<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 3, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
E.PIPHANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0443392
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1900 SOUTH NORFOLK STREET, SUITE 310
SAN MATEO, CALIFORNIA 94403
(650) 356-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROGER S. SIBONI
CHIEF EXECUTIVE OFFICER
1900 SOUTH NORFOLK STREET, SUITE 310
SAN MATEO, CALIFORNIA 94403
(650) 356-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
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. YANPING CAO, ESQ.
ALICIA MORGA, 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
</TABLE>
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
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.0001 per share........... 3,450,000 shares $212.50 $733,125,000 $193,545
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) based on the average of the high and low sale prices of the
common stock on December 30, 1999.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 JANUARY 3, 2000
3,000,000 Shares
LOGO
Common Stock
------------------
We are selling 1.1 million shares of common stock and the selling
stockholders are selling 1.9 million shares of common stock. We will not receive
any of the proceeds from shares sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 450,000 additional
shares, of which 250,000 are from us and 200,000 are from selling stockholders,
to cover over-allotments of shares.
Our shares are listed for trading on The Nasdaq Stock Market's National
Market under the symbol "EPNY." On December 17, 1999, the last reported sales
price for our common stock was $220.13 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS E.PIPHANY STOCKHOLDERS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
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.
Joint Book-Running Managers
CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER
------------------
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
The date of this prospectus is , 2000.
<PAGE> 3
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY................... 1
RISK FACTORS......................... 5
YOU SHOULD NOT RELY ON FORWARD- 21
LOOKING STATEMENTS.................
USE OF PROCEEDS...................... 22
PRICE RANGE OF COMMON STOCK.......... 22
DIVIDEND POLICY...................... 22
CAPITALIZATION....................... 23
DILUTION............................. 24
SELECTED FINANCIAL DATA.............. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS 26
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS......................
BUSINESS............................. 38
MANAGEMENT........................... 52
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED 62
TRANSACTIONS.......................
PRINCIPAL AND SELLING STOCKHOLDERS... 64
DESCRIPTION OF CAPITAL STOCK......... 66
SHARES ELIGIBLE FOR FUTURE SALE...... 69
WHERE YOU CAN FIND MORE 72
INFORMATION........................
UNDERWRITING......................... 73
NOTICE TO CANADIAN RESIDENTS......... 75
LEGAL MATTERS........................ 76
EXPERTS.............................. 76
CHANGE IN INDEPENDENT PUBLIC 76
ACCOUNTANTS........................
PRO FORMA FINANCIAL STATEMENTS....... P-1
E.PIPHANY FINANCIAL INFORMATION...... F-1
RIGHTPOINT FINANCIAL INFORMATION..... F-23
</TABLE>
------------------
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.
i
<PAGE> 4
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 5.
E.PIPHANY, INC.
We develop and market software that helps companies 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 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 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. We have recently expanded our product offerings
to enable companies to make marketing offers in real time during interactions
initiated by customers. 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 is differentiated from other software by
its combination of the following characteristics:
- Our software is designed to establish, maintain and improve customer
relationships. Our software solutions are designed to enable a continuous
process that helps businesses identify and differentiate their customers
and then customize products, services and related interactions based on
customer characteristics and preferences.
- Our software utilizes a Web-based design to promote ease of use and wide
scale deployment to business users. Our software is easy-to-use and is
accessed by business users across a corporate 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 deploying and maintaining the
software.
- Our software is packaged for faster and less expensive
implementation. Our software is a single integrated family of software
solutions that includes technologies to extract, manage, analyze and act
on customer data. This eliminates the need for a company to integrate
multiple software tools from various vendors or develop custom software
to solve specific business problems. Our software solutions can generally
be implemented in 16 weeks or less.
- Our software is designed to generate marketing offers in real time. Our
software delivers marketing offers to customers in real time by
immediately analyzing current customer behavior in the context of all
past interactions to determine the optimal offer for each individual
customer when they initiate contact with a company. The offer is
delivered to the customer through integration with call center automation
applications, Internet infrastructure applications and other software
systems at the point of customer interaction.
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. Our customers
include Acxiom, Amazon.com, American Express, Autodesk, California State
Automobile Association, Capital BlueCross, Charles Schwab, DIRECTV, Edify, GTE,
Hewlett-Packard, Hilton Hotels, KPMG, Lucent Technologies, Microsoft, Procter &
Gamble, SportsLine, Sallie Mae, VoiceStream and Wingspan Bank.
After giving effect to our acquisition of RightPoint Software, Inc.
described below, our pro forma revenue increased from $4.7 million in 1998 to
$14.3 million in the first nine months of 1999. We have a limited operating
history and have incurred significant losses, including a pro forma loss of
$135.5 million for the nine months ended September 30, 1999, which includes
$115.5 million from the amortization of intangible assets recorded in connection
with the RightPoint acquisition. On a pro forma basis, we had an accumulated
deficit of $53.3 million as of September 30, 1999, including an in-process
research and
1
<PAGE> 5
development charge of approximately $24 million. We expect to incur losses in
the foreseeable future, and these losses may be substantial. The market in which
we compete is highly competitive.
RECENT DEVELOPMENT
We expect to acquire RightPoint in a merger transaction on January 4, 2000.
RightPoint develops and markets real-time marketing software. RightPoint's
software solutions enable companies to optimize and present marketing offers,
promotions, and communications while a customer is interacting with a web site,
call center agent or other point of customer interaction. RightPoint's real-time
marketing software applications provide a single integrated view of the customer
across multiple channels, allowing consistent marketing messages and promotions
to customers regardless of which channel a customer is using. In connection with
the acquisition, we expect to issue approximately 3.0 million shares of our
common stock, based on RightPoint's outstanding stock as of December 1, 1999. In
addition, options and warrants of RightPoint will be converted into options and
warrants to purchase approximately 525,000 shares of our common stock, based on
RightPoint's outstanding options and warrants as of December 1, 1999. This
transaction will be accounted for under the purchase method of accounting.
------------------
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 1900 South Norfolk Street, Suite 310,
San Mateo, California 94403. Our telephone number is (650) 356-3800. Our World
Wide Web site is located at http://www.epiphany.com. Information contained on
our World Wide Web site, or available by links from our Web site, does not
constitute part of this prospectus.
Adaptive Schema Generator, E.4, EpiCenter, E.piphany E.4 System, E.piphany,
the E.piphany logo and RightPoint are our trademarks. Other trademarks or
service marks appearing in this prospectus are trademarks or service marks of
the companies that use them.
2
<PAGE> 6
THE OFFERING
Common stock offered by
E.piphany........................ 1,100,000 shares
Common stock offered by the
selling stockholders............. 1,900,000 shares
Common stock to be outstanding
after this offering.............. 31,171,601 shares
Use of proceeds.................. For general corporate purposes, principally
working capital and capital expenditures.
Nasdaq National Market symbol.... EPNY
The share amounts in this table are based on shares outstanding as of
December 17, 1999, and assumes the issuance of 2,998,426 shares to RightPoint
stockholders, based on the outstanding stock of RightPoint on December 1, 1999.
Except as otherwise indicated, information in this prospectus assumes no
exercise of the underwriters' option to purchase 450,000 additional shares, of
which 250,000 are from us and 200,000 are from selling stockholders. This table
excludes, as of December 1, 1999:
- 7,197,780 shares of common stock reserved for issuance under our stock
plans and warrants, including RightPoint's options and warrants, of which
3,771,964 shares are subject to outstanding options and warrants, with a
weighted average exercise price of $13.40 per share, and
- 2,000,000 shares of common stock reserved for issuance under our employee
stock purchase plan.
3
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------------
1998 1999
---------------------- ----------------------
1997 ACTUAL PRO FORMA 1998 ACTUAL PRO FORMA
------- -------- ----------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................... $ $ 3,377 $ 4,666 $ 1,975 $ 10,468 $ 14,269
Cost of revenues....................... -- 1,400 1,527 850 5,528 6,167
Gross profit........................... -- 1,977 3,139 1,125 4,940 8,102
Amortization of goodwill and
intangibles.......................... -- -- 154,002 -- -- 115,501
Stock-based compensation............... 1 799 799 395 2,314 2,814
Loss from operations................... (3,220) (10,613) (170,045) (6,952) (16,218) (135,842)
Net loss............................... (3,149) (10,330) (169,868) (6,799) (16,135) (135,543)
Basic and diluted net loss per share... $ (2.90) $ (7.19) $ (110.45) $ (3.62) $ (2.90) $ (23.83)
Shares used in computing basic and
diluted net loss per share........... 1,087 1,437 1,538 1,877 5,563 5,688
Pro forma basic and diluted net loss
per share (unaudited)................ $ (1.17) $ (16.53) $ (1.00) $ (7.31)
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited).......................... 8,833 10,277 16,197 18,532
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $89,701 $ 93,930 $322,966
Working capital........................................... 85,765 83,114 312,150
Total assets.............................................. 97,976 567,663 796,699
Long-term obligations, net of current portion............. 7,830 7,868 7,868
Total stockholders' equity................................ 80,862 540,822 769,858
</TABLE>
The statement of operations data 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 E.piphany's Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma financial information reflects the acquisition of RightPoint
and is derived from the unaudited pro forma combined condensed financial
statements and should be read in conjunction with such pro forma statements and
the notes thereto, which are included elsewhere in this prospectus. In preparing
the pro forma combined statement of operations data, the RightPoint operations
have been included as if the acquisition had occurred at the beginning of the
earliest period presented. The pro forma combined balance sheet data has been
prepared as if the acquisition had occurred at that date. The unaudited pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have actually occurred if the acquisition had been consummated as of the
beginning of the earliest period presented or at September 30, 1999, nor is it
necessarily indicative of future operating results or our financial position
following the acquisition of RightPoint.
The pro forma as adjusted amounts reflect the receipt of the net proceeds
from the sale of the 1,100,000 shares of common stock offered by us, after
deducting the underwriting discount and estimated offering expenses payable by
us.
4
<PAGE> 8
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks below, together with all of the other information included in
this prospectus before buying shares in this offering. The following risk
factors assume the consummation of our acquisition of RightPoint Software, Inc.,
which is expected to occur on January 4, 2000.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES IN THE FUTURE AND WE MAY NOT EVER
BECOME PROFITABLE.
We incurred net losses of $16.1 million in the nine months ended September
30, 1999, $10.3 million in the year 1998 and $3.1 million in the year 1997. We
had an accumulated deficit of $29.6 million as of September 30, 1999. RightPoint
incurred net losses of $3.8 million for the year ended June 30, 1999 and $2.4
million for the quarter ended September 30, 1999. RightPoint had an accumulated
deficit of $23.8 million as of September 30, 1999. On a pro forma basis with
RightPoint, we had an accumulated deficit of $53.3 million at September 30,
1999, including an in-process research and development charge of $23.7 million.
We expect to incur losses before amortization charges 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.
Our limited operating history makes it difficult to forecast our future
operating results. E.piphany was founded in November 1996, and RightPoint was
founded in 1991. Our revenue and income potential is unproven. E.piphany
received its first revenues from licensing its software and performing related
services in early 1998, and began shipping the E.piphany E.4 System software in
June 1999. RightPoint began offering its current real time marketing
applications in April 1998. 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
5
<PAGE> 9
- changes in demand for our software or for enterprise software and real
time marketing solutions generally
- announcements or introductions of new products by our competitors
- software defects and other product quality problems
- any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting organizations
to help provide implementation, support and training services when our
own capacity is constrained, and
- our ability to hire, train and retain sufficient engineering, consulting,
training and sales staff.
WE MAY NOT REALIZE ANY BENEFITS FROM THE ACQUISITION OF RIGHTPOINT.
Achieving the benefits of the acquisition of RightPoint will depend in part
on the integration of technology, operations and personnel. The integration of
RightPoint into our operations will be a complex, time consuming and expensive
process and may disrupt our business if not completed in a timely and efficient
manner. Among the challenges involved in this integration are demonstrating to
customers and suppliers that the merger will not result in adverse changes in
client service standards or business focus, persuading personnel that our
business culture is compatible with RightPoint's, retaining key personnel and
addressing any perceived adverse changes in business focus. Neither E.piphany
nor RightPoint has experience in integrating operations on the scale represented
by the merger, and it is not certain that we can successfully integrate
RightPoint in a timely manner or at all or that any of the anticipated benefits
of the merger will be realized. Failure to do so could seriously harm our
business, financial condition and operating results.
IF WE DO NOT INTEGRATE RIGHTPOINT'S TECHNOLOGY QUICKLY AND EFFECTIVELY, MANY OF
THE POTENTIAL BENEFITS OF OUR ACQUISITION OF RIGHTPOINT MAY NOT BE REALIZED.
We intend to integrate RightPoint's technology into our own E.piphany E.4
System software solutions as well as offer RightPoint's solutions separately. We
cannot assure you that we will be able to integrate RightPoint's technology
quickly and effectively. In order to obtain the benefits of the merger, we must
make RightPoint's technology, products and services operate together with our
technology, products and services. We may be required to spend additional time
or money on integration which would otherwise be spent on developing our
business and services or other matters. If we do not integrate our technology
effectively or if management and technical staff spend too much time on
integration issues, it could harm our business, financial condition and results
of operations.
THE LOSS OF KEY PERSONNEL 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 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, other than Gayle Crowell, 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.
6
<PAGE> 10
The market price of our common stock has increased substantially since its
initial public offering in September 1999. Consequently, potential employees may
perceive our equity incentives such as stock options as less attractive. In that
case, our ability to attract employees will be adversely affected. Furthermore,
a substantial portion of the equity incentives previously granted to RightPoint
employees will accelerate and become fully vested upon the closing of the
merger. New options granted to RightPoint employees at the current market price
of our common stock may not be sufficient to retain RightPoint employees.
Finally, should our stock price decline substantially, the retention value of
stock options granted since our initial public offering will decline and our
employees may choose not to remain employed by us.
IF CUSTOMERS DO NOT CONTRACT DIRECTLY WITH CONSULTING ORGANIZATIONS TO IMPLEMENT
AND SUPPORT OUR PRODUCTS, OUR REVENUES, PROFITABILITY AND MARGINS MAY BE HARMED.
Our principal focus has been to be a provider of software solutions rather
than services. As a result, we encourage our customers to purchase consulting,
implementation, maintenance and training services directly from consulting
organizations instead of purchasing these services from us. While we do not
receive any fees directly from these consulting organizations when they contract
directly with our customers, we believe that these consulting organizations
increase market awareness and acceptance of our software solutions and allow us
to focus on software development and licensing. If consulting organizations are
unwilling or unable to provide a sufficient level and quality of services
directly to our customers or if customers are unwilling to contract directly
with these consulting organizations, we may not realize these benefits and our
revenues and profitability may be harmed.
Further, to the extent that consulting organizations do not provide
consulting, implementation, maintenance and training services directly to our
customers, we need to provide these services to the customers. We provide these
services to our customers either directly through our internal professional
services organization or indirectly through subcontractors we hire to perform
the services on our behalf. Because our margins on service revenues are less
than our margins on license revenues, our overall margins decline when we
provide services to customers. This is particularly true if we hire
subcontractors to perform these services because it costs us more to hire
subcontractors to perform these services than to provide the services ourselves.
IF OUR INTERNAL PROFESSIONAL SERVICES ORGANIZATION DOES NOT PROVIDE
IMPLEMENTATION SERVICES EFFECTIVELY AND ACCORDING TO SCHEDULE, OUR REVENUES AND
PROFITABILITY WOULD BE HARMED.
Customers that license our products typically require consulting,
implementation, maintenance and training services and obtain them from our
internal professional services organization, which employed a staff of 46 as of
September 30, 1999, or from outside consulting organizations. RightPoint
employed a staff of 11 in its internal professional services organization as of
September 30, 1999. When we provide these services we generally recognize
revenue from the licensing of our software products as the implementation
services are performed. If our internal professional services organization does
not effectively implement and support our products or if we are unable to expand
our internal professional services organization as needed to meet our customers'
needs, 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 internal 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. In addition, we may be unable to negotiate agreements with
subcontractors to provide a sufficient level and quality of services. If we fail
to retain sufficient subcontractors, our ability to sell software for which
these services are required will be harmed and our revenues will suffer.
7
<PAGE> 11
OUR SERVICES REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR PRODUCT
REVENUES, AND AN INCREASE IN SERVICES REVENUES RELATIVE TO LICENSE REVENUES
COULD HARM OUR GROSS MARGINS.
E.piphany's services revenues, which includes fees for consulting,
implementation, maintenance and training, were 46% of our revenues for the nine
months ended September 30, 1999 and 34% of our revenues for the year ended
December 31, 1998. RightPoint's services revenues were 21% of its revenues for
the year ended June 30, 1999 and 28% of revenues for the three months ended
September 30, 1999. Our services revenues have substantially lower gross margins
than license revenues. E.piphany's cost of services revenues for the nine months
ended September 30, 1999 was 113% of its services revenues. RightPoint's cost of
services revenues for the three months ended September 30, 1999 was 128% of its
services revenues. An increase in the percentage of total revenues represented
by services revenues could adversely affect our overall gross margins.
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
- the resources directed by customers to their implementation projects
- the number of users licensed, and
- the extent to which outside consulting organizations provide services
directly to customers.
THE ACQUISITION OF RIGHTPOINT MAY RESULT IN A LOSS OF EMPLOYEES.
Despite our efforts to hire and retain quality employees, we might lose
some of RightPoint's or our own key employees following our acquisition of
RightPoint. Competition for qualified management, engineering and technical
employees in the software industry is intense. We and RightPoint historically
have had different corporate cultures, and RightPoint employees may not want to
work for a larger, publicly-traded company instead of a smaller, start-up
company. Some key employees of RightPoint hold options which partially or fully
vest as a result of the merger, and this may affect our ability to retain these
employees. In addition, competitors may recruit employees during integration, as
is common in high technology mergers. As a result, RightPoint's or our employees
could leave with little or no prior notice. We cannot assure you that we will be
able to attract, retain and integrate employees following the acquisition.
In the acquisition, two employees of RightPoint entered into employment and
non-competition agreements which restrict their ability to compete with us if
they leave us voluntarily. We cannot assure you of the enforceability of these
non-competition agreements or that these employees will continue to work at
E.piphany under their employment agreements after the acquisition.
THE ACQUISITION OF RIGHTPOINT MAY RESULT IN A LOSS OF CUSTOMERS.
RightPoint is currently dependent on a few key customers. As a result of
the acquisition, however, some customers or potential customers may not continue
to do business with RightPoint. In such case, we may lose significant revenue
RightPoint might have otherwise received had the merger not occurred.
8
<PAGE> 12
ACCOUNTING CHARGES RELATING TO THE ACQUISITION OF RIGHTPOINT WILL DELAY AND
REDUCE OUR PROFITABILITY.
We are accounting for our acquisition of RightPoint under the purchase
method of accounting. Under the purchase method, the purchase price of
RightPoint will be allocated to the assets acquired and liabilities assumed from
RightPoint. As a result, we will incur accounting charges from the acquisition
which will delay and reduce our profitability. To the extent future events
result in impairment of any capitalized intangible assets, the negative effect
on our operating results may occur sooner than we expect. These charges include:
- amortization of intangible assets of approximately $462 million over
three years
- in-process research and development of approximately $24 million, to be
expensed in the quarter ended March 31, 2000, and
- other costs not currently known.
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:
- data management and data analysis software tools such as Accrue, Brio
Technology, Broadbase, Business Objects, Informatica, Microstrategy and
Sagent Technology
- enterprise application software such as Oracle, PeopleSoft, SAP and
Siebel Systems
- marketing campaign management software tools such as Exchange
Applications, Prime Response and Recognition Systems, and
- software that recommends products to customers in real time based on
business logic rules such as Net Perceptions.
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 1999, Oracle's annual
revenue exceeded $8.0 billion, and the annual revenue of Siebel Systems in
fiscal 1998 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.
9
<PAGE> 13
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, reducing promotion of our products and limiting the
number of consultants available to implement our software.
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 real-time marketing products 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.
10
<PAGE> 14
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
- integrate RightPoint's real-time marketing offerings with the E.piphany
E.4 System offerings
- 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.
In addition, E.piphany has 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.
The E.piphany E.4 System and our real-time marketing software 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 our software, 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 our software 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, our software 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, SAP and Vantive, 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 or real
time marketing 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.
11
<PAGE> 15
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.
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 consulting organizations and system
integrators that implement our software, including Andersen Consulting,
Cambridge Technology Partners, Ernst & Young and KPMG; resellers, including
Acxiom, Harte Hanks and Pivotal; and application service providers that provide
access to our software to their customers over the Internet, including Corio,
Exactis.com, Bullseye Interactive and Interrelate. 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 and real-time
marketing 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.
12
<PAGE> 16
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. E.piphany currently receives
substantially all of its revenues from direct sales, but we 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 channels 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 increasingly offer our software through application service providers, who
install our software on their own computer servers and charge their customers
for access to our software. We need to expand our indirect sales channels 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 sales 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 from our top customers. For the nine months ended
September 30, 1999, Sallie Mae accounted for 13% of E.piphany's total revenues,
and for the nine months ended September 30, 1998, Autodesk, Charles Schwab,
Hewlett-Packard, Macromedia and Visio accounted for 40%, 22%, 16%, 11% and 10%
of E.piphany's total revenues, respectively. For the three months ended
September 30, 1999, VoiceStream, Edify, AeroFund Bank, and MediaOne accounted
for 42%, 20%, 14%, and 10%, respectively, of RightPoint's total revenues. For
the fiscal year ended June 30, 1999, American Express, GTE, and Edify accounted
for 41%, 13%, and 12%, respectively, of RightPoint's total 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. Some companies
may delay installation of new systems 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.
13
<PAGE> 17
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 will need to grow
quickly in the future. Any failure to manage this growth could impede our
ability to increase revenues and achieve profitability. E.piphany has increased
its number of employees from 21 at December 31, 1997 to approximately 281
employees as of December 15, 1999, including RightPoint's employees. Our
acquisition of RightPoint and 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
- continue to augment our financial and accounting systems
- manage our sales operations, which are in several locations, and
- expand our facilities.
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 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 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 intellectual property rights 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 license 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.
In addition, in all of RightPoint's software license agreements, RightPoint
indemnifies its customers against losses attributable to intellectual property
infringement by RightPoint's software. Should a third party claim that
RightPoint infringes their intellectual property, we could incur substantial
costs in defending and resolving such claims.
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
14
<PAGE> 18
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.
PRIVACY AND SECURITY CONCERNS, PARTICULARLY RELATED TO THE USE OF OUR SOFTWARE
ON THE INTERNET, MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE DEMAND FOR OUR
PRODUCTS.
The effectiveness of our software products relies on the use of customer
data collected from various sources, including information collected on Web
sites, as well as other data derived from customer registrations, billings,
purchase transactions and surveys. Our collection and use of such data for
customer profiling may raise privacy and security concerns. Our customers
generally have implemented security measures to protect customer data from
disclosure or interception by third parties. However, the security measures may
not be effective against all potential security threats. If a well publicized
breach of customer data security were to occur, our software products may be
perceived as less desirable, impacting our future sales and profitability.
In addition, due to privacy concerns, some Internet commentators, consumer
advocates, and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. In addition, Internet users can, if they choose, configure their
Web browsers to limit the collection of user data for customer profiling. Should
many Internet users choose to limit the use of customer profiling technologies,
or if major countries or regions adopt legislation or other restrictions on the
use of customer profiling data, our software would be less useful to our
customers, and our sales and profits could decrease.
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.
15
<PAGE> 19
We have tested our current products and tested our prior products to a
limited extent. We believe, based on those tests, that our products are year
2000 compliant. Our significant vendors of internal systems have reported that
they are also year 2000 compliant or ready. In addition, we have tested our
material internal systems other than the systems we acquired from RightPoint. 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 or we
encounter difficulties with RightPoint's internal systems, 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 pre-existing 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.
E.piphany began shipping its first products in early 1998, and in June
1999, began shipping its E.piphany E.4 System software. RightPoint began
shipping its real time marketing software in April 1998. These products are
complex and may contain currently unknown 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.
16
<PAGE> 20
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 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 before amortization charges 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, stockholders will experience additional dilution, which may be
substantial. 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 establishing, 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, as of September 30, 1999, including RightPoint's
international
17
<PAGE> 21
presence, we had seven sales and marketing professionals located in the United
Kingdom and France. We are also exploring other regions for future expansion.
IF WE ACQUIRE ADDITIONAL COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY COULD
PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
ADVERSELY AFFECT OUR OPERATING RESULTS.
In addition to E.piphany's acquisition of RightPoint, we may acquire or
make investments in other complementary companies, services and technologies in
the future. Aside from the RightPoint acquisition, we have not completed 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
- 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.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE SHARES PURCHASED IN THIS
OFFERING, MAY DEPRESS OUR STOCK PRICE.
If our stockholders or optionees sell substantial amounts of our common
stock in the public market following this offering, the market price of our
common stock could fall. 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.
18
<PAGE> 22
On December 17, 1999, we had 30,071,601 shares of common stock outstanding,
assuming the issuance of 2,998,426 shares to RightPoint stockholders, based on
RightPoint's outstanding stock as of December 1, 1999. We will issue an
additional 1,100,000 shares in this offering. The total number of shares of our
common stock outstanding after this offering will be eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
8,072,343 At or before completion of the offering
1,093,167 At March 20, 2000
20,753,610 The 91st day after the effectiveness of this offering
843,750 At June 16, 2000
316,407 At August 19, 2000
19,414 At September 22, 2000
6,250 At September 27, 2000
66,660 At December 14, 2000
</TABLE>
The above table includes the effect of "lock-up" arrangements which prevent
our directors, officers and other existing stockholders from selling or
otherwise disposing of their shares of common stock until March 20, 2000 and
prevent the selling stockholders from selling or otherwise disposing of any
shares of common stock owned by them until the 91st day after the effective date
of this offering. The above table excludes options and warrants. Shares issued
upon the exercise of outstanding options may generally also be sold in the
public market. We and the underwriters may remove the lock-up restrictions in
advance without prior notice.
WE DO NOT INTEND TO PAY DIVIDENDS, 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.
BECAUSE SOME EXISTING STOCKHOLDERS WILL TOGETHER OWN 31.0% 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, 10,142,100 shares of common stock, which in the aggregate will
represent approximately 31.0% of the outstanding shares of common stock. As a
result, if some of these twelve persons or entities act together, they may 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.
19
<PAGE> 23
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 has staggered terms which make 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
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.
20
<PAGE> 24
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.
The forward-looking statements contained in this prospectus are subject to the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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.
21
<PAGE> 25
USE OF PROCEEDS
The net proceeds to us from the sale of the 1,100,000 shares of common
stock offered by us in the offering are estimated to be $229,036 million, after
deducting the underwriting discount and estimated offering expenses and assuming
no exercise of the underwriters' over-allotment option to purchase 450,000
shares from us. We will not receive any proceeds from the sale of shares being
sold by the selling stockholders.
The principal purposes of this offering are to obtain additional working
capital. 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 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.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq Stock Market's National
Market under the symbol "EPNY" since September 22, 1999, the date of our initial
public offering. The following table sets forth, for the periods indicated, the
high and low sales prices for our common stock as reported by the Nasdaq Stock
Market's National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Third Quarter 1999 (from September 22, 1999)................ $ 52.38 $38.00
Fourth Quarter 1999 (through December 17, 1999)............. $222.75 $44.50
</TABLE>
The last reported sale price for our common stock on the Nasdaq Stock
Market's National Market was $220.13 per share on December 17, 1999. As of
December 17, 1999, we estimate that there were approximately 370 holders of
record of our common stock. This does not include the number of persons whose
stock is in nominee or "street name" accounts through brokers.
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.
22
<PAGE> 26
CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of E.piphany as of September 30, 1999
- the pro forma capitalization of E.piphany as of September 30, 1999 giving
effect to the acquisition of RightPoint, and
- the pro forma as adjusted capitalization of E.piphany giving effect to
the sale of 1,100,000 shares of common stock in this offering by us at an
assumed public offering price of $220.13, the last reported sales price
for our common stock on December 17, 1999, less underwriting discounts
and commissions and estimated offering expenses payable by E.piphany.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, net of current portion........... $ 7,830 $ 7,868 $ 7,868
Stockholders' equity:
Preferred stock; $0.0001 par value, 5,000,000 shares
authorized, no shares issued or outstanding,
actual, pro forma and pro forma as adjusted........ -- -- --
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 26,975,223 shares issued and
outstanding, actual; 29,973,649 shares issued and
outstanding, pro forma; 31,073,649 shares issued
and outstanding, pro forma as adjusted............. 5 5 5
Additional paid-in capital.............................. 113,781 597,440 826,476
Warrants................................................ 532 532 532
Note receivable......................................... (640) (640) (640)
Deferred compensation................................... (3,202) (3,202) (3,202)
Accumulated deficit..................................... (29,614) (53,313) (53,313)
-------- -------- --------
Total stockholders' equity....................... 80,862 540,822 769,858
-------- -------- --------
Total capitalization.......................... $ 88,692 $548,690 $777,726
======== ======== ========
</TABLE>
This table excludes, as of September 30, 1999:
- 6,815,380 shares of common stock reserved for issuance under our stock
plans and warrants, of which 3,200,767 shares are subject to outstanding
options and warrants, with a weighted average exercise price of $5.99 per
share, and
- 2,000,000 shares reserved for issuance under our 1999 employee stock
purchase plan.
23
<PAGE> 27
DILUTION
On a pro forma basis as of September 30, 1999, giving effect to the
acquisition of RightPoint, the net tangible book value of our common stock was
$78.8 million, or approximately $2.63 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 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 1,100,000 shares of common stock offered by
us pursuant to this prospectus and after deducting the underwriting discount and
estimated offering expenses payable by us, our net tangible book value would
have been approximately $307.8 million, or $10.27 per share. This represents an
immediate increase in net tangible book value of $7.64 per share to existing
stockholders and an immediate dilution in net tangible book value of $209.86 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Public offering price per share............................. $220.13
Pro forma net tangible book value per share as of September
30, 1999.................................................... $2.63
Increase per share attributable to new investors............ 7.64
-----
Pro forma net tangible book value per share after the
offering.................................................. 10.27
-------
Dilution in pro forma net tangible book value per share to
new investors............................................. $209.86
=======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Note 6 of Notes to E.piphany's Financial
Statements and Notes to the Unaudited Pro Forma Combined Condensed Financial
Information for more information about these options and warrants. The exercise
of outstanding options and warrants would increase the dilutive effect to new
investors by $1.14 per share.
The following table sets forth, as of September 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 before
deducting the underwriting discount and estimated offering expenses payable by
us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 29,973,649 96.5% $487,507,000 66.8% $ 16.26
New investors....................... 1,100,000 3.5 242,143,000 33.2 $220.13
----------- ------ ------------ ------
Total............................. 31,073,649 100.0% $729,650,000 100.0%
=========== ====== ============ ======
</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 95.1% after the offering, and
- the number of shares held by new investors will be increased to 1,550,000
or approximately 4.9% of the total number of shares of our common stock
outstanding after this offering.
24
<PAGE> 28
SELECTED FINANCIAL DATA
The following selected financial data and other operating information of
E.piphany, which does not include results of RightPoint, as of and for the years
ended December 31, 1997 and 1998, and the nine months ended September 30, 1999
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 nine months ended September 30,
1998 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 E.piphany's Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------------
1997 1998 1998 1999
------- -------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product license...................................... $ $ 2,216 $ 1,270 $ 5,633
Services............................................. -- 1,161 705 4,835
------- -------- ------- --------
Total revenues..................................... -- 3,377 1,975 10,468
------- -------- ------- --------
Cost of revenues:
Product license...................................... -- 4 3 83
Services............................................. -- 1,396 847 5,445
------- -------- ------- --------
Total cost of revenues............................. -- 1,400 850 5,528
------- -------- ------- --------
Gross profit........................................... -- 1,977 1,125 4,940
------- -------- ------- --------
Operating expenses:
Research and development............................. 1,646 3,769 2,617 4,722
Sales and marketing.................................. 1,200 6,519 4,078 11,576
General and administrative........................... 373 1,503 987 2,546
Stock-based compensation............................. 1 799 395 2,314
------- -------- ------- --------
Total operating expenses........................... 3,220 12,590 8,077 21,158
------- -------- ------- --------
Loss from operations................................... (3,220) (10,613) (6,952) (16,218)
Interest income, net................................... 71 283 153 83
------- -------- ------- --------
Net loss............................................... $(3,149) $(10,330) $(6,799) $(16,135)
======= ======== ======= ========
Basic and diluted net loss per share................... $ (2.90) $ (7.19) $ (3.62) $ (2.90)
======= ======== ======= ========
Shares used in calculation of basic and diluted net
loss per share....................................... 1,087 1,437 1,877 5,563
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited).......................................... $ (1.17) $ (1.00)
======== ========
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)....................... 8,833 16,197
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
---- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $369 $13,595 $89,701
Working capital............................................. 131 12,601 85,765
Total assets................................................ 801 16,364 97,976
Long term obligations, net of current portion............... -- 333 7,830
Total stockholders' equity.................................. 468 13,440 80,862
</TABLE>
25
<PAGE> 29
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
5 and elsewhere in this prospectus.
OVERVIEW
Our E.piphany E.4 System is an integrated set of software solutions that
provide capabilities for analysis of customer data and managing distributed
database marketing. 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.
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 began shipping
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 49 employees at September 30, 1998 to 179
employees at September 30, 1999.
THE RIGHTPOINT ACQUISITION
We expect to acquire RightPoint Software, Inc. on January 4, 2000 in a
merger transaction. RightPoint develops and markets real time marketing software
solutions that enable companies to optimize and present marketing offers,
promotions, and communications while a customer is interacting with a web site,
call center agent or other point of customer interaction. In connection with
this transaction, we will acquire all of the outstanding shares of capital stock
of RightPoint in exchange for approximately 3.0 million shares of our common
stock, based on RightPoint's outstanding stock as of December 1, 1999. In
addition, options and warrants of RightPoint will be converted into options and
warrants to purchase approximately 525,000 shares of our common stock, based on
RightPoint's outstanding options and warrants as of December 1, 1999.
RightPoint began offering its current real-time marketing applications in
April 1998. RightPoint began generating revenue from its real-time marketing
applications in its fiscal year ended June 30, 1998. RightPoint's revenues grew
from $806,000 in its fiscal 1998 to $3.5 million in its fiscal 1999. RightPoint
also experienced significant increases in headcount during this period.
RightPoint grew from 34 employees on June 30, 1998 to 58 employees as of
September 30, 1999. RightPoint has incurred substantial costs to develop its
products, and to recruit and train personnel for its engineering, sales and
marketing services organizations.
Following the merger, we expect that we will continue to add employees
across all departments to invest in the development of technology, to continue
to build our direct sales force and professional services organization and to
expand our general and administrative infrastructure following the merger. This
expansion places significant demands on our management and operational
resources. To manage rapid
26
<PAGE> 30
growth and increased demand, we must continue to invest in and implement
additional operational systems, procedures and controls.
We expect that the combination of the companies will result in significant
increases in all expense categories. As of September 30, 1999, E.piphany and
RightPoint had 46 employees and 11 employees, respectively, engaged in the
delivery of services. We expect that the cost of services will increase in
absolute dollars as a result of the acquisition and we expect to continue to
rapidly grow our professional services organization.
As of September 30, 1999, E.piphany and RightPoint had 48 employees and 18
employees, respectively, engaged in research and development. We expect that
research and development expenses will increase in absolute dollars and may
increase as a percentage of revenue as a result of the acquisition.
As of September 30, 1999 E.piphany and RightPoint had 67 and 21 employees,
respectively, engaged in sales and marketing. We expect that sales and marketing
expenses will increase in absolute dollars. We expect to incur marketing
expenses related to integration of the companies which could result in an
increase in sales and marketing expenses as a percentage of revenues as a result
of the acquisition. As of September 30, 1999 E.piphany and RightPoint had 18
employees and 8 employees respectively, engaged in general and administrative
activities. We expect that general and administrative expenses will increase in
absolute dollars and may increase as a percentage of revenue as a result of the
acquisition.
We will account for the acquisition under the purchase method of accounting
and incur an estimated write-off related to in-process research and development
of approximately $24 million in the quarter ended March 31, 2000 upon closing of
the transaction, as the in-process technology to be acquired had not reached
technological feasibility and, in the opinion of our management, has no
alternative future use. In addition to the in-process research and development
charge we will incur, we will record intangible assets of $462 million which
will be amortized ratably over three years.
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 September 30, 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 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 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 substantially higher gross margins than
services revenue, as a percentage of total revenue. We also believe that it will
encourage these consulting organizations to generate sales leads within their
customer base.
27
<PAGE> 31
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 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 consulting organizations, we are
responsible for managing the implementation. To the extent that customers
contract directly with consulting organizations 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 consulting organizations 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.
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
28
<PAGE> 32
not generally expensed in the same period in which license revenues for the
developed products are recognized.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues increased to $10.5 million for the nine months ended
September 30, 1999, from $2.0 million for the nine months ended September 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 nine months ended September 30, 1999, Sallie Mae accounted for
13% of E.piphany's total revenues, and for the nine months ended September 30,
1998, Autodesk, Charles Schwab, Hewlett-Packard, Macromedia and Visio accounted
for 40%, 22%, 16%, 11%, and 10% of total revenues, respectively.
Product license revenues increased to $5.6 million, or 54% of total
revenue, for the nine months ended September 30, 1999 from $1.3 million, or 64%
of total revenue, for the nine months ended September 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.
Services revenues increased to $4.8 million, or 46% of total revenues, for
the nine months ended September 30, 1999 from $0.7 million, or 36% of revenues,
for the nine months ended September 30, 1998. The increase in dollar amount of
service revenues was primarily attributable to increased implementation and
consulting services performed in connection with increased license sales and to
maintenance contracts sold to our new customers.
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 vary greatly depending 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 consulting organizations provide
services directly to customers. Services revenues as a percentage of total
revenues has increased for each of the last three 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.
Services revenues as a percentage of total revenues has also increased because
of increased maintenance revenues due to the growth in our customer base.
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 and services margins do not increase, our overall gross
margins will decline.
This is especially true when we are required to subcontract with consulting
organizations to supplement our internal professional services organization. It
generally costs us more to subcontract with consulting organizations to provide
these services than to provide these services ourselves. To offset the effect
that providing services ourselves or through subcontractors has on our gross
margins, we intend to further encourage customers to contract directly with
consulting organizations for implementation and consulting services. Encouraging
direct contracts between our customers and consulting organizations 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 consulting organizations for implementation and consulting
services.
29
<PAGE> 33
COST OF REVENUES
Total cost of revenues increased to $5.5 million for the nine months ended
September 30, 1999 from $0.9 million for the nine months ended September 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 $5.4 million, or 113% of services revenues, for the nine months
ended September 30, 1999 from $0.8 million, or 120% of services revenues, for
the nine months ended September 30, 1998. The increase in cost of services
revenues in absolute dollars resulted primarily from the hiring of additional
employees and the subcontracting of consulting services to consulting
organizations 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 September 30, 1998 to 46 employees
at September 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 $4.7 million for the nine months ended
September 30, 1999 from $2.6 million for the nine months ended September 30,
1998. The increase in absolute dollars was primarily due to an increase in the
number of employees engaged in research and development from 22 employees as of
September 30, 1998 to 48 employees as of September 30, 1999. Research and
development expenses as a percentage of total revenues decreased from 133% for
the nine months ended September 30, 1998 to 45% for the nine months ended
September 30, 1999. Research and development expenses as a percentage of total
revenues decreased primarily due 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 $11.6 million for the nine months ended September 30, 1999 from
$4.1 million for the nine months ended September 30, 1998. Sales and marketing
expenses as a percentage of total revenues decreased from 206% for the nine
months ended September 30, 1998 to 111% for the nine months ended September 30,
1999. The increase in sales and marketing expenses in absolute dollars was
primarily attributable to an increase in the number of direct sales, pre-sales
support and marketing employees from 18 as of September 30, 1998 to 67 as of
September 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 $2.5 million for the nine
months ended September 30, 1999 from $1.0 million for the nine months ended
September 30, 1998. The increase in general and administrative expenses in
absolute dollars was primarily attributable to an increase in the number of
executive, finance and administrative employees from 4 as of
30
<PAGE> 34
September 30, 1998 to 18 as of September 30, 1999. 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. We have 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. Total stock-based compensation was $2.3 million for the nine months ended
September 30, 1999. We expect amortization of approximately $619,000,
$1,511,000, $787,000, $312,000, and $26,000 in the last quarter of 1999, the
years ended December 31, 2000, 2001, 2002, and the first half of 2003,
respectively. See Note 6 to E.piphany's 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 nine
months ended September 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%. Cost of services revenues in 1998
resulted primarily from the hiring of employees and, to a lesser extent, the
subcontracting of consulting organizations 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, or 112% of
total revenues, 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.
31
<PAGE> 35
Sales and Marketing
Sales and marketing expenses increased to $6.5 million, or 193% of total
revenues, 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, or 45% of
total revenues, 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
We recorded aggregate deferred compensation of $3.2 million in 1998 related
to stock transactions with employees. Of the deferred compensation, $0.7 million
was amortized in 1998. Total stock-based compensation was $0.8 million in 1998.
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 September 30, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of September 30, 1999, we had $34.6 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 2011
through 2019 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 E.piphany's Financial Statements for the components of
the deferred income tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $10.8 million and $6.1
million for the nine months ended September 30, 1999 and 1998, respectively.
Cash used in operating activities for each period resulted primarily from net
losses in those periods, and to a lesser extent, increases in accounts
receivable. These uses of cash were partially offset by increases in accrued
liabilities and deferred revenue.
Net cash used in investing activities totaled $1.6 million and $0.8 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase resulted primarily from the purchase of furniture and equipment,
consisting largely of computer servers and workstations.
32
<PAGE> 36
Net cash provided by financing activities totaled $88.5 million and $20.0
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase was due primarily to the receipt of proceeds from our recently
completed initial public offering.
RightPoint used net cash from operations of $7.4 million and $4.8 million
for the years ended June 30, 1999 and June 30, 1998, respectively. Cash used in
operating activities for each period resulted primarily from net losses in those
periods, and in the year ended June 30, 1999, from the purchase of short-term
investments. We expect net cash used from operations to increase as a result of
the acquisition.
At September 30, 1999, we had $89.7 million in cash and cash equivalents,
and RightPoint had $4.2 million in cash and cash equivalents. We have a $3.0
million term loan under a 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 September 30, 1999, we
had borrowed $3.0 million against this term loan. This loan is secured by
essentially all of our assets.
In addition, we have a subordinated debt facility with Comdisco, Inc. 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,
and 8.0% thereafter.
As of September 30, 1999, our principal sources of liquidity included $89.7
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, including the acquisition
and the addition of RightPoint employees in January, 2000. We believe that our
current cash and cash equivalents will be sufficient to meet our anticipated
liquidity needs for working capital and capital expenditures for at least 12
months. 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 in the future.
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 RightPoint has tested its system for year 2000 compliance. Based on
these tests and input from our customers using the E.piphany E.4 System, we
believe our software is year 2000 compliant. We have also tested our prior
products, but only to a limited extent. Based on these tests and input from our
customers, we believe that our 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 we 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.
33
<PAGE> 37
In addition, some 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. 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 other than systems we acquired from RightPoint, but
only to a very limited extent. We have not tested the RightPoint systems. Based
on the representations of our vendors and those 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 implemented 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.
34
<PAGE> 38
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
unaudited quarterly financial results for the seven quarters ended September 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, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Product license.................... $ 137 $ 396 $ 737 $ 946 $ 1,136 $ 1,793 $ 2,704
Services........................... 90 240 375 456 758 1,437 2,640
------- ------- ------- ------- ------- ------- -------
Total revenues................... 227 636 1,112 1,402 1,894 3,230 5,344
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product license.................... -- -- 3 1 5 20 58
Services........................... 127 243 477 549 827 1,661 2,957
------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 127 243 480 550 832 1,681 3,015
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 100 393 632 852 1,062 1,549 2,329
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........... 724 920 973 1,152 1,294 1,571 1,857
Sales and marketing................ 862 1,398 1,818 2,441 2,763 3,588 5,225
General and administrative......... 172 437 378 516 456 828 1,262
Stock-based compensation........... -- 2 393 404 603 969 742
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 1,758 2,757 3,562 4,513 5,116 6,956 9,086
------- ------- ------- ------- ------- ------- -------
Loss from operations................. (1,658) (2,364) (2,930) (3,661) (4,054) (5,407) (6,757)
Interest income, net................. 63 66 24 130 95 20 (32)
------- ------- ------- ------- ------- ------- -------
Net loss............................. $(1,595) $(2,298) $(2,906) $(3,531) $(3,959) $(5,387) $(6,789)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
Product license.................... 60% 62% 66% 67% 60% 56% 51%
Services........................... 40 38 34 33 40 44 49
------- ------- ------- ------- ------- ------- -------
Total revenues................... 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product license.................... -- -- -- -- -- 1 1
Services........................... 56 38 43 39 44 51 55
------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 56 38 43 39 44 52 56
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 44 62 57 61 56 48 44
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........... 319 145 88 82 68 49 35
Sales and marketing................ 380 220 163 174 146 111 98
General and administrative......... 76 69 34 37 24 26 23
Stock-based compensation........... -- -- 35 29 32 30 14
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 775 434 320 322 270 216 170
------- ------- ------- ------- ------- ------- -------
Loss from operations................. (731) (372) (263) (261) (214) (168) (126)
Interest income, net................. 28 10 2 9 5 1 (1)
------- ------- ------- ------- ------- ------- -------
Net loss............................. (703)% (362)% (261)% (252)% (209)% (167)% (127)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
35
<PAGE> 39
Our quarterly revenues increased throughout 1998 and the first three
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 consulting
organizations 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 consulting organizations provide
services directly to customers. Services revenues as a percentage of total
revenues has increased for each of the last three 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 three 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 with consulting 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.
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.
36
<PAGE> 40
Interest Rate Risk
As of September 30, 1999, we had cash and cash equivalents of $89.7 million
which consist of cash and highly liquid short-term investments. Declines of
interest rates over time will reduce our interest income from our short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 0.5% would cause a corresponding decrease in our annual
interest income by approximately $448,000. As of September 30, 1999, we had
total short term and long term debt outstanding of $629,000 and $2,737,000,
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.
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.
37
<PAGE> 41
BUSINESS
The following discussion of our business assumes the consummation of our
acquisition of RightPoint Software, Inc., which is expected to occur on January
4, 2000.
E.PIPHANY OVERVIEW
We develop and market software that helps companies 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 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 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. We have recently extended our product offerings
to enable companies to make marketing offers in real time during interactions
initiated by customers. 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 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
personalizing products, services and related interactions based on each
customer's characteristics and preferences. Furthermore, when companies
understand individual customer preferences, they can market complementary
products, known as "cross-selling," or market higher-end products, known as
"up-selling." To execute on these marketing strategies, companies need to
establish a single view of each customer across all of the company's various
departments, distribution channels and points of customer interaction. Companies
must then leverage this knowledge to market to customers through proactive
marketing campaigns, as well as by making marketing decisions in real time when
a customer initiates contact with the company. Finally, to better serve
customers, companies can use their knowledge of their customers 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 anticipated
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
spent more than $56 billion on industrial enterprise software applications 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.
38
<PAGE> 42
Despite the vast amounts of data generated, these applications remain
focused on automating business processes, rather than helping companies better
understand their customers or manage marketing campaigns. Moreover, because
these data reside in disparate computer systems in different departments or are
delivered from third parties, combining and analyzing this information to
provide a single 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 systems, store it in
a central repository, analyze the data or manage marketing campaigns. Many of
these internally assembled software systems require substantial amounts of time
to integrate and customize, making them expensive to implement and maintain.
Moreover, these tools often have complex user interfaces that are not accessible
to all business users in a company. Finally, these tools are typically not able
to collect and analyze data in real time to rapidly make marketing offers when a
customer initiates contact with the company.
To allow all business users within a company to better understand and act
on customer information collected from multiple sources, 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, services, and related interactions
customized to each customer's preferences.
- Deployable to all business users and points of interaction 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' existing software to
collect all relevant customer information and enable personalized
interactions at each point of customer interaction.
- Packaged to offer faster and less expensive implementation. Software
should minimize the time and expense of 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 without
substantial customization.
- Designed to generate marketing recommendations in real time. Software
should enable companies to market to customers in real time during
interactions initiated by the customer, such as Web site visits or
contact with a customer support call center. This capability requires
software systems to collect and analyze customer information and then
immediately make a personalized marketing recommendation in real time.
THE E.PIPHANY SOLUTION
Companies can use our software to establish, maintain and continually
improve customer relationships across both Internet and traditional sales,
marketing and distribution channels. Our E.piphany E.4 System allows companies
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 our E.piphany E.4 System to design and execute marketing
campaigns as well as customize products, services and related interactions. We
believe that our software is differentiated by its combination of the following
characteristics:
39
<PAGE> 43
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 according to 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, and
- Customizing products, services and related interactions. Our software
helps companies collect and analyze the data required to customize
products, services and related interactions based on customer
characteristics and preferences. In addition, companies can use our
software to better anticipate customer demand and to 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 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 and manage marketing campaigns. As a result,
companies do not need 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.
Designed to generate marketing recommendations in real time. Our software
has been designed to generate marketing recommendations in real time during
interactions initiated by a customer. For example, the E.piphany E.4 System can
collect data while a customer navigates a company's Web site or speaks to a call
center operator. Our software immediately analyzes that data along with existing
customer data to determine a customized marketing offer to present to the
customer. The offer is then delivered through integration at the point of
customer contact, such as dynamically presenting Web site content or presenting
a script to a call center operator within their existing call center software
application.
E.PIPHANY STRATEGY
We intend 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 extend
the range of problems that we solve. 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
40
<PAGE> 44
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, Internet commerce, healthcare,
telecommunications and 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 extend 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 consulting organizations and
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 increasingly offer
our software through Internet-based applications service providers. For example,
we have recently entered into an applications service provider relationship with
Corio. Applications service providers 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
applications service providers pay us fees for the right to host our
applications for their customers and a subscription fee for each of their
customers. We believe that the applications 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. We also intend to develop our own services that would complement the
applications hosting services offered by our partners. We intend to market our
services under the E.piphany.net brand.
E.PIPHANY PRODUCTS
The 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.
The E.piphany E.4 System software solutions are grouped into three product
families:
- Reporting & Analysis
- Distributed Database Marketing, and
- E-Commerce.
41
<PAGE> 45
Reporting & Analysis
Our Reporting & Analysis software solutions allow any business user with a
Web browser to easily analyze customer, supplier and operational data from
across the enterprise and the Internet. To support this capability, we have
designed the 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 software systems to the application of complex statistical formulas to
that data, known as data mining. Once our software solutions have analyzed the
data, they present the resulting information in an easy-to-use format, such as
graphs and tables. The following are our current Reporting & Analysis software
solutions:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- --------------------------------------------------------------------------------------------
Bookings, Billings & Analyzes bookings, billings, backlog and other sales
Backlog/Sales data to identify trends and the status of sales for
Reporting & Analysis sales managers and finance personnel.
- --------------------------------------------------------------------------------------------
Customer Relationship Analyzes customer data from sales and support
Management Reporting & applications so that sales support and service managers
Analysis can better understand the quantity and status of sales
leads, customer inquiries and service calls as well as
forecast future sales using data mining techniques such
as trend analysis.
- --------------------------------------------------------------------------------------------
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
Analysis centers 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, the profitability of individual
representatives and the most common types of customer
calls.
- --------------------------------------------------------------------------------------------
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>
42
<PAGE> 46
Distributed Database Marketing
Our Distributed Database Marketing software solutions allow employees in a
company's marketing department to collaborate on planning 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 through direct mail, personalized e-mail,
customized Web pages and other points of customer interaction. When campaigns
are executed, our Distributed Database Marketing software solutions analyze
response data to refine and tune campaigns. The following are our current
Distributed Database Marketing software solutions:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- --------------------------------------------------------------------------------------------
Cross-sell/Up-sell Analyzes customer characteristics using data mining
techniques to identify opportunities to sell
complementary or higher-end products to existing
customers, and then enables business users to plan,
execute, measure and refine 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 using data
mining techniques to analyze data from third party data
providers, advertising programs and promotional events
and then enables business users to plan, execute,
measure and refine 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>
43
<PAGE> 47
E-Commerce
Our E-Commerce software solutions help companies analyze customer behavior
on Internet commerce Web sites and personalize those sites by integrating
customer preference data into the 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 other points of e-commerce customer
interaction, 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. The following are our current E-Commerce software solutions:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- --------------------------------------------------------------------------------------------
E-Commerce Reporting & Analyzes Internet commerce purchasing patterns and Web
Analysis site effectiveness. Marketing and finance personnel can
use this solution to analyze customer behavior on Web
sites, including Web site navigation and purchase
patterns. Companies can also use this solution to
measure the effect of Internet commerce on traditional
sales, marketing and distribution channels and overall
corporate profitability.
- --------------------------------------------------------------------------------------------
E-Commerce Campaigns Allows marketing personnel to manage marketing campaigns
through e-mail and Web sites in addition to conventional
direct mail and phone solicitations.
- --------------------------------------------------------------------------------------------
Emailer Allows 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 Analyzes 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 Allows companies to cross-sell, up-sell and deliver
marketing offers for individual customers in real time
across both Internet and traditional points of customer
interaction. This solution is currently available on a
stand alone basis and integrates with our customers'
existing data warehouse investments and our E.piphany
E.4 System. We expect to offer this solution as an
integrated part of our E.piphany E.4 System in the first
half of 2000 as well as continue to offer this solution
on a stand alone basis.
- --------------------------------------------------------------------------------------------
</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. Our
professional services staff currently consists of 57 employees. Our professional
services offerings include:
Consulting and implementation services. We offer consulting and
implementation services focused on configuring and implementing software
solutions to meet each of our customer's unique needs. These services are
delivered primarily by our internal professional services organization, but also
by outside consulting organizations. When we work with third party consulting
organizations we typically subcontract to these consulting organizations or
enter into contracts with them to collaborate on specific projects. We
44
<PAGE> 48
believe that our consulting services enhance the quality of our software
solutions, accelerate the implementation of our solutions 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 other companies with which we have relationships 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 professional services organization 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 its software.
E.PIPHANY E.4 SYSTEM TECHNOLOGY
The E.piphany E.4 System includes core technologies that enable our
software solutions to extract, manage and analyze data from existing systems as
well as manage marketing campaigns. These software technologies allow our
internal research and development organization to rapidly build and deploy new
software solutions as market opportunities arise, without re-developing and
configuring the underlying technologies. The major elements of the 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 and
distributed database marketing. Key functional elements of EpiCenter include:
- Adaptive Schema Generator. The Adaptive Schema Generator is the software
technology that we developed and market as a part of the 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 the 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 or functions 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 the 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. Our E.piphany E.4 System offers a
powerful approach to extracting data from various sources and transforming that
data before loading it into EpiCenter. Central
45
<PAGE> 49
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 that 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.
Our Real Time Campaigner application, which we expect to integrate into our
E.piphany E.4 System, includes the following technologies:
Real-Time Campaign Server. Our Real-Time Campaign Server executes the
marketing campaigns developed by end users for real-time marketing
recommendations. When a customer makes contact with the company through, for
example, a Web site or a call center, our Real-Time Campaign Server accesses
existing customer information, pre-defined campaigns and information gathered
during the current interaction to provide the most appropriate recommendation to
the customer.
Customer Touch Points. Our Customer Touch Points are pre-packaged
connections between our Real-Time Campaign Server and software applications at
the point of customer interaction, such as call center automation and Internet
infrastructure applications. This allows the Real-Time Campaign Server to
collect customer data from these applications as well as present recommendations
within these applications. We currently have Customer Touch Points for call
centers, Internet infrastructure, fax machines, e-mail management systems and
voice response systems such as voice mail. We are currently developing
additional Customer Touch Points, including connections with automated teller
machines (ATMs).
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 work with Andersen
Consulting, Cambridge Technology Partners, Ernst & Young and KPMG through
subcontractor relationships whereby these firms implement our software on
customers' computer systems. In return for the services provided under these
subcontractor agreements, 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 incorporating
our products into their customer relationship management marketing 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 fees for customer referrals. Cambridge Technology
Partners, KPMG and Marketing 1:1 are also investors in E.piphany. We believe
that these relationships will facilitate the 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 their 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
46
<PAGE> 50
core competencies, simplify the task of designing and developing our software
and reduce the time it takes us to make our software compatible with their
software or hardware.
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 Art Technology
Group, BroadVision, FirePond and Vignette, all of which are providers of
Internet infrastructure software.
Reseller and applications service provider 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 that these
relationships will extend our sales presence in new and existing markets. We
have 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. We have also recently entered into a relationship
with Corio -- an Internet-based application service provider. Under these
agreements, we sell our software solutions to these companies at a discount from
our list prices, provide some marketing and training support and must provide
advance notice of price increases. Each of these companies has committed
resources to training their employees, developing co-marketing programs and
incorporating our products into their customer relationship management marketing
strategies. We provide sales materials, training and support services to these
resellers on the implementation of our software solutions. We also currently
have a contractual relationship with Exactis.com, Bullseye Interactive and
Interrelate under which these companies host our software solutions as
Internet-based application service providers. We have not yet generated any
significant revenues from any of these reseller and applications service
provider agreements.
CUSTOMERS
Our customers represent a wide, cross-industry spectrum of large global
institutions. The following customers have entered into agreements to purchase
in excess of $300,000 of software and related services since we began shipping
products:
<TABLE>
<CAPTION>
HIGH TECHNOLOGY FINANCIAL SERVICES COMMUNICATIONS INTERNET COMMERCE OTHER
--------------- ------------------ -------------- ----------------- -----
<S> <C> <C> <C> <C>
Acxiom American Express Cablevision Amazon.com Envision
Agilent Technologies California State DIRECTV DoubleBill Hilton Hotels
Autodesk Automobile GTE SportsLine USA Nissan North America
Edify Association VoiceStream Wingspan Bank Procter & Gamble
FileNET Capital BlueCross KPMG
Hewlett-Packard Charles Schwab
Lucent Technologies Fair, Isaac
Macromedia Sallie Mae
Microsoft Wells Fargo
Visio
</TABLE>
These customers have accounted for approximately 82% of our total revenues
for the year ended December 31, 1998 on a pro forma basis, giving effect to the
acquisition of RightPoint, and 87% of our revenues for the nine months ended
September 30, 1999 on a pro forma basis, giving effect to the acquisition of
RightPoint. For the nine months ended September 30, 1999, Sallie Mae accounted
for 13% of our total revenues. For the year ended December 31, 1998, Autodesk,
Charles Schwab, Hewlett-Packard, KPMG and Macromedia, accounted for 30%, 17%,
16%, 11% and 11%, respectively, of our total revenues.
47
<PAGE> 51
SELECTED CUSTOMER EXAMPLES
The selected customer examples below are intended to provide brief
descriptions of how our customers are using or plan to use the E.piphany E.4
System software solutions to solve their business problems.
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------
CUSTOMER DESCRIPTION
- ----------------------------------------------------------------------------------
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 our Distributed Database
Marketing software solutions because of our ability to
provide an integrated set of solutions focused on improving
customer relationships as well as our ability to make our
solutions broadly available to employees throughout large
corporations.
- ----------------------------------------------------------------------------------
American Express American Express is a diversified worldwide travel,
financial and network services company providing charge and
credit cards, travelers cheques, travel, financial planning,
investment products, insurance and international banking.
American Express has integrated our real-time software
solutions to gather existing customer information as well as
embed recommendation scripts within their existing call
center applications. American Express representatives use
these scripts to make highly targeted cross-sell and up-sell
offers when customers call their call centers.
- ----------------------------------------------------------------------------------
GTE GTE is a leading telecommunications company providing local
service in 28 states and wireless service in 17 states, as
well as nationwide long-distance, directory and
internetworking services. GTE uses E.piphany's real-time
marketing software solutions to enable GTE representatives
to deliver targeted marketing offers to customers in real
time. E.piphany's real-time software solutions are
integrated directly into GTE's existing customer care
application. Leveraging data within this application,
E.piphany profiles each customer and predicts, based upon a
customer's history and preferences, which products and
services are most likely to appeal to each individual. GTE
call center representatives can use this information to make
targeted cross-sell and up-sell recommendations to
customers.
- ----------------------------------------------------------------------------------
Amazon.com Amazon.com is the leading online retailer of books, videos,
music, electronics, software, toys and more with over 13
million customers. Amazon.com is deploying E.piphany's
Reporting, Analysis and Campaign Management solutions to
better understand customer needs and to use this
understanding to deliver timely, relevant and personalized
customer correspondence. Additionally, this environment will
enable Amazon.com to understand, and eventually predict, the
business benefits of these customer initiatives. Amazon.com
chose E.piphany for our reporting, analysis and campaign
management capabilities, and easy-to-use Web interface. This
environment will allow authorized people to analyze customer
information and quickly act on this information to improve
the customer's overall experience at Amazon.com.
- ----------------------------------------------------------------------------------
Procter & Gamble Procter & Gamble is the largest consumer products company in
the world. The company is implementing our Reporting &
Analysis software solutions to analyze customer, supplier,
financial and fulfillment data to improve customer
relationships and business processes. Procter & Gamble chose
E.piphany because of the ability of our solutions to gather
data from across the enterprise as well as from third
parties. Using our solutions, thousands of Procter &
Gamble's users will be able to analyze and act on this
information using our Web-based user interface.
- ----------------------------------------------------------------------------------
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 &
Analysis and Distributed Database Marketing software
solutions to gather and analyze guest behavior information
from its hotels and resorts. Hilton can then make this
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>
48
<PAGE> 52
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
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.
Our research and development staff consists of 77 employees, as of December
15, 1999. E.piphany's 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. We expect that research and development expenses will
increase in absolute dollars and may increase as a percentage of revenue in
future periods.
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 relationships and alliances with major industry vendors that
will add value to our products and expand our distribution opportunities. Our
sales and marketing organization currently consists of 99 employees, as of
December 15, 1999.
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 among
others:
- patent laws
- copyright laws
- trademark laws
- trade secret laws, and
- employee and third-party nondisclosure agreements and confidentiality
procedures.
We hold one patent and have applied for seven other patents on our
technology in the United States and made one international application. We have
also 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
49
<PAGE> 53
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 to
our technology, we may lose competitive position in the market. We cannot assure
you that our means of protecting our 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 our company 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 competes against
various vendors' software tools designed to accomplish specific elements of a
complete 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 Accrue, Brio
Technology, Broadbase, Business Objects, Informatica, Microstrategy and
Sagent Technology
- enterprise application software such as Oracle, PeopleSoft, SAP and
Siebel Systems
- marketing campaign management software tools such as Exchange
Applications, Prime Response and Recognition Systems, and
- software that recommends products to customers in real time based on
business logic rules such as Net Perceptions.
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 our 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
50
<PAGE> 54
- 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 markets for our products are still rapidly evolving,
and we may not be able to compete successfully against current and potential
competitors.
EMPLOYEES
Based on the number of E.piphany employees and RightPoint employees as of
December 15, 1999, we have 281 full-time employees. Of these employees, 77 are
engaged in research and development, 99 are engaged in sales and marketing, 73
are engaged in professional services and 32 are 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 32,500 square feet of office space for our
headquarters in one building in San Mateo, California. We also lease
approximately 35,500 square feet of additional office space in two additional
buildings in San Mateo, California. We also lease sales offices near Atlanta,
Boston, Chicago, Detroit, Dallas, London, Los Angeles, Minneapolis, Phoenix, St.
Louis and Stamford, Connecticut. We believe that our 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.
51
<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our current
executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger S. Siboni............... 45 President, Chief Executive Officer and Chairman of the
Board of Directors
Gayle Crowell................. 49 President, E.piphany.net and Executive Vice President,
Marketing
Kevin J. Yeaman............... 33 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........... 37 Executive Vice President, Worldwide Sales
Paul M. Hazen................. 58 Director
Robert L. Joss................ 58 Director
Sam H. Lee.................... 39 Director
Douglas J. Mackenzie.......... 40 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. He has served
as Chairman of the Board of Directors since December 1999. 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., Active Software and Pivotal Corporation. Mr.
Siboni also serves 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.
Gayle Crowell will join E.piphany as President, E.piphany.net and Executive
Vice President, Marketing upon its expected acquisition of RightPoint on January
4, 2000. From January 1998 to December 1999, Ms. Crowell served as President,
Chief Executive Officer and Director of RightPoint. Ms. Crowell was named
Chairman of the Board of RightPoint in May 1998. Prior to joining RightPoint,
Ms. Crowell served as senior vice president and general manager of worldwide
field operations for Mosaix, Inc., which provides enterprise customer management
call-center solutions to more than 1,300 customers worldwide. Ms. Crowell spent
the first 14 years of her career in senior executive sales and marketing roles
with Oracle Corporation, a database software company; Recognition International,
a document imaging and workflow software company; DSC, a telecommunications
hardware and software company; and Cubix Corporation, a manufacturer of
networking systems. She holds a B.S. degree from the University of Nevada, Reno.
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
52
<PAGE> 56
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. Mr. Leach is a Fellow of the Institute
of Management Accounts, and a Fellow of the Institute of Chartered Accountants
in England and Wales.
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.
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., a national bank, 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 has been dean of the Graduate School of Business at Stanford University
since 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.
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
53
<PAGE> 57
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
Caulfield & 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. Roger S. Siboni was appointed to our board of directors as
a condition of his being hired to be our chief executive officer. The rights of
these persons and entities to appoint members to our board of directors ceased
after our initial public offering.
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 our initial public offering, two of the nominees to the board
were elected to one-year terms, two were elected to two-year terms and two were
elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Sam H. Lee and Roger S. Siboni were designated Class I
directors whose term expires at the 2000 annual meeting of stockholders. Douglas
J. Mackenzie was designated a Class II director whose term expires at the 2001
annual meeting of stockholders. Paul M. Hazen and Robert L. Joss were 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-takeover Effects 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 a 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 Stock Market's National Market, on
which our common stock is listed, require us 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
54
<PAGE> 58
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. Following our initial public offering, we ceased making grants under our
1997 stock plan. 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, 1999, 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, 1999. These executives are referred to as the
named executive officers in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
------------------- SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Roger S. Siboni............................ 1999 $250,000 -- -- $ 2,922
President, Chief Executive Officer and 1998 104,166 -- -- 178,867
Chairman of the Board of Directors
Kevin J. Yeaman............................ 1999 133,333 35,417 50,000 --
Chief Financial Officer 1998 52,083 -- 62,500 --
Phillip M. Fernandez....................... 1999 138,750 98,438 225,000 --
Executive Vice President, Product
Development
Anthony M. Leach........................... 1999 172,500 112,250 337,500 --
Executive Vice President, Operations and
Services
Karen A. Richardson........................ 1999 150,000 224,389 30,292 --
Executive Vice President, Worldwide Sales 1998 84,712 $ 61,909 242,500 --
</TABLE>
The other compensation paid to Mr. Siboni in 1998 represents amounts loaned
to Mr. Siboni in connection with his relocation to E.piphany in 1998, plus
accrued interest through December 31, 1998. The other compensation paid to Mr.
Siboni in 1999 represents accrued interest on Mr. Siboni's relocation loan from
January 1, 1999 to March 31, 1999. As provided in Mr. Siboni's employment
agreement, these amounts were forgiven by us on March 31, 1999.
55
<PAGE> 59
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, 1999, 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, 1999, we granted options to purchase
up to an aggregate of 3,436,078 shares to employees, directors and consultants.
All options were granted under our 1997 stock option plan and our 1999 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 us
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 POTENTIAL REALIZABLE VALUE
OF OPTIONS VALUE AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO PER OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE SHARE 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....... -- -- -- -- -- -- -- --
Kevin J. Yeaman....... 12,500 0.37% $4.00 $6.40 5/4/09 $ 30,000 $ 80,312 $ 157,499
12,500 0.37 11.00 11.00 7/28/09 -- 86,473 219,140
25,000 0.73 11.00 11.00 9/17/09 -- 172,946 438,279
Phillip M.
Fernandez........... 225,000 6.59 2.70 5.08 3/17/09 535,500 1,254,327 2,357,148
Anthony M. Leach...... 337,500 9.88 2.00 3.91 1/18/09 644,625 1,474,530 2,747,767
Karen A. Richardson... 15,146 0.44 6.40 6.40 6/30/09 -- 60,962 154,488
15,146 0.44 62.63 62.63 10/13/09 -- 596,566 1,511,815
</TABLE>
56
<PAGE> 60
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, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $223.125 per share, the closing price of our common stock on
the Nasdaq Stock Market's National Market as of December 31, 1999, less the per
share exercise price, multiplied by the number of shares issued upon exercise of
the option. Options were granted under our 1997 stock option plan or 1999 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 UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OF SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger S. Siboni............ -- -- -- -- -- --
Kevin J. Yeaman............ 25,000 $ 82,750 87,500 -- $19,038,438 --
Phillip M. Fernandez....... -- -- 225,000 -- 49,595,625 --
Anthony M. Leach........... 337,540 3,037,500 -- -- -- --
Karen A. Richardson........ 121,500 704,700 30,292 -- 5,713,374 --
</TABLE>
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 December 17, 1999,
options to purchase an aggregate of 3,027,142 shares of common stock were
outstanding under our 1997 stock plan. Our board of directors determined that no
further options will be granted under the 1997 stock plan after the initial
public 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 December 17, 1999, 196,797
options were outstanding 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 3,614,613 shares of our common stock are reserved for issuance
under the 1999 stock plan.
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.
57
<PAGE> 61
Unless terminated sooner, our 1999 stock plan will terminate September 21,
2009.
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 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 us 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 us 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 us. 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.
58
<PAGE> 62
RIGHTPOINT 1996 STOCK OPTION PLAN
In connection with the acquisition of RightPoint Software, Inc., we will
assume each outstanding and unexercised option granted under the RightPoint
Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan. The
RightPoint 1996 Stock Option Plan provided for the grant of incentive stock
options and non-statutory stock options to employees, consultants and directors
of RightPoint Software, Inc. As of December 1, 1999, there were options to
purchase 473,183 shares of our common stock outstanding under the RightPoint
1996 Stock Option Plan. We will not grant additional options under the
RightPoint 1996 Stock Option Plan.
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
commenced on September 21, 1999 and ends on the last trading day on or before
October 31, 2001.
Employees are eligible to participate if they are customarily employed by
us 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
- 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 us.
59
<PAGE> 63
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, in the event of a merger 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 interest 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 on September 21, 2009 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 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 January
1, 2000, our repurchase right had lapsed with respect to 666,667 of Mr. Siboni's
shares, leaving 933,333 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.
60
<PAGE> 64
In connection with the acquisition of RightPoint we have entered into an
employment agreement with Gayle Crowell, our President of E.piphany.net and
Executive Vice President of Marketing, and former President, Chief Executive
Officer and Director of RightPoint. Pursuant to her employment agreement, Ms.
Crowell is guaranteed a base salary at an annualized rate of $280,000 plus a
bonus of not less than $40,000 on an annualized basis. The agreement also
guarantees Gayle Crowell severance payments for up to 12 months in the event of
a termination without cause.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
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.
61
<PAGE> 65
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>
NUMBER AGGREGATE
PURCHASER OF SHARES 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 18.3% 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 18.2% 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>
NUMBER AGGREGATE
PURCHASER OF SHARES 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>
NUMBER AGGREGATE
PURCHASER OF SHARES 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 owns 7.2% of our stock, and, at the time of the
purchase, was also an officer and director of E.piphany. Steven G. Blank
currently owns 6.6% 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 our founding, we 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 was an officer of
E.piphany and 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 we 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.
62
<PAGE> 66
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 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 us for up to five days per month, until February 6,
2000. We 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 our common stock for up to 180
days following our initial public 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. See the section entitled "Management -- Change in Control,
Severance and Employment Arrangements."
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 January 1, 2000, the total outstanding
principal amount of this loan is $368,000. 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 us 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."
63
<PAGE> 67
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as November 1, 1999, and as adjusted to reflect
the sale of 1,100,000 shares of common stock offered by us and 1,900,000 by the
selling stockholders in this offering, as to:
- each person (or group of affiliated persons) known by us to own
beneficially more than 5% of our outstanding stock
- each of our directors
- each of the executive officers named in the summary compensation table,
and
- the selling stockholders.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o E.piphany, Inc., 1900 South Norfolk Street, Suite 310,
San Mateo, California 94403. 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
30,071,601 shares of common stock outstanding as of December 17, 1999 and
assumes the issuance of 2,998,426 shares to RightPoint stockholders based on the
outstanding stock of RightPoint on December 1, 1999.
PRINCIPAL AND SELLING STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING SHARES OFFERING
-------------------- BEING --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield & Byers(1)............ 3,959,291 13.2% 0 3,959,291 12.0%
2750 Sand Hill Road
Menlo Park, California 94025
Information Technology Ventures(2)............. 3,947,296 13.1 200,000 3,747,296 11.3
3000 Sand Hill Road
Building 1, Suite 280
Menlo Park, California 94025
Eliot L. Wegbreit(3)........................... 2,175,820 7.2 217,582 1,958,238 5.9
Steven G. Blank(4)............................. 2,006,064 6.7 200,606 1,805,458 5.5
Roger S. Siboni(5)............................. 1,600,000 5.3 160,000 1,440,000 4.4
Kevin J. Yeaman................................ 112,500 * 11,250 101,250 *
Phillip M. Fernandez........................... 225,000 * 0 225,000 *
Anthony M. Leach............................... 337,500 1.1 33,750 303,750 *
Karen A. Richardson(6)......................... 272,792 * 27,279 245,513 *
Douglas J. Mackenzie(7)........................ 3,959,291 13.2 0 3,959,291 12.0
Sam H. Lee(8).................................. 3,947,296 13.1 200,000 3,747,296 11.3
Paul M. Hazen(9)............................... 60,000 * 0 60,000 *
Robert L. Joss(10)............................. 60,000 * 0 60,000 *
All directors and officers as a group (9
persons)(11)................................. 10,574,379 35.2 432,279 10,142,100 31.0
Additional selling stockholders, as a group
holding less than 1% of the outstanding
common stock prior to this offering..........
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 3,648,882 shares held by Kleiner Perkins Caufield & Byers VIII,
L.P., 211,426 shares held by KPCB VIII Founders Fund, L.P., and 98,983
shares held by KPCB Information Services
64
<PAGE> 68
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 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) 2,174,570 shares are held by Eliot L. Wegbreit as trustee of the Wegbreit
Trust, 625 shares are held by David Abraham Wegbreit Trust, Eliot L.
Wegbreit and Beth A. Wegbreit trustees, and 625 shares are held by Jennifer
Allison Wegbreit. Eliot L. Wegbreit resigned as our Chairman of the Board
of Directors in December 1999.
(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 and 10,000 shares held by Linn Karnaugh. Mr. Blank is a
founder of E.piphany and was formerly its Executive Vice President,
Marketing.
(5) Includes 966,666 shares subject to repurchase by E.piphany as of December
17, 1999. E.piphany's right of repurchase lapses as to 33,333 shares per
month for Mr. Siboni.
(6) Includes 30,292 shares issuable upon exercise of currently exercisable
stock options.
(7) 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.
(8) 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.
(9) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options.
(10) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options.
(11) Includes the information contained in footnotes (5) to (9) above and
includes an aggregate of 842,792 shares issuable upon exercise of stock
options held by the directors and officers that are exercisable within 60
days of December 17, 1999.
65
<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are 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, and by the
provisions of applicable Delaware law.
COMMON STOCK
As of December 17, 1999 and assuming the issuance of 2,998,426 shares to
RightPoint stockholders based on the outstanding stock of RightPoint on December
1, 1999, there were 30,071,601 shares of common stock outstanding which were
held of record by approximately 370 stockholders. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers. As of December 17, 1999, no shares of preferred stock were 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.
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.
No shares of preferred stock are outstanding and we have no present plans
to issue any shares of preferred stock.
WARRANTS
As of December 17, 1999, there were warrants outstanding to purchase up to
31,250 shares of common stock.
66
<PAGE> 70
REGISTRATION RIGHTS
The holders of 18,974,611 shares of common stock are entitled to the
following rights with respect to registration of such shares under the
Securities Act. Approximately 1.4 million of those shares are being registered
in this offering and those shares will cease to be subject to registration
rights.
These rights are provided under the terms of an agreement between E.piphany
and the holders of registrable securities. After March 20, 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 available, 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 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. All expenses in connection with any
registration, other than underwriting discounts and commissions, will be borne
by us. All registration rights will terminate on September 21, 2004, 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. To the extent that the "lock-up" agreements among existing
stockholders, Credit Suisse First Boston Corporation and us which prohibit
directors, executive officers and existing stockholders from selling their
shares until March 20, 2000 or in the case of selling stockholders in this
offering, the 91st day after completion of this offering, is released, holders
of up to an additional 2,082,266 shares will lose their registration rights,
based on our average trading volume for the four weeks ending December 17, 1999.
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 us by means of a tender offer
- acquisition of us 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 of directors. 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.
67
<PAGE> 71
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-Takeover 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 are traded on The Nasdaq Stock Market's National Market under
the symbol "EPNY."
68
<PAGE> 72
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales occurring could adversely affect
prevailing market prices of our common stock or our future ability to raise
capital through an offering of equity securities.
Upon completion of this offering, we will have outstanding 31,171,601
shares of our common stock, based on shares outstanding as of December 17, 1999
and assuming the issuance of 2,998,426 shares to RightPoint stockholders, based
on the outstanding stock of RightPoint as of December 1, 1999. Of these shares,
3,000,000 shares to be sold by us and the selling stockholders in this offering
and 4,772,500 shares sold in our initial public offering are freely tradable in
the public market without restriction or further registration under the
Securities Act, unless these shares are owned by "affiliates" as that term is
defined in Rule 144 under the Securities Act. In addition, we are obligated to
release an additional 299,843 shares issued to former stockholders of RightPoint
from "lock-up" arrangements upon completion of this offering and such shares
will become freely tradable.
The remaining shares outstanding upon completion of this offering are
"restricted securities" as that term is defined in Rule 144 or are subject to
the "lock-up" agreements described below. We issued and sold these securities in
private transactions in reliance on exemptions from registration 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. Shares subject to
"lock-up" agreements will be eligible for such when released from a "lock-up"
agreement or when the "lock-up" agreement expires.
The following table shows approximately when the 31,571,601 shares of our
common stock, 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 or before the effective date............................. 8,072,343
March 20, 2000.............................................. 1,093,167
The 91st day after the effectiveness of this offering....... 20,753,610
At June 16, 2000............................................ 843,750
At August 19, 2000.......................................... 316,407
At September 22, 2000....................................... 19,414
At September 27, 2000....................................... 6,250
At December 14, 2000........................................ 66,660
</TABLE>
LOCK-UP AGREEMENTS
After this offering approximately 1,093,167 shares of our common stock held
by our directors, executive officers and our existing stockholders will continue
to be subject to "lock-up" agreements with us and Credit Suisse First Boston
Corporation 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 until March 20, 1999. In addition, an additional
approximately 20,753,610 shares held by the selling stockholders that are not
sold in this offering will be subject to similar "lock-up" agreements with us
and Credit Suisse First Boston Corporation which will expire on the 91st day
after the effectiveness of this offering. Transfers or
69
<PAGE> 73
dispositions can be made sooner with our prior written consent and the prior
written consent of Credit Suisse First Boston Corporation.
Under the terms of our merger agreement with RightPoint, the shares of our
common stock issued to the former stockholders of RightPoint are also subject to
a "lock-up" with us which prohibits resale of such stock prior to March 20,
2000. The terms of this "lock-up" agreement are equivalent to the terms of the
"lock-up" agreements with us and Credit Suisse First Boston Corporation
described above. In addition, RightPoint's executive officers, directors and
their affiliates agreed to be bound by any future lock-up restrictions imposed
on our stockholders in connection with any future public offerings, provided all
of our directors, executive officers and 1% stockholders also agree to be so
bound.
Holders of approximately 2,112,991 shares to be issued to RightPoint
stockholders who signed voting agreements in connection with the merger will
also be subject to a lock-up agreement until the 91st day after this offering.
We agreed to release any former RightPoint stockholders who did not sign voting
agreements in connection with the merger from the foregoing restrictions if, and
to the extent that, our existing stockholders subject to lock-up restrictions
contained in the agreements with us and Credit Suisse First Boston Corporation
are also released from such restrictions.
In connection with this offering, Credit Suisse First Boston Corporation
and we have agreed to release 2,698,583 shares of existing E.piphany
stockholders subject to the lock-up to be sold in this offering and an
additional approximately 299,843 shares to be released pursuant to the terms of
the RightPoint merger agreement described above.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 17,670,443 shares of our
common stock 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
We have filed a registration statement on Form S-8 to register
approximately 12,514,613 shares of common stock reserved for issuance under our
stock 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 December 17, 1999, 6,641,755 shares remained reserved for issuance
under our stock plans of which options to purchase 3,215,939 shares of common
stock were issued and outstanding. In addition, as of December 17, 1999, two
million shares were reserved for issuance under our 1999 employee stock purchase
plan. When the lock-up agreements described above expire, options to purchase
332,482 shares of common stock will be fully vested and, when exercised, these
shares will be freely tradable, based on the number of options outstanding as of
December 17, 1999. Shares registered under this 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 each respective lock-up agreement expires. In
addition, we expect to assume options and warrants of RightPoint convertible
into options and warrants to purchase approximately 525,000 shares of our common
stock, based on RightPoint's outstanding options and warrants as of December 1,
1999. We will file a registration statement on Form S-8 to register
approximately 525,000 shares of common stock reserved for issuance under
RightPoint's 1996 Stock Option Plan.
70
<PAGE> 74
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities 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 then-outstanding shares of common stock, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to 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 purchased shares from us under a stock option plan
or other written agreement prior to our initial public offering can resell those
shares excluding the effect of the "lock-up" agreements described above, in
reliance on Rule 144, but without complying with some of the restrictions,
including the holding period, contained in Rule 144. Approximately 2.5 million
of our outstanding shares are subject to Rule 701. Of these shares,
approximately 1.6 million shares will be vested and exercisable and will be able
to be resold after December 20, 1999, subject to the "lock-up" agreements
described above.
WARRANTS
Upon consummation of this offering, warrants to purchase up to 31,250
shares of our common stock will remain outstanding.
71
<PAGE> 75
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement (which term shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, some
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to E.piphany and the common stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto,
and the financial statements and notes filed as a part thereof. Statements made
in this prospectus concerning the contents of any document referred to herein
are not necessarily complete. With respect to each document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved. The Registration
Statement, including exhibits thereto and the financial statements and notes
filed as a part thereof, as well as reports and other information filed with the
Commission, may be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part thereof may be obtained from the Commission upon payment of fees prescribed
by the Commission. These reports and other information may also be inspected
without charge at a Web site maintained by the Commission. The address of the
site is http://www.sec.gov.
72
<PAGE> 76
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation and
Morgan Stanley & Co. Incorporated are acting as joint book-running managers and
as representatives and for whom, Hambrecht & Quist LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and FleetBoston Robertson Stephens Inc. are acting
as co-managers and representatives, the following respective numbers of shares
of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Morgan Stanley & Co. Incorporated...........................
Hambrecht & Quist LLC.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
FleetBoston Robertson Stephens Inc. ........................
--------
Total.............................................
========
</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 the underwriters a 30-day option to purchase up to 150,000
additional shares of common stock and the selling stockholders have granted the
underwriters a 30-day option to purchase up to 300,000 additional shares of
common stock at the 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 we
and the selling stockholders will pay.
<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 payable by
E.piphany......................... $ $ $ $
Expenses payable by E.piphany....... $ $ $ $
Underwriting discounts and
commissions payable by the selling
stockholders...................... $ $ $ $
</TABLE>
73
<PAGE> 77
We, our executive officers and directors and the selling stockholders have
agreed that we and they will not offer, sell, contract 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, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without the prior
written consent of Credit Suisse First Boston Corporation and Morgan Stanley &
Co. Incorporated for a period of 90 days after the date of this prospectus.
Certain of our other stockholders have agreed to a similar "lock-up" agreement
for a period ending March 20, 2000.
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 common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "EPNY."
The representatives on behalf of the underwriters may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934.
- 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 stabilizing or syndicate covering
transaction to cover syndicate short positions.
- In "passive" market-making, market makers in the securities who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for purchases of the securities until the time, if
any, at which a stabilizing bid is made.
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.
74
<PAGE> 78
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 (i) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, the purchaser is purchasing as principal and not as agent, and (iii) 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.
75
<PAGE> 79
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. Upon the completion of this
offering, 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,
will beneficially own up to a total of 81,962 shares of our common stock. Aaron
J. Alter, a member of Wilson Sonsini Goodrich & Rosati, is the Secretary of
E.piphany.
EXPERTS
The audited financial statements of E.piphany, Inc. for the years ended
December 31, 1998 and 1997 and the nine months ended September 30, 1999 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.
The consolidated financial statements of RightPoint as of June 30, 1999 and
1998 and for the years then ended included in this prospectus have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in auditing and accounting.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In July 1998, KPMG Peat Marwick LLP resigned as our independent public
accountants, as KPMG Peat Marwick LLP became an integrator of our products and
purchased our preferred stock. The former independent accountants' report on our
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 our financial statements in this registration statement. KPMG Peat Marwick
LLP did not issue an audit opinion on our 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 our 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.
76
<PAGE> 80
E.PIPHANY, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the acquisition by E.piphany, Inc. of all outstanding shares of
RightPoint Software, Inc. in a transaction accounted for as a purchase.
The pro forma combined condensed statements of operations of E.piphany for
the twelve months ended December 31, 1998 and for the nine months ended
September 30, 1999 assume that the acquisition of RightPoint took place as of
the beginning of the earliest period presented. The statements combine
E.piphany's and RightPoint's statements of operations for the twelve months
ended December 31, 1998 and for the nine months ended September 30, 1999,
respectively.
The pro forma combined condensed balance sheet as of September 30, 1999
combines E.piphany's September 30, 1999 balance sheet with RightPoint's
September 30, 1999 balance sheet as if the acquisition had been consummated on
that date.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisition had been consummated as of the dates indicated, nor is it
necessarily indicative of future operating results or financial position. The
pro forma adjustments are based on the information available at the date of this
prospectus and are subject to change based upon completion of the transaction
and final purchase price allocation, including completion of third party
appraisals.
E.piphany's condensed financial information included in these pro forma
financial statements is derived from its December 31, 1998 and September 30,
1999 audited financial statements included elsewhere in this prospectus.
RightPoint's condensed balance sheet included in the accompanying pro forma
unaudited combined condensed balance sheet is derived from its unaudited
historical consolidated balance sheet as of September 30, 1999 included
elsewhere in this prospectus. The results of operations of RightPoint included
in the unaudited pro forma condensed combined statements of operations of the
year ended December 31, 1998 and the nine months ended September 30, 1999 were
derived from its financial statements for the same periods that have not been
included in this prospectus.
The unaudited condensed financial information of RightPoint has been
prepared in accordance with generally accepted accounting principles applicable
to interim financial information and, in the opinion of RightPoint's management,
includes all adjustments necessary for a fair presentation of the financial
information for such interim periods.
P-1
<PAGE> 81
E.PIPHANY, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E.PIPHANY RIGHTPOINT ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 89,701 $ 4,229 $ -- $ 93,930
Short term investments.......................... -- 1,454 -- 1,454
Accounts receivable, net........................ 3,193 1,119 -- 4,312
Prepaid expenses and other assets............... 2,155 236 -- 2,391
-------- -------- -------- --------
Total current assets.................... 95,049 7,038 -- 102,087
Property and equipment, net..................... 2,442 643 -- 3,085
Goodwill and purchased intangibles.............. -- -- 462,005(A) 462,005
Other assets.................................... 485 1 -- 486
-------- -------- -------- --------
Total assets............................ $ 97,976 $ 7,682 $462,005 $567,663
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation..... $ 88 $ 243 $ -- $ 331
Current portion of notes payable................ 629 -- -- 629
Repayable grant................................. -- 130 -- 130
Trade accounts payable.......................... 1,587 830 -- 2,417
Accrued liabilities............................. 4,442 372 7,750(B) 12,564
Deferred revenue................................ 2,538 364 -- 2,902
-------- -------- -------- --------
Total current liabilities............... 9,284 1,939 7,750 18,973
Capital lease obligations, net of current
portion...................................... 93 38 -- 131
Notes payable, net of current portion........... 7,737 -- -- 7,737
-------- -------- -------- --------
Total liabilities....................... 17,114 1,977 7,750 26,841
-------- -------- -------- --------
Stockholders' equity:
Convertible preferred stock..................... -- 155 (155)(B) --
Common stock.................................... 5 12 (12)(B) 5
Additional paid-in capital...................... 113,781 32,408 451,251(B) 597,440
Warrants to purchase preferred stock............ 532 -- -- 532
Note receivable................................. (640) -- -- (640)
Deferred compensation........................... (3,202) (3,153) 3,153(B) (3,202)
Accumulated other comprehensive income.......... -- 81 (81)(B) --
Accumulated deficit............................. (29,614) (23,798) 99(B) (53,313)
-------- -------- -------- --------
Total stockholders' equity.............. 80,862 5,705 454,255 540,822
-------- -------- -------- --------
Total liabilities and stockholders'
equity................................ $ 97,976 $ 7,682 $462,005 $567,663
======== ======== ======== ========
</TABLE>
P-2
<PAGE> 82
E.PIPHANY, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E.PIPHANY RIGHTPOINT ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product license................................ $ 2,216 $ 952 $ -- $ 3,168
Services....................................... 1,161 337 -- 1,498
-------- ------- --------- ---------
Total revenues......................... 3,377 1,289 -- 4,666
-------- ------- --------- ---------
Cost of revenues:
Product license................................ 4 24 -- 28
Services....................................... 1,396 103 -- 1,499
-------- ------- --------- ---------
Total cost of revenues................. 1,400 127 -- 1,527
-------- ------- --------- ---------
Gross profit..................................... 1,977 1,162 -- 3,139
-------- ------- --------- ---------
Operating expenses:
Research and development....................... 3,769 2,548 -- 6,317
Sales and marketing............................ 6,519 2,769 -- 9,288
General and administrative..................... 1,503 1,275 -- 2,778
Amortization of goodwill and intangibles....... -- -- 154,002(C) 154,002
Stock-based compensation....................... 799 -- -- 799
-------- ------- --------- ---------
Total operating expenses............... 12,590 6,592 154,002 173,184
-------- ------- --------- ---------
Loss from operations............................. (10,613) (5,430) (154,002) (170,045)
Other income (expense)........................... 283 (106) -- 177
-------- ------- --------- ---------
Net loss............................... $(10,330) $(5,536) $(154,002) $(169,868)
======== ======= ========= =========
Basic and diluted net loss per share............. $ (7.19) $ (6.47) $ (110.45)
======== ======= =========
Shares used in computing basic and diluted net
loss per share................................. 1,437 855 1,538
======== ======= =========
Pro forma basic and diluted net loss per share... $ (1.17) $ (0.45) $ (16.53)
======== ======= =========
Shares used in computing pro forma basic and
diluted net loss per share..................... 8,833 12,186 10,277
======== ======= =========
</TABLE>
P-3
<PAGE> 83
E.PIPHANY, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
E.PIPHANY RIGHTPOINT ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product license................................... $ 5,633 $ 2,892 $ -- $ 8,525
Services........................................ 4,835 909 -- 5,744
-------- ------- --------- ---------
Total revenues.......................... 10,468 3,801 -- 14,269
-------- ------- --------- ---------
Cost of revenues:
Product license................................. 83 3 -- 86
Services........................................ 5,445 636 -- 6,081
-------- ------- --------- ---------
Total cost of revenues.................. 5,528 639 -- 6,167
-------- ------- --------- ---------
Gross profit...................................... 4,940 3,162 -- 8,102
-------- ------- --------- ---------
Operating expenses:
Research and development........................ 4,722 2,213 -- 6,935
Sales and marketing............................. 11,576 3,410 -- 14,986
General and administrative...................... 2,546 1,162 -- 3,708
Amortization of goodwill and intangibles........ -- -- 115,501(C) 115,501
Stock-based compensation........................ 2,314 500 -- 2,814
-------- ------- --------- ---------
Total operating expenses................ 21,158 7,285 115,501 143,944
-------- ------- --------- ---------
Loss from operations.............................. (16,218) (4,123) (115,501) (135,842)
Other income (expense)............................ 83 216 -- 299
-------- ------- --------- ---------
Net loss................................ $(16,135) $(3,907) $(115,501) $(135,543)
======== ======= ========= =========
Basic and diluted net loss per share.............. $ (2.90) $ (3.71) $ (23.83)
======== ======= =========
Shares used in computing basic and diluted net
loss per share.................................. 5,563 1,054 5,688
======== ======= =========
Pro forma basic and diluted net loss per share.... $ (1.00) $ (0.20) $ (7.31)
======== ======= =========
Shares used in computing pro forma basic and
diluted net loss per share...................... 16,197 19,701 18,532
======== ======= =========
</TABLE>
P-4
<PAGE> 84
NOTES TO THE UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The total purchase price of RightPoint reflects the issuance of
approximately 2,998,000 shares of our common stock and the assumption of options
and warrants to purchase approximately 525,000 shares of our common stock. The
total purchase price was determined as follows (in thousands):
<TABLE>
<S> <C>
Value of E.piphany common stock, options and warrants....... $483,659
Other direct acquisition expenses........................... 7,750
--------
$491,409
========
</TABLE>
The valuation of our common stock is based on its weighted average closing
price three days prior to and three days following the announcement of the
acquisition. The valuation of options and warrants to purchase our common stock
is based upon the Black-Scholes valuation model.
The total purchase price of the RightPoint acquisition has been allocated
to acquired assets based on estimates of their fair values. The purchase price
of approximately $491.4 million has been assigned to the assets acquired as
follows (in thousands):
<TABLE>
<S> <C>
Tangible net assets acquired................................ $ 5,705
Acquired in-process research and development................ 23,699
Assembled work force and customer list...................... 4,100
Developed technology........................................ 12,600
Goodwill.................................................... 445,305
--------
$491,409
========
</TABLE>
We expect to allocate approximately $23.7 million of the purchase price to
RightPoint's in-process research and development, which will be expensed upon
consummation of the merger as it has not reached technological feasibility and,
in the opinion of management, has no alternative future use. The estimated
amount is subject to adjustment based upon completion of third party appraisals.
This amount has not been reflected in the accompanying pro forma statements of
operations as it is a nonrecurring charge, but has been reflected as an
adjustment to accumulated deficit in the accompanying pro forma balance sheet.
The adjustments to the pro forma combined condensed balance sheet as of
September 30, 1999 are as follows:
(A) To reflect goodwill and other intangibles of approximately $462.0
million resulting from the acquisition of RightPoint.
(B) To reflect the purchase price paid as follows: issuance of our
common stock, options and warrants valued at approximately $483.7 million
and acquisition-related expenses of approximately $7.8 million.
The adjustments to the pro forma combined condensed statements of
operations for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 assume the acquisition occurred as of January 1, 1998 and are
as follows:
(C) To reflect the amortization of approximately $462.0 million of
estimated goodwill and other intangibles resulting from the acquisition.
The intangible assets will be amortized ratably over an estimated useful
life of three years.
P-5
<PAGE> 85
E.PIPHANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<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> 86
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, 1997 and 1998, and September 30, 1999,
and the related statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the years ended December 31, 1997 and 1998 and nine
months ended September 30, 1999. 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, 1997 and 1998, and September 30, 1999, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1998,
and nine months ended September 30, 1999 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
December 20, 1999
F-2
<PAGE> 87
E.PIPHANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 369 $ 13,595 $ 89,701
Accounts receivable, net of allowance for doubtful
accounts of $0, $30, and $80, respectively.............. 16 1,243 3,193
Prepaid expenses and other current assets................. 79 354 2,155
------- -------- --------
Total current assets............................... 464 15,192 95,049
Property and equipment, net................................. 337 1,172 2,442
Other assets................................................ -- -- 485
------- -------- --------
$ 801 $ 16,364 $ 97,976
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation............... $ -- $ -- $ 88
Current portion of notes payable.......................... -- 167 629
Accounts payable.......................................... 117 1,015 1,587
Accrued liabilities....................................... 140 1,028 4,442
Deferred revenue.......................................... 76 381 2,538
------- -------- --------
Total current liabilities.......................... 333 2,591 9,284
Capital lease obligations, net of current portion......... -- -- 93
Notes payable, net of current portion..................... -- 333 7,737
------- -------- --------
Total liabilities.................................. 333 2,924 17,114
------- -------- --------
Commitments (Note 4)
Stockholders' equity:
Series A-D convertible preferred stock, $0.0001 par value;
Authorized -- 12,703 shares in 1998, 0 shares at
September 30, 1999
Outstanding -- 3,228 shares in 1997, 10,623 shares in
1998 and 0 at September 30, 1999....................... 1 3 --
Convertible preferred stock, $0.0001 par value;
Authorized -- 5,000 shares at September 30, 1999
Outstanding -- none..................................... -- -- --
Common stock, $0.0001 par value;
Authorized -- 100,000 shares at September 30, 1999
Outstanding -- 5,619 shares in 1997, 8,913 shares in
1998 and 26,975 shares at September 30, 1999........... 1 2 5
Additional paid-in capital................................ 3,615 30,030 113,781
Warrants.................................................. -- -- 532
Note receivable........................................... -- (640) (640)
Deferred compensation..................................... -- (2,476) (3,202)
Accumulated deficit....................................... (3,149) (13,479) (29,614)
------- -------- --------
Total stockholders' equity......................... 468 13,440 80,862
------- -------- --------
$ 801 $ 16,364 $ 97,976
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 88
E.PIPHANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------- -----------------------
1997 1998 1998 1999
------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product license............................... $ -- $ 2,216 $ 1,270 $ 5,633
Services...................................... -- 1,161 705 4,835
------- -------- ------- --------
-- 3,377 1,975 10,468
------- -------- ------- --------
Cost of revenues:
Product license............................... -- 4 3 83
Services...................................... -- 1,396 847 5,445
------- -------- ------- --------
-- 1,400 850 5,528
------- -------- ------- --------
Gross profit............................... -- 1,977 1,125 4,940
------- -------- ------- --------
Operating expenses:
Research and development...................... 1,646 3,769 2,617 4,722
Sales and marketing........................... 1,200 6,519 4,078 11,576
General and administrative.................... 373 1,503 987 2,546
Stock-based compensation...................... 1 799 395 2,314
------- -------- ------- --------
Total operating expenses.............. 3,220 12,590 8,077 21,158
------- -------- ------- --------
Loss from operations....................... (3,220) (10,613) (6,952) (16,218)
------- -------- ------- --------
Other income (expense):
Interest income............................... 71 333 187 464
Interest expense.............................. -- (48) (33) (386)
Other......................................... -- (2) (1) 5
------- -------- ------- --------
Total other income.................... 71 283 153 83
------- -------- ------- --------
Net loss................................... $(3,149) $(10,330) $(6,799) $(16,135)
======= ======== ======= ========
Basic and diluted net loss per share............ $ (2.90) $ (7.19) $ (3.62) $ (2.90)
======= ======== ======= ========
Shares used in computing basic and diluted net
loss per share................................ 1,087 1,437 1,877 5,563
======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)................................... $ (1.17) $ (1.00)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........ 8,833 16,197
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 89
E.PIPHANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE COMMON
PREFERRED STOCK STOCK ADDITIONAL
---------------- --------------- PAID-IN NOTE DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS 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......................... -- -- 1,497 -- 2,530 -- -- --
Issuance of stock options in
exchange for services........... -- -- -- -- 388 -- -- --
Issuance of Series D preferred
stock, net...................... 937 -- -- -- 5,970 -- -- --
Issuance of warrants.............. -- -- -- -- -- 532 -- --
Repurchase of stock............... -- -- (146) -- (4) -- -- --
Issuance of stock related to
leases and debt financing....... -- -- 6 -- 100 -- -- --
Issuance of common stock in
initial public offering, net.... -- -- 4,772 -- 69,866 -- -- --
Conversion of preferred stock..... (11,560) (3) 11,560 3 -- --
Exercise of warrants.............. -- -- 373 -- 2,250 -- -- --
Deferred stock compensation....... -- -- -- -- 2,651 -- (2,651) --
Amortization of deferred stock
compensation.................... -- -- -- -- -- -- -- 1,925
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- -- --
------- --- ------ -- -------- ----- ----- -------
Total comprehensive loss....
Balance, September 30, 1999........ -- $-- 26,975 $5 $113,781 $ 532 $(640) $(3,202)
======= === ====== == ======== ===== ===== =======
<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......................... -- 2,530
Issuance of stock options in
exchange for services........... -- 388
Issuance of Series D preferred
stock, net...................... -- 5,970
Issuance of warrants.............. -- 532
Repurchase of stock............... -- (4)
Issuance of stock related to
leases and debt financing....... -- 100
Issuance of common stock in
initial public offering, net.... -- 69,866
Conversion of preferred stock..... -- --
Exercise of warrants.............. -- 2,250
Deferred stock compensation....... --
Amortization of deferred stock
compensation.................... -- 1,925
Comprehensive loss:
Net loss........................ (16,135) (16,135) $(16,135)
-------- -------- --------
Total comprehensive loss.... $(16,135)
========
Balance, September 30, 1999........ $(29,614) $ 80,862
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 90
E.PIPHANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ ----------------------
1997 1998 1998 1999
------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(3,149) $(10,330) $(6,799) $(16,135)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 47 269 166 549
Allowance for doubtful accounts....................... -- 30 -- 50
Loss on sale of property and equipment................ 9 -- -- --
Noncash compensation expense.......................... 1 799 395 2,314
Noncash interest expense.............................. -- -- -- 47
Changes in operating assets and liabilities:
Accounts receivable................................. (16) (1,257) (480) (2,000)
Prepaid expenses and other assets................... (79) (275) (359) (1,763)
Accounts payable.................................... 117 898 365 572
Accrued liabilities................................. 140 888 457 3,414
Deferred revenue.................................... 76 305 172 2,157
------- -------- ------- --------
Net cash used in operating activities............ (2,854) (8,673) (6,083) (10,795)
------- -------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (408) (1,104) (819) (1,594)
Proceeds from the sale of property and equipment......... 15 -- -- --
------- -------- ------- --------
Net cash used in investing activities............ (393) (1,104) (819) (1,594)
------- -------- ------- --------
Cash flows from financing activities:
Borrowings............................................... -- 500 500 8,000
Repayments on line of credit............................. -- -- -- (135)
Principal payments on capital lease obligations.......... -- -- -- (44)
Proceeds from initial public offering of common stock,
net................................................... -- -- -- 69,866
Proceeds from exercise of warrant........................ -- -- -- 2,250
Net proceeds from issuance of convertible preferred
stock................................................. 3,612 22,033 19,043 5,970
Issuance of common stock................................. 4 470 451 2,588
------- -------- ------- --------
Net cash provided by financing activities........ 3,616 23,003 19,994 88,495
------- -------- ------- --------
Net increase in cash and cash equivalents.................. 369 13,226 13,092 76,106
Cash and cash equivalents at beginning of period........... -- 369 369 13,595
------- -------- ------- --------
Cash and cash equivalents at end of period................. $ 369 $ 13,595 $13,461 $ 89,701
======= ======== ======= ========
Supplemental cash flow information:
Cash paid for interest................................... $ -- $ 48 $ 33 $ 338
Non-cash transactions:
Loan to officer to purchase stock........................ $ -- $ 640 $ 640 $ --
Equipment capital lease.................................. $ -- $ -- $ -- $ 225
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 91
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 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
September 30, 1999, had an accumulated deficit of $29.6 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 for the nine months ended
September 30, 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> 92
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
Customer A............................................... -- 30% 40% --
Customer B............................................... -- 17% 22% --
Customer C............................................... -- 16% 16% --
Customer D............................................... -- 11% 11% --
Customer E............................................... -- 11% -- --
Customer F............................................... -- -- 10% --
Customer G............................................... -- -- -- 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 $235,000 in revenue from this customer for the nine
months ended September 30, 1999 and had $107,000 in accounts receivable at
September 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
$493,000 in revenue from these customers for the nine months ended September 30,
1999 and had a total of $68,000 and $5,000 in accounts receivable at December
31, 1998 and September 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 F. E.piphany recognized $233,000 and $361,000 in revenue from Customer
F for the year ended December 31, 1998 and during the nine months ended
September 30, 1999, and had a total of $57,000 and $55,000 in accounts
receivable as of December 31, 1998 and September 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.
An outside director of E.piphany is a member of the board of directors of
one additional customer. E.piphany recognized $77,000 in revenue from this
customer for the nine months ended September 30, 1999 and has a total of
$107,000 in accounts receivable at September 30, 1999 from this customer.
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.
F-8
<PAGE> 93
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
Computer software and equipment....................... $372 $1,329 $3,142
Furniture and fixtures................................ 12 159 165
---- ------ ------
384 1,488 3,307
Less: Accumulated depreciation........................ (47) (316) (865)
---- ------ ------
$337 $1,172 $2,442
==== ====== ======
</TABLE>
Included in property and equipment are assets acquired under capital leases
with original cost of approximately $225,000 as of September 30, 1999.
Accumulated amortization on the leased assets is approximately $47,000 as of
September 30, 1999.
Future minimum lease payments on capital leases are as follows at September
30, 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 26
2000........................................................ 102
2001........................................................ 73
----
Total minimum lease payments................................ 201
Less: Imputed interest (10.0%).............................. (20)
----
Present value of payments under capital leases.............. 181
Less: Current portion....................................... (88)
----
Long-term capital lease obligations......................... $ 93
====
</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> 94
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
Accrued professional services......................... $ 42 $ 158 $ 707
Accrued sales tax..................................... 17 93 60
Accrued payroll....................................... -- 249 --
Accrued vacation...................................... -- 153 511
Accrued commissions and bonus......................... 16 212 1,396
Accrued initial public offering issuance costs........ -- -- 563
Accrued other......................................... 65 163 1,205
---- ------ ------
$140 $1,028 $4,442
==== ====== ======
</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, collection is probable, and vendor specific objective evidence
exists to allocate the total fee between all elements of the arrangement. 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
F-10
<PAGE> 95
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
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% and 76% of total product revenue
for the year ended December 31, 1998 and the nine months ended September 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 September 30, 1999, $36,000 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 nine months ended
September 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. 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 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.
F-11
<PAGE> 96
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1997 1998 1998 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss............................................. $(3,149) $(10,330) $(6,799) $(16,135)
Basic and diluted:
Weighted average shares of common stock
outstanding..................................... 5,486 7,235 6,691 9,913
Less: Weighted average shares subject to
repurchase......................................... (4,399) (5,798) (4,814) (4,350)
------- -------- ------- --------
Weighted average shares used in computing basic and
diluted net loss per common share.................. 1,087 1,437 1,877 5,563
======= ======== ======= ========
Basic and diluted net loss per common share........ $ (2.90) $ (7.19) $ (3.62) $ (2.90)
======= ======== ======= ========
Net loss........................................... $(10,330) $(16,135)
======== ========
Shares used above.................................... 1,437 5,563
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)........................................ 7,396 10,634
-------- --------
Shares used in computing pro forma basic and diluted
net loss per common share (unaudited).............. 8,833 16,197
======== ========
Pro forma basic and diluted net loss per common share
(unaudited)........................................ $ (1.17) $ (1.00)
======== ========
</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 18,504,000 for the years ended December
31, 1997 and 1998, and the nine months ended September 30, 1999, respectively.
See Note 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 nine months
ended September 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 effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the FASB
issued SFAS
F-12
<PAGE> 97
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
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 September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 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% (8.75% at September 30, 1999)................... -- -- 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% (8.75% at September 30, 1999) and are payable in
monthly installments through September 2001............... -- 500 366
Revolving line of credit with a bank for $1.0 million.
Expires in December 1999. Borrowings bear interest at the
bank's prime rate (8.25% at September 30, 1999)........... -- -- --
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 8,366
Less: current portion..................................... -- (167) (629)
---- ----- ------
Total long-term debt.............................. $ -- $ 333 $7,737
==== ===== ======
</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 and liquidity ratios.
The subordinated convertible debt facility lender had the option to convert
a portion of the outstanding borrowings under the facility to 351,563 shares of
E.piphany's Series C' preferred stock at a price of $6.40 per share. 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
F-13
<PAGE> 98
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
recognized as additional interest expense over the term of this arrangement with
the lender. As of September 30, 1999, this warrant has been exercised.
Borrowings outstanding as of September 30, 1999 are payable as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $ 32
2000........................................................ 938
2001........................................................ 2,730
2002........................................................ 4,416
2003........................................................ 250
------
$8,366
======
</TABLE>
4. COMMITMENTS
E.piphany leases certain equipment and its facilities under operating lease
agreements. The leases expire at various dates through 2003. Future minimum
lease payments under these leases as of September 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999........................................................ $ 393
2000........................................................ 1,456
2001........................................................ 1,297
2002........................................................ 1,336
2003........................................................ 1,135
------
$5,617
======
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998, and the
nine months ended September 30, 1999, was approximately $127,000, $610,000 and
$729,000, respectively.
5. PREFERRED STOCK
Since inception, E.piphany has issued 11,560,000 shares of preferred stock.
These shares were converted to shares of common stock upon the closing of the
Company's initial public offering (IPO). All outstanding warrants to purchase
preferred stock are now exercisable for common stock. Upon the closing of the
IPO, E.piphany authorized 5,000,000 shares of undesignated preferred stock for
future issuance.
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-14
<PAGE> 99
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
the original purchase price. As of September 30, 1999, 2,313,449 shares of
common stock were subject to repurchase under these agreements.
Effective upon the closing of the IPO, the number of authorized shares of
common stock was increased to 100,000,000 shares.
As of September 30, 1999, E.piphany had reserved the following shares of
authorized but unissued common stock:
<TABLE>
<S> <C>
Stock options outstanding under the 1997 stock option
plan...................................................... 3,094,517
Stock options to be granted under the 1999 stock plan....... 3,614,613
Stock reserved for issuance under the 1999 employee stock
purchase plan............................................. 2,000,000
Warrants.................................................... 106,250
---------
Total shares reserved............................. 8,815,380
=========
</TABLE>
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. As of September 30, 1999, this warrant has been exercised.
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 September 30, 1999, this warrant allowed for the purchase of 75,000
shares. The warrant is exercisable through September 21, 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 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.
Upon the closing of the Company's IPO, all warrants to purchase preferred
stock converted to warrants to purchase common stock.
STOCK-BASED COMPENSATION
In connection with the grant of certain stock options to employees during
the year ended December 31, 1998, and the nine months ended September 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
F-15
<PAGE> 100
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
Standards Board Interpretation No. 28. Approximately $0.7 million and $1.9
million was expensed during the year ended December 31, 1998, and the nine
months ended September 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 nine months
ended September 30, 1998 and 1999, E.piphany recorded stock-based compensation
of $1,000, $58,000, $53,000, and $388,000, 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.
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. As of September 30, 1999, no
shares had been purchased.
INITIAL PUBLIC OFFERING
On September 21, 1999, E.piphany completed an initial public offering of
4,772,500 shares of its common stock at a price of $16.00 per share and received
net proceeds of approximately $69.9 million.
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 was
effective upon 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.
STOCK OPTIONS
In 1997, E.piphany adopted the 1997 Stock Plan (the "1997 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% 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.
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. As of September 30, 1999, no shares have been granted.
F-16
<PAGE> 101
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
E.piphany's board of directors determined that no further options would be
granted under the 1997 Plan after the IPO. In addition to the 3,500,000 shares
authorized for the 1999 Plan, the 1997 Plan options authorized but not granted
as of the IPO were made available for grant under the 1999 Plan. Accordingly as
of September 30, 1999, an aggregate of 3,614,613 shares were available for
future option grants under the 1999 Plan.
E.piphany accounts for its stock option plans pursuant to 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
amounts):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------------
<S> <C> <C> <C>
Net loss as reported......................... $(3,149) $(10,330) $(16,135)
Net loss pro forma........................... $(3,163) $(10,457) $(17,499)
Net loss per share as reported............... $ (2.90) $ (7.19) $ (2.90)
Net loss per share pro forma................. $ (2.91) $ (7.28) $ (3.15)
</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
stock option plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 SEPTEMBER 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 3,228 $6.60
Exercised....................... (8) $0.12 (1,540) $0.31 (1,497) $1.89
Canceled........................ -- $0.00 (569) $0.25 (297) $2.85
------ ------- -------
Outstanding at end of period.... 1,210 $0.12 1,661 $0.57 3,095 $6.10
====== ======= =======
Vested and exercisable at end of
period........................ 60 $0.15 156 $0.13 193 $4.01
====== ======= =======
Weighted average fair value per
share......................... $ 0.08 $ 0.28 $ 6.10
====== ======= =======
</TABLE>
F-17
<PAGE> 102
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
OPTIONS VESTED
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SEPTEMBER 30, 1999 REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS PRICE NUMBER PRICE
------------------------ ------ --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.12 - $0.30............................ 182 8.24 $ 0.20 26 $ 0.23
$0.40 - $0.60............................ 281 8.76 $ 0.51 25 $ 0.54
$1.00 - $1.00............................ 230 9.07 $ 1.00 20 $ 1.00
$2.00 - $2.70............................ 416 9.44 $ 2.61 0 $ 0.00
$4.00 - $6.00............................ 663 9.65 $ 5.47 117 $ 5.79
$6.40 - $6.40............................ 173 9.75 $ 6.40 0 $ 0.00
$11.00 - $11.00.......................... 1,150 9.72 $11.00 5 $11.00
----- ---- ------ ------- ------
$0.12 - $11.00........................... 3,095 9.45 $ 6.10 193 $ 4.01
===== ==== ====== ======= ======
</TABLE>
During the years ended December 31, 1997 and 1998, E.piphany issued 11,250
and 60,000 shares, respectively, under the 1997 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,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards................... $ 1,238 $ 4,889 $ 8,981
Accruals and reserves.............................. -- -- 1,090
Plant and equipment................................ -- -- 115
Organization costs................................. -- -- 178
Research and development credits................... 76 333 590
------- ------- --------
Total deferred tax assets.......................... 1,314 5,222 10,954
Valuation allowance................................ (1,314) (5,222) (10,954)
------- ------- --------
Net deferred tax assets............................ $ -- $ -- $ --
======= ======= ========
</TABLE>
As of September 30, 1999, E.piphany had net operating loss carryforwards of
approximately $23.0 million and $11.6 million for federal and state tax
purposes, respectively. The federal net operating loss and other credit
carryforwards expire on various dates beginning on 2011 through 2019. 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.
F-18
<PAGE> 103
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
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 NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1997 1998 1999
----- ----- -------------
<S> <C> <C> <C>
Federal statutory rate............................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit.................. (5.8) (5.8) (5.8)
Change in valuation allowance........................ 39.8 39.8 39.8
----- ----- -----
0% 0% 0%
===== ===== =====
</TABLE>
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 September 30,
1999, $330,000 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 $226,000 are
included in general and administrative expense in the accompanying statements of
operations for the year ended December 31, 1998 and for the nine months ended
September 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. ACQUISITION (UNAUDITED)
On November 15, 1999, E.piphany entered into a definitive agreement (the
"Merger Agreement") with RightPoint Software, Inc. ("RightPoint"). Under the
terms of the Merger Agreement, stockholders of RightPoint will exchange
approximately 0.1185 shares of E.piphany common stock for each share of
RightPoint common stock they own at the time the merger is consummated. In
addition, options and warrants to acquire RightPoint common stock will be
converted as a result of the merger into equivalent options and warrants for
E.piphany common stock, based upon the exchange ratio. The merger is expected to
be completed in January 2000, subject to the approval of the Merger Agreement
and the merger by the stockholders of RightPoint as well as the satisfation or
waiver of customary closing conditions. E.piphany expects to incur costs
directly related to completing the Merger of approximately $7.8 million.
E.piphany
F-19
<PAGE> 104
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 IS UNAUDITED)
anticipates that the total purchase price will be approximately $491.4 million,
of which approximately $23.7 million will be allocated to in-process research
and development and expensed upon closing of the acquisition as it has not
reached technological feasibility and, in management's opinion, has no
alternative future use. The remaining purchase price consists principally of
acquired intangibles and goodwill which will be amortized over a period of 3
years.
F-20
<PAGE> 105
RIGHTPOINT SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-22
Consolidated Balance Sheets................................. F-23
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-24
Consolidated Statements of Stockholders' Equity............. F-25
Consolidated Statements of Cash Flows....................... F-26
Notes to Consolidated Financial Statements.................. F-27
</TABLE>
F-21
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RightPoint Software, Inc.:
We have audited the accompanying consolidated balance sheets of RightPoint
Software, Inc. and subsidiary (the Company) as of June 30, 1998 and 1999, and
the related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RightPoint
Software, Inc. and subsidiary as of June 30, 1998 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP SIGNATURE
Mountain View, California
September 10, 1999
F-22
<PAGE> 107
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,002 $ 4,307 $ 4,229
Short-term investments.................................... -- 3,769 1,454
Accounts receivable, net of allowance of $0, $15 and $15
at June 30, 1998, 1999 and September 30, 1999,
respectively........................................... 145 728 1,119
Prepaid expenses and other current assets................. 163 153 236
-------- -------- --------
Total current assets.............................. 1,310 8,957 7,038
Property and equipment, net................................. 395 265 643
Other assets................................................ 39 1 1
-------- -------- --------
$ 1,744 $ 9,223 $ 7,682
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 140 $ -- $ --
Accounts payable.......................................... 395 464 830
Accrued liabilities....................................... 201 406 372
Deferred revenue.......................................... 66 249 364
Repayable grant........................................... 330 236 130
Current portion of capital lease obligation............... 229 244 243
-------- -------- --------
Total current liabilities......................... 1,361 1,599 1,939
Capital lease obligation, less current portion.............. 318 94 38
Commitments
Stockholders' equity:
Convertible preferred stock, $0.01 par value; shares
authorized, issued, and outstanding:
Series A, 2,047 shares with liquidation preference of
$1,822 as of June 30, 1998 and 1999 and September
30, 1999,........................................... 20 20 20
Series B, 1,482 shares with liquidation preference of
$3,365 as of June 30, 1998 and 1999 and September
30, 1999............................................ 15 15 15
Series C, 1,673 shares with liquidation preference of
$7,412 as of June 30, 1998 and 1999 and September
30, 1999............................................ 17 17 17
Series D, 2,174 shares with liquidation preference of
$5,000 as of June 30, 1998 and 1999 and September
30, 1999............................................ 22 22 22
Series E, 8,100 shares with liquidation preference of
$-0- as of June 30, 1998 and $11,178 as of June 30
and September 30, 1999, respectively................ -- 81 81
Common stock, $0.01 par value; 25,000, 25,000 and 30,000
shares authorized; 957, 1,108 and 1,157 shares issued
and outstanding at June 30, 1998 and 1999 and September
30, 1999, respectively................................. 10 11 12
Additional paid-in capital................................ 17,537 28,708 32,408
Notes receivable from stockholders........................ (36) -- --
Deferred compensation..................................... -- -- (3,153)
Accumulated other comprehensive income.................... 103 89 81
Accumulated deficit....................................... (17,623) (21,433) (23,798)
-------- -------- --------
Total stockholders' equity........................ 65 7,530 5,705
-------- -------- --------
$ 1,744 $ 9,223 $ 7,682
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 108
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT IN PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License............................................. $ 428 $ 2,819 $ 456 $ 933
Service........................................... 378 728 60 356
------- ------- ------- -------
Total revenues................................. 806 3,547 516 1,289
Cost of revenues:
License........................................... 46 10 -- 3
Service........................................... 90 208 9 456
------- ------- ------- -------
Total cost of revenues......................... 136 218 9 459
------- ------- ------- -------
Gross margin................................... 670 3,329 507 830
Operating expenses:
Research and development.......................... 2,474 2,616 592 808
Selling and marketing............................. 3,007 3,301 547 1,489
General and administrative........................ 1,221 1,323 272 432
Stock-based compensation.......................... -- -- -- 500
------- ------- ------- -------
Total operating expenses....................... 6,702 7,240 1,411 3,229
------- ------- ------- -------
Loss from operations........................... (6,032) (3,911) (904) (2,399)
Interest income..................................... 187 188 22 22
Interest expense.................................... (123) (197) (52) (52)
Other income and expenses, net...................... (60) 110 -- 64
------- ------- ------- -------
Net loss....................................... (6,028) (3,810) (934) (2,365)
Other comprehensive income (loss):
Currency translation adjustment................... 49 (14) (79) (8)
------- ------- ------- -------
Net comprehensive loss......................... $(5,979) $(3,823) $(1,013) $(2,373)
======= ======= ======= =======
Basic and diluted net loss per share................ $(10.48) $ (3.83) $ (1.79) $ (2.12)
======= ======= ======= =======
Weighted average shares used in computing basic and
diluted net loss per share........................ 575 995 522 1,118
======= ======= ======= =======
Pro forma basic and diluted net loss per share...... $ (0.24) $ (0.08) $ (0.12)
======= ======= =======
Weighted average shares used in computing pro forma
basic and diluted net loss per share.............. 15,788 11,853 20,549
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 109
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1999, AND THE THREE MONTHS ENDED SEPTEMBER 30,
1999
(IN THOUSANDS)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER
--------------- --------------- PAID-IN FROM DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION INCOME
------ ------ ------ ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1997....... 5,202 $ 52 1,102 $11 $12,601 $(131) -- $55
Issuance of Series D preferred
stock, net of issuance costs of
$43................................ 2,174 22 -- -- 4,935 -- -- --
Issuance of common stock on
exercise of options.............. -- -- 85 1 19 -- -- --
Repurchase of common stock......... -- -- (441) (4) (65) 95 -- --
Issuance of common stock........... -- -- 211 2 47 -- -- --
Currency translation adjustment.... -- -- -- -- -- -- -- 48
Net loss........................... -- -- -- -- -- -- -- --
------ ---- ----- --- ------- ----- ------ ---
Balances as of June 30, 1998....... 7,376 74 957 10 17,537 (36) -- 103
Issuance of Series E preferred
stock for cash and on conversion
of debt, net of issuance costs of
$31.............................. 8,100 81 -- -- 11,119 -- -- --
Issuance of common stock on
exercise of options.............. -- -- 166 1 40 -- -- --
Repurchase of common stock......... -- -- (21) -- (3) -- -- --
Issuance of common stock and
warrants in exchange for
services......................... -- -- 6 -- 15 -- -- --
Repayment of notes receivable from
stockholders..................... -- -- -- -- -- 36 -- --
Currency translation adjustment.... -- -- -- -- -- -- -- (14)
Net loss........................... -- -- -- -- -- -- -- --
------ ---- ----- --- ------- ----- ------ ---
Balances as of June 30, 1999....... 15,476 155 1,108 11 28,708 -- -- 89
Issuance of common stock on
exercise of options
(unaudited)...................... -- -- 34 1 7 -- -- --
Issuance of common stock and
warrants in exchange for services
(unaudited)...................... -- -- 15 -- 40 -- -- --
Deferred stock compensation
(unaudited)...................... -- -- -- -- 3,653 -- (3,653) --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- -- 500 --
Currency translation adjustment
(unaudited)...................... -- -- -- -- -- -- -- (8)
Net loss (unaudited)............... -- -- -- -- -- -- -- --
------ ---- ----- --- ------- ----- ------ ---
Balances as of September 30, 1999
(unaudited)...................... 15,476 $155 1,157 $12 $32,408 $ -- (3,153) $81
====== ==== ===== === ======= ===== ====== ===
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balances as of June 30, 1997....... $(11,595) $ 993
Issuance of Series D preferred
stock, net of issuance costs of
$43................................ -- 4,957
Issuance of common stock on
exercise of options.............. -- 20
Repurchase of common stock......... -- 26
Issuance of common stock........... -- 49
Currency translation adjustment.... -- 48
Net loss........................... (6,028) (6,028)
-------- -------
Balances as of June 30, 1998....... (17,623) 65
Issuance of Series E preferred
stock for cash and on conversion
of debt, net of issuance costs of
$31.............................. -- 11,200
Issuance of common stock on
exercise of options.............. -- 41
Repurchase of common stock......... -- (3)
Issuance of common stock and
warrants in exchange for
services......................... -- 15
Repayment of notes receivable from
stockholders..................... -- 36
Currency translation adjustment.... -- (14)
Net loss........................... (3,810) (3,810)
-------- -------
Balances as of June 30, 1999....... (21,433) 7,530
Issuance of common stock on
exercise of options
(unaudited)...................... -- 8
Issuance of common stock and
warrants in exchange for services
(unaudited)...................... -- 40
Deferred stock compensation
(unaudited)...................... -- --
Amortization of deferred stock
compensation (unaudited)......... -- 500
Currency translation adjustment
(unaudited)...................... -- (8)
Net loss (unaudited)............... (2,365) (2,365)
-------- -------
Balances as of September 30, 1999
(unaudited)...................... $(23,798) $ 5,705
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 110
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
----------------- -----------------
1998 1999 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(6,028) $(3,810) $ (934) $(2,365)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 257 232 62 5
Issuance of common stock and warrants for services...... 41 15 -- 40
Stock-based compensation................................ -- -- -- 500
Provision for returns and doubtful accounts............. -- 15 -- --
Loss on disposal of property and equipment.............. 43 6 -- 18
Proceeds from sale of short-term investments............ 1,021 -- -- 2,315
Purchases of short-term investments..................... -- (3,769) -- --
Changes in operating assets and liabilities:
Accounts receivable................................... 141 (599) (369) (391)
Prepaid expenses and other assets..................... 31 48 44 (83)
Accounts payable...................................... 205 69 (154) 366
Accrued liabilities................................... (573) 205 3 (34)
Deferred revenue...................................... (15) 183 6 114
------- ------- ------- -------
Net cash provided by (used in) operating
activities....................................... (4,877) (7,405) (1,342) 485
------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... -- (109) (16) (417)
Proceeds from sale of property and equipment.............. -- 1 -- 17
Other long-term assets.................................... 31 -- -- --
------- ------- ------- -------
Net cash provided by (used in) investing
activities....................................... 31 (108) (16) (400)
------- ------- ------- -------
Cash flows from financing activities:
Repayment of capital lease obligation..................... (203) (209) (55) (57)
Repayment of repayable grant.............................. (260) (94) 26 (106)
Proceeds from bridge loan................................. 138 1,890 1,890 --
Repayment of bridge loan.................................. (17) (2) -- --
Repayment of notes receivable from stockholders........... 29 36 -- --
Net proceeds from issuance of common stock................ 24 42 1 8
Repurchases of common stock............................... -- (3) (3) --
Net proceeds from issuance of preferred stock............. 4,956 9,172 -- --
------- ------- ------- -------
Net cash provided (used in) by financing
activities....................................... 4,667 10,832 1,859 (155)
------- ------- ------- -------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... 31 (14) (79) (8)
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (148) 3,305 422 (78)
Cash and cash equivalents at beginning of period............ 1,150 1,002 1,002 4,307
------- ------- ------- -------
Cash and cash equivalents at end of period.................. $ 1,002 $ 4,307 $ 1,424 $ 4,229
======= ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period:
Income taxes............................................ $ 3 $ 2 $ -- $ --
======= ======= ======= =======
Interest................................................ $ 102 $ 66 $ 12 $ 12
======= ======= ======= =======
Noncash financing and investing activities:
Issuance of preferred stock on conversion of debt....... $ -- $ 138 $ -- $ --
======= ======= ======= =======
Property and equipment recorded under capital lease..... $ 76 $ -- $ -- $ --
======= ======= ======= =======
Repurchase of common stock for promissory notes......... $ 66 $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 111
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
RightPoint Software, Inc. was originally incorporated under the laws of
France in 1991. The Company was reincorporated under the laws of California in
October 1995 and reincorporated under the laws of Delaware in July 1997. The
Company designs, develops, markets, and supports real-time marketing software
for business environments. The Company operates as one business segment.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiary, RightPoint Software
France SARL (formerly neurOagent, S.A.). All significant intercompany accounts
and transactions have been eliminated.
(c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents as of September 30, 1999, June 30, 1999 and 1998 consisted primarily
of money market funds, recorded at cost, which approximates fair value.
The Company classifies its investments as trading and records them at fair
market value.
(d) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standard ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed",
requires the capitalization of software development costs once technological
feasibility has been established. Software development costs are included in
research and development and expensed as incurred. To date, no software
development costs have been capitalized after technological feasibility was
reached, as such costs have not been significant.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, ranging
from three to five years. Equipment recorded under capital lease and leasehold
improvements are amortized using the straight-line method over the shorter of
the lease-term or estimated useful life of the asset.
(f) REVENUE RECOGNITION
Revenues consist of fees for licenses of the Company's software products,
maintenance, support, consulting, and training.
License revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and determinable and
collectibility is probable.
Maintenance and support revenues are recognized ratably over the term of
the contract, which is generally 12 months. Revenues from consulting and
training are recognized when the services are performed.
F-27
<PAGE> 112
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(g) FOREIGN CURRENCY
The functional currency of the Company's French subsidiary is the local
currency. All foreign assets and liabilities are translated into U.S. dollars at
the current exchange rates as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the subsidiary's
financial statements are reported as cumulative translation adjustment as a
component of accumulated other comprehensive income in stockholders' equity. Net
gains and losses resulting from foreign exchange transactions are included in
the consolidated statements of operations and were not significant during any of
the periods presented.
(h) USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(i) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company maintains its cash
and cash equivalents in commercial checking and money market accounts with
high-quality financial institutions.
As of and for the year ended June 30, 1998, two customers comprised 21% and
20%, respectively, of revenue and 0% and 16%, respectively, of accounts
receivable. As of and for the year ended June 30, 1999, three customers
comprised approximately 41%, 13% and 12%, respectively of revenue and 5%, 52%
and 0%, respectively, of accounts receivable. As of and for the three months
ended September 30, 1999, four customers comprised 42%, 20%, 14%, and 10%,
respectively, of revenue and 58%, 0%, 18%, and 12%, respectively of accounts
receivable.
(j) INCOME TAXES
Income taxes are computed using the asset and liability method. Under this
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the current enacted tax rates and laws.
(k) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using the
intrinsic-value method prescribed in the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations.
The Company provides additional pro forma disclosures as required under
SFAS No. 123, Accounting for Stock-Based Compensation.
F-28
<PAGE> 113
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(l) COMPREHENSIVE INCOME AND LOSS
Comprehensive loss consists of net loss and foreign currency translation
adjustments, and is presented in the accompanying consolidated statements of
operations and comprehensive loss. Accumulated other comprehensive loss consists
entirely of cumulative foreign currency translation adjustments. No tax effects
have been recorded.
(m) COMPUTATION OF NET LOSS PER SHARE
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 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.
Calculations of historical and pro forma net loss per share are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
HISTORICAL
Net loss............................................ $(6,028) $(3,810) $ (934) $(2,365)
Basic and diluted:
Weighted average shares of common stock
outstanding.................................... 1,047 1,023 947 1,142
Less: Weighted average shares subject to
repurchase..................................... 472 47 425 24
------- ------- ------- -------
Weighted average shares used in computing basic and
diluted net loss per common share................. 575 976 522 1,118
======= ======= ======= =======
Basic and diluted net loss per common share....... $(10.48) $ (3.90) $ (1.79) $ (2.12)
======= ======= ======= =======
PRO FORMA
Net loss.......................................... $(6,028) $(3,810) $ (934) $(2,365)
======= ======= ======= =======
Shares used above................................. 575 976 522 1,118
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred
stock.......................................... 14,793 11,331 19,431
------- ------- -------
Shares used in computing pro forma basic and
diluted net loss per common share.............. 15,769 11,853 20,549
======= ======= =======
Pro forma basic and diluted net loss per common
share.......................................... $ (0.24) $ (0.08) $ (0.12)
======= ======= =======
</TABLE>
The Company 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 15,098,000, 25,671,000, 26,878,000, and 14,857,000 for the years
ended June 30, 1998 and 1999 and the three months ended September 30, 1998 and
1999, respectively.
F-29
<PAGE> 114
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
Pro forma diluted net loss per share gives effect to the conversion of
convertible preferred stock. However, outstanding warrants, stock option, and
shares subject to repurchase have been excluded from the calculations of pro
forma diluted net loss per share because all such securities are antidilutive
for all periods presented. The total number of shares excluded from the
calculations of pro forma diluted net loss per share were approximately
6,239,000, 3,526,000 and 7,447,000 for the year ended June 30, 1999 and the
three months ended September 30, 1998 and 1999, respectively.
(n) NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. SFAS No. 133, as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management does
not believe the adoption of SFAS No. 133 will have a material effect on the
Company's consolidated financial position.
(2) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1998 and 1999 and September 30, 1999,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30,
1998 1999 1999
-------- -------- -------------
<S> <C> <C> <C>
Computer equipment and software............................. $478 $507 $ 604
Furniture, fixtures, and office equipment................... 289 312 528
Leasehold improvements...................................... 32 32 92
---- ---- ------
799 851 1,224
Less accumulated depreciation and amortization.............. 404 586 581
---- ---- ------
$395 $265 $ 643
==== ==== ======
</TABLE>
The cost of assets recorded under capital leases included in property and
equipment is approximately $723,000 as of June 30, 1998 and 1999 and September
30, 1999. The accumulated amortization associated with these assets was
$363,000, $547,000, and $618,000 for the years ended June 30, 1998 and 1999 and
the quarter ended September 30, 1999, respectively. Amortization of assets
recorded under capital leases is included in depreciation and amortization
expense.
(3) LEASE COMMITMENTS
The Company leases its main U.S. facilities under an operating lease
agreement expiring in August 2004 and leases its facilities in France under an
operating lease expiring in December 2004. In addition, the Company leases
certain equipment under operating and capital lease agreements.
F-30
<PAGE> 115
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
Future minimum lease payments under capital and noncancelable operating
leases as of June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
2000........................................................ $ 289 $106
2001........................................................ 82 7
2002........................................................ 20 1
Thereafter.................................................. -- --
----- ----
Total minimum lease payments................................ 391 $114
====
Less amount representing imputed interest................... (53)
-----
Present value of minimum lease payment...................... 338
Less current portion........................................ (244)
-----
Long-term portion of capital lease obligation............... $ 94
=====
</TABLE>
Rent expense from operating leases was approximately $417,000, $540,000 and
$180,000 for the years ended June 30, 1998 and 1999 and the quarter ended
September 30, 1999, respectively.
In July, 1999 the Company signed a five year lease agreement for its main
U.S. facilities. Annual rent is approximately $891,000 in the first year with
annual incremental increases to $1,042,000 in the fifth year. The lease expires
in August 2004.
(4) FINANCING ARRANGEMENTS
REPAYABLE GRANT AGREEMENTS
As of June 30, 1998 and 1999 and September 30, 1999, the Company had
$330,000, $236,000 and $130,000 respectively, outstanding in the form of an
interest-free repayable grant from a French organization. Under the grant
agreement, payment is due in fiscal 2000.
NOTE PAYABLE
As of June 30, 1998, the Company had a balance outstanding of approximately
$140,000 under a bridge loan agreement that was signed in conjunction with a
convertible debt offering. All outstanding debt was subsequently converted into
Series E Preferred Stock in January 1999.
LEASE AGREEMENT
As of September 30, 1999, the Company had a lease line of credit available
up to a minimum commitment amount of $400,000 and $100,000 for the financing of
equipment and leasehold improvements, respectively. Upon request and formal
approval by the Lessor, these lines would be extended for an additional $400,000
and $100,000, respectively. As of September 30, 1999 there was no outstanding
balance under this line of credit.
F-31
<PAGE> 116
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(5) STOCKHOLDERS' EQUITY
(A) CONVERTIBLE PREFERRED STOCK
The rights, preferences, and privileges of the preferred stock are as
follows:
- The holders of Series A, B, C, D, and E preferred stock are entitled to
receive noncumulative annual dividends at the rate of $0.07, $0.18,
$0.35, $0.18, and $0.11 per share, respectively, with certain adjustments
for stock splits, stock dividends, recapitalization, and similar events,
when and if declared by the Board of Directors, in preference and
priority to any payment of dividends to holders of common stock.
The liquidation preference for the Series A, B, C, D, and E preferred
stock is $0.89, $2.27, $4.43, $2.30, and $1.38 per share, respectively,
plus all declared but unpaid dividends. If the assets are insufficient to
make payments in full to all holders of preferred stock, assets will be
distributed ratably among the holders of preferred stock in proportion to
the full amounts to which they would have otherwise been entitled. Any
remaining assets shall be distributed ratably among the holders of common
and preferred stock on an "as if converted" basis until such time that
aggregate distributions to holders of Series A, B, C, D, and E preferred
stock equals $1.78, $4.54, $8.86, $6.90, and $4.14 per share,
respectively. After that time, any remaining assets will be distributed
on a pro rata basis to the holders of common stock and preferred stock,
based on the number of shares of common stock held by each, assuming
conversion of all preferred stock.
- At June 30, 1999, each share of Series A, B, C, D and E preferred stock
is convertible into 1.51, 1.55, 2.00, 1.20, and 1.00 shares of common
stock subject to future adjustments for antidilution. Each share of
preferred stock will automatically convert into one share of common
stock, subject to certain adjustments for antidilution, upon the closing
of an underwritten public offering with a per share price reflecting a
valuation of the Company of at least $50,000,000, and with gross proceeds
of at least $20,000,000 or the role of two-thirds of the holders of the
preferred stocks, voting together.
- The holders of preferred stock have voting rights on an "as if converted"
basis.
- The holders of preferred stock have certain registration rights and a
right of first offer in future rounds of financing under certain
conditions.
The Company has reserved 19,431,358 shares of common stock for the
conversion of the preferred stock.
(B) STOCK-BASED COMPENSATION
In connection with the grant of stock options and the sale of common stock
to certain employees during the three months ended September 30, 1999, the
Company recorded deferred compensation of approximately $3,700,000, representing
the difference between the fair value of the common stock 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 $500,000 was expensed during the three months ended September 30,
1999.
F-32
<PAGE> 117
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(C) STOCK OPTION PLANS
The Company adopted stock option plans in October 1995 and July 1996 that
provide for the issuance of incentive and nonstatutory options to purchase
shares of common stock. As of June 30, 1999, the Company has reserved 1,978,176
and 5,458,612 shares of common stock for issuance under the 1995 and 1996 plans,
respectively. Nonstatutory options may be granted to employees and consultants
and incentive options to employees. Options have a term no greater than 10 years
and generally vest 25% at the end of the first year and at a rate of 1/48 per
month thereafter. Options granted under the 1995 and 1996 plans may be exercised
prior to being fully vested. However exercised and unvested shares are subject
to repurchase by the Company at the exercise price. The Company's repurchase
right decreases as shares vest under the original option terms. As of June 30,
1998, 1999, and September 30, 1999 the number of shares outstanding and subject
to repurchase were 466,650, 31,169 and 27,487, respectively.
Vesting of certain options accelerates in full upon a change in control of
the Company.
Nonstatutory options are exercisable at a price not less than 85% of fair
market value of the stock at the date of grant, as determined by the Company's
Board of Directors, unless they are granted to an individual who owns more than
10% of the voting rights of all classes of stock, in which case the exercise
price shall be no less than 110% of the fair market value. Incentive stock
options are exercisable at a price not less than 100% of fair market value of
the stock at the date of grant, as determined by the Company's Board of
Directors, except when they are granted to an employee who owns greater than 10%
of the voting power of all classes of stock, in which case they are exercisable
at a price not less than 110% of fair market value.
The Company has elected to continue using the intrinsic-value-based method
to account for all of its stock-based employee compensation plans. Pursuant to
SFAS No. 123, the Company is required to disclose the pro forma effects on the
net losses of the Company as if the Company had elected to use the fair value
approach to account for all of its stock-based employee compensation plans. Had
compensation cost for the Company's plans been determined consistent with the
fair value approach enumerated in SFAS No. 123, the Company's 1998 and 1999 net
losses would have increased to the following pro forma amounts (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Net loss as reported........................................ $(6,028) $(3,810)
Net loss pro forma.......................................... (6,043) (3,871)
Net loss per share as reported.............................. $(10.48) $ (3.83)
Net loss per share pro forma................................ (10.51) (3.89)
</TABLE>
For the years ended June 30, 1998 and 1999 and the quarter ended September
30, 1999, the fair value of each option was estimated using the minimum
value-based method on the date of grant with the following weighted-average
assumptions: no dividend yield; a risk-free interest rate of 7%; and an expected
life of five years.
F-33
<PAGE> 118
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
The following summarizes activity under the plans as of June 30, 1998 and
1999 and September 30, 1999, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999 SEPTEMBER 30, 1999
------------------- ------------------- ----------------------
(UNAUDITED)
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE AVERAGE
OF EXERCISE OF EXERCISE NUMBER EXERCISE
OPTIONS PRICE OPTIONS PRICE OF OPTIONS PRICE
------- --------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period....... 750 $0.27 2,779 $0.23 5,775 $0.23
Granted.................................. 2,513 0.23 3,456 0.23 1,275 0.46
Exercised................................ (85) 0.23 (166) 0.25 (34) 0.32
Canceled................................. (399) 0.26 (294) 0.24 (36) 0.23
----- ----- -----
Outstanding at end of period............. 2,779 0.23 5,775 0.23 6,980 0.27
===== ===== =====
Vested at period end..................... 287 1,497 1,647
===== ===== =====
Weighted-average fair value of options
granted during the period.............. 0.16 0.16 0.28
</TABLE>
The following table summarizes information about stock options outstanding
as of June 30, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ --------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- ------------ ------- ------------ --------- ------- ----------
<S> <C> <C> <C> <C> <C>
0.15 - 0.29 5,775 9.07 0.23 5,775 0.23
====== =====
</TABLE>
(C) WARRANTS
The Company values all warrants issued using an option pricing model with
the following assumptions: no dividend yield; risk-free interest rates ranging
between 5.5% and 7.0%; contractual lives ranging from five to ten years, and 65%
expected volatility. The fair value assigned to warrants is recorded as
compensation expense by the Company. The Company has reserved the corresponding
number of shares for the exercise of these warrants. The following warrants were
issued and outstanding during the periods presented and as of September 30,
1999:
In July, 1999, the Company issued warrants to purchase 25,000 shares of
common stock at a price of $2.80 per share. These warrants are exercisable
at any time prior to the expiration date of September 2004. In addition, in
conjunction with the signing of the lease agreement for a lease line of
credit, the Company issued warrants to the Lessor for the purchase of
16,304 shares of Series E Preferred Stock at a price of $1.38 per share.
These warrants are exercisable at any time prior to the expiration date of
September 2009, or 5 years from the effective date of the Company's initial
public offering, whichever is earlier. An additional 16,304 shares are
issuable to the Lessor at a price of $1.38 per share if the Company
requests an increase to the line above the initial commitment amount
discussed above under Financing Arrangements.
F-34
<PAGE> 119
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
As of June 30, 1999 and 1998, the Company has three transferable warrants
to purchase 16,439, 16,948, and 18,324 shares of common stock at a price of
$1.46, $2.22, and $1.91 per share, respectively, outstanding. These
warrants are exercisable at any time prior to the expiration dates of
February 2003, October 2003, and December 2005, respectively. As of June
30, 1999, the Company has a warrant outstanding to purchase 48,268 shares
of common stock at a price of $1.91 per share. This warrant is exercisable
at any time prior to the expiration date of August 2008.
As of June 30, 1999, the Company has warrants outstanding to purchase a
total of 294,296 shares of common stock at a price of $0.23 per share.
These warrants are exercisable at any time prior to their expiration date
of January 2009.
(6) INCOME TAXES
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands).
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves....................................... $ 76 $ 168
Plant and equipment....................................... 24 13
State income taxes........................................ 1 1
Research credit carryforward.............................. 306 480
Net operating loss carryforwards.......................... 5,910 6,935
------- -------
Gross deferred tax assets................................... 6,317 7,597
Valuation allowance......................................... (6,317) (7,597)
------- -------
Total deferred tax assets................................... -- --
Deferred tax liabilities.................................... $ -- $ --
======= =======
</TABLE>
The Company has provided a valuation allowance due to the uncertainty of
generating future profits that would allow for the realization of such deferred
tax assets.
As of June 30, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $17,500,000 and
$11,100,000, respectively, available to reduce future income subject to income
taxes. The federal carryforward will expire from 2010 to 2019. The California
net operating loss carryforwards expire in 2003.
The Company also has credit carryforwards for federal and California income
tax return purposes of approximately $269,000 and $211,000, respectively,
available to reduce future income subject to income taxes. The federal credit
carryforward will expire from 2010 to 2019, while the California credit may be
carried forward indefinitely.
As of the year ended June 30, 1998 and 1999, the Company had net deferred
tax assets of approximately $6,317,000 and $7,597,000 respectively. The net
deferred tax assets have been fully offset by valuation allowances. The net
valuation allowance increased by $2,614,000 and $1,281,000 during the years
ended June 30, 1998 and 1999, respectively.
F-35
<PAGE> 120
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE THREE MONTHS THEN ENDED IS
UNAUDITED)
(7) RELATED PARTY TRANSACTIONS
In June 1994, the Company's French subsidiary entered into an exclusive
license agreement with its founder, who is also a director, to use and market
certain technology in certain territories in exchange for an annual royalty fee
payable in quarterly installments. The Company also has an option to purchase
the technology for $700,000 in the event that the licensor fails to perform any
significant obligations or during the six months prior to the contract
expiration in 2004. This agreement was amended and restated in October 1995
under substantially the same terms and conditions. The amounts paid under this
license arrangement for the years ended June 30, 1999 and 1998, was $51,000 per
year.
A second license for the technology was entered into on October 23, 1995,
between the Company and the same individual owner of this technology. Annual
royalties of $800 are payable under the agreement. The agreement licensed the
Company to distribute the technology in certain territories. The license expires
on July 18, 2004, with the licensee having the option to purchase all interests
in the technology for $10,000 provided that the Company's option to purchase the
first technology license is exercised.
In January 1999, the Company entered into an agreement with Edify
Corporation, who is also a Series E preferred shareholder, to distribute certain
RightPoint software products at a discounted price to Edify for a minimum
nonrefundable distribution fee payable to the Company in quarterly installments
over 12 months. As of June 30, 1999 and September 30, 1999, the Company has
recognized $417,000 and $667,000, respectively, of this minimum nonrefundable
distribution fee as revenue.
F-36
<PAGE> 121
EPIPHANY LOGO
<PAGE> 122
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, the NASD filing fee and the Nasdaq Stock Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $193,545
NASD filing fee............................................. 30,500
Nasdaq Stock Market listing fee............................. 17,500
Printing and engraving costs................................ 214,000
Legal fees and expenses..................................... 214,000
Accounting fees and expenses................................ 214,000
Blue Sky fees and expenses.................................. 5,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 1,455
--------
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 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, and several
indemnification by the Registrant and the selling stockholders of the
Underwriters for some liabilities relating to the respective information
provided by each, including liabilities arising under the Securities Act.
II-1
<PAGE> 123
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following share numbers have been adjusted to reflect the one for two
reverse stock split that occurred immediately prior to the effectiveness of our
initial public 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 $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 issued and 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
II-2
<PAGE> 124
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 September 21, 1999, an aggregate of 3,139,755 shares of
common stock had been issued upon exercise of options under the
Registrant's 1997 stock plan, of which 177,527 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 of securities in such transactions represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate 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>
NUMBER EXHIBIT TITLE
------- ------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger dated as of November 15, 1999,
among the Registrant, Yosemite Acquisition Corporation and
RightPoint Software, Inc.
2.2* Form of Voting Agreement dated as of November 15, 1999,
among the Registrant and certain affiliated stockholders of
RightPoint.
3.1** Restated Certificate of Incorporation of the Registrant to
be in effect after the closing of the offering made under
this Registration Statement.
3.2** 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.
</TABLE>
II-3
<PAGE> 125
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------- ------------------------------------------------------------
<C> <S>
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 KPMG LLP.
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (see Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
</TABLE>
- -------------------------
+ To be filed by amendment.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-92103) declared effective by the Securities
Exchange Commission on December 10, 1999.
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-82799) declared effective by the Securities and
Exchange Commission on September 21, 1999.
(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
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> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, on the 3rd day of January, 2000.
E.PIPHANY, INC.
By: /s/ ROGER S. SIBONI
------------------------------------
Roger S. Siboni
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Roger S. Siboni and Kevin J. Yeaman and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement filed
herewith and any or all amendments to said Registration Statement (including
post-effective amendments and registration statements filed pursuant to Rule 462
and otherwise), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents the full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROGER S. SIBONI President, Chief Executive January 3, 2000
- ----------------------------------------------------- Officer and Director
Roger S. Siboni (Principal Executive
Officer)
/s/ KEVIN J. YEAMAN Chief Financial Officer January 3, 2000
- ----------------------------------------------------- (Principal Financial and
Kevin J. Yeaman Accounting Officer)
/s/ PAUL M. HAZEN Director January 3, 2000
- -----------------------------------------------------
Paul M. Hazen
/s/ ROBERT L. JOSS Director January 3, 2000
- -----------------------------------------------------
Robert L. Joss
/s/ SAM H. LEE Director January 3, 2000
- -----------------------------------------------------
Sam H. Lee
Director January 3, 2000
- -----------------------------------------------------
Douglas J. Mackenzie
</TABLE>
II-5
<PAGE> 127
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
- ------ ------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger dated as of November 15, 1999,
among the Registrant, Yosemite Acquisition Corporation and
RightPoint Software, Inc.
2.2* Form of Voting Agreement dated as of November 15, 1999,
among the Registrant and certain affiliated stockholders of
RightPoint.
3.1** Restated Certificate of Incorporation of the Registrant to
be in effect after the closing of the offering made under
this Registration Statement.
3.2** 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 KPMG LLP.
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (see Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
</TABLE>
- -------------------------
+ To be filed by amendment.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-92103) declared effective by the Securities and
Exchange Commission on December 10, 1999.
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-82799) declared effective by the Securities and
Exchange Commission on September 21, 1999.
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
January 3, 2000
E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, CA 94403
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 (the "Commission") on January 3, 2000
(the "Registration Statement") in connection, with the registration under the
Securities Act of 1933, as amended of up to 3,450,000 shares of your Common
Stock (the "Shares"). The Shares consist of 1,500,000 newly issued shares to be
sold by you (the "Primary Shares"), 1,500,000 outstanding shares to be sold
by the selling stockholders indicated in the Registration Statement, and an
over-allotment option granted to the underwriters and the offering to purchase
450,000 newly issued shares to be sold by you (the "Overallotment Shares") (the
Primary Shares and the Overallotment Shares shall collectively be referred to
herein as the "Company 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 sales and issuance of the Company Shares.
It is our opinion that upon completion of the proceedings being taken or
contemplated to be taken by you, and by us, as your counsel, prior to the
issuance of the Company Shares, including the proceedings being taken in order
to permit such transactions to be carried out in accordance with the applicable
securities laws of the various states where required, the Company 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
non-assessable.
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 amendment thereto.
Sincerely,
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
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
San Jose, California
January 3, 2000
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
E.piphany, Inc.
We consent to the use of our report dated September 10, 1999 on the
consolidated financial statements of RightPoint Software, Inc. and subsidiary
as of June 30, 1998 and 1999, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity, and cash flows for the
years then ended included herein and to the reference herein to our firm under
the headings "Experts" and "Change in Independent Public Accountants" in the
prospectus.
/s/ KMPG LLP
Mountain View, California
December 30, 1999
