products and services
as well as our internal management control systems.
With respect to our products, we have designed our E.piphany E.4 System and
other products to be year 2000 compliant. We have tested our E.piphany E.4
System and based on these tests, as well as input from our customers using the
pre-release test version of the software, believe our software is year 2000
compliant. We have tested our prior products only to a limited extent. Based on
these tests and input from our customers, we believe that the prior products are
also year 2000 compliant. We therefore do not expect to expend significant
resources to resolve year 2000 errors in our products. However, we cannot be
certain that our test procedures, particularly the limited tests performed on
our prior products, will uncover all possible year 2000 errors in our products.
In some cases, we have warranted to our customers that our products are year
2000 compliant. If our tests and design measures have failed to discover and
resolve all year 2000 problems in our products, we could be liable to customers
for breach of warranty, product defects or otherwise.
In addition, many of the enterprise databases and web browsers with which
our software interacts may not be year 2000 compliant. If our customers'
databases are not year 2000 compliant, our internal professional services
organization may need to address these existing year 2000 issues. Also,
preexisting data in our customers' databases accessed by our software may
already contain year 2000 errors. Our professional services organization may not
be able to adequately address existing year 2000 issues, or there
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<PAGE> 35
may be preexisting errors in our customers' databases. Although we cannot
control the year 2000 compliance of our customers and their third-party vendors,
we may still be subject to claims and liability based on the fact that our
products provided incorrect data. These claims could divert significant
management, financial and other resources and we may not have adequate
commercial insurance to cover these claims.
With respect to our information technology and management functions, we
have inquired of the year 2000 compliance of our material hardware and software
vendors related to internal accounting, management and product development. We
have also tested our systems, but only to a very limited extent. Based on the
representations of our vendors and the internal tests we have conducted, we do
not believe we will incur material losses relating to upgrade and replacement of
our systems or from failure of our systems.
We intend to implement a new accounting and management reporting system in
late 1999 for business reasons unrelated to year 2000. We have been assured that
our new system is also year 2000 compliant by the vendor. If any of our vendors'
representations regarding their products are not accurate, or if we encounter
unknown year 2000 problems relating to the interaction of our systems, we could
incur significant expenses to resolve these issues or damages resulting from a
failure of our systems to perform correctly. For example, if our accounting
system fails to properly record our transactions, we would need to devote staff
or hire a third-party to correct the problem, could lose important data and
would have difficulty planning and reporting without accurate financial
information.
In the event we discover year 2000 problems in our products or internal
systems, we will endeavor to resolve these problems by making modifications to
our products or systems or purchasing new systems, on a timely basis. However,
we have no other contingency plan to address the effect of year 2000 problems
with our products and internal systems. In addition, the effect of year 2000 on
our customers generally, or on our banks, stock markets and other infrastructure
functions is unknown. We cannot assure you that our products and systems will be
year 2000 compliant or that we will not incur material expenses or liability
relating to the year 2000 problem. Our costs of year 2000 compliance to date
have not been material and we do not anticipate material year 2000 compliance
costs in the future.
MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, all of our recognized revenues have been denominated in U.S.
dollars and primarily from customers in the United States, and our exposure to
foreign currency exchange rate changes has been immaterial. We expect, however,
that future product license and services revenues may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.
Interest Rate Risk
As of June 30, 1999, we had cash and cash equivalents of $19.9 million
which consist of cash and highly liquid short-term investments. Our short-term
investments will decline in value by an immaterial amount if market interest
rates increase, and, therefore, our exposure to interest rate changes has been
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<PAGE> 36
immaterial. Declines of interest rates over time will, however, reduce our
interest income from our short-term investments.
As of June 30, 1999, we had total short term and long term debt outstanding
of $432,000 and $2,979,000, respectively, which contain interest rates that are
tied to the prime rate. Therefore, we are subject to exposure to interest rate
risk for these borrowings based on fluctuations in the prime rate. Based upon
the outstanding indebtedness under these arrangements, an increase in the prime
rate of .5% would cause a corresponding increase in our annual interest expense
of approximately $170,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires companies to
record derivative financial instruments on their balance sheets 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. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting For Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000, or January 1, 2001 for us. This statement will
not have a material impact on the financial condition or results of our
operations.
In December 1998, the AICPA issued Statement of Position (SOP) 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral
of the application of some provisions of SOP 97-2 amended by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. We do not anticipate that this statement will have a material
adverse impact on our statement of operations.
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<PAGE> 37
BUSINESS
E.PIPHANY OVERVIEW
We develop and market software that companies can use to establish,
maintain and continually improve customer relationships across both Internet and
traditional sales, marketing and distribution channels. Our E.piphany E.4 System
is an integrated set of software solutions that provide capabilities for
analysis of customer data and marketing campaign management. Companies can
implement the E.piphany E.4 System to collect and analyze data from their
existing software systems, and from third party data providers, to profile their
customers' characteristics and preferences. Business users within these
companies can then act on this information by using the Epiphany E.4 System to
design and execute marketing campaigns as well as customize products and
services.
INDUSTRY BACKGROUND
The Internet is fundamentally changing the way businesses interact with
their customers and suppliers. Consumers can use the Internet to more quickly
evaluate products and prices from a wide range of vendors without regard to
geographical constraints. At the same time, companies across a variety of
industries are using the Internet to redefine the way that goods and services
are marketed, sold and distributed.
To remain competitive in this dynamic business environment, many companies
are seeking to increase the longevity and profitability of their customer
relationships. We believe companies that improve their understanding of their
customers can gain the loyalty of their most profitable customers by customizing
products and services based on each of those customers' characteristics and
preferences. Furthermore, when companies understand individual customers, they
can market complementary products, known as "cross-selling," or market
higher-end products, known as "up-selling." These companies can also use their
knowledge of the correlation between customer characteristics and preferences to
better market to potential new customers. Finally, companies can also use
customer preference information to better anticipate customer demand and
optimize their processes for fulfilling customer orders. For example, a company
that identifies that many customers prefer a particular product can increase
inventories of that product to meet demand and decrease inventories of other
products that are not in demand.
Over the past two decades, companies have invested in software applications
that reduce costs by automating business processes. AMR Research, an industry
and market analysis firm, estimates that, from 1995 through 1998, companies have
spent more than $56 billion on industrial enterprise applications software that
are focused on automating sales, support, manufacturing, distribution and
finance processes. More recently, companies have begun investing in Internet
infrastructure software, including systems that enable commercial transactions
over the Web, as well as systems that monitor and track customers' behavior on
Web sites. Many companies also continue to operate older, custom-built systems
that automate critical business processes, such as order processing and
accounting. All of these applications have allowed companies to collect and
store enormous volumes of customer data, including customer demographic
information, historical purchasing information or delivery specifications. This
data is often augmented by marketing data from third-party data providers.
Despite the vast amounts of data generated, these applications remain
focused on automating business processes, rather than analyzing data to help
companies better understand their customers. Moreover, because this data resides
in disparate computer systems in different departments or is delivered from
third parties, combining and analyzing this data to provide a comprehensive view
of the customer is a significant challenge. For example, a company may have over
time acquired sales, customer service, and distribution software applications,
each operating on a different computer system. In addition, many companies'
Internet commerce systems operate independently of systems that automate their
traditional sales channels and fulfillment processes. Because these applications
and systems serve different purposes, they collect vastly different types of
customer data. To analyze and act on disparate corporate data, many companies
have attempted to integrate multiple software tools designed to either extract
data from various software
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<PAGE> 38
systems, store it in a central repository, analyze the data or manage marketing
campaigns. Many of these internally developed software systems require
substantial amounts of time to integrate and are expensive to implement and
maintain. Moreover, once these tools have been integrated, they typically must
be customized significantly to solve specific business problems in areas such as
sales, marketing, finance and Internet commerce. Finally, these software systems
often have complex user interfaces and may not be accessible to all business
users across the enterprise.
To allow all business users within a company to analyze and act on
meaningful customer information located throughout the organization, companies
need new software solutions. These software solutions should be:
- Focused on establishing, maintaining and improving customer
relationships. Software should allow companies to identify and
differentiate their current and potential customers and act on that
knowledge to provide products and services customized to each customer's
preferences.
- Deployable to all business users and interactions with
customers. Software should be designed to offer the ease of use and
availability of the Web to enable all business users, not just
information technology professionals and specialized analysts, to access,
understand and act on customer information. Additionally, software should
easily integrate with companies' Internet infrastructure software to help
companies understand customer behavior on websites, market through
websites or e-mail and enable customers to query corporate information
sources via the Web.
- Packaged to offer faster and less expensive implementation. Software
should minimize the time and expense of software implementation and
maintenance by including in a single integrated system all of the
technologies required to extract, store, analyze and act on customer
data. In addition, the software should be designed to solve specific
business problems in areas such as sales, marketing, finance and Internet
commerce without significant customization.
THE E.PIPHANY SOLUTION
Our software can be used by companies to establish, maintain and
continually improve customer relationships across both Internet and traditional
sales, marketing and distribution channels. Companies can use the E.piphany E.4
System to profile customers' characteristics and preferences by collecting and
analyzing data from their existing software systems and third party data
providers. Business users within these companies can then act on this
information by using the E.piphany E.4 System to design and execute marketing
campaigns as well as customize products and services. Our professional services
organization implements our E.piphany E.4 System for our customers and also
provides related consulting and training. We believe that our software is
differentiated by its combination of the following characteristics:
Software designed to establish, maintain and improve customer
relationships. Our software helps companies establish, maintain and improve
customer relationships by:
- Identifying customers. Our software can be used by companies to better
identify their customers by aggregating and analyzing data from existing
software systems as well as from third-party data providers.
- Differentiating customers. Our software allows companies to differentiate
their customers by analyzing customer groups by demographics,
profitability, length of sales cycle, cross-sell success rates and other
company-defined criteria.
- Interacting with customers more personally. Our software helps companies
to extend customer information to all employees that interact with
customers as well as integrate this information with Internet
infrastructure software that generates Web pages and e-mail. Moreover,
our software can be used to design and execute marketing campaigns that
tailor marketing messages to each customer based on his or her specific
characteristics and preferences.
- Customizing products, services and fulfillment. Our software helps
companies collect and analyze the data required to customize products and
services based on customer characteristics and
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<PAGE> 39
preferences. In addition, companies can use our software to better
anticipate customer demand and to better manage their processes for
fulfilling orders in a more efficient manner.
Web-based design to promote ease of use and wide-scale deployment to
business users. Our software offers an easy to use interface that is similar to
those used on most Web sites. The interface is accessed by business users across
a corporate network or the Internet using only a Web browser, such as Microsoft
Internet Explorer. The software is installed by the customer in a central
location, either on the customer's own computer servers or on those of a
third-party hosting service. This Web-based design does not require our software
to be installed on each user's computer, which reduces the costs of deploying
and maintaining software.
Packaged software for faster and less expensive implementation. Our
software solutions are integrated to combine all of the technologies required to
collect and analyze customer data or manage marketing campaigns and is designed
to solve specific business problems in areas such as sales, marketing, finance
and Internet commerce. Because these software solutions are integrated, they can
work together as soon as they are implemented. As a result, companies do not
need to try to combine multiple vendors' software tools, each of which offers
only limited capabilities, into a single software solution and then customize
this software solution to meet their needs. Our software solutions can generally
be implemented in 16 weeks or less.
E.PIPHANY STRATEGY
Our objective is to be the leading provider of software that companies can
use to establish, maintain and continually improve customer relationships across
both Internet and traditional sales, marketing and distribution channels. Key
elements of our strategy include:
Extend the breadth and depth of our product offerings. We intend to
continue to invest in research and development to build new software to solve a
greater range of problems for our customers. In particular, we intend to expand
our software offerings for Internet commerce and to develop new software that
solves additional problems in fulfillment, logistics and operations. We believe
that maintaining and enhancing our products is important to our ability to
expand our market share, retain existing customers and acquire new customers.
Develop industry-specific software products. In the future, we plan to
offer versions of our software designed specifically for industries such as
financial services, high technology, healthcare, telecommunications and
automobile manufacturing. We intend to use the industry expertise of our
professional services organization and the consultants, system integrators and
other companies with which we have relationships to help us design our software
to solve business problems specific to these industries.
Increase market penetration by expanding our sales and distribution
capabilities. In addition to growing our direct sales force, we have developed a
limited number of contractual relationships with consultants, systems
integrators and resellers that we believe will allow us to extend our sales
presence. We intend to use these relationships to support sales and help us
develop new E.piphany E.4 System software solutions. We also intend to build our
international presence through relationships with systems integrators that have
a strong international presence, such as KPMG, in addition to increasing the
size of our direct sales force.
Offer our software through application service providers. In addition to
licensing our software directly to end-users, we intend to offer our software
through multiple Internet-based applications service providers. These companies
would host our software on their own servers, integrate the software with their
customers' existing systems and then allow their customers to utilize our
software over the Internet for a fee. These companies are expected to pay us
fees for the right to host our applications for their customers and a
subscription fee for each of their customers. We currently have a contractual
relationship with Exactis.com -- a provider of e-mail application
services -- under which Exactis.com hosts our software solutions as a part of
its service offering. In the future, we intend to enter into similar agreements
with additional application service providers. We believe that the application
service provider option will be particularly attractive to pure Internet
commerce companies, as well as mid-sized companies that typically have limited
internal information technology resources.
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E.PIPHANY PRODUCTS
Our E.piphany E.4 System includes multiple software solutions designed to
solve specific business problems in areas such as sales, marketing, finance and
Internet commerce. Each of these software solutions incorporate core
technologies that we have designed to extract data from existing software
systems, store it in a central repository, analyze the data to discover customer
characteristics and preferences, and manage marketing campaigns. Our software
solutions can be deployed simultaneously or in incremental steps as our
customers address new business problems.
Our E.piphany E.4 System software solutions are grouped into three product
families:
- Reporting and Analysis
- Distributed Database Marketing
- E-Commerce
REPORTING AND ANALYSIS
Our Reporting and Analysis software solutions allow any business user with
a Web browser to easily analyze customer, supplier and operational data from
across the enterprise. To support this capability, we have designed our
E.piphany E.4 System to extract and manage data from a wide variety of
electronic data sources regardless of their format. The analytical capabilities
of our software solutions range from aggregating data from disparate systems to
the application of complex statistical formulas to that data. Once our software
solutions have analyzed the data, they present the resulting information in an
easy-to-use format, such as graphs and tables. Our current reporting and
analysis software solutions include the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bookings, Billings & Backlog/ Analyzes bookings, billings, backlog and other sales data
Sales Reporting & Analysis to identify trends and the status of sales for finance
personnel and sales managers.
- -----------------------------------------------------------------------------------------------
Customer Relationship Analyzes customer data from sales and support applications
Management Reporting & so that sales support and service managers can better
Analysis understand the quantity and status of sales leads,
customer inquiries and service calls as well as forecast
future sales.
- -----------------------------------------------------------------------------------------------
Channel Sell-Through Analyzes sales data from indirect business channels such
Management as resellers and distributors. Sales managers can use this
information to track channel inventory trends,
distributors' profit margins or other metrics to better
manage sales through indirect channels.
- -----------------------------------------------------------------------------------------------
Call Center Reporting & Analyzes data from call centers. Managers of call centers
Analysis can use this information to improve call center efficiency
by tracking metrics such as the average cost and time for
problem resolution, the frequency of customer contact and
the profitability of individual representatives.
- -----------------------------------------------------------------------------------------------
Customer Profitability Analyzes data to segment customers according to their
current and potential profitability and also calculates
the profitability of divisions, geographies and the entire
company. Managers throughout the company can use this
information to better understand which customers and areas
of the business they should target for profitability
improvements.
- -----------------------------------------------------------------------------------------------
Branch Information Analyzes data from branch office systems so that branch
managers can track regional sales, profile their customers
and market to those customers.
- -----------------------------------------------------------------------------------------------
</TABLE>
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DISTRIBUTED DATABASE MARKETING
Our Distributed Database Marketing software solutions allow employees in a
company's marketing department to collaborate on profiling customers and
designing marketing campaigns that target each customer based on his or her
specific characteristics and preferences. Once a campaign is designed, our
software solutions can execute the campaign by triggering direct mail,
personalized e-mail, customized Web pages and other campaign delivery
mechanisms. Once campaigns are executed, our distributed database marketing
software solutions analyze response data to refine and tune campaigns. Our
current Distributed Database Marketing software solutions include the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cross-sell/Up-sell Analyzes customer characteristics to identify
opportunities to sell complementary or higher-end products
to existing customers, manages test marketing campaigns
and measures the effectiveness of marketing campaigns.
- -----------------------------------------------------------------------------------------------
Campaign Performance Monitors the response rates, costs and profitability of
Measurement corporate and regional marketing campaigns, and also
predicts the likely returns on marketing campaign
investments.
- -----------------------------------------------------------------------------------------------
Loyalty Program Management Analyzes customer buying and attrition data to enable
companies to better identify and understand their most
loyal customers as well as measure and improve the
effectiveness of their loyalty programs.
- -----------------------------------------------------------------------------------------------
Customer Acquisition Identifies promising potential customers by integrating
and analyzing data from third party data providers,
advertising programs and promotional events and then
executing, measuring and refining marketing campaigns to
attract those customers.
- -----------------------------------------------------------------------------------------------
Attrition Management Enables companies to determine why some customers
terminate their relationships with the company. Companies
can then use this information to maximize the retention of
profitable customers and manage the attrition of
unprofitable customers.
- -----------------------------------------------------------------------------------------------
</TABLE>
E-COMMERCE
Our E-Commerce software solutions help companies to analyze customer
behavior on Internet commerce Web sites and personalize those sites by
integrating customer preference data into the Internet infrastructure software
that generates Web pages. As a result, each time a customer accesses the
company's Web site, the customer will see and interact with a Web site
personalized for his or her preferences. These software solutions also enable
companies to design and execute Internet commerce marketing campaigns through
e-mail and websites as well as customize products based on customer preference
information. Finally, these systems can be used to measure the effectiveness of
companies' Internet commerce initiatives as well as their effect on traditional
business channels. Our current E-Commerce software solutions include the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
E-Commerce Reporting & Analyzes Internet commerce purchasing patterns and website
Analysis effectiveness. Marketing and finance personnel can use
this information to measure the effect of Internet
commerce on traditional sales, marketing and distribution
channels and overall corporate profitability.
- -----------------------------------------------------------------------------------------------
</TABLE>
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We are actively working to extend our E-Commerce software solutions family
to add the following software solutions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SOFTWARE SOLUTIONS DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
E-Commerce Campaigns We are designing this software solution to allow marketing
personnel to manage marketing campaigns through e-mail and
websites in addition to conventional direct mail and phone
solicitations.
- -----------------------------------------------------------------------------------------------
E.mailer We are designing this software solution to allow marketing
personnel to personalize and send e-mails based on
customer characteristics and preferences, track e-mail
delivery and responses, embed Internet addresses in
e-mails to provide personalized Web pages and customized
offers and finally, measure and help manage the
effectiveness of Internet marketing campaigns.
- -----------------------------------------------------------------------------------------------
Product Customization We are designing this software solution to analyze
customer preference data so that product development
personnel can customize products for individual customers
as well as develop new products based on current customer
preferences.
- -----------------------------------------------------------------------------------------------
Real-Time Campaigner We are designing this software solution to allow employees
across a company to up-sell, cross-sell and customize
products for individual customers in real-time, based on
customer preference data collected across both Internet
and traditional business channels.
- -----------------------------------------------------------------------------------------------
</TABLE>
PROFESSIONAL SERVICES
Our internal professional services organization plays an integral role in
implementing our software for our customers as well as supporting and training
our customers. We believe that providing a high level of customer service and
technical support is critical to the satisfaction of our customers and our own
success. As of June 30, 1999, our professional services staff consisted of 28
employees. Our professional services offerings include:
Consulting and implementation services. We offer consulting and
implementation services focused on configuring and implementing our software
solutions to meet each of our customers' unique needs. These services are
delivered primarily by our internal consulting specialists, but also by
third-party consultants. When we work with third-party consultants we typically
subcontract these consultants or enter into contracts with these consultants to
collaborate on specific projects. We believe that our consulting services
enhance the quality of our software solutions, accelerate the implementation and
share best business practices with client project teams.
Maintenance services. We provide our customers with extensive maintenance
services including telephone support, Web-based support and updates to our
products and documentation. We enter into maintenance contracts separate from
our product license agreements. Fees are typically 15 to 20% of the license fees
for the associated software products.
Training services. We offer extensive training programs to our customers
and partners to accelerate the implementation and adoption of our solutions by
the users within a company. Fees for our training services are typically charged
separately from our software license fees and consulting fees.
In addition to implementing our software and supporting our customers, our
professional services organization works closely with our internal research and
development organization to design new E.piphany E.4 System software solutions.
Experience gained by our consultants through repeated implementation of our
products is routinely conveyed to our research and development staff. Our
research and development staff then uses this experience to design new features
into new releases of our software. To promote this interaction, we have located
our professional services organization together with our
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research and development organization, and we have created a staff exchange
program between the two parts of our firm.
E.PIPHANY E.4 SYSTEM TECHNOLOGY
Our E.piphany E.4 System includes core technologies that enable our
software solutions to extract, manage and analyze data from existing systems.
These software technologies allow our internal research and development
organization and partners to rapidly build and deploy new software solutions as
market opportunities arise, without re-developing and configuring the underlying
technologies. The major elements of our E.piphany E.4 System's core technologies
include:
EpiCenter. EpiCenter is the E.piphany E.4 System software technology we
developed for storing and managing data. Our software solutions utilize
EpiCenter to retrieve the data that they require to perform their analysis. Key
functional elements of EpiCenter include:
- Adaptive Schema Generator. The Adaptive Schema Generator is software
technology that we have developed and market as a part of our E.piphany
E.4 System. It automatically reconfigures EpiCenter, based on high-level
specifications, each time a customer's software solutions are modified.
This technology enables rapid customization of our products to meet the
specific and dynamic business needs of our customers and allows system
administrators to avoid having to manage complex data storage design
tasks.
- Metadata integration. All of the components of our E.piphany E.4 System
are integrated through our metadata, which is a high-level,
software-based description of a customer's E.piphany E.4 System and the
data which resides in that system. Generic metadata is included in the
E.piphany E.4 System when shipped, and is continually updated by the
E.piphany E.4 System as consultants or users make changes to any portion
of the system. As a result, when new data elements are added to any
software component of a customer's E.piphany E.4 System, all other
software components are able to recognize the change and adapt
accordingly.
- Accelerators. We have integrated into our E.piphany E.4 System
mathematical formulas called accelerators that improve the performance of
our software by pre-computing some information, creating special indices
and providing "hints" to the system on how to optimize the processing of
user queries.
Data extraction and transformation. E.piphany's E.4 System offers a
powerful approach to extracting data from various sources and transforming that
data before loading it into EpiCenter. Central to this capability are our
Packaged Semantic Transformations, which are rules that change customer data
into a format well-suited for data analysis by business users.
Software application server. Our software application server is the
software technology we developed to manage the mathematical formulas that are
used to analyze data in response to user queries. In addition, the software
application server generates the user interface that end-users interact with
through their Web browsers.
RELATIONSHIPS AND ALLIANCES
An important element of our strategy is to establish relationships and
alliances to assist us in marketing, selling and implementing our software
solutions. These relationships and alliances fall into the following four
categories:
Consulting and implementation relationships. We have entered into
subcontracting engagement letters with Cambridge Technology Partners, Ernst &
Young and KPMG under which they implement our software on our customers'
computer systems. In return, we pay fees to these entities and provide personnel
and technical resources to support their implementation of our software. In
order to improve their opportunity to generate service fees from our customers,
each of these entities has committed resources to training their consultants on
our products, co-marketing our products with their services and
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<PAGE> 44
incorporating our products into their customer relationship management market
strategies. We have a contractual relationship with Marketing 1:1 -- a marketing
consulting firm -- under which they provide consulting services to us and
co-market and promote our software. In return, we pay consulting fees and other
compensation to the firm as well as referral fees for customer referrals.
Cambridge Technology Partners, KPMG and Marketing 1:1 are also investors in our
company. We believe these relationships will help enable the rapid adoption and
deployment of our software and expand the capabilities of our software to target
specific industries.
Platform relationships. To help ensure that our products are based on
industry standards and take advantage of current and emerging technologies, we
have formed relationships with vendors of software and hardware technology
platforms. We currently maintain platform relationships with Hewlett-Packard,
Microsoft, Oracle and Sun Microsystems. These companies voluntarily provide us
with early releases of new technology platforms, education related to those
platforms and limited access to these vendors' technical resources to facilitate
adoption of their technology. As a result, we are able to more easily integrate
our products with these vendors' platforms, and we can also anticipate required
changes to our products based on new versions of these vendors' platforms. We
believe that these relationships allow us to focus on our core competencies,
simplify the task of designing and developing software and reduce the time it
takes us to make our software compatible with their software.
Technology relationships. We have formed relationships with vendors of
complementary software products. These relationships consist of non-exclusive
contractual agreements to co-market each other's products and share technical
resources in order to better integrate each other's products. These agreements
also provide, in some instances, for the payment of referral fees to each other
for customer referrals. We currently have such agreements with BroadVision and
Vignette, two Internet infrastructure software providers.
Reseller relationships. We have entered into contractual reseller
agreements with vendors under which we sell software solutions to them for
resale to their customers. We believe these relationships will extend our sales
presence in new and existing markets. We recently entered into reseller
agreements with Acxiom and Harte-Hanks -- two providers of customer data and
strategic marketing services -- and a reseller agreement with Pivotal
Software -- a vendor of sales force automation and customer support software.
Each of these partners has committed resources to training their employees,
co-marketing programs and have incorporated our products into their customer
relationship management market strategies. We provide sales materials, training
and support services to these resellers on the implementation of our software
solutions. We have only recently entered into these reseller agreements and have
not yet generated any revenues from them.
CUSTOMERS
Our customers represent a wide, cross-industry spectrum of large global
institutions. Those customers who have entered into agreements to purchase in
excess of $300,000 of software and related services since we began shipping
products in early 1998, through June 30, 1999, are:
<TABLE>
<S> <C> <C>
Acxiom DIRECTV Lucent Technologies
Agilent Technologies Envision Macromedia
Autodesk Fair, Isaac Microsoft
California State Automobile FileNET Nissan North America
Association Hewlett-Packard Sallie Mae
Capital BlueCross Hilton Hotels Visio
Charles Schwab KPMG Wells Fargo
</TABLE>
These customers have accounted for approximately 93% of our revenues for
the year ended December 31, 1998 and 94% of our revenues for the six months
ended June 30, 1999. For the six months ended June 30, 1999, Sallie Mae, CSAA,
KPMG and Fair, Isaac accounted for 20%, 13%, 11% and 11% of our total revenues,
respectively. For the year ended December 31, 1998, Autodesk, Charles Schwab,
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<PAGE> 45
Hewlett-Packard, KPMG and Macromedia, accounted for 30%, 17%, 16%, 11% and 11%
of total revenues, respectively.
SELECTED CUSTOMER EXAMPLES
The selected customer examples below are intended to provide brief
descriptions of how our customers are using or plan to use our E.piphany E.4
System software solutions to solve their business problems.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CUSTOMER DESCRIPTION
- ------------------------------------------------------------------------------------------
<S> <C>
California State Automobile CSAA is an affiliate of the American Automobile Association.
Association (CSAA) Because CSAA has separate computer systems for its
membership data and its travel services group transaction
records, its marketing department had difficulty integrating
this data to facilitate its efforts to cross-sell and
up-sell services. CSAA is now using our Reporting and
Analysis and Distributed Database Marketing software
solutions to integrate this data to allow its employees to
profile customers as well as manage marketing campaigns.
- ------------------------------------------------------------------------------------------
Capital BlueCross Capital BlueCross is an independent licensee of the
BlueCross and BlueShield Association and offers health care
benefits throughout central Pennsylvania. To better
understand the suitability and profitability of its product
offerings, Capital BlueCross insurance specialists need to
analyze large amounts of customer data. Using our Reporting
and Analysis software solutions, Capital BlueCross is now
able to analyze enrollment histories and other patient
information to better understand member activity and develop
enhancements to existing and future product offerings.
- ------------------------------------------------------------------------------------------
Hewlett-Packard Asia- Hewlett-Packard APCCO manages the flow of Hewlett-Packard's
Pacific Computing Channels computing products through its reseller channels in Asia. To
Operation (HP APCCO) enhance its relationships with these resellers,
Hewlett-Packard APCCO sales and marketing executives needed
to analyze channel sales information from throughout the
Asia-Pacific region. These managers are now using our
Reporting and Analysis software solutions to better
understand their channel activities. They can then use this
information to tailor channel programs based upon their
resellers' past sales and potential future sales.
- ------------------------------------------------------------------------------------------
Hilton Hotels Hilton Hotels develops, owns, manages or franchises hotels,
resorts and vacation properties. Hilton has collected guest
information in disparate computer systems at individual
hotel properties. Hilton is implementing our Reporting and
Analysis and Distributed Database Marketing software
solutions to gather and analyze guest behavior information
from its hotels and resorts. The company can then make
information available to its hotel managers over the
Internet. Those managers can then use this information to
provide better service to their guests, manage corporate
loyalty programs and manage marketing campaigns.
- ------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CUSTOMER DESCRIPTION
- ------------------------------------------------------------------------------------------
<S> <C>
Microsoft Microsoft is the worldwide leader in software for personal
computers. Microsoft was seeking a campaign management
solution to enhance its internal World Wide Marketing
Database. Microsoft is implementing E.piphany's Distributed
Database Marketing software solutions instead of other
vendors' campaign management solutions because of our
ability to provide a full range of enterprise solutions
focused on personalizing customer relationships and our
ability to make our solutions broadly available to
distributed knowledge workers and managers in large
corporations.
- ------------------------------------------------------------------------------------------
Sallie Mae Sallie Mae is a nationwide provider of funds and servicing
for student loans. Sallie Mae is seeking opportunities to
provide better service as well as cross-sell additional
products and services by better understanding its customers.
Using our Reporting and Analysis and Distributed Database
Marketing software solutions, Sallie Mae's marketing
managers are able to rapidly analyze customer data and
manage marketing campaigns to cross-sell new financial
services as customers' financial status changes.
- ------------------------------------------------------------------------------------------
Visio Visio develops, markets, and supports drawing and
diagramming software for enterprise-wide use. To support its
Internet commerce initiatives and evaluate their effect on
the company's traditional sales, marketing and distribution
channels, Visio required a software solution to integrate
and analyze customer data from multiple enterprise systems.
Using our
E-Commerce software solutions, Visio's senior executives and
marketing managers can discern how the company's Internet
commerce initiatives are affecting its business as a whole.
Visio is also using our E-commerce software solutions to
incorporate customer preferences captured on its Internet
commerce site into its product development processes.
- ------------------------------------------------------------------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for developing new
software products, product architecture, core technologies, product testing,
quality assurance and ensuring the compatibility of our products with hardware
platforms, and software platforms. In addition, this organization supports some
pre-sale and customer support activities. Our research and development
organization is divided into teams consisting of development engineers, product
managers, quality assurance engineers and technical writers. In addition, our
professional services staff helps our research and development organization
identify potential new product features.
On June 30, 1999, our research and development staff consisted of 36
employees. Our total expenses for research and development were $3.8 million for
the year ended December 31, 1998 and $1.6 million for the year ended December
31, 1997.
SALES, MARKETING AND DISTRIBUTION
To date, we have marketed our products primarily through our direct sales
force. However, we intend to expand our sales channels through additional
relationships with systems integrators and value-added resellers. In selling our
products, we typically approach both business users and information technology
professionals with an integrated team from our sales and professional services
organizations. Initial sales activities typically include a demonstration of our
product capabilities followed by one or more detailed technical reviews. We also
seek to establish alliances and partnerships with major industry vendors that
will add value to our products and expand distribution opportunities. As of June
30, 1999, our sales and marketing organization consisted of 38 employees.
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We use a variety of marketing programs to build market awareness of our
company, our brand name and our products, as well as to attract potential
customers. These programs include our own market research, product and strategy
updates with industry analysts, public relations activities, direct mail
programs, telemarketing and telesales, seminars, trade shows, reseller programs,
speaking engagements and Web site marketing. Our marketing organization also
produces marketing materials in support of sales to prospective customers that
include brochures, data sheets, white papers, presentations and demonstrations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our future success depends in part on legal protection of our technology.
To protect our technology, we rely on a combination of the following methods,
among others:
- patent laws
- copyright laws
- trademark laws
- trade secret laws, or
- employee and third-party nondisclosure agreements and confidentiality
procedures.
We have applied for seven patents on our technology in the United States;
we have also received several trademark registrations and applied for additional
trademarks. Our pending patent and trademark applications may not be allowed.
Even if they are allowed, these patents may not provide us a competitive
advantage. Competitors may successfully challenge the validity and scope of our
patents and trademarks.
Our end-user licenses are designed to prohibit unauthorized use, copying
and disclosure of our software and technology. However, these provisions may be
unenforceable under the laws of some jurisdictions and foreign countries.
Unauthorized third parties may be able to copy some portions of our products or
reverse engineer or obtain and use information and technology that we regard as
proprietary. Third parties could also independently develop competing technology
or design around our technology. If we are unable to successfully detect
infringement and enforce our rights in our technology, we may lose competitive
position in the market. We cannot assure you that our means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competing companies will not independently develop similar technology. In
addition, some of our licensed users may allow additional unauthorized users to
use our software, and if we do not detect such use we could lose potential
license fees.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We believe that our products do not infringe
the intellectual property rights of third parties. However, we cannot assure you
that we will prevail in all intellectual property disputes. We have not
conducted a search for existing patents and other intellectual property
registrations, and we cannot assure you that our products do not infringe upon
issued patents. In addition, because patent applications in the United States
are not publicly disclosed until the patent is issued, applications may have
been filed which would relate to our products.
We indemnify some of our customers against claims that our products
infringe upon the intellectual property rights of others. We could incur
substantial costs in defending ourselves and our customers against infringement
claims. In the event of a claim of infringement, we or our customers may be
required to obtain one or more licenses from third parties. We cannot assure you
that such licenses could be obtained from third parties at a reasonable cost, or
at all. Defense of any lawsuit or failure to obtain any such required license
would have a material adverse effect on our business.
COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Our integrated software compete against
various vendors' software tools designed to accomplish specific elements of a
complete
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<PAGE> 48
process, including extracting data, storing and managing data, analyzing data,
or managing marketing campaigns. Our competitors include companies that sell:
- data management and data analysis software tools such as Brio Technology,
Business Objects, Cognos, Informatica and Sagent Technology
- enterprise application software such as i2 Technologies and Siebel
Systems, and
- marketing campaigns management software tools such as Exchange
Applications and Prime Response.
In addition, enterprise application software vendors such as Oracle,
PeopleSoft and SAP are beginning to offer software for data analysis, although
they typically tend to support only the analysis of data from their own
operational systems. We may also face competition from vendors of software that
recommend products to customers based on simple logic rules, such as Net
Perceptions and Rightpoint Software, Inc.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing, or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements. Competition
could seriously harm our ability to sell additional software, maintenance
renewals, and services on terms favorable to us. Competitive pressures could
reduce our market share or require us to reduce the price of products and
services, any of which could materially and adversely affect our business,
financial condition and operating results.
We compete on the basis of certain factors, including:
- product performance
- product features
- user scalability
- open architecture
- ease of use
- product reliability
- analytic capabilities
- time to market
- customer support, and
- product pricing.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our products is still rapidly
evolving, and we may not be able to compete successfully against current and
potential competitors.
EMPLOYEES
As of June 30, 1999, we had 115 full-time employees. Of these employees, 36
were engaged in research and development, 38 were engaged in sales and
marketing, 28 were engaged in professional services and 13 were engaged in
finance and administration.
None of our employees is represented by a labor union or a collective
bargaining agreement. We have not experienced any work stoppages and consider
our relations with our employees to be good.
FACILITIES
We currently lease approximately 13,500 square feet of office space for our
headquarters in one building, located in Palo Alto, California. We have entered
into a lease of approximately 32,500 square
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<PAGE> 49
feet of office space in one building in San Mateo, California. We intend to move
our headquarters to the San Mateo office space beginning in September 1999. We
also lease sales offices near Atlanta, Detroit, Dallas, Los Angeles and
Stamford, Connecticut. We believe our new facilities are adequate for our
current needs. We may need to locate additional space to meet our needs in the
future.
LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.
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<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers and directors as of August 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger S. Siboni.............. 44 President, Chief Executive Officer and Director
Kevin J. Yeaman.............. 32 Chief Financial Officer
Phillip M. Fernandez......... 38 Executive Vice President, Product Development
Anthony M. Leach............. 48 Executive Vice President, Operations and Services
Karen A. Richardson.......... 36 Executive Vice President, Worldwide Sales
Julie A. 42 Vice President, Corporate Marketing
Petersen-Dunnington........
Paul A. Rodwick.............. 36 Vice President, Marketing
Eliot L. Wegbreit............ 55 Chairman of the Board of Directors
Paul M. Hazen................ 57 Director
Robert L. Joss............... 58 Director
Sam H. Lee................... 38 Director
Douglas J. Mackenzie......... 39 Director
</TABLE>
Roger S. Siboni has served as President, Chief Executive Officer and a
member of the board of directors of E.piphany since August 1998. Prior to
joining E.piphany, Mr. Siboni served as Deputy Chairman and Chief Operating
Officer of KPMG Peat Marwick LLP, a member firm of KPMG International, an
accounting and consulting organization, from October 1996 to July 1998 and
served as National Managing Partner of KPMG's information and communications
practice from June 1993 to October 1996. He serves on the board of directors of
Cadence Design Systems, Inc., FileNET, Inc., Macromedia, Inc. and Pivotal
Corporation. Mr. Siboni has accepted a position as Chairman of the advisory
board of the Haas Graduate School of Business at the University of California at
Berkeley. Mr. Siboni holds a B.S. in Business Administration from the University
of California at Berkeley and is a Certified Public Accountant in New York and
California.
Kevin J. Yeaman has served as Chief Financial Officer of E.piphany since
August 1999, as Vice President, Finance and Administration of E.piphany from
June 1999 to August 1999 and as Controller of E.piphany from August 1998 to June
1999. From February 1998 to August 1998, Mr. Yeaman served as Worldwide Vice
President of Field Operations for Informix Software, Inc., a provider of
relational database software. From September 1988 to February 1998, Mr. Yeaman
served in Silicon Valley and London in various positions at KPMG Peat Marwick
LLP, an accounting firm, serving most recently as a senior manager. Mr. Yeaman
holds a B.S. in Commerce from Santa Clara University and is a Certified Public
Accountant in California.
Phillip M. Fernandez has served as Executive Vice President, Product
Development of E.piphany since April 1999. Prior to joining E.piphany, Mr.
Fernandez served in several executive positions at Red Brick Systems Inc., a
provider of database software. Mr. Fernandez served as Executive Vice President
and Chief Operating Officer of Red Brick Systems Inc. from June 1998 to December
1998, as Senior Vice President of Products and Services from November 1996 to
May 1998 and as Vice President of Product Development from December 1991 to
October 1996. From January 1999 to March 1999, after Red Brick Systems, Inc. was
acquired by Informix, Mr. Fernandez served as a consultant to Informix. Mr.
Fernandez holds a B.A. in History from Stanford University.
Anthony M. Leach has served as Executive Vice President, Operations and
Services of E.piphany since January 1999. Prior to joining E.piphany, Mr. Leach
was employed by Oracle Corporation, a database system and applications supplier,
as Senior Vice President of Consulting Services for Europe, the Middle East and
Africa from November 1994 to June 1997, and as Senior Vice President of World
Wide Consulting from June 1997 to January 1999. From August 1975 to November
1994, Mr. Leach served with KPMG, an accounting and services firm, in Europe,
and became a partner in the firm in 1984.
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<PAGE> 51
Karen A. Richardson has served as Executive Vice President, Worldwide Sales
of E.piphany since June 1998. From November 1995 to May 1998, Ms. Richardson
served as Vice President of Sales at Netscape Communications Corporation, an
internet software company. From December 1994 to November 1995, Ms. Richardson
served as Vice President of Sales at Collabra Software, Inc., a developer of
groupware software. From November 1993 to September 1995, Ms. Richardson served
as Vice President of Marketing at Be Incorporated, a provider of software
operating systems for digital media applications. Ms. Richardson holds a B.S. in
Industrial Engineering from Stanford University.
Julie A. Petersen-Dunnington has served as Vice President, Corporate
Marketing of E.piphany since June 1998. In January 1997 Ms. Petersen-Dunnington
co-founded JPD Marketing, a marketing consulting firm, and served as its
President from January 1997 to July 1998. In January 1995, Ms. Petersen-
Dunnington co-founded Lightowl L.L.C., a marketing consulting firm, and served
as a partner at Lightowl L.L.C. from January 1995 to January 1997. From December
1992 to January 1995, Ms. Petersen-Dunnington was Director of Emerging
Technologies for Waggener Edstrom, Inc., a strategic public relations and
communications firm. From August 1990 to December 1992, Ms. Petersen-Dunnington
served as Director of Brand Development and Marketing at Lucasfilm Ltd., an
independent film production company. Ms. Petersen-Dunnington holds a B.A. in
Education from Mankato State University and an M.A. in Mass Communications from
Drake University.
Paul A. Rodwick has served as Vice President, Marketing of E.piphany since
August 1999. Prior to joining E.piphany, Mr. Rodwick served in several executive
positions at Red Brick Systems. Mr. Rodwick served as Vice President, Marketing
of Red Brick Systems from July 1998 to December 1998, as acting Vice President,
Development from April 1998 to June 1998, and as Senior Director, Product
Management from January 1996 to June 1998. From January 1999 to March 1999,
after Red Brick Systems was acquired by Informix, Mr. Rodwick served as Vice
President, Marketing for Informix. From October 1994 to January 1996, Mr.
Rodwick served as Senior Product Manager for Sybase, Inc.'s New Media Division,
a provider of interactive television and World Wide Web software. From August
1990 to October 1994, Mr. Rodwick served in a variety of senior development
management, product management and product marketing positions at Metaphor,
Inc., a provider of decision support systems. Mr. Rodwick holds a B.S. in
Computer Engineering from University of Illinois at Urbana-=Champaign.
Eliot L. Wegbreit co-founded E.piphany in November 1996 and has served as
chairman of the board of directors of E.piphany since December 1996. Dr.
Wegbreit also served as Chief Executive Officer and Chief Financial Officer of
E.piphany from December 1996 to May 1998 and as Executive Vice President,
Research and Development from May 1998 to April 1999. From May 1988 to December
1998, Dr. Wegbreit was a principal at Hambrecht & Quist Venture Capital, a
venture capital investment firm. From January 1991 to January 1995, Dr. Wegbreit
served as Chairman of the Board of Directors and Chief Executive Officer of
Kubota Pacific Inc., a manufacturer of graphics workstations. Dr. Wegbreit holds
a B.E.S. in Engineering Physics from Johns Hopkins University and a Ph.D. in
Computer Science from Harvard University.
Paul M. Hazen has served as a director of E.piphany since June 1999. Mr.
Hazen serves as chairman of the board of directors of Wells Fargo & Co., a
position he has held since January 1995. Mr. Hazen also served as Chief
Executive Officer of Wells Fargo & Co. from January 1995 to November 1998 and as
President and Chief Operating Officer from July 1984 to January 1995. Mr. Hazen
serves on the board of directors of Safeway, Inc., Phelps Dodge Corporation, and
Vodafone Group, plc. Mr. Hazen holds a B.S. in Finance from the University of
Arizona and an M.B.A. from the University of California at Berkeley.
Robert L. Joss has served as a director of E.piphany since June 1999. Mr.
Joss will become dean of the Graduate School of Business at Stanford University
on September 1, 1999. From January 1993 to June 1999, Mr. Joss served on the
Board of Directors of Westpac Banking Corporation, a banking and financial
services company. From February 1993 to February 1999, Mr. Joss also served as
Chief Executive Officer of Westpac Banking Corporation. Mr. Joss holds a B.A. in
Economics from the University of Washington and an M.B.A. and Ph.D. in Finance
from Stanford University.
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Sam H. Lee has served as a director of E.piphany since March 1997. Mr. Lee
is a co-founder and general partner of Information Technology Ventures, a
venture capital firm, a position he has held since June 1994. From June 1990 to
May 1994, Mr. Lee served as vice president of Philadelphia Ventures, a venture
capital firm. Mr. Lee serves on the board of directors of several private
companies. Mr. Lee holds a Bachelor of Science degree in Electrical Engineering
from Mississippi State University, a Masters of Engineering degree from Texas
A&M University and an M.B.A. from the Wharton School of the University of
Pennsylvania.
Douglas J. Mackenzie has served as a director of E.piphany since January
1998. Mr. Mackenzie has been a general partner of the venture capital firm of
Kleiner Perkins Caufield & Byers since 1994. Mr. Mackenzie serves on the board
of directors of Marimba, Inc., Pivotal Corporation and Visio Corporation. He
also serves on the board of directors of several private companies. Mr.
Mackenzie holds an A.B. in Economics from Stanford University, an M.S. in
Industrial Engineering from Stanford University and an M.B.A. from Harvard
University.
In connection with their investments in E.piphany, Kleiner Perkins Caufield
& Byers and Information Technology Ventures were given the right to elect one
person each to be a member of our board of directors. Douglas J. Mackenzie was
appointed to our board of directors by Kleiner Perkins Caufield & Byers. Sam H.
Lee was appointed to our board of directors by Information Technology Ventures.
In addition, the founders of the company retained the right to appoint one
member of our board of directors. Dr. Wegbreit was appointed to our board of
directors by the founders. Roger S. Siboni was appointed to our board of
directors as a condition of his being hired to be our chief executive officer.
At the close of this offering, the rights of these persons and entities to
appoint members to our board of directors will cease.
CLASSIFIED BOARD
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and two will be elected
to three-year terms. Thereafter, directors will be elected for three-year terms.
Sam H. Lee and Roger S. Siboni have been designated Class I directors whose term
expires at the 2000 annual meeting of stockholders. Douglas J. Mackenzie and
Eliot L. Wegbreit have been designated Class II directors whose term expires at
the 2001 annual meeting of stockholders. Paul M. Hazen and Robert L. Joss have
been designated Class III directors whose term expires at the 2002 annual
meeting of stockholders. For more information on the classified board, see the
section entitled "Description of Capital Stock -- Anti-takover Effects of
Provisions of Our Certificate and Bylaws and Delaware Law."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
BOARD COMMITTEES
We established an audit committee in June 1999 and compensation committee
in June 1999.
Our audit committee consists of Sam H. Lee and Paul M. Hazen. The audit
committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent accountants.
Our compensation committee consists of Douglas J. Mackenzie and Robert L.
Joss. The compensation committee reviews and recommends to the board of
directors the compensation and benefits of our employees.
The board of directors selects the directors who will serve as members of
these committees and may reduce or enlarge the size of the committees or change
the scope of their responsibilities. The board has no current plans to take any
of these actions. The rules of the Nasdaq National Market, on which
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E.piphany's common stock is listed, requires E.piphany to maintain an audit
committee consisting of at least two directors who are not employees of
E.piphany.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. Under our 1999 stock plan, outside
directors are granted an option to purchase 25,000 shares of our common stock
upon appointment to our board of directors. In addition, an option to purchase
up to 12,500 shares of common stock is granted to each outside director at the
start of each of the second and third years of his service at the then fair
market value of our common stock at that time. During 1999, the board of
directors granted options to purchase 25,000 shares to each of Robert L. Joss
and Paul M. Hazen at an exercise price of $6.00 per share under our 1997 stock
plan. Future grants will be made under our 1999 stock plan after this offering.
See the section entitled "-- Incentive Stock Plans."
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered to
us in all capacities for the fiscal year ended December 31, 1998, by each person
that served as chief executive officer during the last fiscal year and our next
most highly compensated executive officers who earned more than $100,000 during
the fiscal year ended December 31, 1998. These executives are referred to as the
named executive officers in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Roger S. Siboni............................. $104,166 -- -- $178,867
President and Chief Executive Officer
Eliot L. Wegbreit........................... 162,500 -- -- --
Chairman of the Board of Directors,
Former President and Chief Executive
Officer
Steven G. Blank............................. 162,500 -- -- --
Former Executive Vice President, Marketing
Karen A. Richardson......................... 84,712 $61,909 242,500 --
Executive Vice President, Worldwide Sales
</TABLE>
In July 1998, Dr. Wegbreit resigned as our President and Chief Executive
Officer and Mr. Siboni was appointed to these positions. Mr. Siboni joined us in
August 1998, and his annual salary is $250,000. Ms. Richardson joined us in June
1998, and her annual salary is $150,000. Mr. Blank resigned from his employment
with E.piphany effective August 6, 1999.
The other compensation paid to Mr. Siboni represents amounts loaned to Mr.
Siboni in connection with his relocation to E.piphany in 1998, plus accrued
interest through December 31, 1998. As provided in Mr. Siboni's employment
agreement, these amounts were forgiven by E.piphany on March 31, 1999.
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<PAGE> 54
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1998, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 0%, 5% and
10%, compounded annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of our common stock.
In the fiscal year ended December 31, 1998, we granted options to purchase
up to an aggregate of 2,620,163 shares to employees, directors and consultants.
All options were granted under our 1997 stock plan at exercise prices at or
above the fair market value of our common stock on the date of grant, as
determined in good faith by the board of directors. All options have a term of
ten years. Optionees may pay the exercise price by cash, check, cancellation of
any outstanding indebtedness of the option holder to us or delivery of
already-owned shares of our common stock. All options listed below are
immediately exercisable upon grant; however, any unvested shares are subject to
repurchase by us at their cost if the optionee's service with E.piphany
terminates. All option shares listed in the table below vest over four years,
with 25% of the option shares vesting one year after the option grant date, and
the remaining option shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
NUMBER % OF TOTAL DEEMED
OF OPTIONS VALUE POTENTIAL REALIZABLE VALUE AT
SECURITIES GRANTED TO PER ASSUMED ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES EXERCISE SHARE PRICE APPRECIATION FOR OPTION TERM
OPTIONS IN LAST PRICE ON DATE EXPIRATION ------------------------------------
NAME GRANTED FISCAL YEAR PER SHARE OF GRANT DATE 0% 5% 10%
---- ---------- ----------- --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger S. Siboni............ -- -- -- -- -- -- -- --
Eliot L. Wegbreit.......... -- -- -- -- -- -- -- --
Steven G. Blank............ -- -- -- -- -- -- -- --
Karen A. Richardson........ 242,500 9.26% $0.60 $1.58 7/14/08 $237,650 $478,611 $848,292
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for the named executive officers their option
exercises for the fiscal year ended December 31, 1998, and exercisable and
unexercisable options held by them as of December 31, 1998.
The "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on a value of $3.92 per share, the deemed fair market value of our common
stock as of December 31, 1998, less the per share exercise price, multiplied by
the number of shares issued upon exercise of the option. All options were
granted under our 1997 stock plan. All options listed below are immediately
exercisable; however, as a condition of exercise, the optionee must enter into a
restricted stock purchase agreement granting us the right to repurchase any
unvested portion of the shares issuable by such exercise at their cost in the
event of the optionee's termination of employment. The shares vest over four
years, with 25% of the shares vesting one year after the grant date and the
remaining shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS AT DECEMBER 31, THE-MONEY OPTIONS AT
ACQUIRED 1998 DECEMBER 31, 1998
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger S. Siboni............... -- -- -- -- -- --
Eliot L. Wegbreit............. -- -- -- -- -- --
Steven G. Blank............... -- -- -- -- -- --
Karen A. Richardson........... 121,250 $172,175 121,250 -- $402,550 --
</TABLE>
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<PAGE> 55
INCENTIVE STOCK PLANS
1997 STOCK OPTION PLAN
Our 1997 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights. As of August 31, 1999,
options to purchase an aggregate of 2,898,983 shares of common stock were
outstanding under our 1997 stock plan. Our board of directors has determined
that no further options will be granted under the 1997 stock plan after this
offering. The 1997 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each outstanding option
must be assumed or substituted for by the successor corporation. If the
successor corporation refuses to assume or substitute for the E.piphany options,
the E.piphany options will terminate as of the closing of the merger or sale of
assets.
1999 STOCK PLAN
Our 1999 stock plan was adopted by our board of directors in June 1999 and
approved by the stockholders in July 1999. As of the date of this prospectus, no
options or stock purchase rights have been granted under our 1999 stock plan.
Our 1999 stock plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants.
A total of 3,500,000 shares of our common stock has been reserved for
issuance under the 1999 stock plan. In addition, the plan will include:
- the shares of common stock which have been reserved but not granted under
our 1997 stock plan as of the effective date of the offering (as of June
30, 1999, there were 680,621 shares reserved but not yet granted under
our 1997 stock plan) and
- any shares returned to our 1997 stock plan as a result of termination of
options under the 1997 stock plan before the date of our initial public
offering.
In addition, commencing January 1, 2000, annual increases will be added to
the 1999 stock plan equal to the lesser of: (A) 2,500,000 shares, (B) 4% of all
outstanding shares of our common stock or (C) a lesser amount determined by our
board of directors.
Unless terminated sooner, our 1999 stock plan will terminate automatically
ten years from the effective date of this offering.
The administrator of our 1999 stock plan, which is currently our board of
directors, has the power to determine among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of each option or stock purchase right
- the number of shares subject to each option or stock purchase right
- the exercisability of each option or stock purchase right, and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
In addition, the administrator has the authority to amend, suspend or
terminate our 1999 stock plan, so long as the action does not affect any shares
of common stock previously issued and sold or any option previously granted
under our 1999 stock plan. During any fiscal year, each optionee may be granted
options to purchase a maximum of 750,000 shares. In addition, in connection with
an optionee's initial employment with us, such optionee may be granted an option
covering an additional 750,000 shares.
Options and stock purchase rights granted under our 1999 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under our 1999 stock plan must generally be exercised within
three
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<PAGE> 56
months after the end of the optionee's status as an employee, director or
consultant of E.piphany, or within twelve months after such optionee's
termination by death or disability, but not later than the expiration of the
option's term.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants E.piphany a repurchase
option, exercisable for any unvested stock purchase rights, upon the voluntary
or involuntary termination of the purchaser's employment or consulting
relationship with E.piphany for any reason, including death or disability. The
purchase price for shares repurchased pursuant to the restricted stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to E.piphany. The repurchase
option lapses at a rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1999
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1999 stock plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Internal Revenue Code, the exercise price must be at least equal to the
fair market value of our common stock on the date of grant. With respect to any
participant who owns stock having more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal to 110% of the fair market value on
the grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1999 stock plan may not
exceed ten years.
The 1999 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right must be assumed or an equivalent option or stock purchase right
substituted for by the successor corporation. If the outstanding options and
stock purchase rights are not assumed or substituted for by the successor
corporation, the optionees shall become fully vested in and have the right to
exercise such options or stock purchase rights. If an option or stock purchase
right becomes fully vested and exercisable in the event of a merger or sale of
assets, the administrator must notify the optionee that the option or stock
purchase right is fully exercisable for a period of 15 days from the date of the
notice, and the option or stock purchase right will terminate upon the
expiration of the 15 day period.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 employee stock purchase plan was adopted by our board of directors
in June 1999, and approved by the stockholders in July 1999. A total of
2,000,000 shares of our common stock has been reserved for issuance under the
1999 purchase plan, plus annual increases equal to the lesser of: (A) 2,000,000
shares, (B) 4% of the outstanding shares on such date or (C) a lesser amount
determined by our board of directors. As of the date of this prospectus, no
shares have been issued under the 1999 purchase plan.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive, overlapping, twenty-four month
offering periods. Each offering period includes four six-month purchase periods.
The offering periods generally start on the first trading day on or after May 1
and November 1 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before October 31, 2001.
Employees are eligible to participate if they are customarily employed by
E.piphany or any participating subsidiary for at least 20 hours per week and for
more than five months in any calendar year. However, employees may not be
granted an option to purchase stock under the 1999 purchase plan if they either:
- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
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<PAGE> 57
- hold rights to purchase stock under our employee stock purchase plans
which accrue at a rate which exceeds $25,000 worth of stock for each
calendar year.
The 1999 purchase plan permits participants to purchase our common stock
through payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings,
overtime, shift premium and bonuses, but excludes other compensation. The
maximum number of shares a participant may purchase during a single purchase
period is 20,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:
- at the beginning of the offering period, or
- at the end of the purchase period.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use the lower fair market value as of the first date of the
new offering period to determine the purchase price for future purchase periods.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with E.piphany.
Rights granted under the 1999 purchase plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 purchase plan. The 1999 purchase plan provides
that, if a merge with or into another corporation or a sale of substantially all
of our assets, each outstanding option may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in progress
will be shortened and a new exercise date will be set. The new exercise date
will be set prior to the proposed date of the merger or sale of assets.
Our board of directors has the authority to amend or terminate the 1999
purchase plan, except that they may not adversely affect any outstanding rights
to purchase stock under the 1999 purchase plan. However, the board of directors
may terminate an offering period on any exercise date if the board determines
that the termination of the 1999 purchase plan is in our best interests and the
best interest of our stockholders. Notwithstanding anything to the contrary, the
board of directors may in its sole discretion amend the 1999 purchase plan to
the extent necessary and desirable to avoid unfavorable financial accounting
consequences by altering the purchase price for any offering period, shortening
any offering period or allocating remaining shares among the participants. The
1999 purchase plan will terminate automatically ten years from the effective
date of this offering unless terminated earlier by our board of directors.
401(K) PLAN
In January 1999, we adopted a 401(k) plan to provide eligible employees
with a tax preferential savings and investment program. Employees become
eligible to participate in the 401(k) plan on the first day they perform an hour
of service for us. Eligible participants may elect to reduce their current
compensation up to the lesser of 15% of eligible compensation or the statutorily
prescribed annual limit, currently $10,000, and have such reduction contributed
to the 401(k) plan. The 401(k) plan permits, but does not require, us to make
additional matching contributions to the 401(k) plan on behalf of eligible
participants. We have not made any matching contributions to the 401(k) plan to
date. All contributions made by and on behalf of participants are subject to a
maximum contribution limitation currently equal to the lesser of 25% of their
compensation or $30,000 per year. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan,
and income earned on plan contributions, are
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<PAGE> 58
generally not taxable to the participants until withdrawn, and contributions by
us, if any, are generally deductible by us when made.
CHANGE IN CONTROL, SEVERANCE AND EMPLOYMENT ARRANGEMENTS
In connection with our hiring of Roger S. Siboni as our President and Chief
Executive Officer in July 1998, we sold 1,600,000 shares of our common stock to
him at a purchase price of $0.40 per share in exchange for a promissory note and
cash. We have a right to repurchase these shares of stock at a price of $0.40
per share. Our right to repurchase Mr. Siboni's shares lapses as to 1/48 of his
total number of shares at the end of each month after May 1, 1998. As of August
31, 1999, our repurchase right had lapsed with respect to 533,333 of Mr.
Siboni's shares, leaving 1,066,667 of his shares subject to the repurchase
right. However, our right to repurchase Mr. Siboni's shares terminates as to all
of his shares upon a change in control of E.piphany in which Mr. Siboni is not
given equivalent compensation and title in the post change of control entity.
See the sections entitled "Certain Relationships and Related
Transactions -- Common Stock Purchases and Sales" and " -- Employee Loans."
In a merger or a sale of substantially all of our assets, if the options
under our 1997 stock plan are not assumed or substituted for, each outstanding
option will terminate as of the closing of the merger or sale of assets. In a
merger or a sale of substantially all of our assets, if the options outstanding
under our 1999 stock plan are not assumed or substituted, each outstanding
option will vest fully and become immediately exercisable.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
- unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether our bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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<PAGE> 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK SALES
Series C Preferred Stock. In September and October 1998, we sold shares of
Series C Preferred Stock, at a purchase price of $3.38 per share, to raise
capital to finance our operations. The following 5% stockholders purchased
shares in that financing:
<TABLE>
<CAPTION>
PURCHASER NUMBER OF SHARES AGGREGATE CONSIDERATION
--------- ---------------- -----------------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers.................. 1,479,291 $5,000,000
Information Technology Ventures................... 1,183,433 4,000,000
</TABLE>
Partnerships controlled by Kleiner Perkins Caufield & Byers own 18.5% of
our stock and were allotted one seat on our board of directors, currently filled
by Douglas J. Mackenzie, in connection with their investment in our Series B
Preferred Stock financing. Partnerships controlled by Information Technology
Ventures own 18.4% of our stock and were allotted one seat on our board of
directors, currently filled by Sam H. Lee, in connection with their investments
in our preferred stock financings.
Series B Preferred Stock. In January 1998, we sold shares of Series B
Preferred Stock, at a purchase price of $2.50 per share, to raise capital to
finance our operations. The following 5% stockholders purchased shares in that
financing:
<TABLE>
<CAPTION>
PURCHASER NUMBER OF SHARES AGGREGATE CONSIDERATION
--------- ---------------- -----------------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers.................. 2,230,000 $5,575,000
Information Technology Ventures................... 596,932 1,492,329
</TABLE>
Series A Preferred Stock. In March and September 1997, we sold shares of
Series A Preferred Stock, at a purchase price of $1.13 per share, to raise
capital to finance our operations. The following directors, officers, and 5%
stockholders purchased shares in that financing:
<TABLE>
<CAPTION>
PURCHASER NUMBER OF SHARES AGGREGATE CONSIDERATION
--------- ---------------- -----------------------
<S> <C> <C>
Information Technology Ventures................... 2,166,931 $2,448,632
Eliot L. Wegbreit as Trustee of Wegbreit Trust.... 74,570 84,264
Steven G. Blank as Trustee of Elliot-Blank
Revocable Trust................................. 31,063 35,101
</TABLE>
Eliot L. Wegbreit currently serves as chairman of our board of directors,
currently owns 10.1% of our stock, and, at the time of the purchase, was also an
officer of E.piphany. Steven G. Blank currently owns 9.9% of our stock and was
an officer of E.piphany at the time of the purchase.
COMMON STOCK PURCHASES AND SALES
At the time of E.piphany's foundation, E.piphany entered into stock
purchase agreements with Steven G. Blank and Eliot L. Wegbreit, founders of
E.piphany. On January 24, 1997, Mr. Blank and Dr. Wegbreit each purchased
2,100,000 shares of our common stock under their agreements at a purchase price
of $0.0005 per share for $1,050 each. Mr. Blank was an officer of E.piphany and
Dr. Wegbreit is chairman of our board of directors. We had the right to
repurchase Mr. Blank's and Dr. Wegbreit's shares at their original purchase
price of $0.0005 per share if E.piphany terminated their respective employment
for cause or upon their death or disability. Our repurchase right lapsed as to
1/48 of the total number of shares at the end of each month after November 1,
1996.
In March 1999, Dr. Wegbreit resigned as Executive Vice President,
Engineering of E.piphany. In accordance with the terms of his stock purchase
agreement, Dr. Wegbreit's remaining shares of common stock are no longer subject
to our repurchase right.
On August 6, 1999, Steven G. Blank, who was at the time our Executive Vice
President of Marketing, resigned from E.piphany to pursue other interests. In
connection with Mr. Blank's resignation, 125,000 shares of his common stock were
repurchased by us for a total purchase price of $62.50. In
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<PAGE> 60
accordance with the terms of his stock purchase agreement, Mr. Blank's remaining
shares of common stock are no longer subject to our repurchase right. Mr. Blank
has agreed to continue as a consultant to E.piphany for up to five days per
month, until February 6, 2000. E.piphany will not be required to pay any
consulting fees to Mr. Blank, however, after the earlier of February 6, 2000 or
the termination of the lock-up period which restricts Mr. Blank's sale of his
shares of E.piphany common stock for up to 180 days following this offering.
In connection with our hiring of Roger S. Siboni, our President and Chief
Executive Officer, on July 7, 1998 we sold an aggregate of 1,600,000 shares of
common stock to Mr. Siboni at a purchase price of $0.40 per share. Mr. Siboni
paid for his shares with a promissory note in the amount of $639,680 and $320 in
cash. The principal amount of the note accrues simple interest at a rate of
5.88% per year.
On January 16, 1998, in connection with our Series B financing, we sold an
aggregate of 250,000 shares of our common stock to entities affiliated with
Kleiner Perkins Caufield & Byers, a 5% stockholder of E.piphany, at a purchase
price of $0.25 per share.
EMPLOYEE LOANS
In addition to the loan to purchase stock given to Mr. Siboni, in
connection with his offer of employment as our President and Chief Executive
Officer, Mr. Siboni received a loan of $175,000 for relocation expenses. The
entire amount of the loan was forgiven under the terms of the loan on March 31,
1999. We have also offered to loan to Mr. Siboni up to $250,000 per year for two
years, drawable monthly. Mr. Siboni is currently drawing down this loan at a
rate of $20,833 per month. As of June 30, 1999, the total outstanding principal
amount of this loan is $267,000. This loan bears interest at a rate per annum of
5.6% compounded monthly and is repayable upon Mr. Siboni's first sales of our
stock. Mr. Siboni is also eligible for an annual bonus of up to $125,000, which
is first applied to any outstanding loan balance that Mr. Siboni has with
E.piphany including the loan described above.
INDEMNIFICATION AGREEMENTS
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
We believe that the shares sold in transactions described above were sold
at fair market value and the terms of the other arrangements described above
were no less favorable than we could have obtained from unaffiliated third
parties.
In addition to the transactions described above, we have compensation
arrangements with directors and officers which are described under the section
entitled "Management."
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of August 31, 1999, by the following
individuals or groups:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock
- each of the named executive officers
- each of our directors, and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o E.piphany, Inc., 2300 Geng Road, Suite 200, Palo Alto,
California 94303. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Applicable percentage ownership in the following table is based on
21,683,984 shares of common stock outstanding as of August 31, 1999.
To the extent that any shares are issued upon exercise of options, warrants
or other rights to acquire our capital stock that are presently outstanding or
granted in the future or reserved for future issuance under our stock plans,
there will be further dilution to new public investors.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option. We have granted the underwriters an option to
purchase up to 622,500 shares to cover over-allotments, if any.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
---------------- ------------------ -------- --------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers(1)....................... 3,959,291 18.3% 15.3%
2750 Sand Hill Road
Menlo Park, California 94025
Information Technology Ventures(2)........................ 3,947,296 18.2 15.3
3000 Sand Hill Road
Building 1, Suite 280
Menlo Park, California 94025
Eliot L. Wegbreit(3)...................................... 2,174,570 10.0 8.4
Steven G. Blank(4)........................................ 2,006,063 9.3 7.8
Roger S. Siboni........................................... 1,600,000 7.4 6.2
Karen A. Richardson(5).................................... 257,646 1.2 1.0
Douglas J. Mackenzie(6)................................... 3,959,291 18.3 15.3
Sam H. Lee(7)............................................. 3,947,296 18.2 15.3
Paul M. Hazen(8).......................................... 25,000 * *
Robert L. Joss(9)......................................... 25,000 * *
All directors and officers as a group (12 persons)(10).... 12,776,303 56.8 47.9
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 3,651,632 shares held by Kleiner Perkins Caufield & Byers VIII,
L.P., 208,676 shares held by KPCB VIII Founders Fund, L.P., and 98,983
shares held by KPCB Information Services Zaibatsu Fund II, L.P. The general
partner of Kleiner Perkins Caufield & Byers VIII, L.P. and KPCB VIII
Founders Fund, L.P. is KPCB VIII Associates, L.P. The general partner of
KPCB
59
<PAGE> 62
Information Sciences Zaibatsu Fund II, L.P. is KPCB VII Associates, L.P.
Douglas J. Mackenzie, a member of the board of directors of E.piphany, is a
general partner of both KPCB VIII Associates, L.P. and KPCB VII Associates,
L.P.
(2) Includes 3,844,768 shares held by Information Technology Ventures, L.P. and
102,528 shares held by ITV Affiliates Fund, L.P. The general partner of
each of these two limited partnerships is ITV Management, L.L.C. Sam H.
Lee, a member of the board of directors of E.piphany, is a principal member
of ITV Management, L.L.C.
(3) All 2,174,570 shares are held by Eliot L. Wegbreit as trustee of the
Wegbreit Trust.
(4) Includes 31,063 shares held by Steven G. Blank as Trustee of the
Elliot-Blank Revocable Trust, 39,063 shares held by David Elliot as Trustee
of the Katherine Elliot Blank Trust and 39,063 shares held by David Elliot
as Trustee of the Sarah Elliot Blank Trust. Mr. Blank disclaims beneficial
ownership of the shares held by the Katherine Elliot Blank and Sarah Elliot
Blank Trusts. Mr. Blank is a founder of E.piphany and was formerly its
Executive Vice President, Marketing.
(5) Includes 15,146 shares issuable upon exercise of currently exercisable
stock options.
(6) All 3,959,291 shares are held by entities associated with Kleiner Perkins
Caufield & Byers, a venture capital firm (see footnote (1) above). Mr.
Mackenzie disclaims beneficial ownership of the shares held by the entities
associated with Kleiner Perkins Caufield & Byers except for his monetary
interest arising from his general partnership interest in the entities.
(7) All 3,947,296 shares are held by entities associated with ITV Management,
L.L.C., a venture capital firm. Mr. Lee disclaims beneficial ownership of
the shares held by the entities associated with ITV Management, L.L.C.
except for his monetary interest arising from his principal membership
interest in ITV Management, L.L.C.
(8) Includes 25,000 shares issuable upon exercise of currently exercisable
stock options.
(9) Includes 25,000 shares issuable upon exercise of currently exercisable
stock options.
(10) Includes the information contained in footnotes (3) to (9) above and
includes an aggregate of 827,646 shares issuable upon exercise of stock
options held by the directors and officers that are exercisable within 60
days of August 31, 1999.
60
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our preferred stock outstanding prior to this offering will automatically
be converted into common stock upon the closing of this offering according to
the terms of our certificate of incorporation. We will file an amended
certificate of incorporation to be effective upon the closing of this offering
that creates a new class of preferred stock. No shares of the new preferred
stock will be outstanding upon completion of this offering. Upon the completion
of this offering, we will be authorized to issue 100,000,000 shares of common
stock, $0.0001 par value, and 5,000,000 shares of undesignated preferred stock,
$0.0001 par value. The following description of our capital stock is subject to
and qualified in its entirety by our amended certificate of incorporation and
bylaws, which are included as exhibits to the registration statement of which
this prospectus forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of August 31, 1999, there were 9,772,429 shares of common stock
outstanding which were held of record by approximately 105 stockholders and upon
conversion of all outstanding shares of convertible preferred stock, which will
automatically occur upon the closing of this offering according to the terms of
our certificate of incorporation, there will be an aggregate of 21,683,984
shares of common stock outstanding.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of the liquidation, dissolution or
winding up of E.piphany, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel to E.piphany, is delivering a legal opinion that the shares of common
stock to be issued upon the closing of this offering, when issued and sold in
the manner described in this prospectus and in accordance with the resolutions
adopted by the board of directors, will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock
- diluting the voting power of the common stock
- impairing the liquidation rights of the common stock, or
- delaying or preventing a change in control of E.piphany without further
action by the stockholders.
Upon the closing no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
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<PAGE> 64
WARRANTS
At June 30, 1999, there were warrants outstanding to purchase 22,124 shares
of Series A preferred stock, up to 75,000 shares of Series B preferred stock,
and up to 31,250 shares of Series C preferred stock which are convertible in the
aggregate into 128,374 shares of common stock.
REGISTRATION RIGHTS
The holders of 18,474,847 shares of common stock and the holders of
warrants to purchase preferred stock convertible into 75,000 shares of common
stock are entitled to the following rights with respect to registration of such
shares under the Securities Act. These rights are provided under the terms of an
agreement between E.piphany and the holders of registrable securities. Beginning
180 days following the date of this prospectus but not before March 18, 2000, if
holders of at least 50% of the then outstanding registrable securities request
that at least 30% of the then outstanding registrable securities be registered,
we may be required, on up to two occasions, to register their shares for public
resale. We are obligated to register these shares only if the outstanding
registrable securities have an anticipated public offering price of at least
$6,000,000. Also, holders of registrable securities may require on two separate
occasions within any twelve month period that we register their shares for
public resale on Form S-3 or similar short-form registration if the value of the
securities to be registered is at least $2,000,000. Depending on market
conditions, however, we may defer such registration for up to 120 days.
Furthermore, in the event we elect to register any of our shares of common stock
for purposes of effecting any public offering, the holders of the registrable
securities described above and additional holders of warrants to purchase
preferred stock convertible into an additional 22,124 shares of common stock are
entitled to include their shares of common stock in the registration, but we may
reduce the number of shares proposed to be registered in view of market
conditions. We plan to obtain waivers of these registration rights with respect
to this offering. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate five years following the consummation of this offering,
or, with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE AND BYLAWS AND DELAWARE LAW
Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
- acquisition of E.piphany by means of a tender offer
- acquisition of E.piphany by means of a proxy contest or otherwise, or
- removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders for more information on the
classified board, see the section entitled "Management -- Executive Officers and
Directors." This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
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<PAGE> 65
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware Anti-Takover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Cumulative voting provides for a minority stockholder to vote a portion or all
of its shares for one or more candidates for seats on the board of directors.
Without cumulative voting, a minority stockholder will not be able to gain as
many seats on our board of directors based on the number of shares of our stock
that such stockholder holds than if cumulative voting were permitted. The
elimination of cumulative voting makes it more difficult for a minority
stockholder to gain a seat on our board of directors to influence the board of
directors' decision regarding a takeover.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of E.piphany. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of E.piphany.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
NASDAQ NATIONAL MARKET LISTING
Our shares have been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "EPNY."
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to E.piphany.
After the offering 25,833,984 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 4,150,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which are
summarized below.
The following table shows approximately when the 21,683,984 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<CAPTION>
SHARES ELIGIBLE
FOR SALE
---------------
<S> <C>
At the effective date....................................... 0
181 days after the effective date........................... 20,394,921
At June 16, 2000............................................ 937,500
At August 19, 2000.......................................... 351,563
</TABLE>
Resale of 15,358,720 of the restricted shares that will become available
for sale in the public market starting 181 days after the effective date will be
limited by volume and other resale restrictions under Rule 144 because the
holders are affiliates of E.piphany.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 258,340 shares immediately after this offering; or
- the average weekly trading volume of our common stock on The Nasdaq Stock
Market's National Market during the four calendar weeks before a notice
of the sale on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, but without
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<PAGE> 67
complying with some of the restrictions, including the holding period, contained
in Rule 144. As of August 31, 1999, 2,447,429 shares outstanding had been issued
as a result of the exercise of stock options. Of these shares, 1,278,015 shares
will be vested and exercisable and will be able to be resold after the 90 day
period, subject to the lock-up agreements described below.
LOCK-UP AGREEMENTS
After this offering approximately 21,683,984 shares of our common stock
held by our directors, executive officers and our existing stockholders are
subject to "lock-up" agreements under which they agree not to sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock, or publicly disclose the intention
to make any such offer, sale, pledge or disposal without the prior consent of
Credit Suisse First Boston Corporation, for a period of 180 days after the date
of this prospectus. Transfers or dispositions can be made sooner with the prior
written consent of Credit Suisse First Boston Corporation.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 18,474,847 shares of our
common stock and holders of 97,124 shares of our common stock issuable upon
conversion of warrants, assuming such warrants are converted, will be entitled
to rights to registration of their shares under the Securities Act. After
registration, these shares will become freely tradable without restrictions
under the Securities Act. Any sales of securities by these shareholders could
have a material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering shares of common stock subject to outstanding
options or reserved for issuance under our stock option plans. Each year as the
number of shares reserved for issuance under our 1999 stock plan and 1999
employee stock purchase plan automatically increases, we will file an amendment
to the registration statement covering the additional shares. As of August 31,
1999, 3,721,346 shares remained reserved for issuance under our 1997 stock plan
of which options to purchase 2,898,983 shares of common stock were issued and
outstanding. When the lock-up agreements described above expire, options to
purchase 507,929 shares of common stock will become fully vested and, when
exercised, these shares will be freely tradable, based on the number of options
outstanding as of August 31, 1999. This registration statement is expected to be
filed and become effective as soon as practicable after the effective date of
this offering. Accordingly, shares registered under that registration statement
will, upon the optionee's exercise and subject to vesting provisions and Rule
144 volume limitations applicable to our affiliates, be available for sale in
the open market immediately after the 180 day lock-up agreements expire.
WARRANTS
Upon consummation of the initial public offering, warrants to purchase up
to 128,374 shares of our common stock will remain outstanding of which warrants
for 75,000 and 22,124 shares will have the registration rights described in the
section entitled "Description of Capital Stock -- Registration Rights."
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<PAGE> 68
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to E.piphany and our common
stock, see the registration statement and the exhibits and schedules thereto.
Any document we file may be read and copied at the Securities and Exchange
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information about the public reference rooms. Our
filings with the Securities and Exchange Commission are also available to the
public from the Securities and Exchange Commission's Web site at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the Securities and Exchange Commission's public reference rooms and the World
Wide Web site of the Securities and Exchange Commission referred to above.
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<PAGE> 69
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
---------
Total............................................. 4,150,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 622,500 additional shares of common stock at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses that
we will pay. The compensation we will pay to the underwriters will consist
solely of the underwriting discount, which is equal to the public offering price
per share of common stock less the amount the underwriters pay to us per share
of common stock. The underwriters have not received and will not receive from us
any other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice. The underwriting fee
will be determined based on our negotiations with the underwriters at the time
the initial public offering price of our common stock is determined. We do not
expect the underwriting discount per share of common stock to exceed 7% of the
initial public offering price per share of common stock.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us... $ $ $ $
Expenses payable by us..... $ $ $ $
</TABLE>
The principal components of the offering expenses payable by us will
include the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
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<PAGE> 70
We, our executive officers, directors and our existing stockholders have
agreed not to offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial offering price, up
to 280,000 shares of common stock for employees and other persons associated
with us who have expressed an interest in purchasing common stock in the
offering. In addition, the underwriters have reserved for sale, at the initial
public offering price, approximately 150,000 shares of common stock for Hilton
Hotels. Hilton Hotels is a customer of E.piphany. The number of shares of common
stock available for sale to the general public in the offering will be reduced
to the extent these persons purchase the reserved shares. Any reserved shares
not so purchased will be offered by the underwriters to the general public on
the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments which the underwriters may be
required to make in that respect.
Our shares have been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "EPNY."
Prior to the offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be determined
by negotiation between the representatives and us and does not reflect the
market price of the common stock following the offering. Among the principal
factors considered in determining the initial public offering price will be:
- the information in this prospectus and otherwise available to the
representatives
- market conditions for initial public offerings
- the history of and prospects for the industry in which we will
compete
- the ability of our management
- our prospects for our future earnings
- the present state of our development and our current financial
condition
- the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies, and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act:
- Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
- Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been completed
in order to cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock originally
sold by the syndicate member is purchased in a
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<PAGE> 71
syndicate covering transaction to cover syndicate short positions. The
representatives track these purchases through the initial public
offering tracking system operated by the Depository Trust Company. The
representatives may, at their discretion, reclaim a selling concession
from any syndicate member that appears to have permitted its customers
to purchase shares in the initial public offering and then promptly
resell all or a portion of those shares to the syndicate member that
sold them.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
69
<PAGE> 72
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the issuer and these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
70
<PAGE> 73
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Some legal matters will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California. As of the date of this
prospectus, WS Investments, an investment partnership composed of some current
and former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, as well as several individual attorneys of
this firm, beneficially own a total of 78,462 shares of our common stock. Aaron
J. Alter, a member of Wilson Sonsini Goodrich & Rosati, is the Secretary of
E.piphany.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In July 1998, KPMG Peat Marwick LLP resigned as E.piphany's independent
public accountants, as KPMG Peat Marwick LLP became an integrator of E.piphany's
products and purchased E.piphany's preferred stock. The former independent
accountants' report on E.piphany's financial statements for the year ended
December 31, 1997 did not contain an adverse opinion, a disclaimer of opinion or
any qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. The former independent public
accountants' report does not cover any of E.piphany's financial statements in
this registration statement. KPMG Peat Marwick LLP did not issue an audit
opinion on E.piphany's financial statements for any other period. There were no
disagreements with the former public accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to E.piphany's financial statements up through the time
of dismissal that, if not resolved to the former accountants' satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. In September 1998, E.piphany
retained Arthur Andersen LLP as its independent public accountants. The decision
to retain Arthur Andersen LLP was approved by resolution of the board of
directors. Prior to retaining Arthur Andersen LLP, E.piphany had not consulted
with Arthur Andersen LLP regarding accounting principles.
71
<PAGE> 74
E.PIPHANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Stockholders' Equity and Comprehensive Loss.... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
After the stock split discussed in Note 10 to E.piphany, Inc.'s financial
statements, we expect to be in a position to render the following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
June 19, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To E.piphany, Inc.:
We have audited the accompanying balance sheets of E.piphany, Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for the years then ended. These financial statements are the
responsibility of E.piphany's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of E.piphany, Inc., as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Jose, California
June 19, 1999
(except with respect to the matters
discussed in Note 10, as to which the
date is ______ __, 1999)
F-2
<PAGE> 76
E.PIPHANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 369 $ 13,595 $ 19,852
Accounts receivable, net of allowance for doubtful
accounts
of $0, $30, and $50, respectively....................... 16 1,243 1,989
Prepaid expenses and other current assets................. 79 354 507
------- -------- --------
Total current assets............................... 464 15,192 22,348
Property and equipment, net................................. 337 1,172 1,888
Other assets................................................ -- -- 523
------- -------- --------
$ 801 $ 16,364 $ 24,759
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation............... $ -- $ -- $ 81
Current portion of notes payable.......................... -- 167 432
Accounts payable.......................................... 117 1,015 533
Accrued liabilities....................................... 140 1,028 2,213
Deferred revenue.......................................... 76 381 800
------- -------- --------
Total current liabilities.......................... 333 2,591 4,059
Capital lease obligations, net of current portion......... -- -- 116
Notes payable, net of current portion..................... -- 333 7,979
------- -------- --------
Total liabilities.................................. 333 2,924 12,154
------- -------- --------
Commitments (Note 4)
Stockholders' equity:
Convertible preferred stock, $0.0001 par value;
Series A:
Authorized -- 3,250 shares
Outstanding -- 3,228 shares in 1997, 1998 and June 30,
1999;
liquidation preference of $3,648...................... 1 1 1
Series B:
Authorized -- 3,304 shares
Outstanding -- 3,229 shares in 1998 and June 30, 1999;
liquidation preference of $8,072...................... -- 1 1
Series C:
Authorized -- 4,462 shares
Outstanding -- 4,166 shares in 1998 and June 30, 1999;
liquidation preference of $14,080..................... -- 1 1
Series C':
Authorized -- 750 shares
Outstanding -- 0 shares................................. -- -- --
Series D:
Authorized -- 937 shares
Outstanding -- 937 shares at June 30, 1999; liquidation
preference of $6,000................................... -- -- --
Common stock, $0.0001 par value;
Authorized -- 25,000 shares
Outstanding -- 5,620 in 1997, 8,913 shares in 1998 and
9,522 shares at June 30, 1999......................... 1 2 2
Additional paid-in capital................................ 3,615 30,030 39,375
Warrants to purchase preferred stock...................... -- -- 532
Note receivable........................................... -- (640) (640)
Deferred compensation..................................... -- (2,476) (3,842)
Accumulated deficit....................................... (3,149) (13,479) (22,825)
------- -------- --------
Total stockholders' equity......................... 468 13,440 12,605
------- -------- --------
$ 801 $ 16,364 $ 24,759
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 77
E.PIPHANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- ------------------
1997 1998 1998 1999
------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product license.................................. $ -- $ 2,216 $ 533 $ 2,929
Services......................................... -- 1,161 330 2,195
------- -------- ------- -------
-- 3,377 863 5,124
------- -------- ------- -------
Cost of revenues:
Product license.................................. -- 4 -- 25
Services......................................... -- 1,396 370 2,488
------- -------- ------- -------
-- 1,400 370 2,513
------- -------- ------- -------
Gross profit............................. -- 1,977 493 2,611
------- -------- ------- -------
Operating expenses:
Research and development......................... 1,646 3,769 1,644 2,865
Sales and marketing.............................. 1,200 6,519 2,260 6,351
General and administrative....................... 373 1,503 609 1,284
Stock-based compensation......................... 1 799 2 1,572
------- -------- ------- -------
Total operating expenses................. 3,220 12,590 4,515 12,072
------- -------- ------- -------
Loss from operations..................... (3,220) (10,613) (4,022) (9,461)
------- -------- ------- -------
Other income (expense):
Interest income.................................. 71 333 149 261
Interest expense................................. -- (48) (18) (145)
Other............................................ -- (2) (2) (1)
------- -------- ------- -------
Total other income....................... 71 283 129 115
------- -------- ------- -------
Net loss................................. $(3,149) $(10,330) $(3,893) $(9,346)
======= ======== ======= =======
Basic and diluted net loss per share............... $ (2.90) $ (7.19) $ (1.82) $ (1.87)
======= ======== ======= =======
Shares used in computing basic and diluted net loss
per share........................................ 1,087 1,437 2,136 5,005
======= ======== ======= =======
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (1.17) $ (0.60)
======== =======
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 8,833 15,679
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 78
E.PIPHANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------------- -------------------- PAID-IN NOTE DEFERRED
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- ---------- ---------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock................. -- $-- $ -- 5,600 $ 1 $ 2 $ -- $ --
Exercise of common stock
options............... -- -- -- 8 -- 1 -- --
Issuance of common stock
in exchange for
services.............. -- -- -- 11 -- 1 -- --
Issuance of Series A
preferred stock,
net................... 3,228 1 -- -- -- 3,611 -- --
Comprehensive loss:
Net loss.............. -- -- -- -- -- -- -- --
---------- --- ---- ------ --- -------- ----- -------
Total comprehensive
loss..............
Balance, December 31,
1997...................... 3,228 1 -- 5,619 1 3,615 -- --
Issuance of Series B
preferred stock,
net................... 3,229 1 -- -- -- 8,019 -- --
Sale of common stock to
Series B investors.... -- -- -- 250 -- 62 -- --
Issuance of common stock
to officer............ -- -- -- 1,600 -- 640 (640) --
Issuance of common stock
in exchange for
services.............. -- -- -- 60 -- 36 -- --
Issuance of Series C
preferred stock,
net................... 4,160 1 -- -- -- 13,992 -- --
Exercise of common stock
options............... -- -- -- 1,540 1 488 -- --
Repurchase of stock..... -- -- -- (156) -- (70) -- --
Issuance of Series C
preferred stock in
exchange for
services.............. 6 -- -- -- -- 20 -- --
Stock-based
compensation.......... -- -- -- -- -- 11 -- --
Deferred stock
compensation.......... -- -- -- -- -- 3,217 -- (3,217)
Amortization of deferred
stock compensation.... -- -- -- -- -- -- -- 741
Comprehensive loss:
Net loss.............. -- -- -- -- -- -- -- --
---------- --- ---- ------ --- -------- ----- -------
Total comprehensive
loss..............
Balance, December 31,
1998...................... 10,623 3 -- 8,913 2 30,030 (640) (2,476)
Exercise of common stock
options (unaudited)... -- -- -- 609 -- 437 -- --
Stock-based compensation
(unaudited)........... -- -- -- -- -- 251 -- --
Issuance of Series D
preferred stock, net
(unaudited)........... 937 -- -- -- -- 5,970 -- --
Issuance of warrants
related to leases and
debt financing
(unaudited)........... -- -- 532 -- -- -- -- --
Deferred stock
compensation
(unaudited)........... -- -- -- -- -- 2,687 -- (2,687)
Amortization of deferred
stock compensation
(unaudited)........... -- -- -- -- -- -- -- 1,321
Comprehensive loss:
Net loss
(unaudited)......... -- -- -- -- -- -- -- --
---------- --- ---- ------ --- -------- ----- -------
Total comprehensive
loss
(unaudited).......
Balance, June 30, 1999
(unaudited)............... 11,560 $ 3 $532 9,522 $ 2 $ 39,375 $(640) $(3,842)
========== === ==== ====== === ======== ===== =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
DEFICIT EQUITY LOSS
----------- ------------- -------------
<S> <C> <C> <C>
Issuance of common
stock................. $ -- $ 3
Exercise of common stock
options............... -- 1
Issuance of common stock
in exchange for
services.............. -- 1
Issuance of Series A
preferred stock,
net................... -- 3,612
Comprehensive loss:
Net loss.............. (3,149) (3,149) $ (3,149)
-------- -------- --------
Total comprehensive
loss.............. $ (3,149)
========
Balance, December 31,
1997...................... (3,149) 468
Issuance of Series B
preferred stock,
net................... -- 8,020
Sale of common stock to
Series B investors.... -- 62
Issuance of common stock
to officer............ -- --
Issuance of common stock
in exchange for
services.............. -- 36
Issuance of Series C
preferred stock,
net................... -- 13,993
Exercise of common stock
options............... -- 489
Repurchase of stock..... -- (70)
Issuance of Series C
preferred stock in
exchange for
services.............. -- 20
Stock-based
compensation.......... -- 11
Deferred stock
compensation.......... -- --
Amortization of deferred
stock compensation.... -- 741
Comprehensive loss:
Net loss.............. (10,330) (10,330) $(10,330)
-------- -------- --------
Total comprehensive
loss.............. $(10,330)
========
Balance, December 31,
1998...................... (13,479) 13,440
Exercise of common stock
options (unaudited)... -- 437
Stock-based compensation
(unaudited)........... -- 251
Issuance of Series D
preferred stock, net
(unaudited)........... -- 5,970
Issuance of warrants
related to leases and
debt financing
(unaudited)........... -- 532
Deferred stock
compensation
(unaudited)........... -- --
Amortization of deferred
stock compensation
(unaudited)........... -- 1,321
Comprehensive loss:
Net loss
(unaudited)......... (9,346) (9,346) $ (9,346)
-------- -------- --------
Total comprehensive
loss
(unaudited)....... $ (9,346)
========
Balance, June 30, 1999
(unaudited)............... $(22,825) $ 12,605
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 79
E.PIPHANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------
1997 1998 1998 1999
------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(3,149) $(10,330) $(3,893) $(9,346)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................ 47 269 90 320
Allowance for doubtful accounts..................... -- 30 -- 20
Loss on sale of property and equipment.............. 9 -- -- --
Noncash compensation expense........................ 1 799 2 1,572
Noncash interest expense............................ -- -- -- 9
Changes in operating assets and liabilities:
Accounts receivable............................... (16) (1,257) (892) (766)
Prepaid expenses and other assets................. (79) (275) (150) (153)
Accounts payable.................................. 117 898 (1) (482)
Accrued liabilities............................... 140 888 428 1,185
Deferred revenue.................................. 76 305 527 419
------- -------- ------- -------
Net cash used in operating activities.......... (2,854) (8,673) (3,889) (7,222)
------- -------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment..................... (408) (1,104) (520) (811)
Proceeds from the sale of property and equipment....... 15 -- -- --
------- -------- ------- -------
Net cash used in investing activities.......... (393) (1,104) (520) (811)
------- -------- ------- -------
Cash flows from financing activities:
Borrowings............................................. -- 500 500 8,000
Repayments on line of credit........................... -- -- -- (89)
Principal payments on capital lease obligations........ -- -- -- (28)
Net proceeds from issuance of convertible preferred
stock............................................... 3,612 22,033 8,020 5,970
Issuance of common stock............................... 4 470 77 437
------- -------- ------- -------
Net cash provided by financing activities...... 3,616 23,003 8,597 14,290
------- -------- ------- -------
Net increase in cash and cash equivalents................ 369 13,226 4,188 6,257
Cash and cash equivalents at beginning of period......... -- 369 369 13,595
------- -------- ------- -------
Cash and cash equivalents at end of period............... $ 369 $ 13,595 $ 4,557 $19,852
======= ======== ======= =======
Supplemental cash flow information:
Cash paid for interest................................. $ -- $ 48 $ 18 $ 204
Non-cash transactions:
Loan to officer to purchase stock...................... $ -- $ 640 $ -- $ --
Equipment capital lease................................ $ -- $ -- $ -- $ 225
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 80
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS
E.piphany, Inc. ("E.piphany" or the "Company"), formerly Epiphany Marketing
Software, Inc., was incorporated in Delaware in November 1996, and develops and
markets software that companies can use to establish, maintain and continually
improve customer relationships across both Internet and traditional sales,
marketing and distribution channels. In 1997, E.piphany was in the development
stage and was primarily engaged in obtaining equity financing and performing
research and development activities. Although E.piphany began actively selling
its products in 1998 and no longer considers itself to be in the development
stage, it has not operated profitably to date and there are no assurances that
it will operate profitably in the future.
E.piphany has incurred net operating losses since inception and, as of June
30, 1999, had an accumulated deficit of $22.8 million. E.piphany is subject to
various risks associated with companies in a comparable stage of development,
including having a limited operating history; competition from substitute
products and larger competitors; dependence on a limited number of customers;
dependence on key individuals; and the ability to obtain adequate financing to
support its growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 expenses during the reporting period.
Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, E.piphany considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of amounts on deposit at a
commercial bank and investments in commercial paper and other securities.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
E.piphany provides credit to its customers in the normal course of
business, performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, to date, have not been material.
F-7
<PAGE> 81
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
Receivables due from significant customers as a percentage of total
accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
Customer A.................................................. 21% 19%
Customer B.................................................. 17% --
Customer C.................................................. 13% --
Customer D.................................................. 12% --
Customer E.................................................. 10% --
Customer F.................................................. -- 21%
Customer G.................................................. -- 17%
</TABLE>
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------- ---------------
1997 1998 1998 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
Customer A............................................ -- 16% -- --
Customer B............................................ -- 17% -- --
Customer C............................................ -- 30% 57% --
Customer D............................................ -- 11% 16% --
Customer F............................................ -- -- -- 11%
Customer G............................................ -- -- -- 20%
Customer H............................................ -- 11% -- 11%
Customer I............................................ -- -- 21% --
Customer J............................................ -- -- -- 13%
</TABLE>
In September 1998, the President and Chief Executive Officer of E.piphany
was elected to the board of directors of Customer D. E.piphany recognized
$357,000 in revenue from this customer in 1998 and had $146,000 in accounts
receivable due from Customer D at December 31, 1998. The majority of the
agreements relating to this revenue were entered into before the chief executive
officer was employed by E.piphany or elected to Customer D's board of directors.
E.piphany also recognized $227,000 in revenue from this customer for the six
months ended June 30, 1999 and had $169,000 in accounts receivable at June 30,
1999.
The President and Chief Executive Officer of E.piphany is a member of the
board of directors of two additional customers. E.piphany recognized a total of
$463,000 in revenue from these customers for the six months ended June 30, 1999
and had a total of $68,000 and $12,000 in accounts receivable at December 31,
1998 and June 30, 1999, respectively, from these customers. An outside director
of E.piphany is also a member of the board of directors of one of these
customers.
An outside director of E.piphany is a member of the board of directors of
Customer I. E.piphany recognized $233,000 and $236,000 in revenue and $57,000
and $0 in accounts receivable from Customer I for the year ended December 31,
1998 and during the six months ended June 30, 1999, respectively. The first
agreement with this customer was entered into before the outside director was
elected to E.piphany's board of directors.
F-8
<PAGE> 82
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
five years. Depreciation expense is included in operating expenses.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
---- ------ --------
<S> <C> <C> <C>
Computer software and equipment........................... $372 $1,329 $2,365
Furniture and fixtures.................................... 12 159 159
---- ------ ------
384 1,488 2,524
Less: Accumulated depreciation............................ (47) (316) (636)
---- ------ ------
$337 $1,172 $1,888
==== ====== ======
</TABLE>
Included in property and equipment are assets acquired under capital leases
with original cost of approximately $225,000 as of June 30, 1999. Accumulated
amortization on the leased assets is approximately $27,000 as of June 30, 1999.
Future minimum lease payments on capital leases are as follows at June 30,
1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 51
2000........................................................ 102
2001........................................................ 73
----
Total minimum lease payments................................ 226
Less: Imputed interest (10.0%).............................. (29)
----
Present value of payments under capital leases.............. 197
Less: Current portion....................................... (81)
----
Long-term capital lease obligations......................... $116
====
</TABLE>
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development expenses.
E.piphany defines establishment of technological feasibility as the completion
of a working model. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the products are capitalized, if material, after consideration
of various factors, including net realizable value. To date, software
development costs that are eligible for capitalization have not been material
and have been expensed.
F-9
<PAGE> 83
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ------ --------
<S> <C> <C> <C>
Accrued professional services............................... $ 42 $ 158 $ 521
Accrued sales tax........................................... 17 93 48
Accrued compensation........................................ 16 614 1,259
Accrued other............................................... 65 163 385
---- ------ ------
$140 $1,028 $2,213
==== ====== ======
</TABLE>
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect to employ the method proscribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method. E.piphany has elected to continue to account for its
stock-based compensation arrangements under the provisions of APB 25, and
accordingly, has included in Note 6 the pro forma disclosures required under
SFAS No. 123.
REVENUE RECOGNITION
E.piphany generates several types of revenue including the following:
License Fees. E.piphany's standard end user license agreement for
E.piphany's products provides for an initial fee to use the product in
perpetuity up to a maximum number of users. E.piphany also enters into other
license agreement types, which allow for the use of E.piphany's products,
usually restricted by the number of employees, the number of users, or the
license term. Fees from licenses are recognized as revenue upon contract
execution, provided all shipment obligations have been met, fees are fixed or
determinable, and collection is probable. Fees from license agreements which
include the right to receive unspecified future products are recognized over the
term of the arrangement or, if not specified, the estimated economic life of the
product.
When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the above
criteria have been met, (2) payment of the license fees is not dependent upon
the performance of the consulting services, and (3) the services do not include
significant alterations to the features and functionality of the software. To
date, services have been essential to the functionality of the software products
for substantially all license agreements entered into which included
implementation services. For these arrangements and other arrangements which
don't meet the above criteria, both the product license revenues and services
revenue is recognized in accordance with the provisions of Statement of Position
("SOP") 81-1, "Accounting for Performance of Construction Type and Certain
Production Type Contracts." When reliable estimates are available for the costs
and efforts necessary to complete the implementation services, the Company
accounts for the arrangements under the percentage completion contract method
pursuant to SOP 81-1. When such estimates are not available, the completed
contract method is utilized. License revenue recognized pursuant to SOP 81-1
comprised 76%
F-10
<PAGE> 84
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
and 67% of total product revenue for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively.
E.piphany provides for sales returns based on historical rates of return
which, to date, have not been material.
Maintenance Agreements. Maintenance agreements generally call for E.piphany
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the maintenance agreement and is included in services revenue in the
accompanying statements of operations.
Consulting, Implementation and Training Services. E.piphany provides
consulting, implementation and training services to its customers. Revenue from
such services, when not sold in conjunction with product licenses, is generally
recognized as the services are performed.
As of June 30, 1999, $594,000 of accounts receivable was unbilled due to
services performed in advance of billings.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. The Company does
not incur any direct-response advertising costs.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which E.piphany adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that results from transactions and other economic events of the period other
than transactions with shareholders ("comprehensive income"). Comprehensive
income is the total of net income and all other non-owner changes in equity. For
each of the two years ended December 31, 1998, and the six months ended June 30,
1999, E.piphany's comprehensive income was equal to net loss.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND
DILUTED NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings Per Share," for all periods presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if such stock had been outstanding for all periods presented. To
date, E.piphany has not had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Basic and diluted pro
forma net loss per common share, as presented in the statements of
F-11
<PAGE> 85
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock (using the if-converted method)
from the original date of issuance.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- ------------------
1997 1998 1998 1999
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net loss........................................... $(3,149) $(10,330) $(3,893) $(9,346)
Basic and diluted:
Weighted average shares of common stock
outstanding................................... 5,486 7,235 5,892 9,133
Less: Weighted average shares subject to
repurchase....................................... (4,399) (5,798) (3,756) (4,128)
------- -------- ------- -------
Weighted average shares used in computing basic and
diluted net loss per common share................ 1,087 1,437 2,136 5,005
======= ======== ======= =======
Basic and diluted net loss per common share...... $ (2.90) $ (7.19) $ (1.82) $ (1.87)
======= ======== ======= =======
Net loss......................................... $(10,330) $(9,346)
======== =======
Shares used above................................ 1,437 5,005
Pro forma adjustment to reflect weighted effect
of assumed conversion of convertible preferred
stock (unaudited)............................. 7,396 10,674
-------- -------
Shares used in computing pro forma basic and
diluted net loss per common share
(unaudited)................................... 8,833 15,679
======== =======
Pro forma basic and diluted net loss per common
share (unaudited)............................. $ (1.17) $ (0.60)
======== =======
</TABLE>
E.piphany has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share were
approximately 8,124,000, 14,952,000, and 18,074,000 for the years ended December
31, 1997 and 1998, and the six months ended June 30, 1999, respectively. See
Notes 5 and 6 for further information on these securities.
SEGMENT REPORTING
During 1998, E.piphany adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, E.piphany is organized and operates as one business
segment, the design, development, and marketing of software solutions.
During the years ended December 31, 1997 and 1998, and the six months ended
June 30, 1998 and 1999, E.piphany did not generate significant revenues in
foreign countries.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments 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. The key criterion for hedge
accounting is that the hedging relationship must be highly
F-12
<PAGE> 86
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
effective in achieving offsetting changes in fair value or cash flows. In June
1999, the FASB issued SFAS No. 137, "Accounting For Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,"
which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (or January 1, 2001 for E.piphany). This
Statement will not have a material impact on the financial condition or results
of the operations of E.piphany.
In December 1998, the AICPA issued Statement of Position ("SOP") 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral
of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. E.piphany does not anticipate that this statement will have a
material impact on its statement of operations.
3. LONG-TERM DEBT
E.piphany had the following long-term debt arrangements as of June 30, 1999
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ----- --------
<S> <C> <C> <C>
Subordinated convertible debt facility for $10.0 million.
Expires in February 2000. Borrowings bear interest at 10%
and are payable in equal monthly installments of interest
only through June 2001 and equal installments of
principal and interest from June 2001 to December 2002... $ -- $ -- $5,000
Non-revolving equipment line of credit with a bank for $3.0
million. Expires in March 2000 with all payments due
March 2003. Borrowings bear interest at the bank's prime
rate plus 0.5% (8.25% at December 31, 1998).............. -- -- 3,000
Non-revolving equipment line of credit with a bank for
$1.25 million. Borrowings bear interest at the bank's
prime rate plus 0.5% (8.25% at December 31, 1998) and are
payable in monthly installments through October 2001..... -- 500 411
Revolving line of credit with a bank for $1.0 million.
Expires in December 1999. Borrowings bear interest at the
bank's prime rate (7.75% at December 31, 1998)........... -- -- --
Equipment lease line for $2.0 million. Expires in May 2000.
Borrowings bear interest at 8.5% for the first six months
of the lease............................................. -- -- --
---- ----- ------
Total borrowings outstanding............................. -- 500 8,411
Less: current portion.................................... -- (167) (432)
---- ----- ------
Total long-term debt............................. $ -- $ 333 $7,979
==== ===== ======
</TABLE>
All of the debt arrangements above are collateralized by substantially all
of E.piphany's assets. E.piphany must comply with certain covenants under some
of these arrangements including minimum deposits, liquidity ratios, and
quarterly profitability requirements.
The subordinated convertible debt facility lender has the option to convert
forty-five percent of the outstanding borrowings under the facility as of June
30, 1999 to shares of E.piphany's Series C' preferred stock at a price of $6.40
per share. As of June 30, 1999, the number of shares subject to conversion was
351,563. The conversion warrant is exerciseable irrespective of whether
borrowings are outstanding under the arrangement and terminates within
forty-five days of notice to the lender of an initial public offering of
F-13
<PAGE> 87
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
E.piphany's stock. The fair value of the warrant at the date of issuance was
determined to be $391,000 and was estimated using the Black-Scholes model with
the following assumptions: risk-free interest rate of 5.6%; expected life of
0.25 years; and expected volatility of 85%. This amount will be recognized as
additional interest expense over the term of this arrangement with the lender.
Borrowings outstanding as of June 30, 1999 are payable as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................ $ 78
2000........................................ 937
2001........................................ 2,730
2002........................................ 4,416
2003........................................ 250
------
$8,411
======
</TABLE>
4. COMMITMENTS
E.piphany leases its facilities under operating lease agreements. The
facility leases expire at various dates in 1999. As of December 31, 1998, future
minimum payments required under E.piphany's operating leases in 1999 were
$464,000.
In April 1999, E.piphany entered into an operating lease agreement for a
new office facility. The term of the lease is four years and expires in October
2003. Future minimum lease payments under the lease are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999........................................ $ 416
2000........................................ 1,259
2001........................................ 1,297
2002........................................ 1,336
2003........................................ 1,135
------
$5,443
======
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998, and the
six months ended June 30, 1999, was approximately $127,000, $610,000 and
$384,000, respectively.
5. PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK
The rights, preferences, and privileges of the holders of preferred stock
are as follows:
- Dividends are noncumulative and payable only upon declaration by
E.piphany's board of directors at a rate of $0.12, $0.24, $0.34, $0.34
and $0.64 per share per annum for Series A, B, C, C', and D preferred
stock, respectively.
- The holders of Series A, B, C, C' and D preferred stock have voting
rights equal to an equivalent number of shares of common stock into which
it is convertible.
- Each share of Series A, B, C, C' and D preferred stock is convertible at
any time into one share of common stock at the option of the holder,
subject to adjustment to protect against dilution. E.piphany can be
required to convert the preferred stock into common stock at the consent
of not less than two-thirds of the outstanding Series A, B, C, C' and D
preferred stockholders, voting together as a single class. Each share of
preferred stock automatically converts upon the closing of
F-14
<PAGE> 88
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
the sale of E.piphany's common stock in a public offering in which the
gross proceeds exceed $10,000,000 and the offering price equals or
exceeds $10.00 per share or whenever less than 1,250,000 shares of
preferred stock remain outstanding.
- In the event of liquidation, dissolution or winding up of E.piphany, the
holders of Series A, B, C, C' and D preferred stock are entitled to
receive $1.13, $2.50, $3.38, $3.38 and $6.40 per share, respectively, as
well as any declared but unpaid dividends on each share, prior to any
distribution to the holders of common stock. Any remaining distributable
assets of E.piphany would be distributed among the holders of Series A,
B, C, C' and D preferred stock and common stock on a pro-rata basis, up
to a total distribution of $3.40, $7.50, $10.14, $10.14 and $19.20 per
Series A, B, C, C' and D preferred stock share, respectively, after which
any remaining assets are distributed solely to the holders of common
stock.
In September 1998, 6,020 shares of Series C preferred stock were granted to
an outside firm for services rendered to E.piphany. The fair value of the Series
C preferred stock of $20,347 has been reflected in operating expenses in 1998.
WARRANTS
In May 1997, E.piphany issued a warrant to purchase 22,124 shares of Series
A preferred stock at $1.13 per share in connection with obtaining a line of
credit. The warrant is exercisable through May 2002. The fair value of the
warrant at the date of issuance was estimated using the Black-Scholes model with
the following assumptions: risk-free interest rate of 6.4%; expected life of 4
years; and expected volatility of 85%. The value was determined to be
immaterial.
In January 1998, E.piphany issued a warrant to purchase shares of Series B
preferred stock at $2.50 per share in connection with obtaining a line of credit
with a bank. The number of shares is calculated based on $97,500 plus a
percentage of borrowings under the revolving line of credit divided by the share
price. At December 31, 1998, this warrant allowed for the purchase of 75,000
shares. The warrant is exercisable through the earlier of January 9, 2003, or
three years after the initial public offering of E.piphany. The fair value of
the warrant at the date of issuance was estimated using the Black-Scholes model
with the following assumptions: risk-free interest rate of 5.6%; expected life
of 3 years; and expected volatility of 85%. The value was determined to be
immaterial.
In June 1999, E.piphany issued a warrant to purchase 31,250 shares of
Series C preferred stock at $3.38 per share in connection with obtaining an
equipment lease line. The warrant is exercisable immediately and expires in June
2009. The fair value of the warrant at the date of issuance was determined to be
$141,000 and was estimated using the Black-Scholes model with the following
assumptions: risk-free interest rate of 5.2%; expected life of 3 years; and
expected volatility of 85%. This amount will be recognized as additional
interest expense over the term of this arrangement with the lender.
6. COMMON STOCK
During January and February 1997, E.piphany issued 5,600,000 shares of
common stock, under restricted stock purchase agreements, for $0.0005 per share
in exchange for cash. Pursuant to the restricted stock purchase agreements,
E.piphany has the right to repurchase the common stock at the original purchase
price. The repurchase right expires over a 48-month period. In July 1998,
E.piphany's chief executive officer purchased 1,600,000 shares of common stock
under a restricted stock purchase agreement in exchange for a promissory note
(see Note 8). Pursuant to the stock purchase agreement, E.piphany has the right
to repurchase the common stock at the original purchase price. The repurchase
right expires over a 48-month period. All exercised but unvested stock options
are also subject to repurchase by E.piphany at
F-15
<PAGE> 89
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
the original purchase price. As of June 30, 1999, 2,686,458 shares of common
stock were subject to repurchase under these agreements.
In December 1997, 11,250 shares of common stock valued at $1,350 were
granted to an outside consultant for services rendered to E.piphany. In July
1998, 60,000 shares of common stock valued at $36,000 were granted to a
marketing firm for services rendered to E.piphany. The fair value of these
shares is reflected in operating expenses in the respective years.
As of June 30, 1999, E.piphany had reserved the following shares of
authorized but unissued common stock:
<TABLE>
<S> <C>
Conversion of Series A preferred stock...................... 3,227,878
Conversion of Series B preferred stock...................... 3,228,823
Conversion of Series C preferred stock...................... 4,165,791
Conversion of Series D preferred stock...................... 937,500
Conversion of preferred stock upon the exercise of stock
warrants.................................................. 479,937
Stock options outstanding and remaining to be granted under
1997 stock option plan.................................... 3,471,977
----------
Total shares reserved............................. 15,511,906
==========
</TABLE>
In January 1998, E.piphany sold 250,000 shares of common stock to a Series
B preferred stock holder for $0.25 per share for cash.
STOCK-BASED COMPENSATION
In connection with the grant of certain stock options to employees during
the year ended December 31, 1998, and the six months ended June 30, 1999, the
Company recorded deferred compensation of approximately $5.9 million,
representing the difference between the deemed value of the common stock for
accounting purposes and the option exercise price or stock sale price at the
date of the option grant or stock sale. Such amount is presented as a reduction
of stockholders' equity and amortized over the vesting period of the applicable
options in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. Approximately $0.7 million and $1.3 million was expensed
during the year ended December 31, 1998, and the six months ended June 30, 1999,
respectively. Compensation expense is decreased in the period of forfeiture for
any accrued but unvested compensation arising from the early termination of an
option holder's services.
During the years ended December 31, 1997 and 1998, and the six months ended
June 30, 1998 and 1999, E.piphany recorded stock-based compensation of $1,000,
$58,000, $2,000, and $251,000, respectively, related to equity instruments
issued to non-employees. Stock-based compensation related to stock options to
purchase common stock which are issued to non-employees is determined based upon
the fair value at the date of issuance in accordance with the provisions of SFAS
No. 123.
STOCK OPTIONS
In 1997, E.piphany adopted the 1997 Stock Plan (the "Plan") under which
incentive stock options and nonstatutory stock options may be granted to
employees and consultants of E.piphany. The exercise price for incentive stock
options is at least 100% of the fair market value on the date of grant for
employees owning less than 10% of the voting power of all classes of stock and
at least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock. For nonstatutory
stock options, the exercise price is at least 110% of the fair market value on
the date of grant for employees owning more than 10% of voting power of all
classes of stock and at least 85%
F-16
<PAGE> 90
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
for employees owning less than 10% of the voting power of all classes of stock.
Options generally expire in 10 years. Options are immediately exercisable, but
shares so purchased vest over periods determined by the board of directors,
generally four years. Upon termination of employment, unvested shares may be
repurchased by E.piphany for the original purchase price.
As of June 30, 1999, an aggregate of 680,621 shares were available for
future option grants under the Plan.
E.piphany accounts for the Plan under APB 25 whereby the difference between
the exercise price and the fair value at the date of grant is recognized as
compensation expense. Had compensation expense for stock option plans been
determined consistent with SFAS No. 123, net losses would have increased to the
following pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS
------------------- ENDED JUNE 30,
1997 1998 1999
------- -------- --------------
<S> <C> <C> <C>
Net loss as reported............................. $(3,149) $(10,330) $ (9,346)
Net loss pro forma............................... (3,163) (10,457) (10,117)
Net loss per share as reported................... $ (2.90) $ (7.19) $ (1.87)
Net loss per share pro forma..................... (2.91) (7.28) (2.02)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................ 5.8 - 6.9% 4.3 - 5.7% 4.4 - 5.4%
Expected life of the option........................ 4.5 years 4.5 years 4.5 years
Dividend yield..................................... 0% 0% 0%
Volatility......................................... 0% 85% 85%
</TABLE>
The following table summarizes the stock option plan activity under the
Plan (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999
------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $0.00 1,210 $0.12 1,661 $0.57
Granted................ 1,218 $0.12 2,560 $0.56 1,891 $3.89
Exercised.............. (8) $0.12 (1,540) $0.31 (609) $0.72
Canceled............... -- $0.00 (569) $0.25 (152) $1.36
------ ------- ------
Outstanding at end of
period................. 1,210 $0.12 1,661 $0.57 2,791 $2.74
====== ======= ======
Vested and exercisable at
end of period.......... 60 $0.15 156 $0.13 244 $3.23
====== ======= ======
Weighted average fair
value per share........ $ 0.08 $ 0.28 $ 1.18
====== ======= ======
</TABLE>
F-17
<PAGE> 91
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
OPTIONS VESTED
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
JUNE 30, 1999 AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES NUMBER YEARS PRICE NUMBER PRICE
--------------- ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.12 - $0.60.. 714 8.73 $0.37 108 $0.26
$1.00 - $2.00.. 785 9.46 $1.63 6 $1.00
$2.70 - $4.00.. 612 9.74 $3.18 12 $4.00
$6.00 - $6.40.. 680 9.94 $6.12 118 $6.00
----- -----
$0.12 - $6.40.. 2,791 9.45 $2.74 244 $3.23
===== =====
</TABLE>
During the years ended December 31, 1997 and 1998, E.piphany issued 11,250
and 60,000 shares, respectively, under the plan for services rendered. The fair
value of these shares is reflected in operating expenses in the respective
years.
7. INCOME TAXES
E.piphany accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes." A valuation allowance has been recorded for the total
deferred tax assets of E.piphany as a result of uncertainties regarding the
realization of the assets based on the limited operating history of E.piphany,
the lack of profitability to date, and the uncertainty of future profitability.
The components of net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 1,238 $ 4,889
Research and development credits......................... 76 333
------- -------
Total deferred tax assets................................ 1,314 5,222
Valuation allowance...................................... (1,314) (5,222)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
</TABLE>
As of December 31, 1998, E.piphany had net operating loss carryforwards of
approximately $11.7 million for federal and state tax purposes. The federal net
operating loss and other credit carryforwards expire on various dates beginning
on 2012 through 2018. The state net operating loss carryforwards will expire in
2004.
Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
The provision for income taxes differs from the expected tax benefit amount
computed by applying the statutory federal income rate of 34% to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Federal statutory rate...................................... (34.0)% (34.0)%
State taxes, net of federal benefit......................... (5.8) (5.8)
Change in valuation allowance............................... 39.8 39.8
----- -----
0% 0%
===== =====
</TABLE>
F-18
<PAGE> 92
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND 1998 IS UNAUDITED)
8. RELATED PARTY TRANSACTIONS
In 1998, E.piphany loaned its chief executive officer $175,000 for
relocation expenses. In accordance with the loan agreement, the entire amount of
the loan was forgiven on March 31, 1999. The loan was charged to compensation
expense and is included in general and administrative expense in the
accompanying statement of operations for the year ended December 31, 1998. The
chief executive officer was also offered a loan of $250,000 per year for two
years, drawable monthly. This loan bears interest at 5.6% per annum compounded
monthly and is repayable by the officer's first stock sales. As of June 30,
1999, $267,000 was outstanding on this loan. As the repayment of this amount was
contingent on future stock sales, this amount has been expensed as paid.
Advances under the loan were charged to compensation expense in the period in
which the amounts were loaned to the officer and $104,000 and $163,000 are
included in general and administrative expense in the accompanying statements of
operations for the year ended December 31, 1998 and for the six months ended
June 30, 1999, respectively. This chief executive officer was also given a loan
to purchase 1,600,000 shares of common stock at $0.40 per share. This loan is
due on July 1, 2008 and accrues interest at 5.88% per annum.
9. 401(K) PLAN
In January 1999, the Company adopted a 401(k) plan (the "401(k)").
Participation in the 401(k) is available to all employees. Employees are
eligible to participate in the 401(k) at any time beginning with their first day
of employment. Each participant may elect to contribute an amount up to 15% of
his or her annual base salary plus commission and bonus, but not to exceed the
statutory limit as prescribed by the Internal Revenue Code. The Company may make
discretionary contributions to the 401(k). To date, no contributions have been
made by the Company.
10. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
(UNAUDITED)
1999 STOCK PLAN
On June 30, 1999, the board of directors approved the adoption of
E.piphany's 1999 Stock Plan (the "1999 Plan"). A total of 3,500,000 shares of
common stock have been reserved for issuance related to stock options under the
1999 Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
On June 30, 1999, the board of directors approved the adoption of
E.piphany's 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of
2,000,000 shares of common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock, as defined in the Purchase Plan.
INITIAL PUBLIC OFFERING
On June 30, 1999 the board of directors authorized E.piphany to undertake
an initial public offering ("IPO") of E.piphany's common stock. In addition, the
board approved an amendment to the Certificate of Incorporation to be effective
upon the closing of the IPO to authorize 100,000,000 shares of common stock and
5,000,000 shares of undesignated Preferred Stock.
STOCK SPLIT
On June 30, 1999, E.piphany's board of directors approved a 1 for 2 reverse
stock split of E.piphany's outstanding common and preferred shares which will
become effective immediately prior to E.piphany's initial public offering. All
share and per share information included in these financial statements have been
retroactively adjusted to reflect this reverse stock split.
F-19
<PAGE> 93
[INSIDE BACK COVER OF PROSPECTUS]
The graphic begins with our logo and the title "E.piphany Software Solutions for
Real Business Problems" and includes language as follows:
The graphic further depicts photographs of three types of users of the E.piphany
E.4 System and includes language as follows:
"Reporting & Analysis Software Solutions -- Which of our products are most
profitable and how can I improve the profitability of our other products?"
"Distributed Database Marketing Software Solutions -- To which customers should
I market this new product and what are the most effective media with which to
reach them?"
"E-Commerce Software Solutions -- How are my Internet commerce initiatives
affecting business in my traditional sales, marketing and distribution
channels?"
The graphic continues with a table containing the following language:
THE E.PIPHANY E.4 SYSTEM
<TABLE>
<S> <C> <C>
REPORTING & ANALYSIS DISTRIBUTED DATABASE E-COMMERCE
MARKETING
</TABLE>
THE E.PIPHANY E.4 SYSTEM PLATFORM
<PAGE> 94
LOGO
<PAGE> 95
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 E.piphany in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,595
NASD filing fee............................................. 5,750
Nasdaq Stock Market listing fee............................. 95,000
Printing and engraving costs................................ 150,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 200,000
Blue Sky fees and expenses.................................. 5,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 19,655
Total....................................................... $900,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VII of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the underwriters for some liabilities,
including liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the Underwriters for inclusion in
the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following share numbers have been adjusted to reflect the one for two
reverse stock split to occur immediately prior to the effectiveness of the
offering. During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) On January 24, 1997 and February 24, 1997, Registrant issued and
sold an aggregate of 5,600,000 shares of common stock to the founding
officers and directors of the Registrant for an aggregate purchase price of
$2,800. The foregoing purchase and sale was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(b) On March 18, 1997 and September 30, 1997, Registrant issued and
sold an aggregate of 3,227,878 shares of Series A preferred stock to 17
investors for $1.13 per share or an aggregate of
II-1
<PAGE> 96
$3,647,500. The foregoing purchases and sales were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that
the transaction did not involve a public offering.
(c) On May 29, 1997, Registrant issued and sold a warrant to purchase
up to 22,124 shares of Series A preferred stock at an exercise price of
$1.13 per share to Imperial Bancorp. The foregoing purchase and sale was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.
(d) On January 16, 1998, Registrant issued and sold an aggregate of
3,228,823 shares of Series B preferred stock to a total of 16 investors for
$2.50 per share, or an aggregate of $8,072,056.25. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(e) On January 16, 1998, Registrant also sold an aggregate of 250,000
shares of our common stock to entities affiliated with Kleiner Perkins
Caufield & Byers at a purchase price of $0.25 per share. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transaction did not
involve a public offering.
(f) On January 16, 1998, Registrant issued and sold a warrant to
purchase up to 71,000 shares of Series B preferred stock at an exercise
price of $2.50 per share to Silicon Valley Bank. The foregoing purchase and
sale was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(g) On July 1, 1998, Registrant issued and sold an aggregate of
1,600,000 shares of common stock at a purchase price of $0.40 per share to
Roger S. Siboni, who serves as President and Chief Executive Officer of
E.piphany. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that
the transaction did not involve a public offering.
(h) On September 24, 1998 and October 30, 1998, Registrant issued and
sold an aggregate of 4,165,791 shares of Series C preferred stock to a
total of 25 investors for $3.38 per share, or an aggregate of
$14,080,353.30. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transaction did not involve a public offering.
(i) On June 2, 1999, Registrant issued and sold a warrant to purchase
up to 31,250 shares of Series C preferred stock at an exercise price of
$3.38 per share to Comdisco, Inc. On June 2, 1999 the Registrant also
granted a stock purchase option to Comdisco, Inc. to purchase shares of
Series C' preferred stock at a purchase price of $6.40 per share, which was
exercised for 351,563 shares of Series C' preferred stock on August 19,
1999. The foregoing purchases and sales were exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(j) On June 16, 1999, Registrant issued and sold an aggregate of
937,500 shares of Series D preferred stock to a total of two investors for
$6.40 per share, or an aggregate of $6,000,000. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(k) As of August 31, 1999, an aggregate of 2,603,654 shares of common
stock had been issued upon exercise of options under the Registrant's 1997
stock plan, of which 156,225 shares have been repurchased and not returned
to the 1997 stock plan option pool.
Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering, and
the Registrant believes that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation
D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients in such transactions represented
II-2
<PAGE> 97
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Restated Certificate of Incorporation of the
Registrant to be in effect after the closing of the offering
made under this Registration Statement.
3.2* Form of Restated Bylaws of the Registrant to be in effect
after the closing of the offering made under this
Registration Statement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1997 Stock Plan and form of agreements thereunder.
10.5* Fourth Amended and Restated Investors' Rights Agreement
dated June 16, 1999.
10.6* Loan and Security Agreement entered into as of January 9,
1998 with Silicon Valley Bank.
10.7* Loan Modification Agreement between the Registrant and
Silicon Valley Bank dated December 1, 1998.
10.8* Master Lease Agreement dated June 2, 1999 by and between
Comdisco, Inc. and the Registrant.
10.9* Subordinated Loan and Security Agreement dated as of June 2,
1999 by and between the Registrant and Comdisco, Inc.
10.10* Sublease Portion of Third Floor of 1900 Norfolk Street, San
Mateo, California dated April 23, 1999 by and between
Inktomi Corporation and the Registrant.
10.11* Form of Amended and Restated Common Stock Purchase Agreement
dated March 18, 1997 between the Registrant and four
stockholders.
10.12* Restricted Stock Purchase Agreement, Promissory Note, Stock
Pledge Agreement and Joint Escrow Instructions dated July 1,
1998 between Roger S. Siboni and the Registrant.
10.13* Promissory Note dated August 15, 1998 between Roger S.
Siboni and the Registrant.
16.1* Letter from KPMG LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
II-3
<PAGE> 98
(b) Financial Statement Schedules
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 Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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 Securities 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 a director,
officer or controlling person in connection with the securities being registered
hereunder, 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 Securities 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, 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, 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-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, State of California, on the 8th day of
September, 1999.
E.PIPHANY, INC.
By: /s/ ROGER S. SIBONI
------------------------------------
Roger S. Siboni
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement on Form S-1 has been signed
by the following persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive September 8, 1999
/s/ ROGER S. SIBONI Officer and Director
- --------------------------------------------------- (Principal Executive
Roger S. Siboni Officer)
* Chief Financial Officer September 8, 1999
- --------------------------------------------------- (Principal Financial and
Kevin J. Yeaman Accounting Officer)
* Chairman of the Board of September 8, 1999
- --------------------------------------------------- Directors
Eliot L. Wegbreit
* Director September 8, 1999
- ---------------------------------------------------
Paul M. Hazen
* Director September 8, 1999
- ---------------------------------------------------
Robert L. Joss
* Director September 8, 1999
- ---------------------------------------------------
Sam H. Lee
* Director September 8, 1999
- ---------------------------------------------------
Douglas J. Mackenzie
*By /s/ ROGER S. SIBONI
----------------------------------------------
Roger S. Siboni
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Restated Certificate of Incorporation of the
Registrant to be in effect after the closing of the offering
made under this Registration Statement.
3.2* Form of Restated Bylaws of the Registrant to be in effect
after the closing of the offering made under this
Registration Statement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1997 Stock Plan and form of agreements thereunder.
10.5* Fourth Amended and Restated Investors' Rights Agreement
dated June 16, 1999.
10.6* Loan and Security Agreement entered into as of January 9,
1998 with Silicon Valley Bank.
10.7* Loan Modification Agreement between the Registrant and
Silicon Valley Bank dated December 1, 1998.
10.8* Master Lease Agreement dated June 2, 1999 by and between
Comdisco, Inc. and the Registrant.
10.9* Subordinated Loan and Security Agreement dated as of June 2,
1999 by and between the Registrant and Comdisco, Inc.
10.10* Sublease Portion of Third Floor of 1900 Norfolk Street, San
Mateo, California dated April 23, 1999 by and between
Inktomi Corporation and the Registrant.
10.11* Form of Amended and Restated Common Stock Purchase Agreement
dated March 18, 1997 between the Registrant and four
stockholders.
10.12* Restricted Stock Purchase Agreement, Promissory Note, Stock
Pledge Agreement and Joint Escrow Instructions dated July 1,
1998 between Roger S. Siboni and the Registrant.
10.13* Promissory Note dated August 15, 1998 between Roger S.
Siboni and the Registrant.
16.1* Letter from KPMG LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION]
September 8, 1999
E.piphany, Inc.
2300 Geng Road, Suite 200
Palo Alto, CA 94303
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission ("SEC") on July 14, 1999 (Registration
No. 333-82799), as amended by Amendment No. 1 filed with the SEC on
August 19, 1999 and Amendment No. 2 filed with the SEC on September 8, 1999 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 4,772,500 shares of your Common
Stock (the "Shares"). The Shares include an over-allotment option granted to the
underwriters of the offering to purchase 622,500 shares. We understand that the
Shares are to be sold to the underwriters of the offering for resale to the
public as described in the Registration Statement. As your legal counsel, we
have examined the proceedings taken, and are familiar with the proceedings
proposed to be taken, by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be duly authorized, legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
August 18, 1999
