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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-26437
================================================================================
ACCRUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3238684
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48634 MILMONT DRIVE
FREMONT, CA 94538-7353
(Address of principal executive offices, including zip code)
(510) 580-4500
(Registrant's telephone number, including area code)
[FORMER NAME OR FORMER ADDRESS, IF APPLICABLE]
(Former name, former address and former fiscal year, if changed since
last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2001, there were 30,146,875 shares of the registrant's
Common Stock outstanding.
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ACCRUE SOFTWARE, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2001 AND MARCH 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 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 20
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 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, MARCH 31,
2001 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 11,571 $ 11,951
Accounts receivable, net .............................. 1,056 1,868
Prepaid expenses and other current assets ............. 383 2,782
----------- -----------
Total current assets ............................... 13,010 16,601
Property and equipment, net ............................. 2,651 2,923
Intangible assets, net .................................. 7,015 10,383
Other assets ............................................ 362 362
----------- -----------
Total assets ....................................... $ 23,038 $ 30,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 386 $ 1,026
Accrued liabilities ................................... 3,221 4,406
Accrued liabilities, merger ........................... 54 80
Deferred revenue ...................................... 3,929 4,897
Short term borrowings ................................. --- 2,000
----------- -----------
Total current liabilities .......................... 7,590 12,409
----------- -----------
Stockholders' equity:
Common stock ............................................ 30 31
Additional paid-in capital .............................. 264,967 264,996
Deferred stock-based compensation ....................... (814) (1,023)
Accumulated other comprehensive income (loss) ........... 64 (35)
Accumulated deficit ..................................... (248,799) (246,109)
----------- -----------
Total stockholders' equity ......................... 15,448 17,860
----------- -----------
Total liabilities and stockholders' equity ......... $ 23,038 $ 30,269
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
2001 2000
-------- --------
Net revenue:
Software license $ 1,147 $ 6,923
Maintenance and service 2,465 2,827
-------- --------
Total revenue 3,612 9,750
-------- --------
Cost of revenues:
Software license 105 381
Maintenance and service 2,128 1,439
-------- --------
Total cost of revenue 2,233 1,820
-------- --------
Gross profit 1,379 7,930
-------- --------
Operating expenses:
Research and development 2,122 1,936
Sales and marketing 1,489 4,149
General and administrative 1,323 904
Amortization of intangible assets 3,368 10,859
Stock-based compensation expense 209 749
-------- --------
Total operating expenses 8,511 18,597
-------- --------
Loss from operations (7,132) (10,667)
Other income, net 4,440 405
-------- --------
Net loss $ (2,692) $(10,262)
======== ========
Net loss per share, basic and diluted $ (0.09) $ (0.40)
======== ========
Shares used in computing net loss per
share, basic and diluted 29,821 25,578
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ACCRUE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
---------------------------
JUNE 30, JUNE 30,
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss .................................................................... $ (2,692) $ (10,262)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Gain on sale of technology assets ........................................ (4,306) ---
Depreciation and amortization ............................................ 3,640 11,048
Provision for sales returns and doubtful accounts ........................ --- 189
Stock-based compensation expense ......................................... 209 749
Changes in operating assets and liabilities:
Accounts receivable .................................................... 812 (2,106)
Prepaid expenses and other current assets .............................. 2,399 683
Other assets ........................................................... --- 49
Accounts payable ....................................................... (640) 689
Accrued liabilities .................................................... (1,053) 735
Accrued costs related to merger and acquisition ........................ (26) (1,139)
Deferred revenue ....................................................... (968) (283)
---------- ----------
Net cash provided by (used in) operating activities ................. (2,625) 352
---------- ----------
Cash flows from investing activities:
Net proceeds from sale of technology assets ................................. 4,306
Acquisition of property and equipment ....................................... --- (487)
---------- ----------
Net cash provided by (used in) investing activities ................. 4,306 (487)
---------- ----------
Cash flows from financing activities:
Proceeds from stock options and warrants exercised .......................... 9 492
Repurchase of common stock .................................................. (29) (92)
Repayment of short term borrowings .......................................... (2,000)
Repayment of equipment loan ................................................. --- (48)
---------- ----------
Net cash provided by (used in) financing activities ................. (2,020) 352
Effect of exchange rate changes on cash ............................. (41) ---
---------- ----------
Net increase (decrease) in cash and cash equivalents .......................... (380) 217
Cash and cash equivalents at beginning of period .............................. 11,951 31,754
---------- ----------
Cash and cash equivalents at end of period .................................... $ 11,571 $ 31,971
========== ==========
Supplemental disclosure of cash flow information:
Interest paid ............................................................... $ 24 $ 4
========== ==========
Unearned compensation related to grants of stock options .................... $ 814 $ 3,488
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown. The balance sheet as of March 31, 2001 was
derived from audited financial statements, but does not include all required
disclosures required by generally accepted accounting principles.
Accrue has completed several rounds of equity financing, most recently its
initial public offering that generated $40.8 million of net proceeds in July
1999. However, Accrue has incurred substantial losses and negative cash flows
from operations in each fiscal period since inception. For the quarter ended
June 30, 2001, Accrue incurred net losses of $2.7 million and negative cash
flows from operations of $2.6 million. As of June 30, 2001, Accrue had an
accumulated deficit of $248.8 million. Management expects operating losses and
negative cash flows to continue for the foreseeable future due to a decline in
projected revenues in comparison to fiscal 2001. Management, however, expects
that losses will decrease from the prior fiscal year due to the decline in
revenues being offset by reduction in headcount and other cost saving efforts in
place. Also, to fund fiscal year 2002 operations Accrue generated approximately
$4.3 million from the sale of certain intellectual property in June 2001 (see
Note 5). Certain costs, such as employee costs, could be reduced further if
working capital decreased significantly. Failure to generate sufficient
revenues, reduce certain discretionary spending or raise additional capital
could have a material adverse effect on Accrue's ability to continue as a going
concern and to achieve its intended business objectives.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in our Annual Report on
Form 10-K/A for the fiscal year ended March 31, 2001. The results of operations
for the current interim period are not necessarily indicative of results to be
expected for the entire current year or other future interim periods.
NOTE 2 - NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of vested
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 vested common shares and potential common shares outstanding during the
period. However, as Accrue generated net losses in all periods presented,
potential common shares, composed of incremental common shares issuable upon the
exercise of stock options and warrants, are not included in diluted net loss per
share because such shares are anti-dilutive.
Net loss per share for the quarter ended June 30, 2000 does not include the
effect of approximately 3,617,000 stock options outstanding or approximately
1,621,000 shares of common stock issued and subject to repurchase by Accrue,
because their effects are anti-dilutive.
Net loss per share for the quarter ended June 30, 2001 does not include the
effect of approximately 6,167,000 stock options outstanding or approximately
394,000 shares of common stock issued and subject to repurchase by Accrue,
because their effects are anti-dilutive.
A reconciliation of shares used in the calculation of net loss per share follows
(in thousands, except per share data):
THREE MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
--------- ---------
NET LOSS PER SHARE, BASIC AND DILUTED:
Net loss ....................................................... $ (2,692) $ (10,262)
========= =========
Basic and diluted:
Weighted average shares of common stock outstanding ............ 30,267 27,369
Less: weighted average shares subject to repurchase ............ (446) (1,791)
--------- ---------
Weighted average shares used in computing net loss per
share, basic and diluted .................................... 29,821 25,578
========= =========
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Net loss per share, basic and diluted .......................... $ (0.09) $ (0.40)
========= =========
NOTE 3 - EQUITY TRANSACTIONS
During the three months ended June 30, 2001, Accrue granted options to purchase
an aggregate of 1,000,000 shares of common stock pursuant to our stock option
plans at weighted average exercise price of $0.25. Also 20,145 shares of common
stock were exercised pursuant to our stock option plans.
NOTE 4 - SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Revenue by geographic region is as follows (in thousands):
THREE MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
---------- ----------
United States $ 2,227 $ 8,287
Foreign 1,385 1,463
---------- ----------
$ 3,612 $ 9,750
========== ==========
One customer accounted for more than 10% of revenue for the three months ended
June 30, 2001. No one customer accounted for more than 10% of revenue for the
three months ended June 30, 2000.
NOTE 5 -- SALE OF TECHNOLOGY ASSETS
On June 26, 2001, Accrue Software, Inc. and its wholly owned subsidiary NeoVista
Software, Inc. ("NeoVista") signed a definitive agreement ("the Agreement") with
JDA Software Group, Inc. ("JDA") pursuant to which Accrue and NeoVista
transferred and sold to JDA certain intellectual property and technology assets
(including the Decision Series, RDS Assort and RDS Profile software products),
and also transferred to JDA related personnel responsible for developing the
transferred technology. Pursuant to the Agreement, JDA granted back to Accrue a
royalty-free license to use and distribute the Decision Series software and
other related intellectual property in certain market segments. Accrue received
$4.9 million for the sale of the Decision Series business of which $0.5 million
was placed in an escrow account which will be released to Accrue in June 2002,
subject to indemnification and escrow provisions set forth in the Agreement.
Accrue has accrued $132,000 in transaction costs related to the sale of Decision
Series Assets. Since Accrue's basis in the intellectual property sold to JDA was
zero, Accrue recognized a net gain of $4.3 million from the transaction. The
$0.5 million held in escrow will be recognized as an additional gain on sale by
Accrue if received as contemplated by the Agreement in June 2002.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Accrue adopted SFAS
No. 133 (as amended by SFAS No. 138) as required by SFAS No. 137, "Deferral of
the Effective Date the FASB Statement No. 133", effective January 1, 2001. To
date, Accrue has not engaged in derivative and hedging activities, and
accordingly the adoption of SFAS No. 133 did not have a material effect on
Accrue's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. Accrue is
currently assessing but has not yet determined the impact of SFAS No. 142 on its
financial position and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. IN
EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE CAPTION "RISK 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 is a leading provider of enterprise-level Internet analysis
solutions that help companies understand, predict, and respond to online
customer behavior. Our products enable business decision makers to address
critical marketing and merchandising initiatives concerning the effectiveness of
their Web sites. These initiatives encourage visitors to stay longer, buy more,
and come back more often. Accrue products collect, process, store, analyze, and
report on business data at a level of detail and accuracy that we believe
distinguishes our solutions from all others. As a result, we believe Accrue
solutions are the most scalable ones available, built to handle the
ever-expanding amounts of data and the increasingly complex business
infrastructures of our customers.
While merchandising managers traditionally have always depended on analysis of
marketing metrics like campaign effectiveness, shopping patterns, or price
elasticity, the quantity of that data has increased dramatically as the
information age has extended the number of methods of and reach for marketing
communications. Furthermore, conducting traditional marketing analysis has
become even more complicated as the growth of the Web, personal digital
assistants, and wireless products further compound the complexity of collecting
and analyzing valuable merchandising information. As a result, businesses are
demanding analysis that provides a measure of return on investment for their
Internet initiatives. We believe Accrue is the only company that delivers an
integrated solution addressing all of these requirements through our detailed,
flexible, robust and easy-to-use approach to Internet analysis.
Accrue Software was founded in 1996 and is headquartered in Fremont, California
with regional sales offices throughout the world. We offer our products, Accrue
G2, Accrue Insight, Accrue Hit List, and the Pilot business intelligence suites,
to customers for a license fee and provide related maintenance services. In
addition, we provide professional services to assist customers at every stage in
their deployment of Accrue products, from identification of their specific
business needs through enterprise integration and customization of analytics
reporting, to delivery of a rapid and effective implementation.
Substantially all of our product revenues through June 30, 2001 were
attributable to licensing Accrue Insight, Accrue Hit List, our Pilot business
intelligence suites, and related products and support services. We anticipate
that sales of Accrue G2 to new and existing customers will account for a
significant portion of product and services revenue in fiscal year 2002. A
decline in the price or demand of Accrue G2 products, or related products and
service would seriously harm our business, financial condition and results of
operations. Maintenance for Accrue Insight, Accrue Hit List and Pilot will
account for a significant portion of maintenance revenue for fiscal year 2002.
In June 2001, we sold certain of our software assets acquired as part of our
acquisition of NeoVista to JDA Software Group, Inc., but have retained license
rights to incorporate NeoVista software into Accrue products for distribution in
certain market segments.
We recognize license revenues upon customer acceptance of a product provided
that a signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable.
We generally do not allow product returns; however, in the past, upon request by
a customer and approval of management,
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certain returns have been allowed. Therefore, provision for estimated product
returns are recorded at the time the products are shipped.
For contracts with multiple obligations (e.g. products, maintenance,
installation and other services), revenue is allocated to each component of the
contract based on objective evidence of its fair value, or for products not
being sold separately, the price established by management. We recognize revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met. We recognize revenue allocated to maintenance fees,
including amounts allocated from product revenue, for ongoing customer support
and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to consulting services, such as
installation and training, we recognize revenue as the related services are
performed.
We market our products, both domestically and internationally, through our
direct sales force. Sales derived through indirect channels, which consist
primarily of international resellers and system integrators, accounted for
approximately 18% of our total revenue for the three months ended June 30, 2001.
We expect that sales through indirect channels will increase as a percentage of
total revenue as we expand our international efforts. We license our products to
our customers primarily on a perpetual basis. Our pricing model is based on the
number of server-based CPUs allowing for additional revenue as a customer's
business expands. License fees for our products have typically ranged from ten
to several hundred thousand dollars. Annual support and maintenance contracts,
which are purchased with initial product licenses, entitle customers to
telephone support and upgrades, when and if available. The price for our support
and maintenance program is based on a percentage of list price and is paid in
advance. Consulting fees for implementation services and training are primarily
charged on a time-and-materials basis.
Our new product, Accrue G2, became available in May 2001 through our Preferred
Customer Program. Accrue G2 is a comprehensive Internet analytics platform
designed to provide companies with deep insight into the relationships between
Web site activity and business actions. Some of the key benefits include: rapid
return on investment through immediate response to online customer behavior;
higher lifetime customer value through ongoing relationship management;
sustainable depth of analysis and system responsiveness through growth of Web
site volume and complexity; and configurable integration of Accrue G2 into
existing production information systems.
RESULTS OF OPERATIONS
Revenue. Total revenue was $3.6 million for the three months ended June 30,
2001, a decrease of 63% from $9.8 million for the quarter ended June 30, 2000.
One customer accounted for more than 10% of revenue for the quarter ended June
30, 2001 and no one customer accounted for more than 10% of revenue for the
quarter ended June 30, 2000.
Software license revenue. Revenue from software licenses was $1.1 million for
the three months ended June 30, 2001, a decrease of $5.8 million, or 84%, from
$6.9 million for the three months ended June 30, 2000. The decrease is primarily
due to a decline in purchases from e-commerce companies, an increase in our
product sales cycle to enterprise customers, and the fact that our product sales
during the quarter involved a greater percentage of professional services
causing us to defer the license revenue relating to these contracts which we
will recognize over the period the services are rendered.
Maintenance and service revenue. Maintenance and service revenue was $2.5
million for the three months ended June 30, 2001, representing a decrease of 13%
from $2.8 million in the corresponding period of fiscal 2001. The decrease is
primarily due to reduced service revenue related to the decreased product
revenue. Maintenance and service revenues depend on the continued ability of our
customers to pay over time. If the creditworthiness of our customers
deteriorates, particularly customers that are dependent on revenues from
e-commerce, we may not be able to sustain our historic levels of maintenance and
service revenues in the future.
Cost of revenues. Cost of revenues consists primarily of the salaries and
related expenses for maintenance and service personnel. These costs were $2.2
million or 62% of revenue, for the three months ended June 30, 2001, as compared
to $1.8 million or 19% of revenue in the corresponding period of fiscal 2001.
The increase of cost of revenues in dollar amount reflects an increase in
maintenance and service personnel headcount as well as an increase in consulting
expense associated with special programming projects. The increase in percentage
of revenue is due to the decrease in revenue for the three months ended June 30,
2001 from the corresponding period in fiscal 2001. Because all development costs
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incurred in the research and development of our software products and
enhancements to our existing software products have been expensed as incurred,
cost of revenue includes no amortization of capitalized software development
costs. We do not anticipate increases to our headcount and related costs in the
next several quarters but may rely more on outsourcing alternatives in the near
term.
Gross profit. Gross profits were 38% and 81% of revenue for the three months
ended June 30, 2001 and 2000, respectively. In the future, 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 decrease as a
percentage of total revenue due to greater revenue derived from license sales.
Maintenance and service revenue has lower gross profit than product revenue, as
does the revenue derived through indirect channels.
Operating expenses. Total operating expenses were $8.5 million for the quarter
ended June 30, 2001, or 236% of revenues as compared to $18.6 million or 191% of
revenues for the quarter ended June 30, 2000. The decrease in dollar amount is
primarily due to our reduced spending in sales and marketing and a decrease in
goodwill amortization as a result of the goodwill impairment charge we incurred
in fiscal 2001. We anticipate that total operating expenses will remain
relatively flat for the remaining nine months of fiscal 2002.
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
$2.1 million for the quarter ended June 30, 2001, or 59% of revenue, as compared
to $1.9 million, or 20% of revenue for the quarter ended June 30, 2000. The
increase is primarily attributable to staffing costs associated with an
increased headcount. However, we believe that research and development expenses
will remain relatively constant for the remaining nine months of fiscal 2002.
Research and development expenditures are charged to operations as incurred.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, and
promotional expenses. Sales and marketing expenses were $1.5 million, or 41% of
revenue, for the quarter ended June 30, 2001, compared to $4.1 million, or 43%
of revenue for the quarter ended June 30, 2000. The decrease is primarily due to
the decreased staffing costs as a result of a reduction in headcount, less
travel and commission expenses associated with a decrease in revenue, and
reduced marketing spending on previously established products to allow funds to
be used for the introduction and marketing of our new product, Accrue G2. In the
near term, we believe that sales and marketing expenses will increase in dollar
amount along with the launch of Accrue G2.
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 $1.3 million, or 37% of revenue, for the quarter
ended June 30, 2001, as compared to $0.9 million, or 9% of revenue, for the
quarter ended June 30, 2000. The increase is primarily due to staffing costs
associated with an increased headcount. We believe that general and
administrative expenses will remain relatively constant for the remaining nine
months of fiscal 2002.
Amortization of intangible assets. Amortization of intangible assets was $3.4
million, or 93% of revenue, for the quarter ended June 30, 2001, as compared to
$10.9 million, or 111% of revenue, for the quarter ended June 30, 2000. The
balance is associated with the amortization of the excess of the purchase price
over the fair value of the identifiable tangible and intangible assets acquired
in our acquisitions of NeoVista Software, Inc., the Infocharger division of
Tantau Software International, Inc., and Pilot Software, Inc. Intangible assets
are being amortized on a straight-line basis over a useful life of three years.
Stock-based compensation. Total stock-based compensation of approximately $0.2
million, or 6% of revenue was amortized for the quarter ended June 30, 2001.
Total stock-based compensation of approximately $0.7 million, or 8% of revenue
was amortized for the three months ended June 30, 2000. The remaining balance of
$0.8 million will continue to be amortized over the vesting of the related
options. Such deferred expense has been recorded as a reduction of equity in the
balance sheet.
Other income, net. Other income, net consists of interest income, interest
expense, other income, other expense, and gain from sale of technology assets.
Other income, net was $4.4 million and $0.4 million for the quarters ended June
30, 2001
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and 2000, respectively. The increase is primarily a result of gain from sale of
technology assets of $4.3 million in the quarter ended June 30, 2001.
On June 26, 2001, we signed a definitive agreement ("the Agreement") with JDA
Software Group, Inc. ("JDA") pursuant to which we transferred and sold to JDA
certain intellectual property and technology assets (including the Decision
Series, RDS Assort and RDS Profile software products), and also transferred to
JDA related personnel responsible for developing the transferred technology.
Pursuant to the Agreement, JDA granted back to us a royalty-free license to use
and distribute the Decision Series software and other related intellectual
property in certain market segments. We received $4.9 million for the sale of
the Decision Series business of which $0.5 million was placed in an escrow
account which will be released to us in June 2002, subject to indemnification
and escrow provisions set forth in the Agreement. We have accrued $132,000 in
transaction costs related to the sale of Decision Series Assets. Since our basis
in the intellectual property sold to JDA was zero, we recognized a net gain of
$4.3 million from the transaction. The $0.5 million held in escrow will be
recognized as an additional gain on sale by us if received as contemplated by
the Agreement in June 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations principally through private
sales of preferred stock with net proceeds of $15.5 million, our initial public
offering with net proceeds of $40.8 million, bank loans and cash generated from
operations. We used cash primarily to fund our net losses from operations and to
pay for acquisition related expenses.
Operating activities utilized cash of $2.6 million in the three months ended
June 30, 2001 and provided cash of $0.4 million in the three months ended June
30, 2000. Cash utilized by operating activities during the three months ended
June 30, 2001 results primarily from our operating loss of $7 million, decrease
in accounts payable of $0.6 million, decrease in accrued liabilities of $1.1
million, and decrease in deferred revenue of $1.0 million, offset in part by
depreciation and amortization of $3.6 million, stock-based compensation expense
of $0.2 million, decrease in accounts receivable of $0.8 million, and decrease
in prepaid expenses and other current assets of $2.4 million. The decreases in
accounts receivable and deferred revenue were a result of the decrease in
license revenue and a smaller growth rate of maintenance and service revenue for
the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000.
Investing activities provided cash of $4.3 million in the three months ended
June 30, 2001 and utilized cash of $0.5 million in the three months ended June
30, 2000. Cash provided by investing activities during the three months ended
June 30, 2001 represents cash received from JDA for the sale of technology
assets.
Financing activities utilized cash of $2.0 million in the three months ended
June 30, 2001 and provided cash of $0.4 in the three months ended June 30, 2000.
The 2001 activity consists primarily of the repayment of a $2.0 million working
capital line of credit with Silicon Valley Bank, which expired in June 2001. The
2000 activity consists primarily of proceeds from stock options exercised,
treasury stock issuance and repayment of an equipment loan.
In June 2001, we entered into an one-year accounts receivable purchase agreement
with a financial institution under which we can borrow up to an aggregate of
$1.5 million, renewable annually. The borrowing base under this agreement is the
lesser of 80% of eligible accounts receivable or $1.5 million. As of June 30,
2001, we have not sold any receivables pursuant to this agreement.
We expect to experience a short-term decrease in cash resources as a result of
our reduction in projected revenue and resulting cash collections. We anticipate
that our operating expenses, as well as planned capital expenditures, will
continue to constitute a material use of our cash resources. We believe that our
cash and cash equivalents, funds generated from operations, payment from the
sale of technology assets in June 2001 and available commercial credit and other
facilities from the bank will provide adequate liquidity to meet our normal
operating requirements for at least the next twelve months. In the event
additional financing is required, we may not be able to raise it on acceptable
terms, if at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
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reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. We adopted
SFAS No. 133 (as amended by SFAS No. 138) as required by SFAS No. 137, "Deferral
of the Effective Date the FASB Statement No. 133", effective January 1, 2001. To
date, we have not engaged in derivative and hedging activities, and accordingly
the adoption of SFAS No. 133 did not have a material effect on our consolidated
financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but have not yet determined the impact of SFAS No. 142 on
our financial position and results of operations.
YEAR 2000 READINESS
"Year 2000 Issues" refer generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31,
1999 to January 1, 2000 date change;
- Function according to the product documentation provided for
this date change, without changes in operation resulting from
the advent of a new century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the
ambiguity as to century in a disclosed, defined and
predetermined manner; Store and provide output of date
information in ways that are unambiguous as to century if the
date elements in interfaces and data storage specify the
century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured and
used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. We have tested
our products for Year 2000 compliance.
As of June 30, 2001, we have not experienced any significant issues as a result
of Year 2000 problems and do not anticipate incurring material incremental costs
in future periods due to such issues.
RISK FACTORS
The following is a discussion of certain factors that currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our capital stock or other securities is
cautioned to carefully consider these factors, along with the factors discussed
in our Annual Report filed on Form 10-K/A and our periodic reports filed
pursuant to the Exchange Act.
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND YOUR INVESTMENT
Accrue was formed in February 1996, and we introduced Accrue Insight 1.0, our
first software product, in January 1997. For the fiscal years ended March 31,
1999, 2000 and 2001, we generated $4.7 million, $18.9 million and $25.6 million
in revenue, respectively. For the three months ended June 30, 2001, we generated
$3.6 million in revenue. Thus, we have a
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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
We have not achieved profitability. We incurred net losses of $7.6 million for
the fiscal year ended March 31, 1999, $21.1 million for the fiscal year ended
March 31, 2000, $211.2 million for the fiscal year ended March 31, 2001, and
$2.7 million for the three months ended June 30, 2001. At June 30, 2001, we had
an accumulated deficit of $248.8 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. Please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for more detailed
information on our historical results of operations.
OUR ABILITY TO ACHIEVE PROFITABILITY IS CONTINGENT ON INCREASING REVENUE WHILE
MAINTAINING AN EXPENSE BASE THAT IS FLAT
If we are unable to increase our revenues from licensing, maintenance and
service each quarter while maintaining our expenses at their current level, we
will not be able to achieve profitability.
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. Please see "Management's Discussion and Analysis
of Financial Conditions -- Liquidity and Capital Resources".
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. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
THE LOSS OF KEY MANAGEMENT PERSONNEL COULD HARM OUR BUSINESS AND DECREASE THE
VALUE OF YOUR INVESTMENT
Our success depends largely upon the continued services of our key management
and technical personnel, the loss of which could seriously harm our business. In
particular, we rely on Jeffrey Walker, President, Chief Executive Officer and a
director, Bob Page, Chief Technology Officer and Tom Lefort, Vice President of
Product Development. Messrs. Walker, Page and Lefort 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.
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WE FACE INTENSE COMPETITION WHICH COULD MAKE IT DIFFICULT FOR US TO ACQUIRE AND
RETAIN CUSTOMERS NOW AND IN THE FUTURE
The market for Internet analytics 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 Internet customer data
collection and analysis markets such as Macromedia, net.Genesis
Corporation, and NetIQ;
- Application Service Provider (ASP) vendors such as Coremetrics,
Inc. and Digimine, Inc.;
- providers of business intelligence tools, such as Hyperion
Solutions, Corp., MicroStrategy Inc., Business Objects S.A. and
Informatica Corp.;
- custom development efforts by system integrators and in-house
developers
We expect that if we are successful in our strategy to expand the scope of our
products and services, we may encounter many additional market-specific
competitors. In addition, because there are relatively low barriers to entry in
the software market, we expect additional competition from traditional business
intelligence and enterprise software vendors as the Internet software market
continues to develop and expand. Some of these companies, as well as some other
competitors, have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and a larger installed base of customers than we have. In addition, many of our
competitors have well-established relationships with current and potential
customers of ours, have extensive knowledge of our industry and are capable of
offering a single-vendor solution. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, devote greater resources to the development, promotion and sale of
their products, or adopt more aggressive pricing policies to gain market share.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase
as a result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors, in which case our
business could suffer.
IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN E-COMMERCE TECHNOLOGY, OUR PRODUCT
REVENUE COULD DECLINE
The market for our products is characterized 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, and the level of
features and complexity that our customers may require. 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. Similarly, if our products do not meet customer requirements
for features and functionality, 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. Internet analytics technology is complex and new products and
product enhancements can require long development and testing periods. Any
delays in developing and releasing enhanced or new products could harm our
business, operating results and financial condition.
THE FAILURE TO RETAIN AND ATTRACT KEY TECHNICAL PERSONNEL COULD HARM OUR
BUSINESS AND DECREASE THE VALUE OF YOUR INVESTMENT
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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 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 restructured our direct sales force and plan to hire additional
sales personnel. As of June 30, 2001, our sales and support organization
consisted of 56 employees. Competition for qualified sales personnel is intense,
and we might not be able to hire the kind and number of sales personnel we are
targeting. New hires will require extensive training and typically take several
months to achieve productivity. In addition, we need to expand our relationships
with domestic and international channel partners, distributors, value-added
resellers, systems integrators, online and other resellers, Internet service
providers, original equipment manufacturers, and other partners to build our
indirect sales channel, and there is no assurance that we will be successful in
this endeavor.
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 Internet analytics 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 and distribute our products. We
expect our services revenue to increase in absolute dollars as we continue to
provide consulting and training services that complement our products and as our
installed base of customers grows. We generally bill our clients for our
services on a fixed-price basis; however, from time to time we bill our clients
on a time-and-materials basis. Failure to estimate accurately the resources and
time required for an engagement, to manage our customers' expectations
effectively regarding the scope of services to be delivered for an estimated
price or to complete fixed-price engagements within budget, on time and to the
customer's satisfaction could expose us to risks associated with cost overruns,
and in some cases, penalties, and may harm our business. Although we plan to
expand our services in order to address our customers' needs, we cannot be
certain that we will be able to expand our professional services organization to
meet customer requirements.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND
INTERNATIONALLY
Licenses and services sold to clients located outside the United State for the
three months ended June 30, 2001 and 2000 were 38% and 15% of our total revenue,
respectively. We expect international revenue to account for an increasing
percentage of total revenue in the future. We believe that we must expand our
international sales activities in order to be successful, but cannot assure you
that we will be able to do so.
Continued expansion into international markets will require management attention
and resources. We also intend to enter into a number of international alliances
as part of our international strategy and rely extensively on these business
partners to conduct operations, coordinate sales and marketing efforts, and
provide software localization services. At June 30, 2001, we had non-exclusive
alliances with a number of partners, including Sumisho Electronics Company,
Ltd., a subsidiary of Sumitomo Corporation in Asia Pacific, Extend Software in
South America, and Executive Planning Systems (EPS) and Intranet Software
Solutions (ISSEL) Ltd in Europe, Middle East, Africa (EMEA). These alliances are
not subject to binding agreements, have no specified performance requirements by
us or our alliance partners, and may be terminated by either party at any time.
Our success in international markets will depend on the success of our business
partners and their willingness to dedicate sufficient resources to our
relationships. We cannot be certain that we will be successful in expanding
internationally. International operations are subject to other inherent risks,
including:
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- 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 VARIED SALES CYCLES MAKE IT DIFFICULT TO BUDGET AND FORECAST OUR OPERATING
RESULTS
We have varied sales cycles because we generally need to educate potential
clients regarding the use and benefits of our product applications. The
stability of our sales cycle continues to evolve as our products mature. Our
sales cycles make it difficult to predict the quarter in which sales may fall
and to budget and forecast operating results. In addition, a significant portion
of our sales fall within the last month of a quarter, making it difficult to
predict revenue until late in the quarter and to adjust expenses accordingly.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY SMALL DELAYS IN CUSTOMER
ORDERS OR PRODUCT INSTALLATIONS
Small delays in customer orders can cause significant variability in our license
revenue and operating results for any particular period. We derive a substantial
portion of our revenue from the sale of software products and related services.
Our revenue recognition policy requires us to deliver the software prior to
recognizing any revenue for the product and to substantially complete the
implementation of our product before we can recognize service revenue. Any end
of quarter delays in orders for delivery or product installation schedules could
harm operating results for that quarter.
IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT AND FUTURE
CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED
Our success is dependent on the continued growth of our customer base and the
retention of our customers. For the fiscal years ended March 31, 2000 and 2001,
approximately 25 - 30% and 50 - 55% of our revenue, respectively, was derived
from sales of products and services to existing customers. For the three months
ended June 30, 2001, approximately 80% of our revenue was derived from sales of
products and services to existing customers. We expect to continue to derive a
significant amount of revenue from our existing customers. If we fail to
generate repeat and expanded business from our current and future customers,
particularly from maintenance contract renewals, our operating results would be
seriously harmed. Our ability to attract new customers will depend on a variety
of factors, including the accuracy, scalability, reliability and
cost-effectiveness of our products and services and our ability to effectively
market our products and services. In the past, we have lost potential customers
to competitors for various reasons, including lower prices and other incentives
not matched by us. Many of our current customers initially purchase a license
for our products and services for installation on a limited number of servers.
If an installation is successful, the customer may purchase additional licenses
to expand the use of our products in its organization, license additional
products and services from us, or renew maintenance fees. However there is no
assurance that our customers will expand their current use of our products and
services in this way.
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
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Due in part to the emerging nature of the market for Internet analytics
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 Internet
analytics 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.
ACCRUE INSIGHT AND ACCRUE G2, OUR MOST IMPORTANT PRODUCTS, ARE NOT PROTECTED BY
PATENTS. IF ANOTHER PARTY WERE TO USE THIS TECHNOLOGY, OUR BUSINESS WOULD SUFFER
We regard substantial elements of our Internet analytics solutions as
proprietary and attempt to protect them by relying on patent, trademark, service
mark, trade dress, copyright, and trade secret laws and restrictions, as well as
confidentiality procedures and contractual provisions. However, Accrue Insight
and Accrue G2, our most important products, are not protected by patents. Any
steps we take to protect our intellectual property may be inadequate, time
consuming, and expensive. In addition, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property, which could have a material adverse effect on our business.
Furthermore, legal standards relating to the validity, enforceability, and scope
of protection of intellectual property rights in Internet-related industries are
uncertain and still evolving, and the future viability or value of any of our
intellectual property rights is uncertain. Effective trademark, copyright, and
trade secret protection may not be available in every country in which our
products are distributed or made available through the Internet. Furthermore,
our competitors may independently develop similar technology that substantially
limits the value of our intellectual property or design around patents issued to
us.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In addition to the technology we have developed internally, we also use code
libraries developed and maintained by third parties and have acquired or
licensed technologies from other companies. Our internally developed technology,
the code libraries, or the technology we acquired or licensed may infringe a
third party's intellectual property rights who may bring claims against us
alleging infringement of their intellectual property rights. In recent years,
there has been significant litigation in the United States involving patents and
other intellectual property rights. We are not currently involved in any
intellectual property litigation. However, as the number of entrants into our
market increases, the possibility of an intellectual property claim against us
grows and we may be a party to litigation in the future to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting litigation could subject
us to significant liability for damages and invalidation of our proprietary
rights, would likely be time-consuming and expensive to defend and would divert
management time and attention. Any potential intellectual property litigation
could also force us to do one or more of the following:
- cease selling, incorporating, or using products or services that
incorporate the challenged intellectual property;
- obtain from the holder of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
and/or
- redesign those products or services that incorporate infringing
technology.
Any of these results could seriously harm our business.
PRODUCT DEFECTS COULD LEAD TO LOSS OF CUSTOMERS WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Despite internal testing and testing by current and potential customers, our
current and future products may contain serious defects, including Year 2000
errors, the occurrence of which could result in adverse publicity, loss of or
delay in market acceptance, or claims by customers against us, any of which
could harm our business, results of operations, and financial condition. In
addition, our products and product enhancements are very complex and may from
time to time contain errors or result in failures that we did not detect or
anticipate when introducing our products or enhancements to the market. The
computer hardware environment is characterized by a wide variety of non-standard
configurations that
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make pre-release testing for programming or compatibility errors very difficult
and time consuming. Despite our testing, errors may still be discovered in some
new products or enhancements after the products or enhancements are delivered to
customers.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD REQUIRE
CONSIDERABLE EFFORT AND EXPENSE TO DEFEND AND WHICH COULD HARM OUR BUSINESS
Our products are used to monitor the traffic data of our customers' Web sites,
and to segment, analyze and report this data. These and other functions that our
products provide are often critical to our customers, especially in light of the
considerable resources many organizations spend on the development and
maintenance of their Web sites. Our end-user licenses contain provisions that
limit our exposure to product liability claims, but these provisions may not be
enforceable in all jurisdictions. Additionally, we maintain limited product
liability insurance. To the extent our contractual limitations are unenforceable
or these claims are not covered by insurance, a successful product liability
claim could harm our business.
EVOLVING REGULATION OF THE INTERNET MAY HARM OUR BUSINESS
As e-commerce continues to evolve, increasing regulation by federal, state, or
foreign agencies becomes more likely. This regulation is likely in the areas of
user privacy, pricing, content, quality of products and services, taxation,
advertising, intellectual property rights, and information security. In
particular, laws and regulations applying to the solicitation, collection, or
processing of personal or consumer information could negatively affect our
activities. Typically, our products capture traffic data when consumers,
business customers or employees visit a Web site. The perception of security and
privacy concerns, whether or not valid, may indirectly inhibit market acceptance
of our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the data
captured after visiting Web sites may be used by marketing entities to
unilaterally direct product promotion and advertising to that user. We are not
aware of any similar legislation or regulatory requirements currently in effect
in the United States. Other countries and political entities, such as the
European Economic Community, have adopted legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business could be harmed. Moreover, the applicability to the Internet of
existing laws governing issues such as intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity and libel is
uncertain and developing. Furthermore, any regulation imposing fees or assessing
taxes for Internet use could result in a decline in the use of the Internet and
the viability of e-commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet, may impose additional burdens on e-commerce
or may require us to alter how we conduct our business. This could decrease the
demand for our products and services, increase our cost of doing business,
increase the costs of products sold through the Internet or otherwise have a
negative effect on our business, results of operations and financial condition.
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET
Continued expansion in the sales of our Internet analytics 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 Internet
analytics 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.
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BECAUSE ACCRUE'S OFFICERS AND DIRECTORS OWN APPROXIMATELY 13.5% OF THE
OUTSTANDING COMMON STOCK, YOU AND OTHER INVESTORS WILL HAVE MINIMAL INFLUENCE ON
STOCKHOLDER DECISIONS
As of May 31, 2001, our officers and directors beneficially owned approximately
13.5% of our outstanding common stock. As a result, they will be able to
exercise significant influence over all matters requiring stockholder approval,
and you and other investors will have minimal influence over the election of
directors or other stockholder actions. As a result, these stockholders could
approve or cause Accrue to take actions that you disapprove or that are contrary
to your interests and those of other investors. Our certificate of incorporation
and bylaws do not provide for cumulative voting; therefore, our controlling
stockholders will have the ability to elect all of our directors. The
controlling stockholders will also have the ability to approve or disapprove
significant corporate transactions without further vote by the investors who
purchase common stock pursuant to this offering. This ability to exercise
influence over all matters requiring stockholder approval could prevent or
significantly delay another company or person from acquiring or merging with us.
THE EFFECTS OF ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE
LAW COULD PREVENT A CHANGE IN CONTROL OF ACCRUE WHICH MAY REDUCE THE MARKET
PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws may have the effect of
delaying or preventing a merger or sale of Accrue, or making a merger or
acquisition less desirable to a potential acquirer, even where stockholders may
consider the acquisition or merger favorable. These provisions could also have
the effect of making it more difficult for a third party to effect a change of
control of the board of directors. The issuance of preferred stock may have the
effect of delaying, deferring, or preventing a change in control without further
action by the stockholders. Any issuance of preferred stock may harm the market
price of the common stock. The issuance of preferred stock may also result in
the loss of the voting control of holders of common stock to the holders of the
preferred stock.
THE MARKET PRICE FOR OUR COMMON STOCK, LIKE OTHER TECHNOLOGY STOCKS, HAS BEEN
AND MAY CONTINUE TO BE VOLATILE
The stock markets have, in general, and with respect to Internet companies in
particular, recently experienced extreme stock price and volume volatility,
resulting in significant decreases in companies' stock prices. The decreases in
stock prices for many companies in the technology and emerging growth sector
have often been unrelated to the operating performance of these companies in
many cases. Fluctuations such as these have affected the market price of our
common stock. Our common stock is trading at a level significantly below its
historic levels, and there can be no assurance that our stock price will
increase significantly in the foreseeable future. In addition, if we fail to
address any of the risks described in this section, the market price for our
common stock, and consequently, the value of your investment, could decline
further.
SIGNIFICANT FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES CLASS ACTION CLAIMS AGAINST US, WHICH COULD SERIOUSLY HARM OUR
BUSINESS
Securities class action claims have been brought against companies in the past
where volatility in the market price of that company's securities has taken
place. This kind of litigation could be very costly and divert our management's
attention and resources, and any adverse determination in this litigation could
also subject us to significant liabilities, any or all of which could seriously
harm our business.
IF WE CANNOT RAISE FUNDS, IF NEEDED, ON ACCEPTABLE TERMS, WE MAY NOT BE ABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS AND SERVICES, TAKE ADVANTAGE OF FUTURE
OPPORTUNITIES OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED CAPITAL
REQUIREMENTS WHICH COULD HARM OUR BUSINESS
We expect cash on hand, cash equivalents, funds generated from operations,
payment from sales of technology assets in June 2001 and commercial credit and
other facilities to meet our working capital and capital expenditure needs for
at least the next twelve months following June 30, 2001. However, we may need to
raise additional funds and we cannot be certain that we would be able to obtain
additional financing on favorable terms, if at all. Further, if we issue equity
securities, stockholders may experience additional dilution particularly as a
result of our lower stock price, or the new
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equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we incur indebtedness to help us meet our
future capital requirements, this debt could contain covenants that restrict our
operations. If we cannot raise funds, if needed, on acceptable terms, we may not
be able to develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures or unanticipated
capital requirements, which could harm our business, operating results and
financial condition.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock in the public market, or
the perception that these sales may occur, could adversely affect the market
price of the common stock by potentially introducing a large number of sellers
of our common stock into a market in which the common stock price is already
volatile, thus driving the common stock price down. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional equity securities. As of July 31, 2001, we had 30,146,875 shares of
common stock outstanding. 4,485,000 shares of our common stock, including the
underwriter's option to purchase additional shares which was exercised in full,
were registered in connection with the initial public offering of our common
stock. Of the 3,225,261 shares of our common stock issued to the stockholders of
Marketwave Corporation in connection with our acquisition of that company,
1,088,309 shares are registered on a registration statement on Form S-3 declared
effective on December 14, 2000. 1,666,667 shares of our common stock were issued
to Tantau Software, Inc. in connection with our purchase of certain assets from
Tantau and its wholly owned subsidiary, Tantau Software International, Inc., and
registered pursuant to a registration statement on Form S-3/A declared effective
by the Securities and Exchange Commission on December 14, 2000. 974,273 shares
of our common stock were issued to Aviator Holding Corporation and its direct
and indirect subsidiaries, including its wholly owned subsidiary Pilot Software,
Inc., and registered pursuant to a registration statement on Form S-3 declared
effective by the Securities and Exchange Commission on December 14, 2000. The
foregoing shares issued to the Marketwave, Tantau and Aviator shareholders, may
be sold subject to the terms of the applicable registration statement without
restriction or further registration under the federal securities laws unless
held by our "affiliates" as that term is defined in Rule 144 while the
respective registration statements remain effective. The remaining 21,932,626
shares of common stock outstanding are "restricted securities" as that term is
defined in Rule 144; however, virtually all of these shares are eligible for
sale, in some cases only subject to the volume, manner of sale and notice
requirements of Rule 144. In addition, we have registered a total of 16,972,731
shares of our common stock under our existing stock option and employee stock
purchase plans.
IF WE ARE UNABLE TO COMPLY WITH NASDAQ'S CONTINUED LISTING REQUIREMENTS, OUR
COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET
Since March 6, 2001, our common stock has failed to maintain a minimum bid price
of $1.00 per share for at least 10 consecutive days, which has caused our stock
price to fail to meet one of the minimum standards required by Nasdaq for
continued listing as a Nasdaq National Market security. On July 19, 2001, we
received a letter from Nasdaq stating that because of this failure to comply
with the $1.00 minimum bid price requirement, our common stock is subject to
delisting. We appealed that determination and have been granted a hearing before
a Nasdaq Listing Qualifications Panel on August 31, 2001 to review the
determination. Although in accordance with Nasdaq rules delisting of our common
stock has been stayed pending the decision of the Panel, there can be no
assurance that we will be able to satisfy all Nasdaq requirements for continued
listing of our common stock on the Nasdaq National Market, including the minimum
bid price requirement. If we are unable to meet Nasdaq's requirements, our stock
will be subject to delisting, which may have a material adverse effect on the
price of our common stock and the levels of liquidity currently available to our
stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates and foreign currency exchange rates.
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to our investment portfolio
and credit facilities. All investments are classified as cash equivalents and
are deposited with financial institutions carried at cost, which approximate
market value. We do not plan to use derivative financial instruments in our
investment portfolio. If market rates were to increase
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immediately and uniformly by 10% from levels at June 30, 2000 and 2001, the
decline in fair value of the portfolio would not be material. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.
FOREIGN CURRENCY RISK
Although we have foreign sales offices in Europe and Asia, to date, our exposure
to foreign currency rate fluctuations has not been significant. International
sales are transacted in U.S. dollars and operating expenses of foreign offices
are funded from time to time in U.S. dollars. However, as we continue to
increase our international business we could be subject to risks typical of an
international business, including but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors.
To date, we do not use derivative financial instruments for speculative trading
purposes, nor do we hedge any foreign currency exposure in a manner that
entirely offsets the effects of changes in foreign exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings except that on
February 20, 1999, Execplan Sistemas Executivos Ltda., a former distributor of
our wholly-owned subsidiary Pilot Software, Inc.'s products in Brazil, filed a
Claim for Arbitration with the American Arbitration Association in connection
with Pilot's failure to enter into a new distribution agreement with Execplan
when the prior agreement between the parties terminated by its terms. Execplan
has made a claim for damages in the amount of $15 million. Pilot denied
Execplan's claim and filed a counterclaim alleging, among other things, breach
of contract, misappropriation of Pilot trade secrets and infringement of Pilot
copyrights. The arbitration proceedings will take place in Boston,
Massachusetts, and we intend to vigorously defend against Execplan's claim,
which we believe to be without merit. In addition, under the terms of the
Agreement and Plan of Merger dated as of August 24, 2000 among Accrue, Pilot,
Pilot Acquisition Corp., Aviator Holding Corporation and Platinum Equity
Holdings, LLC, we have a right of indemnification against Platinum if damages
awarded to Execplan in the arbitration exceed $500,000. In addition, we may from
time to time become a party to various legal proceedings arising in the ordinary
course of our business. We are pursuing collection of accounts receivable
balances owed to us by third parties through lawsuits filed against such
parties.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. Securities sold during the quarter ended June 30, 2001 that were not
registered under the Securities Act.
None.
d. Use of proceeds from sale of Registered Securities.
Not applicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Proposals of stockholders intended to be included in the Company's proxy
statement for the 2002 Annual Meeting of Stockholders must be received by the
Company's Chief Financial Officer, Accrue Software, Inc., 48634 Milmont Drive,
Fremont, California 94538, no later than March 29, 2002. If the Company is not
notified of a stockholder proposal not less than ninety nor more than one
hundred twenty days prior to the date of the next Annual Meeting of
Stockholders, then the proxies held by management of the Company provide
discretionary authority to vote against such stockholder proposal, even though
such proposal is not discussed in the Proxy Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibits are attached hereto:
3.3 Amended and Restated Bylaws of Accrue Software, Inc.
b. Reports filed on Form 8-K during quarter ended June 30, 2001:
None.
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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/ HARRISON N. PAIST
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HARRISON N. PAIST
VICE PRESIDENT OF FINANCE AND
CHIEF FINANCIAL OFFICER
Date: August 14, 2001
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EXHIBIT INDEX
Exhibit
No. Description
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3.3 Amended and Restated Bylaws of Accrue Software, Inc.