-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R9/xDztNculb3iv7TKLXFuaCrAjiPopbsC4UVoMjcy6R6lRJdAdo+7E0H7QVJLpl kmQwWPTA3pXn0nsoohJEwA== 0000891618-99-005212.txt : 19991117 0000891618-99-005212.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005212 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCRUE SOFTWARE INC CENTRAL INDEX KEY: 0001087243 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943238684 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26437 FILM NUMBER: 99753623 BUSINESS ADDRESS: STREET 1: 48634 MILMONT DRIVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5105804500 MAIL ADDRESS: STREET 1: 48634 MILMONT DR CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-26437 - -------------------------------------------------------------------------------- ACCRUE SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3238684 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 48634 MILMONT DRIVE FREMONT, CA 94538-7353 (Address of principal executive offices, including zip code) (510) 580-4500 (Registrant's telephone number, including area code) [FORMER NAME OR FORMER ADDRESS, IF APPLICABLE] (Former name, former address and former fiscal year, if changed since last report) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] As of November 12, 1999, there were 25,055,092 shares of the registrant's Common Stock outstanding. 2 ACCRUE SOFTWARE, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1999 AND MARCH 31, 1999 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 21 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22 ITEM 5. OTHER INFORMATION 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 SIGNATURES 22
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ACCRUE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, MARCH 31, 1999 1999 ------------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 40,888 $ 2,862 Accounts receivable, net 3,785 2,005 Prepaid expenses and other current assets 507 188 -------- -------- Total current assets 45,180 5,055 Property and equipment, net 1,652 894 Other assets, net 24 160 -------- -------- TOTAL ASSETS $ 46,856 $ 6,109 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 722 $ 475 Accrued liabilities 1,502 791 Accrued liabilities - merger 2,924 -- Deferred revenue 2,661 1,127 Current portion long term debt -- 136 -------- -------- Total current liabilities 7,809 2,529 Long term debt, net of current portion -- 169 -------- -------- Total liabilities 7,809 2,698 -------- -------- Stockholders' equity: Convertible preferred stock, $0.001 par value; -- 15,517 Common stock, $0.001 par value 25 7 Additional paid-in capital 67,371 6,803 Notes receivable from stockholders (213) (213) Unearned compensation (6,175) (4,930) Accumulated deficit (21,961) (13,773) -------- -------- Total stockholders' equity 39,047 3,411 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,856 $ 6,109 ======== ========
See accompanying notes to the condensed consolidated financial statements. 3 4 ACCRUE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net revenue: Software license $ 2,784 $ 573 $ 5,395 $ 1,060 Maintenance and service 766 252 1,341 391 -------- ------- -------- ------- Total revenue 3,550 825 6,736 1,451 Cost of revenues: Software license 101 65 200 103 Maintenance and service 364 46 600 93 -------- ------- -------- ------- Total cost of revenues 465 111 800 196 -------- ------- -------- ------- Gross profit 3,085 714 5,936 1,255 -------- ------- -------- ------- Operating expenses: Research and development 1,035 676 1,829 1,463 Sales and marketing 3,125 1,141 5,458 2,142 General and administrative 577 427 1,114 821 Merger costs 3,560 -- 3,560 -- Stock-based compensation expense 1,146 173 2,407 173 -------- ------- -------- ------- Total operating expenses 9,443 2,417 14,368 4,599 -------- ------- -------- ------- Loss from operations (6,358) (1,703) (8,432) (3,344) Other income, net 288 18 244 3 -------- ------- -------- ------- Net loss $ (6,070) $(1,685) $ (8,188) $(3,341) ======== ======= ======== ======= Net loss per share, basic and diluted $ (0.37) $ (0.36) $ (0.74) $ (0.73) ======== ======= ======== ======= Shares used in computing net loss per share, basic and diluted 16,283 4,644 11,122 4,575 ======== ======= ======== =======
See accompanying notes to the condensed consolidated financial statements. 4 5 ACCRUE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ------------- ------------- Cash flows from operating activities: Net loss $ (8,188) $(3,341) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 230 101 Provision for sales returns and doubtful accounts 85 -- Amortization of discount on line of credit 7 -- Stock-based compensation expense 2,407 173 Changes in operating assets and liabilities: Restricted cash -- 37 Accounts receivable (1,865) (124) Prepaid expenses and other current assets (319) 1 Other assets 127 -- Accounts payable 247 124 Accrued liabilities 711 165 Accrued costs related to mergers and acquisitions 2,924 -- Deferred revenue 1,534 235 -------- ------- Net cash used in operating activities (2,100) (2,629) -------- ------- Cash flows from investing activities: Acquisition of property and equipment (980) (181) -------- ------- Net cash used in investing activities (980) (181) -------- ------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net of issuance costs -- 7,360 Proceeds from initial public offering, net of issuance costs 40,854 -- Proceeds from equipment loan 602 -- Proceeds from note payable -- (520) Proceeds from stock options exercised 557 42 Repayment of equipment loan (907) (34) -------- ------- Net cash provided by financing activities 41,106 6,848 -------- ------- Net increase in cash and cash equivalents 38,026 4,038 Cash and equivalents at beginning of period 2,862 479 -------- ------- Cash and equivalents at end of period $ 40,888 $ 4,517 ======== ======= Supplemental disclosure of cash flow information: Notes payable converted to preferred stock $ 500 ======= Convertible preferred stock converted to common stock $ 15,517 ========
See accompanying notes to the condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial results for the periods shown. The balance sheet as of March 31, 1999 was derived from audited financial statements, but does not include all required disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form S-1 (File No. 333-79491) and the Company's Form 8-K dated September 30, 1999, filed with the Securities and Exchange Commission. The condensed consolidated financial statements have been restated to reflect the September 1999 acquisition of Marketwave Corporation, which was accounted for as a pooling of interests. The results of operations for the current interim period are not necessarily indicative of results to be expected for the entire current year or other future interim periods. Components of the consolidated results of operations of Accrue and Marketwave prior to acquisition are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net revenues: Accrue $ 2,570 $ 484 $ 4,498 $ 765 Marketwave 980 341 2,238 686 ------- ------- ------- ------- $ 3,550 $ 825 $ 6,736 $ 1,451 ======= ======= ======= ======= Net loss: Accrue $(5,107) $(1,456) $(7,250) $(2,947) Marketwave (963) (229) (938) (394) ------- ------- ------- ------- $(6,070) $(1,685) $(8,188) $(3,341) ======= ======= ======= =======
NOTE 2 - NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding. Options, warrants, shares subject to repurchase and non-converted convertible preferred stock were not included in the computation of diluted net loss per share because the effect would be anti-dilutive. Net loss per share for the three and six months ended September 30, 1998 does not include the effect of approximately 10,753,135 shares of convertible preferred stock outstanding, 1,949,000 stock options outstanding, 350,000 common stock warrants outstanding, and 1,656,725 shares of common stock issued and subject to repurchase by the Company, because their effects are anti-dilutive. Net loss per share for the three and six months ended September 30, 1999 does not include the effect of approximately 2,505,700 stock options outstanding, 20,000 common stock warrants outstanding, and 2,195,632 shares of common stock issued and subject to repurchase by the Company, because their effects are anti-dilutive. 6 7 Pro forma net loss per share is computed using the outstanding number of common shares, less shares subject to repurchase, at the end of the period and the assumed conversion of preferred stock, as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- PRO FORMA NET LOSS PER SHARE, BASIC AND DILUTED: Net loss $ (6,070) $ (1,685) $ (8,188) $ (3,341) ======== ======== ======== ======== Shares outstanding at respective period end 24,755 6,365 24,755 6,365 Shares subject to repurchase (2,195) (1,657) (2,195) (1,657) Adjustment to reflect the assumed conversion of preferred stock 10,753 10,753 -------- -------- -------- -------- Shares used in computing pro forma net loss, basic and diluted 22,560 15,461 22,560 15,461 ======== ======== ======== ======== Pro forma net loss per share, basic and diluted $ (0.27) $ (0.11) $ (0.36) $ (0.22) ======== ======== ======== ========
NOTE 3 - EQUITY TRANSACTIONS For the three and six months ended September 30, 1998, the Company recorded unearned stock-based compensation expense of $6,019,638. For the three and six months ended September 30, 1999, the Company recorded unearned stock-based compensation of $11,600 and $3,652,282, respectively, for the difference at the grant date between the exercise price and the deemed fair value of the common stock underlying the options granted during that period. Amortization of unearned compensation recognized for the three and six months ended September 30, 1998 was $172,802 and for the three and six months ended September 30, 1999 was $1,146,414 and $2,406,695, respectively. During the three and six months ended September 30, 1999, the Company granted options to purchase an aggregate of 792,572 and 1,485,824, shares of common stock, respectively, pursuant to the Company's 1996 Stock Option Plan (the "Option Plan"). Also 103,587 and 1,438,054 shares of common stock were exercised pursuant to the Option Plan. See Note 5 for acquisition of Marketwave Corporation. NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION Revenue by geographic region is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- United States $3,184 $ 773 $6,002 $1,352 Foreign 366 52 734 99 ------ ------ ------ ------ $3,550 $ 825 $6,736 $1,451 ====== ====== ====== ======
One customer accounted for 12% of revenue for the quarter ended September 30, 1999, and one customer accounted for 12% of revenue for the quarter ended September 30, 1998. No one customer accounted for more 7 8 than 10% of revenue for the six months ended September 30, 1999 and one customer accounted for 11% of revenue for the six months ended September 30, 1998. NOTE 5 - ACQUISITION On September 30, 1999, the Company completed the acquisition of Marketwave Corporation, a Washington corporation. Under the terms of the acquisition, which was accounted for as a pooling of interests, the Company exchanged approximately 3,446,414 shares of Accrue Common Stock for all of Marketwave outstanding common stock and unexpired and unexercised options to acquire Marketwave capital stock. The condensed consolidated financial statements for the three and six month periods ended September 30, 1999 include nonrecurring expenses of $3.6 million relating to costs incurred with this transaction. The costs include investment banking and financial advisory fees of approximately $1.3 million and other merger related expenses totaling $2.4 million. Other merger related expenses consist of professional services ($0.5 million), severance costs, which relate to termination of certain employees with redundant job functions in substantially all functional areas ($1.1 million), stock-based compensation expense ($0.3 million) and other merger related expenses ($0.4 million). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the condensed historical financial information and the notes thereto included in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations and related financial information contained in the Company's Registration Statement on Form S-1 (File No. 333-79491) and subsequently filed reports on Form 10-Q. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RICK FACTORS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. OVERVIEW Accrue Software was founded in 1996 and is headquartered in Fremont, California with regional sales offices throughout the US, and an international office in London, England. Our principle product, Accrue Insight, is a software solution that collects stores and analyzes detailed Web site traffic information and visitor activity data and presents this information in detailed reports to help managers and marketers make more effective merchandising and marketing decisions. We sell Accrue Insight to customers for a license fee and also provide related maintenance services. In addition, we provide professional services to assist customers at every stage of Accrue Insight deployment, from identification of specific business needs through enterprise integration and customization of e-business analysis reporting, to delivering a rapid and effective implementation. We also offer an application hosting service, Accrue Site Knowledge (ASK) Service, that enables customers to outsource system administration responsibilities in connection with their purchase of Accrue Insight. On September 30, 1999, the Company completed the acquisition of Marketwave Corporation, a Washington corporation. Under the terms of the acquisition, which was accounted for as a pooling of interests, the Company 8 9 exchanged approximately 3,446,414 shares of Accrue Common Stock for all of Marketwave outstanding capital stock and unexpired and unexercised options to acquire Marketwave capital stock. The condensed consolidated financial statements for the three and six month periods ended September 30, 1999 include nonrecurring expenses of $3.6 million relating to costs incurred with this transaction. The historical financial information has been restated to reflect the acquisition of Marketwave Corporation. Marketwave Corporation was founded in 1996 to provide software that allows marketing and business professional to maximize their Internet marketing opportunities. Marketwave's Hit List Live 4.0 is an enterprise-class Windows NT ebusiness analysis program that uses a proprietary technology called DataLink (TM) to integrate Web traffic with traditional business data such as accounting and sales databases, allowing marketing and advertising managers to see real return on investment data and track how changes in visitors' demographics affect browsing and purchasing behavior. This is accomplished by providing information about how visitors found the site, what paths the visitors used once at the site, what type of information visitors are searching for when at the site, and which parts of the site are getting the most traffic. Marketwave's Seattle location will become another Accrue facility, focusing on the Hit List solutions for development, customer service and marketing while Accrue Insight will continue to be supported and developed in California. Substantially all of our product revenues through September 30, 1999 were attributable to licensing Accrue Insight, Accrue Hit List and related products and support services. We anticipate that these will continue to account for a substantial portion of our revenues for the foreseeable future. Consequently, a decline in the price of or demand for Accrue Insight, Accrue Hit List, or related products and services, or its failure to achieve broad market acceptance, would seriously harm our business, financial condition and results of operations. We generally recognized license revenue, net of estimated returns allowance, upon product shipment. Where multiple products or services are sold together under one contract, we allocate revenue to each element based on their relative fair value, with fair value being determined using the price charged when that element is sold separately. We recognize maintenance service revenue ratably over the term of the service agreement, and we recognize consulting service revenue as services are performed. We market our products, both domestically and internationally, through our direct sales force. Sales derived through indirect channels, which consist primarily of international resellers and system integrators, accounted for less than 5% of our total revenue to date. We expect that sales derived through indirect channels will increase as a percentage of total revenue as we expand our international efforts. We license our products to our customers primarily on a perpetual basis. We offer multiple pricing models from usage-based to server- and CPU-based, allowing for additional revenue as a customer's e-business expands. Selling prices for our products have typically ranged from ten to several hundred thousand dollars. Annual support and maintenance contracts, which are purchased with initial product licenses, entitle customers to telephone support and upgrades, when and if available. The price for our support and maintenance program is based on a percentage of list price and is paid in advance. Consulting fees for implementation services and training are charged on a time-and-materials basis or a fixed-fee basis for package services. RESULTS OF OPERATIONS Revenue. Total revenues were $3.6 million and $6.7 million for the three and six months ended September 30, 1999, respectively, an increase of 330% from $0.8 million for the quarter ended September 30, 1998 and an increase of 364% from $1.5 million for the six months ended September 30, 1998. One customer accounted for 12% of revenue for the quarter ended September 30, 1999, and one customer accounted for 12% of revenue for the quarter ended September 30, 1998. No one customer accounted for more than 10% of revenue for the six months ended September 30, 1999 and one customer accounted for 11% of revenue for the six months ended September 30, 1998. Software license revenue. Revenue from software licenses was $2.8 million for the quarter ended September 30, 1999 an increase of $2.2 million, or 386%, over $0.6 million for the quarter ended September 30, 1998. For the 9 10 six months ended September 30, 1999, revenue from software licenses was $5.4 million an increase of $4.3 million, or 409%, over $1.1 million for the six months ended September 30, 1998. The majority of the growth in product revenue was due to higher unit sales volumes and an increase in the average dollar size of licenses. We anticipate that revenue from product licenses will continue to represent a substantial majority of our revenues in the future. We expect that because of our small but increasing revenue base, historical percentage growth rates of our product revenue will not be sustainable in the future. Maintenance and service revenue. Maintenance and service revenues were $0.8 million and $1.3 million for the three and six months ended September 30, 1999, respectively, representing increases of 204% from $0.3 million and 243% from $0.4 million from the corresponding periods in fiscal 1998. This growth is primarily due to expanded service offerings, more proactive sales of these offerings, and a higher proportion of renewals of maintenance contracts by existing customers. We expect that historical percentage growth rates of our maintenance and service revenue will not be sustainable in the future. Cost of revenue. Cost of revenue consists of royalties paid to third parties and the salaries and related expenses for maintenance and service personnel. These costs were $0.5 million and $0.8 million, or 13% and 12% of revenue, respectively, for the three and six months ended September 30, 1999, as compared to $0.1 million and $0.2 million or 13% and 14% of revenue in the corresponding periods in fiscal 1998. These dollar amount increases of cost of revenue reflect the higher volumes of product shipped and related third-party royalties. Because all development costs incurred in the research and development of software products and enhancements to existing software products have been expensed as incurred, cost of revenue includes no amortization of capitalized software development costs. Gross profit. Gross profit remained nearly flat at 86.9% and 86.6% for the quarters ended September 30, 1999 and 1998, and 88.1% and 86.5% for the six months ended September 30, 1999 and 1998. In the future, we expect that royalties paid to third parties will increase in absolute dollars. In addition, we expect that sales derived through indirect channels will increase as a percentage of total revenue. We also expect that maintenance and service revenue will increase as a percentage of total revenue as we expand our service offerings and maintain our maintenance contract renewal rates with customers. Maintenance and service revenue has lower gross margins than product revenue. For all of these reasons, we expect that our gross margins will decline. Operating expenses. Total operating expenses were $9.4 million for the quarter ended September 30, 1999, or 266% of net revenues as compared to $2.4 million or 293% of net revenues for the quarter ended September 30, 1998. For the six months ended September 30, 1999, total operating expenses were $14.4 million, or 213% of revenue, as compared to $4.6 million, or 317% of revenue for the six months ended September 30, 1998. The increases in absolute dollars were largely due to increased salaries and related expenses associated with newly hired employees, stock-based compensation expenses, and nonrecurring expenses of $3.6 million related to the Marketwave acquisition. Research and development expenses. Research and development expenses consist primarily of salaries and related costs associated with the development of new products, the enhancement of existing products, and the performance of quality assurance and documentation activities. Research and development expenses were $1.0 million for the quarter ended September 30, 1999, or 29% of revenue, as compared to $0.7 million, or 82% of revenue for the quarter ended September 30, 1998. For the six months ended September 30, 1999, research and development expenses were $1.8 million, or 27% of revenue, as compared to $1.5 million, or 101% of revenue for the six months ended September 30, 1998. The increase in absolute dollars is primarily attributable to increased staffing and associated support for software engineers required to expand and enhance our product and services offerings. We believe that research and development expenses will increase in dollar amount but decrease as a percentage of total revenue in the future. Research and development expenditures are charges to operations as incurred. Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions and bonuses of sales and marketing personnel, and promotional expenses. Sales and marketing expenses were $3.1 million, or 88% of revenue, for the quarter ended September 30, 1999, compared to $1.1 million, or 138% of 10 11 revenue for the quarter ended September 30, 1998. For the six months ended September 30, 1999, sales and marketing expenses were $5.5 million, or 81% of revenue, as compared to $2.1 million, or 148% of revenue for the six months ended September 30, 1998. The increases were primarily due to increased headcount in our sales and marketing departments, and increased marketing communications expenditures associated with our products and services. We believe that sales and marketing expenses will increase in dollar amount but continue to decrease as a percentage of total revenue in the future. General and administrative expenses. General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, financial, human resource, business development, and other related administrative functions, as well as legal and accounting costs. General and administrative expenses were $0.6 million, or 16% of revenue, for the quarter ended September 30, 1999, as compared to $0.4 million, or 52% of revenue for the quarter ended September 30, 1998. For the six months ended September 30, 1999, general and administrative expenses were $1.1 million, or 17% of revenue, as compared to $0.8, or 57% of revenue for the six months ended September 30, 1998. The increase in absolute dollars was primarily the result of increased staffing and associated expenses necessary to manage and support our growth. We believe that general and administrative expenses will increase in dollar amount as we continue to increase staffing to manage expanding operations and facilities, and incur additional expenses associated with operating as a public company. However, we believe that general and administrative expenses will decrease as a percentage of total revenue in the future. Mergers and acquisitions expense. During September 1999 the Company completed the acquisition of Marketwave Corporation through the issuance of Accrue Common Stock. The Company recorded nonrecurring charges of $3.6 million relating to the costs of this transaction. Stock-based compensation. Total stock-based compensation as of September 30, 1999 amounted to $9.9 million, of which approximately $1.1 million was amortized for the quarter ended September 30, 1999 and $2.4 million was amortized for the six months ended September 30, 1999. Total stock-based compensation as of September 30, 1998 amounted to $6.0 million, of which approximately $0.2 million was amortized for the three and six months ended September 30,1998. The remaining balance will continue to be amortized over the vesting of the related options. Other income (expense), net. Other income (expense), net consists of interest income, interest expense, other income and other expense. Other income (expense), net was $288,000 for the quarter ended September 30, 1999 and $18,000 for the quarter ended September 30, 1998. Other income (expense), net was $244,000 for the six months ended September 30, 1999 and $3,000 for the six months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations principally through private sales of preferred stock, with net proceeds of $12.9 million, bank loans, and with the net proceeds of $40.9 million from our initial public offering completed in August of 1999. We used $1.9 million of cash in operations for the six months ended September 30, 1999 and $2.6 million of cash in operations for the six months ended September 30, 1998. We used cash primarily to fund our net losses from operations. For the six months ended September 30, 1999, cash used by operating activities was primarily attributable to our net loss of $8.2 million and an increase in accounts receivable of $1.9 million, offset in part by an increase in deferred revenue of $1.5 million, an increase in accrued liabilities of $0.7 million, an increase in accrued costs related to mergers and acquisitions of $2.9 million and stock-based compensation expense of $2.6 million. The increase in accounts receivable, provision for sales returns and doubtful accounts and deferred revenue were a result of higher unit sales of Accrue Insight. Cash provided by financing activities was $40.9 million for the six months ended September 30, 1999 and $6.8 million for the six months ended September 30, 1998. We have a $2.0 million working capital line of credit with Silicon Valley Bank, which expires in June 2000. Interest is payable monthly. There were no amounts outstanding under the line as of September 30, 1999. Capital expenditures were $1.0 million for the six months ended September 30, 1999, and $0.2 million for the six months ended September 30, 1998. Our capital expenditures consist primarily of purchases of property and 11 12 equipment, including computer equipment and software. We expect that our capital expenditures will continue to increase in the future. We expect to experience significant growth in our operating expenses in the future in order to execute our business plan, particularly research and development and sales and marketing expenses. As a result, we anticipate that our operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. We believe that the net proceeds from the sale of the common stock in our initial public offering completed in August 1999 will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all. YEAR 2000 READINESS "Year 2000 Issues" refer generally to the problems that some software may have in determining the correct century for the year. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in failures or the creation of erroneous results. We have defined Year 2000 compliant as the ability to: o Correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; o Function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; o Respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined and predetermined manner; Store and provide output of date information in ways that are unambiguous as to century if the date elements in interfaces and data storage specify the century; and o Recognize the Year 2000 as a leap year. We designed our current products to be Year 2000 compliant when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are Year 2000 compliant. We have tested our products for Year 2000 compliance. We continue to respond to customer questions about prior versions of our products on a case-by-case basis. We have not tested software obtained from third parties. However, we are seeking assurances from our vendors that licensed software is Year 2000 compliant. Despite assurances from developers of products incorporated into our products, our products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in delay or loss of revenues, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could seriously harm our business, financial condition and results of operations. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of such lawsuits against other software vendors. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent we may be affected by it. We are assessing our material internal information technology systems, including both our own software products and third party software and hardware technology. We expect to complete testing of our information technology systems in 1999. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from such vendors that their systems are Year 2000 compliant. We are not currently aware of any significant operational issues or costs associated with preparing our internal information technology and non-information technology systems for the Year 2000. However, we may experience significant unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal information technology and non-information technology systems. 12 13 We do not currently have any information concerning the Year 2000 compliance status of our customers. Our current or future customers may incur significant expenses to achieve Year 2000 compliance. If our customers are not Year 2000 compliant, they may experience material costs to remedy problems, they may face litigation costs and they may delay purchases or implementation of our products. Year 2000 issues could reduce or eliminate the budgets that current or potential customers could have for purchases of our products and services. As a result, our business, financial condition and results of operations could be seriously harmed. We have funded our Year 2000 plan from cash balances and such costs in the past. To date, these costs have not been significant. Although we do not expect to, we may incur additional costs related to the Year 2000 plan for administrative personnel to manage the project, outside contractor assistance, technical support for our products, product engineering and customer satisfaction. In addition, we may experience material problems and costs with Year 2000 compliance that could seriously harm our business, financial condition and results of operations. We are in process of finalizing a contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing such a plan may itself be significant. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company interruptions caused by Year 2000 compliance failures. RISK FACTORS The following is a discussion of certain factors which currently impact or may impact our business, operating results and/or financial condition. Anyone making an investment decision with respect to our capital stock or other securities is cautioned to carefully consider these factors, along with the factors discussed in the Company's Registration Statement on Form S-1 (File No. 333-79491). WE HAVE A LIMITED OPERATING HISTORY. Accrue was formed in February 1996, and we introduced Accrue Insight 1.0, our first software product, in January 1997. For the fiscal year ended March 31, 1998, we generated $2.0 million in revenue, for the fiscal year ended March 31, 1999, we generated $4.7 million in revenue, and for the six months ended September 30, 1999 we generated $6.7 million in revenue. Thus, we have only a limited operating history upon which you can evaluate our business and prospects. Due to our limited operating history, it is difficult or impossible for us to predict future results of operations. For example, we cannot forecast operating expenses based on our historical results because they are limited, and we are required to forecast expenses in part on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenue is lower than we had projected, therefore net losses in a given quarter would be greater than expected. In addition, our ability to forecast accurately our quarterly revenue is limited due to a number of factors described in detail below, making it difficult to predict the quarter in which sales will occur. Moreover, due to our limited operating history, any evaluation of our business and prospects must be made in light of the risks and uncertainties often encountered by early-stage companies in Internet-related products and services markets, which is new and rapidly evolving. Many of these risks are discussed under the sub-headings below. We may not be able to successfully address any or all of these risks and our business strategy may not be successful. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detailed information on our historical results of operations. WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES. We have not achieved profitability and we expect to incur net losses for the foreseeable future. We incurred net losses of $2.0 million for the fiscal year ended March 31, 1997, $4.2 million for the fiscal year ended March 31, 1998, $7.6 million for the fiscal year ended March 31, 1999 and $8.2 million for the six months ended September 30, 1999. As of September 30, 1999, we had an accumulated deficit of $22.0 million. If we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future, or at all. 13 14 WE EXPECT OPERATING EXPENSES TO INCREASE, WHICH MAY IMPEDE OUR ABILITY TO ACHIEVE PROFITABILITY. As we grow our business we expect operating expenses to increase significantly, and as a result, we will need to generate increased quarterly revenue to achieve and maintain profitability. In particular, we expect to incur additional costs and expenses related to the expansion of our sales force and distribution channels, the expansion of our product and services offerings, the development of relationships with strategic business partners, the expansion of management and infrastructure, and brand development, marketing and other promotional activities. IF WE CANNOT FUND OPERATIONS FROM CASH GENERATED BY OUR BUSINESS, WE MAY BE REQUIRED TO SELL ADDITIONAL STOCK, WHICH COULD DEPRESS OUR COMMON STOCK PRICE. To date, we have been unable to fund operations from cash generated by our business and have funded operations primarily by selling securities. If our revenue fails to offset operating expenses, we may be required to fund future operations through the sale of additional common stock, which could cause our common stock price to decline. FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK. Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, particularly as a result of the risks we describe in this section. Because our operating results are volatile and difficult to predict, you should not rely on the results of one quarter as an indication of future performance. It is likely that in some future quarter our operating results will fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may fall significantly. OUR SUCCESS DEPENDS ON CERTAIN KEY MANAGEMENT PERSONNEL. Our success depends largely upon the continued services of our key management and technical personnel, the loss of which could seriously harm our business. In particular, we rely on Richard Kreysar, President, Chief Executive Officer and a director, and Bob Page, Vice President of Product Development and Chief Technical Officer. Messrs. Kreysar and Page do not have employment or non-competition agreements and could therefore terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our employees. WE FACE INTENSE COMPETITION, WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS NOW AND IN THE FUTURE. The market for e-business analysis solutions is intensely competitive, evolving and subject to rapid technological change. We expect the intensity of competition to increase in the future. Competitors vary in size and in the scope and breadth of the products and services they offer. Our principal competitors today include vendors of software that target e-business customer data collection and analysis markets such as Andromedia, Inc., net.Genesis Corporation and WebTrends Corporation;developers of software that address only certain technology components of our products; and in-house development efforts by potential customers or partners. We expect that if we are successful in our strategy to expand the scope of our products and services, we may encounter many additional, market-specific competitors. In addition, because there are relatively low barriers to entry in the software market, we expect additional competition from traditional business intelligence and enterprise software vendors as the Internet software market continues to develop and expand. Some of these companies, as well as some other competitors, have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we have. In addition, many of our competitors have well-established relationships with current and potential customers of ours, have extensive knowledge of our industry and are capable of offering a single-vendor solution. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in 14 15 customer requirements, devote greater resources to the development, promotion and sale of their products, or adopt more aggressive pricing policies to gain market share. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of software industry consolidations. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We may not be able to compete successfully against current and future competitors, in which case our business could suffer. WE RELY ON SALES OF A SINGLE PRODUCT LINE FOR OUR REVENUE. We currently derive all of our revenue from the license and related upgrades, professional services and support of our Accrue Insight and Accrue Hit List products. We expect that we will continue to depend on revenue related to new and enhanced versions of these products for at least the next several quarters. We cannot be certain that we will be successful in upgrading and marketing our products and services or that we will successfully develop and market new products and services on a timely basis. If we do not continue to increase revenue related to our existing products and services or generate revenue from new products and services, our business would be seriously harmed. IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN E-COMMERCE TECHNOLOGY, OUR PRODUCT REVENUE COULD DECLINE. The market for our products is marked by rapid technological change, frequent new product introductions, Internet-related technology enhancements, uncertain product life cycles, changes in client demands and evolving industry standards. We cannot be certain that we will successfully develop and market new products, new product enhancements or new products compliant with present or emerging Internet technology standards. In developing our products, we have made, and will continue to make, assumptions with respect to which standards will be adopted by the industry, our customers and competitors. If the standards adopted are different from those, which we have chosen to support, market acceptance of our products may be significantly reduced or delayed and our business will be seriously harmed. In addition, we may be required to make significant expenditures to adapt our products to changing or emerging technologies. New products based on new technologies or new industry standards can render existing products obsolete and unmarketable. To succeed, we will need to enhance our current products and develop new products on a timely basis to keep pace with developments related to Internet technology and to satisfy the increasingly sophisticated requirements of our clients. E-business analysis technology is complex and new products and product enhancements can require long development and testing periods. Any delays in developing and releasing enhanced or new products could harm our business, operating results and financial condition. THE FAILURE TO RETAIN AND ATTRACT KEY TECHNICAL PERSONNEL COULD HARM OUR BUSINESS. Because of the complexity of our products and technologies, we are substantially dependent upon the continued service of our existing product development personnel. In addition, we intend to hire a number of engineers with high levels of experience in designing and developing software and Internet-related products in time-pressured environments. The competition in Silicon Valley for qualified engineers in the computer software and Internet markets is intense. New personnel will require training and education and take time to reach full productivity. Our future success depends on our ability to attract, train and retain these key personnel. FAILURE TO EXPAND OUR SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD LIMIT OUR GROWTH. In order to maintain and increase our market share and revenue, we will need to expand our direct and indirect sales operations and channels of distribution. We have recently expanded our direct sales force and plan to hire 15 16 additional sales personnel. Our direct sales and support organization consisted of 30 employees as of April 30, 1999 and 48 employees as of September 30, 1999, including the September, 1999 addition of 11 people from Marketwave. Competition for qualified sales personnel is intense, and we might not be able to hire the kind and number of sales personnel we are targeting. New hires will require extensive training and typically take several months to achieve productivity. In addition, we need to expand our relationships with domestic and international channel partners, distributors, value-added resellers, systems integrators, online and other resellers, Internet service providers, original equipment manufacturers, and other partners to build our indirect sales channel. WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE PROFESSIONAL SERVICES ORGANIZATION WHICH COULD NEGATIVELY AFFECT BOTH OUR OPERATING RESULTS AND OUR ABILITY TO ASSIST OUR CUSTOMERS WITH THE IMPLEMENTATION OF OUR PRODUCTS. Customers that license our software typically engage our professional services organization to assist with support, training, consulting and implementation of their e-business analysis solutions. We believe that growth in our product sales depends on our ability to provide our customers with these services and to educate third-party resellers on how to use our products. We expect our services revenue to increase in absolute dollars as we continue to provide consulting and training services that complement our products and as our installed base of customers grows. We generally bill our clients for our services on a time-and-materials basis. Failure to estimate accurately the resources and time required for an engagement, to manage our customers' expectations effectively regarding the scope of services to be delivered for an estimated price or to complete fixed-price engagements within budget, on time and to the customer's satisfaction could expose us to risks associated with cost overruns, and in some cases, penalties, and may harm our business. Although we plan to expand our services in order to address our customers' needs we cannot be certain that it will ever achieve profitability. OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND INTERNATIONALLY. Licenses and services sold to clients located outside the United State for the three and six months ended September 30, 1999 were 10.3% and 10.9%, respectively, of our total revenue and 6.3% and 6.8%, respectively, for the three and six months ended September 30, 1998. We expect international revenue to account for an increasing percentage of total revenue in the future. We believe that we must expand our international sales activities in order to be successful. We initiated operations in selected international markets in the first quarter of fiscal 2000. Expansion into international markets will require management attention and resources. We also intend to enter into a number of international alliances as part of our international strategy and rely extensively on these business partners to conduct operations, coordinate sales and marketing efforts, and provide software localization services. To date, we have non-exclusive alliances with Sumisho Electronics Company, Ltd., a subsidiary of Sumitomo Corporation, and Itochu Techno-Science Corporation for distribution of our products in Japan, and Scientific Computers GmbH for distribution of our products in Europe. These alliances are not subject to binding agreements, have no specified performance requirements by us or our allied partners, and may be terminated by either party at any time. Our success in international markets will depend on the success of our business partners and their willingness to dedicate sufficient resources to our relationships. We cannot assure you that we will be successful in expanding internationally. International operations are subject to other inherent risks, including such factors as protectionist laws and business practices that favor local competition, difficulties and costs of staffing and managing foreign operations, dependence on local vendors, multiple, conflicting and changing governmental laws and regulations, longer sales and collection cycles, foreign currency exchange rate fluctuations, political and economic instability, reduced protection for intellectual property rights in some countries, seasonal reductions in business activity, and expenses associated with localizing products for foreign countries. If we fail to address these risks adequately our business may be seriously harmed. OUR GROWTH COULD BE LIMITED IF WE FAIL TO SUCCESSFULLY IDENTIFY AND INTEGRATE POTENTIAL ACQUISITIONS AND INVESTMENTS. Due to the intensely competitive nature of the e-business analysis market, we believe that our success will depend on our ability to attain significant market share, which will depend in part on our ability to successfully identify 16 17 and acquire businesses, products and technologies from third parties that are complementary to our existing products and services. We do not have any present understanding, nor are we having any discussions relating to any acquisition or investment. We cannot be certain that we will be able to rapidly expand our product and services offerings through these acquisitions or investments. Some of the risks we may encounter include complementary products and services may not be available on commercially reasonable terms; we may be unable to compete for acquisitions of products and services with many of our competitors who have greater financial resources than we do; acquired products and services may not meet the needs of our customers; we may incur difficulties associated with the integration of the personnel and operations of an acquired company with our personnel and operations; we may incur difficulties in assimilating acquired products, services or technologies, with our existing products, services and technologies; and integration of acquired and existing products and services may result in decreases in revenue from existing products and services. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, we may have to issue equity securities to pay for any future acquisition which could be dilutive to our existing stockholders. We may also have to incur debt which could contain covenants that restrict our operations. In addition, acquisitions and investments may have negative effect on our reported results of operations from acquisition-related charges and amortization of acquired technology and other intangibles. Any of these acquisition-related risks could harm our business. OUR VARIED SALES CYCLES MAKE IT DIFFICULT TO BUDGET AND FORECAST OUR OPERATING RESULTS. We have varied sales cycles because we generally need to educate potential clients regarding the use and benefits of our product applications. The stability of our sales cycle continues to evolve as our products mature. Our long sales cycle makes it difficult to predict the quarter in which sales may fall and to budget and forecast operating results. In addition, a significant portion of our sales fall within the last month of a quarter, making it difficult to predict revenue until late in the quarter and to adjust expenses accordingly. OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY SMALL DELAYS IN CUSTOMER ORDERS OR PRODUCT INSTALLATIONS. Small delays in customer orders can cause significant variability in our license revenue and operating results for any particular period. We derive a substantial portion of our revenue from the sale of software products and related services. Our revenue recognition policy requires us to deliver the software prior to recognizing any revenue for the product and to substantially complete the implementation of our product before we can recognize service revenue. Any end of quarter delays in orders for delivery or product installation schedules could harm operating results for that quarter. IF THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS IS NO LONGER AVAILABLE, OUR BUSINESS COULD BE HARMED. We integrate third-party software as a component of our software. For example, we rely on Red Brick database technology licensed to us by Informix Software, Inc. to maintain data stored in our Accrue Insight product. This agreement terminates in March 2000, and we cannot be certain that Informix will renew this agreement. If Informix does not renew this agreement, we will be required to obtain similar technology from other parties, which may not be available to us on commercially reasonable terms. Although we plan to integrate additional database technology in our products prior to March 2000, we cannot be certain that we will be able to successfully integrate this technology prior to this date. We also incorporate graphic generation tools from VI/Visualize, Inc. in Accrue Insight. This agreement terminates in July 2000. If we cannot maintain licenses to key third-party software, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could seriously harm our business, financial results and results of operations. IF WE FAIL TO SUCCESSFULLY PROMOTE OUR ACCRUE BRAND NAME OR IF WE INCUR SIGNIFICANT EXPENSES PROMOTING AND MAINTAINING OUR ACCRUE BRAND NAME, OUR BUSINESS COULD BE HARMED. 17 18 Due in part to the emerging nature of the market for e-business analysis solutions and the substantial resources available to many of our competitors, there may be a time-limited opportunity for us to achieve and maintain a significant market share. Developing and maintaining awareness of the Accrue brand name is critical to achieving widespread acceptance of our e-business analysis solutions. Furthermore, the importance of brand recognition will increase as competition in the market for our products increases. Successfully promoting and positioning the Accrue brand will depend largely on the effectiveness of our marketing efforts and our ability to develop reliable and useful products at competitive prices. Therefore, we may need to increase our financial commitment to creating and maintaining brand awareness among potential customers. THE STRAIN THAT OUR GROWTH RATE PLACES UPON OUR SYSTEMS AND MANAGEMENT RESOURCES MAY ADVERSELY AFFECT OUR BUSINESS. We have recently experienced a period of significant expansion of our operations that has placed a significant strain on our management, administrative and operational resources. In addition, we have recently hired a significant number of employees and plan to further increase our total headcount. Our headcount has increased from 22 at March 31, 1997, to 38 at March 31, 1998, to 59 at March 31, 1999, and 95 at September 30, 1999 including the September, 1999 addition of 20 people from Marketwave. Furthermore, our Chief Financial Officer joined us in April 1999 and has had limited exposure to our prior operations. In addition, we intend to further expand our finance, administrative and operations staff. Any failure to properly manage our growth could have a material adverse effect on our business, results of operations, and financial condition. To properly manage this growth, we must, among other things, implement and improve additional and existing administrative, financial, and operational systems, procedures, and controls on a timely basis. We may not be able to complete the necessary improvements to our systems, procedures, and controls necessary to support our future operations in a timely manner. Management may not be able to hire, train, retain, motivate, and manage required personnel and may not be able to successfully identify, manage, and exploit existing and potential market opportunities. In connection with our expansion, we plan to increase our operating expenses to expand our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, broaden professional services and support, and improve operational and financial systems. Failure of our revenue to increase along with these expenses during any fiscal period could have a materially adverse impact on our financial results for that period. ACCRUE INSIGHT, OUR MOST IMPORTANT PRODUCT, IS NOT PROTECTED BY A PATENT. IF ANOTHER PARTY WERE TO USE THIS TECHNOLOGY, OUR BUSINESS WOULD SUFFER. We regard substantial elements of our e-business analysis solutions as proprietary and attempt to protect them by relying on patent, trademark, service mark, trade dress, copyright, and trade secret laws and restrictions, as well as confidentiality procedures and contractual provisions. Any steps we take to protect our intellectual property may be inadequate, time consuming, and expensive. In addition, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, which could have a material adverse effect on our business. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. Effective trademark, copyright, and trade secret protection may not be available in every country in which our products are distributed or made available through the Internet. Furthermore, our competitors may independently develop similar technology that substantially limits the value of our intellectual property or design around patents issued to us. OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD HARM OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. In addition to the technology we have developed internally, we also use code libraries developed and maintained by third parties and have acquired or licensed technologies from other companies. Our internally developed technology, the code libraries, or the technology we acquired or licensed may infringe a third party's intellectual property rights who may bring claims against us alleging infringement of their intellectual property rights. We have recently received a letter from a patent holder regarding possible infringement of their U.S. patent. We have investigated this patent and believe we have meritorious defenses to any claims that could be asserted. Any 18 19 infringement or claim of infringement could have a material adverse effect on our business. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We are not currently involved in any intellectual property litigation. However, as the number of entrants into our market increases, the possibility of an intellectual property claim against us grows and we may be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These claims and any resulting litigation could subject us to significant liability for damages and invalidation of our proprietary rights, would likely be time-consuming and expensive to defend and would divert management time and attention. Any potential intellectual property litigation could also force us to cease selling, incorporating, or using products or services that incorporate the challenged intellectual property; obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; and/or redesign those products or services that incorporate infringing technology. Any of these results could seriously harm our business. PRODUCT DEFECTS COULD LEAD TO LOSS OF CUSTOMERS, WHICH COULD HARM OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Despite internal testing and testing by current and potential customers, our current and future products may contain serious defects, including Year 2000 errors, the occurrence of which could result in adverse publicity, loss of or delay in market acceptance, or claims by customers against us, any of which could harm our business, results of operations, and financial condition. In addition, our products and product enhancements are very complex and may from time to time contain errors or result in failures that we did not detect or anticipate when introducing our products or enhancements to the market. The computer hardware environment is characterized by a wide variety of non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time consuming. Despite our testing, errors may still be discovered in some new products or enhancements after the products or enhancements are delivered to customers. WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD REQUIRE CONSIDERABLE EFFORT AND EXPENSE TO DEFEND AND WHICH COULD HARM OUR BUSINESS. Our products are used to monitor the traffic data of our customers' Web sites, and to segment, analyze and report this data. These and other functions that our products provide are often critical to our customers, especially in light of the considerable resources many organizations spend on the development and maintenance of their Web sites. Our end-user licenses contain provisions that limit our exposure to product liability claims, but these provisions may not be enforceable in all jurisdictions. Additionally, we maintain limited products liability insurance. To the extent our contractual limitations are unenforceable or these claims are not covered by insurance, a successful products liability claim could harm our business. RISKS RELATED TO OUR INDUSTRY EVOLVING REGULATION OF THE INTERNET MAY HARM OUR BUSINESS. As e-commerce continues to evolve, increasing regulation by federal, state, or foreign agencies becomes more likely. This regulation is likely in the areas of user privacy, pricing, content, quality of products and services, taxation, advertising, intellectual property rights, and information security. In particular, laws and regulations applying to the solicitation, collection, or processing of personal or consumer information could negatively affect our activities. Typically, our products capture traffic data when consumers, business customers or employees visit a Web site. The perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our products. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify Web site users that the data captured after visiting Web sites may be used by marketing entities to unilaterally direct product promotion and advertising to that user. We are not aware of any similar legislation or regulatory requirements currently in effect in the United States. Other countries and political entities, such as the European Economic Community, have adopted legislation or regulatory requirements. The United States may adopt similar legislation or regulatory requirements. If consumer privacy concerns are not adequately 19 20 addressed, our business could be harmed. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity and libel is uncertain and developing. Furthermore, any regulation imposing fees or assessing taxes for Internet use could result in a decline in the use of the Internet and the viability of e-commerce. Any new legislation or regulation, or the application or interpretation of existing laws or regulations, may decrease the growth in the use of the Internet, may impose additional burdens on e-commerce or may require us to alter how we conduct our business. This could decrease the demand for our products and services, increase our cost of doing business, increase the costs of products sold through the Internet or otherwise have a negative effect on our business, results of operations and financial condition. OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET. Continued expansion in the sales of our e-business analysis solutions will depend upon the continued growth of the Internet as a widely used medium for commerce and communication. Rapid growth in the use of the Internet is a recent phenomenon. Acceptance and use may not continue to develop at historical rates and a sufficiently broad base of customers may not adopt or continue to use the Internet and online services as a medium of commerce and communication. Demand and market acceptance for recently-introduced products and services relating to the Internet are subject to a high level of uncertainty and few proven products and services exist. If the Internet does not continue to grow as a widespread communications medium and commercial marketplace, the demand for our e-business analysis solutions could be significantly reduced. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development of complementary products, such as high speed modems. The Internet infrastructure may not be able to support the demands placed on it by continued growth. Additionally, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to the impact of interest rate changes, foreign currency fluctuation, and changes in the market values of it investments. INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company has not used derivative financial instruments in its investment portfolio. The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates ot the Company may suffer losses in principle if forced to sell securities which have declined in market value due to changes in interest rates. FOREIGN CURRENCY RISK To date, international sales are made by our direct sales force or through international alliances and are all transacted in U.S. dollars. However, as we continue to increase our international business we could be subject to risks typical of an international business, including but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. 20 21 The Company does not use derivative financial instruments for speculative trading purposes, nor does the Company hedge any foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings that are material to its business or financial condition. ITEM 2. CHANGE IN SECURITIES a. Not applicable b. Not applicable c. Securities sold during the quarter ended September 30, 1999 that were not registered under the Securities Act. The sales of the securities listed below were deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") in reliance on Section 4(2) of the Securities Act or Rule 701 promulgated under section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contract relating to compensation as provided under such rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. (i) During the quarter ended September 30, 1999, the Company granted options to purchase an aggregate of 798,500 shares of Common Stock to an aggregate of 40 directors, officers and employees pursuant to the Company's 1996 Stock Option Plan (the "Option Plan"). (ii) During the quarter ended September 30, 1999, options to purchase an aggregate of 103,519 shares of Common Stock were exercised by an aggregate of 9 directors, officers and employees pursuant to the Option Plan. (iii) Pursuant to the acquisition of Marketwave Corporation on September 30, 1999, the Company issued 3,446,414 shares of Accrue Common Stock to the stockholders and optionholders of Marketwave Corporation in exchange for all outstanding capital stock and all unexpired and unexercised options to acquire capital stock. d. Use of proceeds from sale of Registered Securities. On August 4, 1999, the Company completed an initial public offering of its Common Stock, $0.001 par value. The managing underwriters in the offering were BancBoston Robertson Stephens and Thomas Weisel Partners, LLC, (the "Underwriters"). The shares of Common Stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-79491) that was declared effective by the SEC on July 29, 1999. The offering commenced on July 30, 1999, on which date 3,900,000 shares of Common Stock registered under the Registration Statement were sold at a price of $10.00 per share. The aggregate price of the offering amount registered and sold was $39,000,000. In connection with the offering, the Company paid an aggregate of $2,730,000 in underwriting discounts and commissions to the Underwriters and the aggregate proceeds to the Company were approximately $35.6 million after deducting estimated offering expenses of $700,000. The Underwriters also had an overallotment option to purchase 585,000 shares, which closed on August 26, 1999. The aggregate price of the offering was $44,850,000. The aggregate underwriting discounts and commissions to the Underwriters was $3,139,500 and the aggregate net proceeds to the Company was approximately $40.8 million after deducting offering expenses of $856,000. 21 22 The Company currently expects to use the net proceeds primarily for working capital and general corporate purposes, including funding product development and expanding the sales and marketing organization. We have not yet determined the actual expected expenditures and thus cannot estimate the amounts to be used for each of these purposes. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. In addition, we may use a portion of the net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. Accordingly, although we have no present commitments or agreements with respect to such acquisitions, management will have significant discretion in applying the net proceeds of this offering. None of the Company's net proceeds of the offering were paid directly or indirectly to any director, officer, general partner of Accrue or their associates, persons owning 10% or more of any class of equity securities of Accrue, or an affiliate of Accrue. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following exhibit is attached hereto: 27.1 Financial Data Schedule b. Reports on Form 8-K: On October 12, 1999, the Company filed a report on Form 8-K announcing the September 30, 1999 acquisition of Marketwave Corporation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACCRUE SOFTWARE, INC. By: /s/ GREGORY C. WALKER ------------------------------------- GREGORY C. WALKER CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND FINANCE OFFICER) Date: November 11, 1999 22 23 EXHIBIT INDEX Exhibit No. Document ------ -------- 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 6-MOS MAR-31-2000 MAR-31-1999 APR-01-1999 APR-01-1998 SEP-30-1999 SEP-30-1998 40,888 4,572 0 0 3,999 996 214 25 0 0 507 5,637 2,234 911 582 275 46,856 6,315 7,809 1,311 0 237 0 0 0 13,996 25 36 39,022 (9,264) 46,856 6,315 5,395 1,060 6,736 1,451 200 103 800 196 14,368 4,599 85 0 42 28 (8,188) (3,341) 0 0 (8,188) (3,341) 0 0 0 0 0 0 (8,188) (3,341) (0.74) (0.73) (0.74) (0.73)
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