<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
BLAZE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0081248
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
</TABLE>
150 Almaden Boulevard
San Jose, CA 95113
(Address of principal executive office and zip code)
(408) 275-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [_]
As of July 31, 2000, 22,703,196 shares of the Registrant's common stock
were outstanding.
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<PAGE>
BLAZE SOFTWARE, INC.
FORM 10-Q
Quarter ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and March
31, 2000............................................................ 1
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2000 and 1999........................................ 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2000 and 1999........................................ 3
Notes to Condensed Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 8
Item 3. Qualitative and Quantitative Disclosure About Market Risk........ 24
Part II Other Information
Item 1. Legal Proceedings................................................ 25
Item 2. Changes in Securities and Use of Proceeds........................ 25
Item 3. Defaults Upon Senior Securities.................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................. 26
Signatures................................................................. 27
</TABLE>
i
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, March
2000 31, 2000
----------- --------
(unaudited) (a)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 45,099 $ 57,295
Short-term investments.................................. 22,821 11,998
Accounts receivable, net................................ 5,444 4,939
Prepaid expenses and other current assets............... 1,973 1,108
-------- --------
Total current assets.................................. 75,337 75,340
Property and equipment, net............................... 3,223 1,933
Restricted cash........................................... 716 702
Deposits and other assets................................. 369 384
-------- --------
Total assets.......................................... $ 79,645 $ 78,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................ $ 914 $ 1,972
Current portion of capital lease obligations............ 173 176
Accrued expenses........................................ 6,261 7,446
Deferred revenue........................................ 2,485 2,728
-------- --------
Total current liabilities............................. 9,833 12,322
Long-term liabilities:
Capital lease obligations, net of current portion....... 211 256
Other long-term liabilities............................. 34 12
-------- --------
Total liabilities..................................... 10,078 12,590
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock......................................... -- --
Common stock............................................ 2 2
Additional paid-in capital.............................. 153,385 144,642
Accumulated other comprehensive income.................. 318 489
Unearned stock-based compensation....................... (16,876) (21,207)
Accumulated deficit..................................... (67,262) (58,157)
-------- --------
Total stockholders' equity............................ 69,567 65,769
-------- --------
Total liabilities and stockholders' equity................ $ 79,645 $ 78,359
======== ========
</TABLE>
--------
(a) The balance sheet at March 31, 2000 has been derived from the audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts--unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Net revenues:
Product licenses........................................... $ 3,320 $ 1,394
Services and maintenance................................... 3,914 1,926
------- -------
Total revenues........................................... 7,234 3,320
------- -------
Cost of revenues:
Product licenses........................................... 10 10
Services and maintenance................................... 3,194 1,187
------- -------
Total cost revenues...................................... 3,204 1,197
------- -------
Gross profit................................................. 4,030 2,123
------- -------
Operating expenses:
Research and development................................... 1,902 1,260
Sales and marketing........................................ 5,959 1,894
General and administrative................................. 1,838 638
Stock-based compensation................................... 4,330 --
------- -------
Total operating expenses................................. 14,029 3,792
------- -------
Operating loss............................................... (9,999) (1,669)
Interest expense............................................. (28) (112)
Other income and (expense), net.............................. 1,050 10
------- -------
Net loss from continuing operations before income taxes...... (8,977) (1,771)
Provision for income taxes................................... (6) (12)
------- -------
Net loss from continuing operations.......................... (8,983) (1,783)
Discontinued operations:
Income (loss) from operations of discontinued user
interface business (net of income taxes).................. (121) 652
------- -------
Net loss..................................................... (9,104) (1,131)
Accretion of mandatorily redeemable preferred stock to
redemption value............................................ -- (442)
------- -------
Net loss attributable to common stockholders................. (9,104) (1,573)
Other comprehensive income (loss), net of tax:
Unrealized loss on investments............................. (35) --
Translation adjustments.................................... (136) (111)
------- -------
Comprehensive loss........................................... $(9,275) $(1,684)
======= =======
Basic and diluted net loss per common share attributable to
common stockholders:
Loss from continuing operations............................ $ (0.41) $ (1.01)
Earnings/(loss) from discontinued operations............... (0.01) 0.30
------- -------
Basic and diluted net loss per common share attributable to
common stockholders......................................... $ (0.42) $ (0.71)
======= =======
Number of shares used in the calculation of basic and diluted
net loss per share.......................................... 21,864 2,211
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (9,104) $(1,131)
Add (deduct) loss (income) from discontinued operations..... 121 (652)
-------- -------
Loss from continuing operations............................. (8,983) (1,783)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 232 119
Amortization of stock-based compensation.................. 4,330 --
Changes in assets and liabilities:
Accounts receivable...................................... (1,062) 242
Prepaid expenses and other............................... (865) (54)
Accounts payable......................................... (1,034) (441)
Accrued expenses ........................................ (1,185) 452
Deferred revenue......................................... (243) (608)
Deposits and other assets................................ 15 213
Other long-term liabilities.............................. 22 --
-------- -------
Net cash used in continuing operations...................... (8,773) (1,860)
Net cash provided by discontinued operations................ 412 674
-------- -------
Net cash used in operating activities.................. (8,361) (1,186)
-------- -------
Cash flows from investing activities:
Capital expenditures........................................ (1,522) (20)
Purchases of short-term investments, net.................... (10,858) --
-------- -------
Net cash used in investing activities.................. (12,380) (20)
-------- -------
Cash flows from financing activities:
Repayment of note payable................................... -- (43)
Payments of principal under capital lease financing......... (48) (31)
Bank borrowings, net........................................ -- 102
Proceeds from issuance of Common Stock...................... 8,769 15
Repurchase of Common Stock.................................. (26) --
Proceeds from issuance of Preferred Stock warrants, Series D
and Series E (net of issuance costs)....................... -- 36
Proceeds from issuance of Preferred Stock, Series AA (net of
issuance costs)............................................ -- 2,860
Increase in restricted cash................................. (14) --
-------- -------
Net cash provided by financing activities.............. 8,681 2,939
-------- -------
Effect of exchange rate changes in cash..................... (136) (111)
-------- -------
Net increase (decrease) in cash and cash equivalents........ (12,196) 1,622
Cash and cash equivalents at beginning of period............ 57,295 2,129
-------- -------
Cash and cash equivalents at end of period.................. $ 45,099 $ 3,751
======== =======
Supplemental non-cash investing and financing activities:
Assets acquired under capital lease obligations............. $ -- $ 22
Accretion of cumulative dividends on Preferred Stock........ $ -- $ 442
Conversion of bridge loan to Preferred Stock................ $ -- $ 1,596
Conversion of Mandatorily Redeemable Preferred Stock to
Common Stock............................................... $ -- $20,882
Write-off of property and equipment......................... $ -- $ 3,761
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY
Blaze Software, Inc. ("Blaze Software" or the "Company") was incorporated
in California as Neuron Data, Inc. in 1985. The Company changed its name to
Blaze Software, Inc. in August 1999 and reincorporated in the State of
Delaware in March 2000. Blaze Software develops and licenses infrastructure
software that enables adaptable and personalized interactions that are
consistent across all company communication channels, or touch points. This
software enables companies to implement their policies, practices and
procedures, or business rules, in e-business applications across multiple
touch points. Blaze Software also provides related maintenance and consulting
services. Blaze Software markets its products to a wide range of customers
mainly in North America, Europe and the Pacific Rim primarily through a direct
sales force.
NOTE 2--BASIS OF PRESENTATION
Interim Financial Statements
The accompanying condensed consolidated financial statements include the
accounts of Blaze Software and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation. The financial
results and related information as of June 30, 2000 and for the three month
periods ended June 30, 2000 and 1999 are unaudited. The balance sheet at March
31, 2000, has been derived from the audited consolidated financial statements
as of that date but does not necessarily reflect all of the informational
disclosures previously reported in accordance with accounting principles
generally accepted in the United States. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
necessary adjustments, consisting of normal recurring adjustments, to fairly
state the Company's financial position, results of operations, and cash flows
for the periods indicated. The accompanying condensed consolidated financial
statements should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this
Form 10-Q and the consolidated financial statements and notes thereto included
with the Company's Form 10-K and other documents that have been filed with the
Securities and Exchange Commission ("SEC"). The results of the Company's
operations for the interim periods presented are not necessarily indicative of
operating results for the full fiscal year or any future interim periods.
Discontinued Operations
In December 1999, the Company's Board of Directors resolved to discontinue
Blaze Software's entire user interface line of business. The accompanying
condensed consolidated financial statements have been prepared to reflect the
historical results of operations and cash flows of the user interface line of
business as discontinued operations for all periods presented. In July 2000,
the Company sold its user interface line of business, effective as of May 1,
2000. See Note 8, Subsequent Events. Revenues from the discontinued operations
were $174,000 for the three months ended June 30, 2000 and $1.2 million for
the three months ended June 30, 1999.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net loss per share
Blaze Software computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
Under the provisions of SFAS No. 128, basic net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and common equivalent shares
outstanding during the period. Options, warrants and preferred stock were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
4
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Basic and diluted net loss per share:
Numerator:
Net loss from continuing operations........................ $(8,983) $(1,783)
Accretion of mandatorily redeemable preferred stock to
redemption value.......................................... -- (442)
------- -------
Net loss from continuing operations attributable to common
stockholders.............................................. (8,983) (2,225)
Income (loss) from operations of discontinued user
interface business........................................ (121) 652
------- -------
Loss attributable to common stockholders................... $(9,104) $(1,573)
======= =======
Denominator:
Weighted average common shares outstanding................. 22,497 2,211
Weighted average unvested common shares subject to
repurchase................................................ (633) --
------- -------
Denominator for basic and diluted calculation.............. 21,864 2,211
======= =======
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (0.42) $ (0.71)
======= =======
Antidilutive securities including options, warrants and
preferred stock not included in net loss per share
calculations.............................................. 4,660 9,520
======= =======
</TABLE>
Use of estimates
The preparation of financial statements in conformity with GAAP 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 revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
Blaze Software is assessing the potential impact of this pronouncement on the
financial statements; however, the Company does not expect any significant
impact.
In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue
Recognition ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance on disclosure related to revenue recognition policies.
The Company believes that it currently complies with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB 25
(the "Interpretation"). This Interpretation clarifies (a) the definition
5
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of an employee for purposes of applying APB 25, (b) the criteria for
determining whether a stock plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation became
effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that this Interpretation covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying this Interpretation
did not have a material impact on the consolidated financial statements. Blaze
Software does not expect that the adoption of the remaining provision of this
Interpretation will have a material impact on the consolidated financial
statements.
NOTE 4--BUSINESS COMBINATIONS
On June 20, 2000, Brokat Infosystems AG ("Brokat"), a company listed on the
German Neuer Markt and Blaze Software announced that the companies had entered
into a definitive agreement for Brokat to acquire Blaze Software in a stock-
for-stock merger. Under the terms of the agreement, Blaze Software
stockholders will receive 0.1826 of a Brokat ordinary share in exchange for
each share of Blaze Software common stock. Based on Brokat's closing price on
June 19, 2000, the acquisition is valued at approximately $560 million. The
merger is intended to be accounted for as a purchase, tax-free to Blaze
Software stockholders, and is expected to close in September 2000.
NOTE 5--CONTINGENCIES
From time to time, Blaze Software may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes
that there are no claims or actions pending or threatened against Blaze
Software, the ultimate disposition of which would have a material impact on
Blaze Software's financial position or results of operations. Blaze Software
received notification of claims from a founder and director that he may assert
against the Company. He contends that his personal equity ownership of Blaze
Software was diluted improperly in connection with a preferred stock
financing. Blaze Software believes that these assertions are without merit and
intends to vigorously defend claims that may be brought against the Company.
NOTE 6--EXERCISE OF OVER-ALLOTMENT OPTION
In April 2000, in conjunction with Blaze Software's initial public offering
in March 2000, the underwriters purchased an additional 600,000 shares of
common stock at $16 a share as a result of their over-allotment option. This
sale resulted in additional net proceeds of approximately $8.8 million.
NOTE 7--SEGMENTAL INFORMATION
Blaze Software, which operates in a single business segment, develops and
licenses component-based development software for building business-critical
applications and also provides related maintenance and consulting services.
Operations of Blaze Software's overseas subsidiaries consist of product
license revenues and service revenues.
Intercompany transfers between geographic areas are accounted for at prices
that approximate arm's length transactions.
6
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information regarding geographic areas at June 30, 2000 and 1999, and for
each of the three months then ended, is as follows (in thousands):
<TABLE>
<CAPTION>
Geographic Area Americas Europe Pacific Rim Eliminations Total
--------------- -------- ------ ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
June 30, 2000 and for the
three months then ended:
Sales to unaffiliated
customers.............. $ 5,497 $1,191 $ 546 $ -- $ 7,234
------- ------ ------ -------- -------
Operating (loss)
income................. (9,657) (1) (341) -- (9,999)
------- ------ ------ -------- -------
Liabilities--continued
operations............. 12,564 8,551 5,154 (16,191) 10,078
Liabilities--
discontinued
operations............. -- -- -- -- --
------- ------ ------ -------- -------
Total Liabilities..... 12,564 8551 5,154 (16,191) 10,078
------- ------ ------ -------- -------
Identifiable assets--
continued operations... 87,327 6,887 1,622 (16,191) 79,645
Identifiable assets--
discontinued
operations............. -- -- -- -- --
------- ------ ------ -------- -------
Total Identifiable
assets............... $87,327 $6,887 $1,622 $(16,191) $79,645
======= ====== ====== ======== =======
June 30, 1999 and for the
three months then ended:
Sales to unaffiliated
customers.............. $ 2,884 $ 423 $ 13 $ -- $ 3,320
------- ------ ------ -------- -------
Operating (loss)
income................. (1,236) 12 (445) -- (1,669)
------- ------ ------ -------- -------
Liabilities--continued
operations............. 12,279 6,085 3,516 (12,870) 9,010
Liabilities--
discontinued
operations............. (68) -- -- -- (68)
------- ------ ------ -------- -------
Total Liabilities..... 12,211 6,085 3,516 (12,870) 8,942
------- ------ ------ -------- -------
Identifiable assets--
continued operations... 13,362 5,913 1,603 (12,870) 8,008
Identifiable assets--
discontinued
operations............. 388 230 254 -- 872
------- ------ ------ -------- -------
Total Identifiable
assets............... $13,750 $6,143 $1,857 $(12,870) $ 8,880
======= ====== ====== ======== =======
</TABLE>
NOTE 8--SUBSEQUENT EVENTS
Sale of User Interface Line of Business
In July 2000, Blaze Software signed an agreement to sell its user interface
line of business effective May 1, 2000. The consolidated financial statements
as of, and for the three months ended, June 30, 2000 reflect the sale of the
user interface line of business. The sale of the user interface line of
business resulted in a loss on the disposal of approximately $540,000. The
loss has been included in the statement of operations under income (loss) from
operations of discontinued user interface business (net of income taxes).
Blaze Software may receive future royalty payments for a period of two
years after the effective date of the agreement. No royalty payments were made
in the three months ended June 30, 2000.
Director Option Acceleration
In July 2000, the Company accelerated the remaining vesting period of
outstanding options granted to certain members of the Board of Directors. Due
to this change in the terms of these options, the Company will incur a one-
time stock-based compensation charge of approximately $670,000 in the quarter
ended September 30, 2000.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among others, statements
concerning our future operations, financial condition and prospects, and our
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Forward-
looking statements in this report include but are not limited to statements
regarding the proposed merger with Brokat AG and our future growth, sales and
marketing plans and expenses, cost of services and maintenance, competition,
intellectual property, legal proceedings, deployment product revenues,
royalties from sales by independent software vendors, availability and use of
our cash resources, net losses, research and development expenses, general and
administrative expenses, income taxes, liquidity requirements, revenues,
including our dependencies on revenues related to Blaze Advisor Solutions
Suite, operating expenses, operating results, and international operations, as
well as changes in the e-commerce and internet commerce application software
markets, technology and customer needs. Investors in our common stock are
cautioned not to place undue reliance on any of these forward-looking
statements. These forward-looking statements are subject to substantial risks
and uncertainties that could cause our future business, financial condition,
or results of operations to differ materially from historical results or
currently anticipated results. Investors should carefully review the
information contained under the captions "Risk Factors Related to the Merger
Agreement, Completion of the Merger and the Consequences of the Merger" and
"Risk Factors That May Affect Future Results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in, or
incorporated by reference into, this report.
In this report, "Blaze Software," "the Company," "we," "us" and "our" refer
to Blaze Software, Inc. and, unless the context requires otherwise, its
subsidiaries.
Overview
We are a leading provider of software that enables companies to provide
customers, employees, partners and suppliers with adaptable and personalized
interactions that are consistent across all company communication channels
including the Internet, automated telephone response systems, manned customer
service centers, electronic kiosks and others. Our Blaze Advisor Solutions
Suite allows companies to implement their policies, practices and procedures,
or business rules, in e-business applications, enabling them to provide
individualized interactions across these communications channels. We also
provide consulting and professional services to help customers plan, develop
and implement e-business personalization solutions using our software.
We were incorporated in California as Neuron Data, Inc. in 1985. We changed
our company name to Blaze Software, Inc. in August 1999 and reincorporated in
the State of Delaware in March 2000. We completed our initial public offering
of 4,000,000 shares of common stock in March 2000, raising net proceeds of
approximately $57 million. In April 2000, in connection with our initial
public offering, the underwriters purchased an additional 600,000 shares of
common stock resulting in additional net proceeds of approximately $9 million.
Customer demand for C/C++ cross-platform user interface development
software has substantially diminished over the past three years as the use of
Java and HTML has increased. Therefore, over time we have significantly
decreased research and development activities related to our products used for
designing user interfaces, which are display forms and interactive systems for
presenting and accepting information in computer applications. In December
1999, our board of directors decided to discontinue operations related to our
user interface design products, which included our product Blaze Presenter, a
C-language product for designing user interfaces that we first introduced in
1991 under the name Open Interface. Operating results related to the
discontinued operations have been excluded from our continuing operations and
reported separately as discontinued operations. In July 2000, we signed an
agreement to sell our user interface line of business effective May 1, 2000.
The financial statements as of, and for the three months ended, June 30, 2000
reflect the sale of the user interface line of business. Blaze Software may
receive future royalty payments for a period of two years after the effective
date of the agreement. No such royalty payments were made in the three months
ended June 30, 2000.
8
<PAGE>
We derive all of our revenues from continuing operations from the Blaze
Advisor Solutions Suite, a Java-based product suite first released in June
1997 consisting of Blaze Advisor Builder, Blaze Advisor Rule Engine, Blaze
Advisor Rule Server and, since its introduction in June 2000, Blaze Advisor
Innovator, and Blaze Expert, a C-language rules-based expert system and
development tool first introduced in December 1986 under the name Nexpert. We
sell products to corporate customers and to system integrators and
distributors that install and provide support for our products. We also
license our products to independent software vendors that incorporate our
technology into their offerings. We sell products that comprise the Blaze
Advisor Solutions Suite in various configurations. Pricing of our products is
based on development and deployment rights. Blaze Advisor Builder is priced at
a fixed amount for each licensed user. Blaze Advisor Rule Engine is priced on
a sliding scale based on the total number of processors used to support the
deployed application. Blaze Advisor Rule Server and Blaze Advisor Innovator
are priced as percentages of the negotiated deployment fee for Blaze Advisor
Rule Engine. Deployment product revenues typically exceed development product
revenues for most customer sales. Pricing for independent software vendors is
usually offered at a base price for unlimited use of the full Blaze Advisor
Solutions Suite in developing a marketable product, plus a negotiated royalty
fee calculated as a percentage of the developed application's sale price to
the vendor's customers. We expect cumulative royalties over time to exceed the
initial use fee for most independent software vendor sales.
Product licenses revenues consist of license fees and royalty payments. We
recognize software license revenues upon shipment of a product if collection
of the resulting receivable is probable, an executed agreement or purchase
order has been received, the fee is fixed or determinable and objective
evidence of fair value exists to allocate revenue to any undelivered elements
of the arrangement. If an acceptance period is provided, we recognize revenue
upon the earlier of customer acceptance or the expiration of that period. For
sales made through distributors, we recognize revenue upon shipment if an
executed agreement or purchase order has been received, the fee is fixed and
determinable, collection is deemed probable and the distributor has identified
to us that a valid end-user for the product exists. In those instances where a
distributor has not identified a valid end-user for the product, the revenue
is deferred. Distributors have no right of return.
Service and maintenance revenues consist primarily of professional
services, maintenance, support and training fees for the associated products.
We generally recognize revenues from maintenance contracts ratably over the
term of the contract. We recognize consulting and services revenues as the
training, implementation or consulting services are performed. If professional
or maintenance services are included in an arrangement that involves a license
agreement, amounts related to support or professional services are allocated
based upon objective evidence of fair value, which is based on the price when
such elements are sold separately, or when not sold separately, the price
established by management having the relevant authority to do so.
Our future success depends in part on our continued investment in research
and development and the continued expansion of our sales, marketing and
professional services organization in order to build an infrastructure to
support our long-term growth strategy. As a result of this investment in our
infrastructure, we have incurred significant net losses in each fiscal year
since fiscal 1996. We incurred net losses from continuing operations of $9.0
million for the three months ended June 30, 2000 and $26.4 million for fiscal
2000. We also had an accumulated deficit of $67.3 million as of June 30, 2000.
We expect to experience significant growth in our operating expenses for the
foreseeable future in order to grow our business. As a result, we anticipate
that operating expenses will constitute a significant use of our cash
resources and that we will continue to generate net losses for the foreseeable
future.
On June 20, 2000, Brokat Infosystems AG and Blaze Software announced that
the companies had entered into a definitive agreement for Brokat to acquire
Blaze Software in a stock-for-stock merger, subject to the approval of Blaze
Software stockholders, regulatory agencies and other customary closing
conditions. Under the terms of the agreement, Blaze Software stockholders will
receive an American Depositary Share equivalent of 0.1826 of a Brokat ordinary
share in exchange for each share of Blaze Software common stock. Based on
Brokat's closing price on June 19, 2000, the acquisition is valued at
approximately $560 million. The merger is intended to be accounted for as a
purchase, tax-free to Blaze Software stockholders, and is expected to close in
September 2000.
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Results of Operations
The following table presents certain financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended June
30,
--------------
2000 1999
------ -----
<S> <C> <C>
Consolidated Statement of Operations Data:
Net revenues:
Product licenses............................................. 45.9 % 42.0 %
Services and maintenance..................................... 54.1 58.0
------ -----
Total revenues............................................. 100.0 100.0
------ -----
Cost of revenues:
Product licenses............................................. 0.1 0.3
Services and maintenance..................................... 44.2 35.7
------ -----
Total cost of revenues..................................... 44.3 36.0
------ -----
Gross profit................................................... 55.7 64.0
------ -----
Operating expenses:
Research and development..................................... 26.3 38.0
Sales and marketing.......................................... 82.4 57.0
General and administrative................................... 25.4 19.2
Stock-based compensation..................................... 59.8 --
------ -----
Total operating expenses................................... 193.9 114.2
------ -----
Operating loss................................................. (138.2) (50.2)
Interest expense............................................... (0.4) (3.4)
Other income and (expense), net................................ 14.5 0.3
------ -----
Net loss from continuing operations before income taxes........ (124.1) (53.3)
Provision for income taxes..................................... (0.1) (0.4)
------ -----
Net loss from continuing operations............................ (124.2) (53.7)
Income (loss) from discontinued user interface business........ (1.7) 19.6
------ -----
Net loss....................................................... (125.9)% (34.1)%
------ -----
</TABLE>
Three Months Ended June 30, 2000 and 1999
Total Revenues
Total revenues increased $3.9 million, or 118%, to $7.2 million for the
three months ended June 30, 2000 from $3.3 million for the comparable period
in 1999. This increase was due to an increase in the number and average size
of sales of our products and services and maintenance generated. Total
revenues from sales to customers outside the Americas were $1.7 million, or
24%, of total revenues for the three months ended June 30, 2000 and $436,000,
or 13%, of total revenues for the three months ended June 30, 1999. Unisys
Corporation accounted for 13% of total revenues for the three months ended
June 30, 2000 and 20% of total revenues for the three months ended June 30,
1999. This was for products and services used in support of Unisys' design and
development work in connection with the deployment at Norwest Financial
Information Services.
Product Licenses. Product license revenues increased $1.9 million, or 138%,
to $3.3 million for the three months ended June 30, 2000 from $1.4 million for
the comparable period in 1999.
Services and Maintenance. Services and maintenance revenues increased $2.0
million, or 103%, to $3.9 million for the three months ended June 30, 2000,
from $1.9 million for the comparable period in 1999.
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Cost of Revenues
Product Licenses. Cost of product licenses consists of packaging,
documentation and associated shipping costs. Cost of product licenses was
unchanged for the three months ended June 30, 2000 from $10,000 for the
comparable period in 1999. This expense did not increase proportionately to
revenue due to the increased usage of electronic product transfer, which does
not have shipping charges. As a percentage of product licenses revenues, cost
of product licenses was less than 1% in both the three months ended June 30,
2000 and 1999.
Services and Maintenance. Cost of services and maintenance consists of
personnel and other costs related to professional services, training and
technical support. Cost of services and maintenance increased $2.0 million, or
169%, to $3.2 million for the three months ended June 30, 2000 from $1.2
million for the comparable period in 1999. As a percentage of services and
maintenance revenues, cost of services and maintenance was 82% for the three
months ended June 30, 2000 and 62% for the comparable period in 1999. This
increase in dollars and as a percentage of services and maintenance revenues
was due to increased personnel costs as we shifted personnel from supporting
the user interface business in order to meet customer requirements for our
Blaze Advisor Solutions Suite. Cost of services and maintenance as a
percentage of services and maintenance revenues may vary between periods due
to our use of third-party professional services, and varying gross margins on
customer engagements.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, project managers
and quality assurance personnel, payments to outside software developers, and
general corporate overhead allocations for facilities and equipment used in
the research and development process. Research and development expenses
increased $642,000, or 51%, to $1.9 million for the three months ended June
30, 2000 from $1.3 million for the comparable period in 1999. This increase
was due to increased costs associated with third-party consultants and
increased personnel costs associated with research and development for the
Blaze Advisor Solutions Suite. Research and development expenses represented
26% of total revenues for the three months ended June 30, 2000 and 38% of
total revenues for the comparable period in 1999. We believe that a
significant increase in our research and development expenses will be
necessary to expand our market presence and to expand our technology and
product leadership. Therefore, we expect that research and development
expenses will increase in the future.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions and bonuses for sales, marketing and support personnel, and costs
related to travel, trade shows, promotional expenses and general corporate
overhead. Sales and marketing expenses increased $4.1 million, or 215%, to
$6.0 million for the three months ended June 30, 2000 from $1.9 million for
the comparable period in 1999. This increase was due to increased sales and
marketing efforts for Blaze Advisor Solutions Suite and a shift in personnel
from supporting the user interface business to supporting Blaze Advisor and
Blaze Expert. Sales and marketing expenses represented 82% of total revenues
for the three months ended June 30, 2000 and 57% of total revenues for the
comparable period in 1999. We believe that a significant increase in our sales
and marketing expenses will be necessary to expand our market presence. We
intend to expand our direct sales force by hiring additional salespersons,
sales engineers and sales management personnel. Therefore, we expect that
sales and marketing expenses will increase significantly in the future.
General and Administrative. General and administrative expenses consist of
salaries and benefits for administrative officers and support personnel,
travel expenses, legal, accounting and general corporate overhead expenses.
General and administrative expenses increased $1.2 million, or 188%, to $1.8
million for the three months ended June 30, 2000 from $638,000 for the
comparable period in 1999. This increase was due to increased infrastructure
costs to support our expanding activities, costs associated with being a
public company and additional rent on our new corporate headquarters. General
and administrative expenses represented 25% of total revenues for the three
months ended June 30, 2000 and 19% of total revenues for the comparable period
in 1999. We believe that our general and administrative expenses will continue
to increase as a result of additional
11
<PAGE>
infrastructure costs as we expand our business and expenses associated with
being a public company, including annual and other public reporting costs,
increased directors and officers liability insurance, investor relations
programs and accounting and legal fees.
Interest Expense
Interest expense consists of interest expense incurred on our line of
credit, bridge loans and capital leases. Interest expense decreased $84,000,
or 75%, to $28,000 for the three months ended June 30, 2000 from $112,000 for
the comparable period in 1999. The decrease was due to the repayment of our
bank borrowings and bridge loan.
Other Income and (Expense), Net
Other income and (expense) consists primarily of interest income earned on
our cash equivalents and short-term investments. Other income was $1.1 million
for the three months ended June 30, 2000 compared to $10,000 for the
comparable period in 1999. The increase was the result of increased interest
income on our cash equivalents and short-term investments subsequent to our
initial public offering.
Provision for Income Taxes
Provision for income taxes consists of foreign and de minimis domestic
taxes paid. Provision for income taxes decreased $6,000, or 100%, to $6,000
for the three months ended June 30, 2000 from $12,000 for the comparable
period in 1999. No provision for federal and state income taxes has been
recorded because we have experienced significant net losses, which have
resulted in deferred tax assets. In light of our recent history of operating
losses, we have provided a full valuation allowance for all deferred tax
assets as we are presently unable to conclude that it is more likely than not
that the deferred tax asset will be realized.
Income (Loss) from Discontinued Operations, Net of Income Taxes
Income (loss) from discontinued operations, net of income taxes, decreased
$773,000, or 119%, to a loss of $121,000 for the three months ended June 30,
2000 compared with income of $652,000 for the comparable period in 1999. This
decrease was due to a $1.0 million decrease in revenue to $174,000 for the
three months ended June 30, 2000 from $1.2 million for the three months ended
June 30, 1999, offset by a decrease of $272,000, or 48%, in expenses to
$295,000 for the three months ended June 30, 2000, from $567,000 for the
comparable period in 1999. These decreases in revenues and costs resulted from
the sale of the user interface line of business effective May 1, 2000.
Liquidity and Capital Resources
Since inception, we have financed our operations through private sales of
preferred stock, internally generated funds, the use of our receivables based
line of credit and an initial public offering completed in March 2000. As of
June 30, 2000, we had $67.9 million of cash, cash equivalents and short-term
investments.
Net cash used in operating activities was $8.4 million for the three months
ended June 30, 2000 and $1.2 million for the comparable period in 1999. Net
cash used for operating activities for both periods was due to net losses. Net
cash used for operating activities for the three months ended June 30, 2000
was partially offset by the non-cash charges from the amortization of stock-
based compensation.
Net cash used in investing activities was $12.4 million for the three
months ended June 30, 2000 and $20,000 for the comparable period in 1999. Net
cash used in investing activities included purchases of property and equipment
and, for three months ended June 30, 2000, net purchases of $10.9 million of
short-term investments.
12
<PAGE>
Net cash provided by financing activities was $8.7 million for the three
months ended June 30, 2000 and $2.9 million for the comparable period in 1999.
Net cash provided by financing activities for the three months ended June 30,
2000 was due the underwriters purchase of an additional 600,000 shares of
common stock as a result of the exercise of their over-allotment option. Net
cash provided by financing activities for the three months ended June 30, 1999
was due to proceeds from the issuance of preferred and common stock and
borrowings under our line of credit facility.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may need
to raise additional funds to finance more rapid expansion, to develop new or
enhance existing services or products, to respond to competitive pressures or
to acquire complementary products, businesses or technologies. If additional
funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced and
such securities may have rights, preferences or privileges senior to those of
our stockholders. We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. Our business, results of operations and financial
condition could be materially adversely affected by such limitation.
13
<PAGE>
RISK FACTORS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this report.
Risks Related to the Merger Agreement, Completion of the Merger and the
Consequences of the Merger.
Brokat and Blaze Software may not realize any benefits from the merger.
Achieving the benefits of the merger will depend in part on the integration
of technology, operations and personnel. The integration of Brokat and Blaze
Software will be a complex, time consuming and expensive process and may
disrupt Brokat's business if not completed in a timely and efficient manner.
In addition, Brokat has also agreed to acquire GemStone Systems, Inc. and will
face similar problems integrating GemStone. The merger of Brokat and Blaze
Software is not contingent on the merger of Brokat and GemStone. Among the
challenges involved in the integration of Brokat and Blaze Software 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 Brokat's and Blaze Software's business cultures are compatible,
retaining key personnel and addressing any perceived adverse changes in
business focus. Neither Brokat nor Blaze Software has experience in
integrating operations on the scale represented by the merger, and it is not
certain that Brokat and Blaze Software can be successfully integrated 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 the business,
financial condition and operating results of the combined company. All of
these same risks apply to the merger of Brokat and GemStone, and the
contemporaneous timing of that merger adds to the complexity and difficulty of
successfully completing the merger of Brokat and Blaze Software.
Because the exchange ratio is fixed, decreases in Brokat's trading price will
reduce the value of what Blaze Software shareholders receive in the merger.
Upon completion of the merger, each share of Blaze Software common stock
will be exchanged for an American Depository Share equivalent of 0.1826 of a
Brokat ordinary share. There will be no adjustment for changes in the market
price of Brokat ordinary shares, and Blaze Software is not permitted to
withdraw from the merger or resolicit the vote of its stockholders solely
because of changes in the market price of Brokat ordinary shares. Accordingly,
the specific dollar value of Brokat ordinary shares that Blaze Software
stockholders will receive upon completion of the merger will depend on the
market value of Brokat ordinary shares at the time of completion of the
merger.
If Brokat and Blaze Software do not integrate their technology quickly and
effectively, the potential benefits of the merger may not be realized.
Brokat intends to integrate Blaze Software's technology into its own
software solutions as well as offer Blaze Software's solutions separately.
Brokat and Blaze Software cannot assure you that they will be able to
integrate their technology quickly and effectively. In order to obtain the
benefits of the merger, Brokat must make Blaze Software's technology, products
and services operate together with Brokat's technology, products and services.
Brokat may be required to spend additional time or money on integration that
would otherwise be spent on developing its business and services or other
matters. If Brokat does not integrate the technology effectively or if
management spends too much time on integration issues, it could harm the
combined company's business, financial condition and results of operations.
The merger may result in a loss of Blaze Software or Brokat employees.
Blaze Software and Brokat might lose some of their respective key employees
prior to or following the merger despite their respective efforts to hire and
retain quality employees. Competition for qualified
14
<PAGE>
management, engineering and technical employees in the software industry is
intense. Brokat and Blaze Software have different corporate cultures, and
Blaze Software employees may not want to work for a larger, non-U.S.-based,
publicly traded company instead of a smaller start-up company. In addition,
competitors may recruit employees prior to the merger and during integration,
as is common in high technology mergers. As a result, employees of Blaze
Software or the combined company could leave with little or no prior notice.
Brokat and Blaze Software cannot assure you that the combined company will be
able to attract, retain and integrate employees following the merger.
The merger may result in a loss of customers.
As a result of the merger or its announcement, some customers or potential
customers may not continue to do business with Blaze Software. In such case,
we may lose significant revenue that we might have otherwise received had the
merger not been announced or occurred.
Merger related accounting charges will delay and reduce Brokat's
profitability.
The Blaze Software acquisition by Brokat is being accounted for by Brokat
under the "purchase" method of accounting. Under the purchase method, the
purchase price of Blaze Software will be allocated to the assets and
liabilities acquired from Blaze Software. As a result, Brokat will incur
accounting charges from the merger that will delay and reduce Brokat's
profitability.
If the conditions to the merger are not met, the merger will not occur.
Several conditions must be satisfied or waived to complete the merger,
including but not limited to the approval of Blaze Software stockholders and
regulatory approvals. These conditions are described in detail in the merger
agreement. Brokat and Blaze Software cannot assure you that each of the
conditions will be satisfied. If the conditions are not satisfied or waived,
the merger will not occur or will be delayed, and Brokat and Blaze Software
each may lose some or all of the intended benefits of the merger. If the
merger is not completed, Blaze Software will require substantial additional
capital resources to continue its business, which resources may not be
available on favorable terms, or at all.
There has been no prior market for the Brokat ADSs and we cannot assure you
that the price of the Brokat ADSs will not decline after the closing of the
merger.
Brokat intends to apply for the quotation of American Depositary Shares
representing its underlying ordinary shares on the Nasdaq National Market.
There has not been a public market for the Brokat ADSs and an active market
for the Brokat ADSs may not develop or be sustained after the closing of the
merger. Further, the price of the Brokat ADSs may decline after the closing.
Factors That May Affect Future Results
We have a history of losses, we expect losses in the future and we may never
become profitable.
We incurred net losses of $9.1 million for the three months ended June 30,
2000 and $23.8 million in fiscal 2000. We also had an accumulated deficit of
$67.3 million as of June 30, 2000. We expect to continue to incur losses in
the foreseeable future. These losses may be substantial, and we may never
become profitable. We also expect to significantly increase our expenses,
especially in sales and marketing and research and development. As a result,
our operating results will be harmed if our revenues do not keep pace with the
expected increase in our expenses or are 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.
15
<PAGE>
Variations in quarterly operating results due to such factors as changes in
demand for our products and services and changes in our mix of revenues may
cause our stock price to decline.
Our quarterly revenues, expenses and operating results have varied in the
past and may vary significantly from quarter-to-quarter in the future. 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. If our
operating results in future quarters fall below the expectations of market
analysts and investors, the price of our common stock will fall. Factors that
may cause our operating results to fluctuate on a quarterly basis include:
. varying size, timing and contractual terms of orders for our products;
. our ability to complete our implementation and service obligations
related to product sales in a timely manner;
. changes in the mix of revenues attributable to higher-margin product
license revenues as opposed to substantially lower-margin consulting
services revenues;
. customers' decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next;
. changes in demand for our Blaze Advisor Solutions Suite software or for
personalization software solutions generally;
. loss of significant customers;
. announcements or introductions of new products by our competitors;
. software defects and other product quality problems; and
. seasonal trends in sales of business software.
Our products have a long sales cycle that makes it difficult to plan our
expenses and forecast our results.
It typically takes us between two 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; and
. potential customers may delay purchases due to announcements or planned
introductions of new products by us or our competitors.
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.
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We depend significantly on sales of the Blaze Advisor Solutions Suite, and a
decrease in sales would harm our business.
We currently derive all of our revenues from continuing operations from
licenses of the Blaze Advisor Solutions Suite and Blaze Expert and related
consulting and maintenance revenues. We anticipate that revenues related to
the Blaze Advisor Solutions Suite will continue to comprise a substantial
portion of our revenues for the foreseeable future. In addition, our
dependence on revenues from the Blaze Advisor Solutions Suite will increase
because we are continuing to decrease our emphasis on selling Blaze Expert and
have discontinued operations associated with Blaze Presenter. Consequently, a
decline in the price of the Blaze Advisor Solutions Suite, or its failure to
achieve broad market acceptance, would harm our business.
If we fail to expand our direct sales capabilities, we may 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
our direct sales capabilities. If we fail to do so, this failure could harm
our ability to increase revenues. We currently receive substantially all of
our revenues from direct sales. Our products and services require a
sophisticated sales effort targeted at senior management and information
technology managers of our prospective customers. As of June 30, 2000, our
direct sales organization in North America consisted of 47 employees.
Competition for qualified sales personnel is intense, and we may not be able
to hire the kind and number of sales personnel we are targeting. New hires may
require extensive training and typically take several months to achieve
productivity. We cannot be certain that our recent hires will be as productive
as necessary.
New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products and could reduce our market
share or result in pressure to price our products in a manner that reduces our
margins.
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. Competition could seriously harm
our ability to sell additional software, maintenance renewals, and services on
terms favorable to us. Competitive pressures could reduce our market share or
require us to reduce the price of products and services, any of which could
harm our business. Competitors could offer new products with features or
functionality that are equal to or better than our products. We may not have
sufficient engineering staff, competitive awareness, management initiative,
equipment, or time to modify our products to match our competitors. In this
case, we could lose existing customers or new customers to competitors.
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 opportunities, technologies and changes in customer
requirements or devote greater resources to the development, promotion and
sale of their products than we can. Current and potential competitors may have
more extensive customer bases that could be leveraged, thereby gaining market
share to our detriment. Such competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to purchasers. Moreover, certain of our indirect
and potential competitors, such as BroadVision, IBM, Oracle and SAP, may
bundle their products in a manner that may discourage users from purchasing
products offered by us. Furthermore, independent software vendors that
incorporate our products into their offerings may be perceived by potential
customers as offering alternatives to the use of our products on a stand-alone
basis. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
Customers may prefer more specific solutions to narrowly bounded business
needs. If application needs are initially small or well-defined, a competitor
may offer a product that addresses those needs in a more efficient or
17
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time-effective manner than we can provide. The cross-industry breadth of our
customer base may cause product enhancements to be added in many different
areas that fail to achieve solution dominance for any one industry or market
segment.
Some businesses may have already made a substantial investment in other
third party or internally developed software designed to personalize customer
interactions. 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 for their enterprises.
We are dependent on our professional services organization and if we are
unsuccessful in increasing the size of this organization, our business would
be harmed.
Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in sales of the Blaze Advisor Solutions
Suite depends on our ability to provide our clients with these services. 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, our ability to sell software will be
harmed, affecting our revenues. We rely on customer satisfaction for customer
referrals and additional sales to customers, which depends in part on the
quality and timeliness of services provided by our professional services
organization. If we are not successful in hiring additional customer support
personnel, our business would be harmed. As of June 30, 2000, our professional
services organization in North America consisted of 50 employees. We are in a
new and evolving market and there are a limited number of people who have the
skills needed to provide the services that our customers demand. Competition
for qualified service personnel is intense. We cannot be certain that we can
attract or retain a sufficient number of qualified service personnel for our
business needs.
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 personalization software 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 that 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 Blaze Advisor Solutions Suite and develop new products that respond to new
technological developments, keep pace with products of our competitors and
satisfy the changing requirements of our customers. If more end users access
the Internet or other electronic contact channels, our software may not
provide adequate response to meet our customers' transaction load
requirements. Our ability to deliver performance improvements could be
adversely affected by insufficient engineering resources, insufficient
understanding of technology platforms, lack of performance by required
underlying
18
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technologies such as Java or middleware, or other commitments taking priority.
If we are unsuccessful in improving our products and developing new products,
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.
We may commit to improvements and enhancements in products based on
requests and requirements from significant customers. These could consume
engineering staff, resources, and management and planning that would otherwise
be devoted to more generally marketable product work. This could reduce
satisfaction and renewals from existing customers and could reduce market
opportunities for new product sales.
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.
If we fail to manage our growth, our ability to generate new revenues and
achieve profitability would be harmed.
We have grown significantly since our inception and need to grow quickly in
the future. This growth has placed and will continue to place a strain on our
management, administrative, operational and financial infrastructure. Any
failure to manage this growth could impede our ability to increase revenues
and achieve profitability. The number of our employees has increased from 94
at June 30, 1999 to 207 at June 30, 2000. Future expansion could be expensive
and strain our management and other resources. If we are unable to manage
growth effectively, our business may be harmed.
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,
customer services, marketing, research and development, 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. We do not maintain key person
insurance on any of our employees. We would also be harmed if one or more of
our executive officers or key employees decided to join a competitor or
otherwise compete with us.
If our products contain defects or our services are not perceived as high
quality, we could lose potential customers or be subject to damages.
Our products are complex and may contain errors, defects or failures,
particularly since new releases are regularly introduced. 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. Computer viruses could cause our products to act erratically or
fail. 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.
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Our customers also may encounter system configuration problems that require us
to spend additional consulting or support resources to resolve these problems.
Our software is installed on operating systems and runtime software
platforms such as Java that must operate correctly in order for us to deliver
proper results. Bugs in Java, an operating system, or a third party software
package used by one of our customers could result in improper operation of our
products. In such cases, the customer perception could be that our software is
at fault. We could also find it difficult or impossible to track down the root
cause of an error because of insufficient access to or familiarity with the
underlying software at fault. Even if the error is properly identified as the
fault and responsibility of a third party, it could impact our customers
satisfaction with us or could influence them to choose a different
implementation strategy, resulting in lost revenues and decreased customer
goodwill.
Because our software products are used for customer interaction processes
by our customers, product defects may also give rise to product liability
claims. Customers may rely on our rule execution engine to process
transactions driving the response of their developed applications. Because
customers are free to write any combination of rules they wish, we cannot
foresee or test all possible rule execution scenarios. If our rule engine
incorrectly executes customer rules, incorrect output or application behavior
may result. As Blaze Advisor is used in more customer applications and with
larger rule applications from existing customers, the potential for a material
error increases. Customers could potentially seek restitution or damages from
us in such cases. 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.
Our international operations and our international sales efforts expose us to
risks.
Sales to customers outside the Americas accounted for 24% of total revenues
from continuing operations for the three months ended June 30, 2000 and 17% of
total revenues from continuing operations in fiscal 2000. We have limited
experience in marketing, selling and supporting our products and services
abroad. Furthermore, our management team has had limited experience managing
our international operations. We intend to expand our international sales
efforts in the future, but we may face difficulties managing international
operations. 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:
. longer sales cycles and collection of accounts receivable;
. agreements with customers with terms and conditions that differ from
agreements that we enter into with customers in the United States;
. unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
. reduced protection for intellectual property rights in some countries;
. differing labor regulations;
. compliance with a wide variety of complex regulatory requirements;
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. changes in a specific country's or region's political or economic
conditions;
. greater difficulty in staffing and managing foreign operations;
. increased financial accounting and reporting burdens and complexities;
and
. fluctuating exchange rates.
Our international operations will require a significant amount of attention
from our management and substantial financial resources. We cannot be certain
that our investments in establishing facilities in other countries will
produce desired levels of revenues or profitability.
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 total revenues from
a small number of large orders from our top customers. For example, Unisys
Corporation alone accounted for 13% of total revenues from continuing
operations for the three months ended June 30, 2000 and 23% of total revenues
from continuing operations in fiscal 2000. However, we do not have any
contracts or agreements with Unisys other than purchase orders in the ordinary
course of business. 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 we fail to establish, maintain or expand our strategic relationships with
third parties, our ability to grow revenues could be harmed.
In order to grow our business, we must generate, retain and strengthen
strategic relationships with third parties. To date, we have established
relationships with several companies, including consulting organizations and
system integrators that implement our software. If the third parties with
which we have strategic relationships do not provide sufficient, high-quality
service or integrate and support our software correctly, or if we are unable
to enter into successful new strategic relationships, our revenues may be
harmed. In addition, the third parties with which we have strategic
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 strategic 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 strategic relationships that offset the significant time and
effort that are necessary to develop these relationships.
If Sun Java loses popularity, demand for our products will be reduced.
Our software is written in the Java computer programming language developed
by Sun Microsystems. While a number of companies have introduced Web and
server-side applications based on Java, Java could fall out of favor and fail
to be supported by Sun Microsystems or other companies. In particular,
Microsoft may offer substitute products or technologies. If support for Java
decreased or we could not continue to use Java or related Java technologies,
we could have to rewrite the source code for the Blaze Advisor Solutions Suite
to enable our products to run on other computer platforms. Also, changes to
Java could require us to change our products. If we were unable to develop or
implement appropriate modifications to our products on a timely basis, we
could lose revenue opportunities and our business could be harmed. If open-
source versions of Java become popular or if cross-platform standardization is
lost, we could be forced to write different versions of our products for
different hardware and software platforms, leading to increased expenses and
time to release products.
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.
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Any litigation regarding intellectual property could be costly and time-
consuming and divert the attention of our management and key personnel from
our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims
of intellectual property infringement might also require us to enter into
costly royalty or license agreements. However, we may not be able to obtain
royalty or licenses agreements on terms acceptable to us, or at all. We also
may be subject to significant damages or an injunction against use of our
products. A successful claim of patent or other intellectual property
infringement against us would have an immediate material adverse effect on our
business and financial condition.
If we are unable to protect our intellectual property rights, this inability
could weaken our competitive position, reduce our revenues and increase our
costs.
Our success depends in large part on our proprietary technology. We rely on
a combination of copyrights, trademarks, trade secrets, patents,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. We have not yet fully implemented comprehensive
procedures to protect our proprietary information such as marking our patents,
trademark and copyrights consistent with applicable laws, maintaining
appropriate records, and controlling access to facilities and computer systems
and our proprietary information itself. We may be required to spend
significant resources to monitor and police our intellectual property rights.
If we fail to successfully enforce our intellectual property rights, our
competitive position may be harmed.
Our software uses license keys and we require contractual commitments from
end-users to prevent unauthorized use or copying of the products. In addition,
product pricing is typically based upon the number of central processing units
used by the customer in their application deployment. As applications become
more complex or as more users access the applications, our customers may need
larger deployment machines, resulting in additional license revenue
opportunities. If our license protection or contractual compliance is
insufficient to prevent them from copying our software or upgrading without
payment, we could lose substantial revenues. In addition, our software could
be copied and resold without our knowledge and the licensing algorithms could
be deciphered or bypassed, allowing copying, distribution, and use of our
software without our knowledge and without revenues to us.
Our patent, trademark or pending trademark registration applications may
not be allowed or competitors may successfully challenge the validity or scope
of these registrations. 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.
Our products are not tightly integrated with currently popular software
programs and we may lose sales opportunities to competitors.
Our Blaze Advisor Solutions Suite must work with commercially available
software programs that are currently popular. Various information and data may
be stored in a variety of our customers' existing software systems, including
leading systems from Oracle, PeopleSoft, Siebel Systems and SAP, running on a
variety of computer operating systems. If we do not update our software to be
compatible with these programs, we may lose sales opportunities to
competitors. If we fail to obtain access to development versions of these
software products, we may be unable to build and enhance our products on
schedule. If we fail to enhance our software to interact with these products,
we may lose potential customers. If we lose customers, our revenues and
profitability may be harmed.
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If we need additional financing to maintain and expand our business, financing
may not be available on favorable terms, if at all.
We expect to incur net losses for the foreseeable future. If we need
additional financing, we cannot be certain that it will be available on
favorable terms, if at all. 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.
If we acquire any companies or technologies in the future, they could prove
difficult to integrate, disrupt our business, dilute stockholder value and
adversely affect our operating results.
We may acquire or make investments in complementary companies, services and
technologies in the future. Our ability as an organization to conduct
acquisitions or investments is unproven because we have only made one
acquisition to date. If we fail to properly evaluate and execute acquisitions
and investments and integrate new opportunities, our business and prospects
may be harmed. Our inability to successfully evaluate and integrate
acquisitions or technology may result in 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.
Future sales of our common stock may depress our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. Shares issued
upon the exercise of outstanding options may also be sold in the public
market. In addition, such sales could create the perception to the public of
difficulties or problems with our products and services. As a result, these
sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
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 that 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 makes it difficult to remove them all at once. The acquiror would also
be required to provide advance notice of its proposal to remove directors at
an annual meeting. The acquiror also will not be able to cumulate votes at a
meeting, which will require the acquiror to hold more shares to gain
representation on the board of directors than if cumulative voting were
permitted.
Our board of directors also has the ability to issue preferred stock that
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 Blaze Software. If the
acquiror was discouraged from offering to acquire us or prevented from
successfully completing a hostile acquisition by the antitakeover measures,
shareholders could lose the opportunity to sell their shares at a favorable
price.
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We may encounter computer problems or a natural disaster at our headquarters,
which could cause us to lose revenues and customers.
Viruses or bugs introduced into our research and development, quality
assurance, production and shipping, customer support or financial and
administrative software systems could cause us to lose data, expose us to time
and expense in identifying and resolving the problem or delay product
shipments. Furthermore, our headquarters are located in a single location in
San Jose, California. We could be particularly vulnerable in a natural
disaster, such as an earthquake. Any of these events could cause us to lose
customers or goodwill, which would decrease our revenues.
One of our former directors has asserted claims against us that may require us
to pay substantial damages or issue additional shares that would dilute
existing stockholders.
On January 6, 2000, Patrick Perez, a founder and former director of Blaze
Software, notified us of claims that he may assert against us. Mr. Perez
contends that his personal equity ownership of Blaze Software was diluted
improperly in connection with our Series AA preferred stock financing that
closed in June and September 1999. In particular, Mr. Perez contends that he
was wrongfully denied the opportunity to purchase shares at a price of $0.54
per share in connection with the financing, and that the financing was
otherwise unfair and benefited participating stockholders. If Mr. Perez had
participated in the financing, he would have been able to purchase up to
1,710,949 shares. Should any litigation be decided adversely to us or to our
officers or directors, we may be required to pay substantial damages or
indemnification, or issue additional shares to Mr. Perez. In addition, other
stockholders that did not participate in the financing may assert similar
claims against us. If we are required to issue additional shares to Mr. Perez
or other stockholders, then-existing stockholders would experience dilution of
their ownership and we would need to record an accounting charge in our
statement of operations equal to the fair market value of the shares at the
time of issuance.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
The Company's market risk disclosures set forth in Item 7A of its amended
Annual Report on Form 10-K for the fiscal year ended March 31, 2000 have not
changed significantly.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On January 6, 2000, a founder and former director of Blaze Software,
notified the Company of claims that he may assert against Blaze Software. The
founder and former director contends that his personal equity ownership of
Blaze Software was diluted improperly in connection with our Series AA
preferred stock financing that closed in June and September 1999. In
particular, he contends that he was wrongfully denied the opportunity to
purchase shares at a price of $0.54 per share in connection with the
financing, and that the financing was otherwise unfair and benefited
participating stockholders. If he had participated in the financing, he would
have been able to purchase up to 1,710,949 shares. The Company believes that
his assertions are without merit and intend to vigorously defend any claims
that he may bring against Blaze Software. On March 17, 2000, the Company filed
a complaint against the founder and former director in the United States
District Court for the Northern District of California asking for declaratory
relief regarding his allegations. However, should any litigation be decided
adversely to us or to our officers or directors, we may be required to pay
substantial damages or indemnification, or issue additional shares to Mr.
Perez. In addition, other stockholders that did not participate in the
financing may assert similar claims against the Company. If the Company is
required to issue additional shares to him or other stockholders, then-
existing stockholders would experience dilution of their ownership and the
Company would need to record an accounting charge in the statement of
operations equal to the fair market value of the shares at the time of
issuance.
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.
Item 2. Changes in Securities and Use of Proceeds
The Company registered the initial public offering of its common stock, par
value $0.0001 per share, on a Registration Statement on Form S-1 (File No.
333-94549), which was declared effective on March 22, 2000. The offering
closed on March 28, 2000. The managing underwriters of the offering were
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and Dain Rauscher
Incorporated. A total of 4,600,000 shares of common stock were sold by the
Company in the offering at a price of $16.00 per share, resulting in net
proceeds of approximately $66 million. From the time of receipt through June
30, 2000, the Company has applied its net proceeds from the offering toward
working capital and funding operations. Net cash used from the offering for
operating activities totaled approximately $9 million, and cash used for
investing activities, principally the purchase of highly liquid short-term
investments, totaled approximately $24 million.
On June 15, 2000, a total of 500,000 shares of common stock, with par value
$0.0001 per share were issued to the Bora Rabbi Trust in connection with
assumption of options by Brokat Infosystems AG in the proposed merger.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith;
27.1 Financial data schedule
(b) A Form 8-K was filed on June 20, 2000 in connection with our proposed
merger with Brokat.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Company has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
BLAZE SOFTWARE, INC.
/s/ Thomas F. Kelly
San Jose, California By: _________________________________
August 10, 2000 Thomas F. Kelly
Chief Executive Officer, President
and Chairman of the Board
(Principal Executive Officer)
/s/ Gary Shroyer
By: _________________________________
Gary Shroyer
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
27
