SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
January 7, 2000
--------------------
Date of Report (Date of earliest event reported)
SIEBEL SYSTEMS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20725 94-3187233
--------------- --------------- ---------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation File Number) Identification No.)
1855 South Grant Street
San Mateo, CA 94402
--------------------
(Address of principal executive offices)
(650) 295-5000
--------------------
(Registrant's telephone number, including area code)
1
Item 5. Other Events
Attached as Appendix A to this current report on Form 8-K are the
Registrant's audited supplemental consolidated financial statements as of
December 31, 1997 and 1998, for each of the years in the three-year period ended
December 31, 1998, and the unaudited supplemental consolidated financial
statements as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999 and the related supplemental consolidated financial
statement schedule, supplemental selected financial data and management's
discussion and analysis of financial condition and results of operations.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
The following Exhibits are filed as part of this report:
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
2
SIGNATURE
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 hereunto duly authorized.
SIEBEL SYSTEMS, INC.
Date: January 7, 2000
By: /s/ Howard H. Graham
-----------------------------
Howard H. Graham
Senior Vice President,
Finance and Administration
and Chief Financial Officer
3
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and ratios)
The following selected consolidated financial data should be read in
conjunction with our Supplemental Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in the Form 8-K. The selected
consolidated financial data for each of the years in the three-year period ended
December 31, 1998, and as of December 31, 1997 and 1998 is derived from our
consolidated financial statements that have been audited by KPMG LLP,
independent auditors. The selected consolidated financial data for the year
ended December 31, 1996, and as of December 31, 1996, is derived from audited
consolidated financial statements that have not been included in this Form 8-K.
The selected financial data as of, and for the nine months ended, September 30,
1998 and 1999 have been derived from unaudited supplemental consolidated
financial statements included elsewhere in this Form 8-K.
The unaudited supplemental consolidated financial statements have been
prepared on the same basis as the audited supplemental consolidated financial
statements and include all adjustments, consisting of normal, recurring
adjustments, that in the opinion of management are necessary for a fair
presentation of the information set forth therein. Historical results are not
necessarily indicative of the results to be expected in the future.
Nine Months Ended
Year Ended December 31, September 30,
------------------------------ -----------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- -------
Total revenues....................... $111,980 $222,071 $409,886 $281,787 $522,935
Operating income (loss).............. 18,162 8,518 68,019 38,365 117,729
Net income (loss).................... 13,750 643 44,265 24,405 77,115
Proforma net income.................. 13,313 55 43,460 23,691 77,144
Pro Forma diluted net
income (loss) per share(1).......... 0.08 0.00 0.21 0.12 0.35
Pro Forma basic net
income (loss) per share(1).......... 0.09 0.00 0.24 0.13 0.41
Total assets......................... 209,602 210,950 447,596 391,121 1,004,444
Total equity......................... 173,157 210,950 291,120 258,212 475,913
________________________
(1) See Note 1 of Notes to Supplemental Consolidated Financial Statements for
an explanation of the determination of the number of shares used in computing
per share data.
APPENDIX A
AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
1997 AND 1998, FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER
31, 1998 AND THE UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1999, AND THE RELATED SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE, SUPPLEMENTAL SELECTED FINANCIAL DATA AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
APPENDIX A
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Siebel Systems, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Siebel Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the related supplemental consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1998. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Siebel Systems, Inc. and OnTarget, Inc. on December 1, 1999,
which has been accounted for as a pooling of interests as described in Note 9 to
the supplemental consolidated financial statements. Generally accepted
accounting principles prescribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financials
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Siebel Systems, Inc.
and subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Siebel Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/KPMG LLP
Mountain View, California
December 1, 1999
5
SIEBEL SYSTEMS, INC.
Supplemental Consolidated Balance Sheets
(In thousands, except per share data)
December 31, September 30,
1997 1998 1999
---------------- -------------- -------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 70,336 $ 80,741 $ 466,198
Short-term investments 91,999 151,888 158,593
Marketable equity securities - - 46,503
Accounts receivable, net 65,238 126,081 223,750
Deferred income taxes 4,824 13,270 13,120
Prepaids and other 6,967 14,402 20,987
---------------- -------------- -------------
Total current assets 239,364 386,382 929,151
Property and equipment, net 25,564 46,384 46,418
Other assets 6,607 14,830 28,875
---------------- -------------- -------------
Total assets $ 271,535 $ 447,596 $ 1,004,444
================ ============== =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 5,938 $ 4,558 $ 17,914
Accrued expenses 29,117 88,185 109,244
Income taxes payable 2,345 10,917 10,285
Deferred revenue 23,007 52,033 63,247
Deferred income taxes - - 15,356
---------------- -------------- -------------
Total current liabilities 60,407 155,693 216,046
Convertible subordinated debentures - - 300,000
Other noncurrent liabilities - - 12,242
Deferred income taxes 178 783 243
---------------- -------------- -------------
Total liabilities 60,585 156,476 528,531
---------------- -------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value; 600,000 shares authorized;
174,037, 181,569 and 189,447 shares issued and outstanding,
respectively 174 182 189
Additional paid-in capital 194,903 235,400 318,136
Notes receivable from stockholders (406) (406) (406)
Deferred compensation (639) (360) (748)
Accumulated other comprehensive gains (losses) (365) (669) 25,208
Retained earnings 17,283 56,973 133,534
---------------- -------------- -------------
Total stockholders' equity 210,950 291,120 475,913
---------------- -------------- -------------
Total liabilities and stockholders' equity $ 271,535 $ 447,596 $ 1,004,444
================ ============== =============
See accompanying notes to supplemental consolidated financial statements.
SIEBEL SYSTEMS, INC.
Supplemental Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ----------- ---------- ------------- ------------
Revenues: (unaudited) (unaudited)
Software $ 80,413 $ 156,971 $ 290,890 $ 200,567 $ 329,388
Maintenance, consulting and other 31,567 65,100 118,996 81,220 193,547
----------- ---------- ---------- ------------ -----------
Total revenues 111,980 222,071 409,886 281,787 522,935
----------- ---------- ---------- ------------ -----------
Cost of revenues:
Software 2,197 4,393 5,600 4,295 5,111
Maintenance, consulting and other 15,979 31,646 65,387 45,643 112,223
----------- ---------- ---------- ------------ -----------
Total cost of revenues 18,176 36,039 70,987 49,938 117,334
----------- ---------- ---------- ------------ -----------
Gross margin 93,804 186,032 338,899 231,849 405,601
----------- ---------- ---------- ------------ -----------
Operating expenses:
Product development 14,775 26,650 43,950 34,909 58,324
Sales and marketing 46,549 103,551 178,957 126,482 194,874
General and administrative 14,318 21,275 34,473 18,593 34,674
Merger termination costs - 3,298 - - -
Merger-related expenses - 22,740 13,500 13,500 -
----------- ---------- ---------- ------------ -----------
Total operating expenses 75,642 177,514 270,880 193,484 287,872
----------- ---------- ---------- ------------ -----------
Operating income 18,162 8,518 68,019 38,365 117,729
Other income, net 3,134 5,385 6,258 4,466 6,697
----------- ---------- ---------- ------------ -----------
Income before income taxes 21,296 13,903 74,277 42,831 124,426
Income taxes 7,546 13,260 30,012 18,426 47,311
----------- ---------- ---------- ------------ -----------
Net income $ 13,750 $ 643 $ 44,265 $ 24,405 $ 77,115
=========== ========== ========== ============ ===========
Unaudited pro forma net income and
per share data:
Income before taxes as reported $ 21,296 $ 13,903 $ 74,277 $ 42,831 $ 124,426
Pro forma income taxes 7,983 13,848 30,817 19,140 47,282
----------- ---------- ---------- ------------ -----------
Pro forma net income $ 13,313 $ 55 $ 43,460 $ 23,691 $ 77,144
=========== ========== ========== ============ ===========
Pro forma diluted net income per share $ 0.08 $ 0.00 $ 0.21 $ 0.12 $ 0.35
=========== ========== ========== ============ ===========
Pro forma basic net income per share $ 0.09 $ 0.00 $ 0.24 $ 0.13 $ 0.41
=========== ========== ========== ============ ===========
Shares used in diluted pro forma net income
per share computation 158,704 191,338 202,204 201,838 220,719
=========== ========== ========== ============ ===========
Shares used in basic pro forma net income
per share computation 141,780 169,904 177,446 176,458 185,929
=========== ========== ========== ============ ===========
Comprehensive income
Net income $ 13,750 $ 643 $ 44,265 $ 24,405 $ 77,115
Other comprehensive income (loss), net
of tax:
Foreign currency translation
adjustments - (365) (505) (138) 726
Unrealized gains on securities - - 201 - 25,151
----------- ---------- ---------- ------------ -----------
Total comprehensive income $ 13,750 $ 278 $ 43,961 $ 24,267 $ 102,992
=========== ========== ========== ============ ===========
See accompanying notes to supplemental consolidated financial statements.
SIEBEL SYSTEMS, INC.
Supplemental Consolidated Statements of Stockholders' Equity
(in thousands)
Accumu-
lated
Convertible Addit- Notes Deferred other Total
Preferred stock Common stock ional receivable stock compre- stock-
------------------ ----------------- paid-in from compen- hensive Retained holders'
Shares Amount Shares Amount Capital stockholders sation losses earnings equity
-------- -------- -------- ------ --------- ------------ -------- -------- -------- ---------
Balances, December 31,
1995................... 39,244 $ 39 93,869 $ 94 $ 39,390 $ (13) $ (652) $ -- $ 4,685 $ 43,543
Issuance of common
stock under Employee
Stock Option Plans..... -- -- 5,350 5 2,016 -- -- -- -- 2,021
Issuance of common
stock under Employee
Stock Purchase Plans... -- -- 590 -- 1,641 -- -- -- -- 1,641
Issuance of common
stock, net of issuance
costs of $1,849........ -- -- 25,782 26 109,464 (507) -- -- -- 108,983
Repayment of note
receivable............. -- -- -- -- -- 12 -- -- -- 12
Issuance of convertible
preferred stock........ 988 1 -- -- 1,093 -- -- -- -- 1,094
Convertible preferred
stock issued for
exercise of warrant.... 600 1 -- -- 436 -- -- -- -- 437
Tax benefit from stock
options................ -- -- -- -- 2,173 -- -- -- -- 2,173
Compensation related
to stock options....... -- -- -- -- 893 -- (893) -- -- --
Cancellation of
stock options issued
below fair value....... -- -- -- -- (48) -- 48 -- -- --
Conversion of
convertible preferred
stock into common
stock.................. (40,832) (41) 40,832 41 -- -- -- -- -- --
Repurchase and
retirement of common
stock.................. -- -- (176) -- -- -- -- -- -- --
Amortization of
deferred compensation
related to stock
options................ -- -- -- -- -- -- 324 -- -- 324
Subchapter S
distributions.......... -- -- -- -- -- -- -- -- (822) (822)
Net income............. -- -- -- -- -- -- -- -- 13,750 13,750
-------- -------- -------- ------ --------- ------------ -------- -------- -------- ---------
Balances, December 31,
1996................... -- -- 166,247 166 157,058 (508) (1,173) -- 17,613 173,156
Issuance of common
stock under Employee
Stock Option Plans..... -- -- 4,134 5 4,785 -- -- -- -- 4,790
Issuance of common
stock under Employee
Stock Purchase Plans... -- -- 1,252 1 4,299 -- -- -- -- 4,300
Issuance of common
stock related to
InterActive
acquisition............ -- -- 1,204 1 14,580 -- -- -- -- 14,581
Issuance of common
stock related to
Nomadic acquisition.... -- -- 1,200 1 10,392 -- -- -- -- 10,393
Repayment of note
receivable............. -- -- -- -- -- 102 -- -- -- 102
Compensation related to
stock options.......... -- -- -- -- (256) -- 256 -- -- --
Cancellation of stock
options issued below
fair value............. -- -- -- -- (1) -- 1 -- -- --
Tax benefit from stock
options................ -- -- -- -- 4,046 -- -- -- -- 4,046
Accumu-
lated
Convertible Addit- Notes Deferred other Total
Preferred stock Common stock tional receivable stock compre- stock
----------------- ----------------- paid-in from compen- hensive Retained holders'
Shares Amount Shares Amount Capital stockholders sations losses earnings equity
------ ------ ------- ------ -------- ------------ -------- ---------- -------- --------
Amortization of
deferred compensation
related to stock
options............... -- -- -- -- -- -- 277 -- -- 277
Currency translation
adjustment (net of
taxes of $214)........ -- -- -- -- -- -- -- (365) -- (365)
Subchapter S
distributions......... -- -- -- -- -- -- -- -- (973) (973)
Net income............ -- -- -- -- -- -- -- 643 643
------ ------ ------- ------ -------- ------------ -------- ---------- -------- --------
Balances, December
31, 1997.............. -- -- 174,037 174 194,903 (406) (639) (365) 17,283 210,950
Issuance of common
stock under Employee
Stock Option Plans.... -- -- 6,270 7 17,855 -- -- -- -- 17,862
Issuance of common
stock under Employee
Stock Purchase Plans.. -- -- 1,262 1 8,534 -- -- -- -- 8,535
Adjustment to
conform acquired
company's year-end.... -- -- -- -- -- -- -- -- (1,464) (1,464)
Cancellation of
stock options issued
below fair value...... -- -- -- -- (39) -- 39 -- -- --
Tax benefit from
stock options......... -- -- -- -- 13,516 -- -- -- -- 13,516
Amortization of
deferred
compensation related
to stock options...... -- -- -- -- -- -- 240 -- -- 240
Unrealized gain on
short-term
investments (net of
taxes of $118)........ -- -- -- -- -- -- -- 201 -- 201
Currency translation
adjustment (net of
taxes of $297)........ -- -- -- -- -- -- -- (505) -- (505)
Transfer of common
stock to employees.... -- -- -- -- 631 -- -- -- -- 631
Subchapter S
distributions......... -- -- -- -- -- -- -- -- (3,111) (3,111)
Net income............ -- -- -- -- -- -- -- -- 44,265 44,265
------ ------ ------- ------ -------- ------------ -------- ----------- -------- --------
Balances, December
31, 1998.............. -- -- 181,569 182 235,400 (406) (360) (669) 56,973 291,120
Issuance of common
stock under Employee
Stock Option Plans
(unaudited)........... -- -- 6,620 7 35,727 -- -- -- -- 35,734
Issuance of common
stock under Employee
Stock Purchase Plans
(unaudited)........... -- -- 523 -- 7,537 -- -- -- -- 7,537
Issuance of common
stock under stock
award plan
(unaudited)........... -- -- -- -- 198 -- -- -- -- 198
Tax benefit from
stock options
(unaudited)........... -- -- -- -- 33,575 -- -- -- -- 33,575
Compensation related
to stock options
(unaudited) .......... -- -- -- -- 538 -- (538) -- -- --
Amortization of
deferred compensation
related to stock
options (unaudited)... -- -- -- -- -- -- 150 -- -- 150
Unrealized gain on
short-term
investments (net of
taxes of $20,769)
(unaudited)........... -- -- -- -- -- -- -- 25,151 -- 25,151
Currency translation
adjustment (net of
taxes of $426)
(unaudited)........... -- -- -- -- -- -- -- 726 -- 726
Subchapter S
distributions
(unaudited)........... -- -- -- -- -- -- -- -- (554) (554)
Issuance of common
stock related to
Target Marketing
Systems Worldwide and
Target Marketing
Systems S.A. acquisitions
(unaudited).............. -- -- 735 -- 5,161 -- -- -- -- 5,161
Net income (unaudited)... -- -- -- -- -- -- -- -- 77,115 77,115
------ ------- -------- ------ -------- ------ ------ ------- -------- --------
Balances, September
30, 1999 (unaudited)..... -- -- 189,447 $ 189 $318,136 $ (406) $ (748) $25,208 $ 33,534 $475,913
====== ======= ======== ====== ======== ====== ====== ======= ======== ========
See accompanying notes to supplemental consolidated financial statements.
SIEBEL SYSTEMS, INC.
Supplemental Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, Nine Months Ended September 30,
------------------------------------------ -------------------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- -----------
Cash flows from operating activities: (unaudited) (unaudited)
Net income $ 13,750 $ 643 $ 44,265 $ 24,405 $ 77,115
Adjustments to reconcile net
income to net cash provided by
operating activities:
Compensation related to stock
options 324 277 240 193 150
Depreciation and amortization 3,450 8,275 13,638 8,095 16,219
Deferred income taxes (2,036) (1,614) (9,543) - -
Tax benefit from exercise of
stock options 2,173 4,046 13,516 8,061 33,575
Loss on disposal of property
and equipment 155 307 4,557 252 714
Provision for doubtful accounts
and returns, net 1,275 2,348 6,613 3,964 4,938
Write-off of acquired research
and development - 22,740 - - -
Software licenses exchanged for
equipment and prepaid assets (3,408) - - - -
Changes in operating assets and
liabilities:
Accounts receivable (19,248) (41,344) (68,739) (51,331) (98,132)
Prepaids and other (3,391) (1,946) (6,744) (617) (6,213)
Accounts payable and accrued
expenses 13,442 14,130 49,802 43,912 33,301
Income taxes payable 2,963 (1,896) 9,228 (3,051) (1,113)
Deferred revenue 3,949 15,744 30,286 22,984 11,046
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities 13,398 21,710 87,119 56,867 71,600
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and
equipment (14,107) (18,013) (39,581) (16,096) (26,883)
Purchases of short-term
investments, net (66,671) (17,866) (56,751) (28,339) (7,500)
Proceeds from sale of property
and equipment 16 - - - 13,225
Cash acquired in acquisitions - 129 (31) - 993
Other assets (947) (1,764) (2,641) 2,514 (3,739)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities (81,709) (37,514) (99,004) (41,921) (23,904)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of purchases 112,559 8,725 27,254 26,123 43,529
Proceeds from issuance of
preferred stock 1,532 - - - -
Proceeds from issuance of
convertible debt - - - - 300,000
Borrowings on line of credit 115 130 1,542 - 4,431
Repayments of line of credit - - - (659)
Subchapter S distributions (822) (974) (2,366) (2,366) (1,290)
Repayment of stockholder notes (169) (43) - - -
Payment of debt issuance costs - - - - (8,250)
---------- ---------- ---------- ---------- ----------
Net cash provided by
financing activities 113,215 7,838 26,430 23,757 337,761
---------- ---------- ---------- ---------- ----------
Change in cash and cash equivalents 44,904 (7,966) 14,545 38,703 385,457
Adjustment to conform acquired
company's year end - - (4,140) (4,140) -
Cash and cash equivalents, beginning
of period 33,398 78,302 70,336 70,336 80,741
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of
period $ 78,302 $ 70,336 $ 80,741 $ 104,899 $ 466,198
========== ========== ========== ========== ==========
Cash paid for interest $ 16 $ 22 $ - $ - $ -
========== ========== ========== ========== ==========
Cash paid for income taxes $ 4,731 $ 14,579 $ 14,194 $ 3,154 $ 14,667
========== ========== ========== ========== ==========
Supplemental disclosures of noncash
financing and investing activities:
Purchase price payable 20*20 Group,
Ltd. $ - $ - $ 6,000 $ - $ -
========== ========== ========== ========== ==========
Common stock issued for acquisitions $ - $ 24,974 $ - $ - $ 4,934
========== ========== ========== ========== ==========
Exercise of common stock options in
exchange for stockholder note $ 507 $ - $ - $ - $ -
========== ========== ========== ========== ==========
Subchapter S distributions payable $ 16 $ 22 $ 745 $ - $ -
========== ========== ========== ========== ==========
Convertible notes issued for
acquisitions $ - $ - $ - $ - $ 6,685
========== ========== ========== ========== ==========
See accompanying notes to supplemental consolidated financial statements
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
(1) Summary of Significant Accounting Policies
The accompanying unaudited supplemental consolidated financial statements
as of September 30, 1999 and for the nine-month periods ended September 30, 1998
and 1999 have been prepared on substantially the same basis as the audited
consolidated financial statements, and in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for
their fair presentation. The interim results presented are not necessarily
indicative of results for any subsequent quarter or for the year ending December
31, 1999.
In May 1998, Siebel Systems, Inc. (the "Company") acquired Scopus
Technology, Inc. ("Scopus") in a merger transaction accounted for as a pooling
of interests. Accordingly, all financial information has been restated to
reflect the combined operations of these companies. See Note 9.
In December 1999, the Company acquired OnTarget, Inc. ("OnTarget") in a
business combination transaction accounted for as a pooling of interests.
Accordingly, all financial information has been restated to reflect the combined
operations of the two companies. See Note 9.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Prior to January 1, 1998, the Company recognized revenue in accordance with
Statement of Position ("SOP") No. 91-1, "Software Revenue Recognition". Software
license revenue was recognized when all of the following criteria had been met:
there was an executed license agreement; software had been shipped to the
customer; no significant vendor obligations remained; the license fee was fixed
and payable within twelve months and collection was deemed probable.
On January 1, 1998, the Company adopted the provisions of Statement of
Position ("SOP") No. 97-2 "Software Revenue Recognition." Revenue from software
licenses is recognized under SOP No. 97-2 when persuasive evidence of an
arrangement exists and delivery has occurred, provided the fee is fixed and
determinable, collectibility is probable and the arrangement does not require
significant customization of the software. Revenue on multiple element
arrangements is allocated to the various elements based on fair values specific
to the Company.
Professional services, maintenance and other revenues relate primarily to
consulting services, maintenance and training. Maintenance revenues are
recognized ratably over the term of the maintenance contract, typically 12
months. Consulting and training revenues are recognized as the services are
performed and are usually on a time and materials basis. Such services primarily
consist of implementation services related to the installation of the Company's
products and do not include significant customization to, or development of, the
underlying software code. Deferred revenue includes deposits on training
programs billed and/or collected in advance. Income is then recognized in the
period in which the related services are rendered.
The Company's customer base includes a number of its suppliers (e.g. AT&T,
BankBoston Robertson Stephens, Bank of America, Cabletron Systems, The Charles
Schwab Corporation, Cigna Corporation, Cisco Systems, Inc., Compaq Computer
Corporation, Dell Computer Corporation, Lucent Technologies, MCI
Telecommunications Corporation, Microsoft Corporation, NationsBanc Montgomery
Securities, Inc., PeopleSoft,
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
Inc., Sequent Computer Systems, Inc., Siemens Corporation and Sun Microsystems,
Inc.). On occasion, the Company has purchased goods or services for company
operations from these vendors at or about the same time Siebel has licensed its
software to these organizations. These transactions are separately negotiated
and recorded at terms the Company considers to be arm's-length. During 1998, the
Company recognized approximately $16,500,000 of revenue in connection with such
transactions.
Cost of Revenues
Cost of software consists primarily of media, product packaging,
documentation and other production costs, and third-party royalties.
Cost of professional services, maintenance and other consists primarily of
salaries, benefits and allocated overhead costs related to consulting, training
and customer support personnel, including cost of services provided by third
party consultants engaged by the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents.
Short-term investments generally consist of highly liquid debt securities with
remaining maturities in excess of 90 days. Marketable equity securities include
an investment in a publicly traded company. The Company has classified its
short-term investments and marketable equity securities as "available-for-sale."
Such investments are carried at fair value with unrealized gains and losses, net
of related tax effects, reported within accumulated other comprehensive income.
Realized gains and losses on available-for-sale securities are computed using
the specific identification method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, generally three to ten years.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful lives of the improvements, generally seven years.
Expenditures for maintenance and repairs are charged to expense as
incurred. Costs and accumulated depreciation of assets sold or retired are
removed from the respective property accounts, and gain or loss is reflected in
the statement of income.
Software Development Costs
Software development costs associated with new products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
time period between the establishment of technological feasibility and
completion of software development has
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
been short, and no significant development costs have been incurred during that
period. Accordingly, the Company has not capitalized any software development
costs to date.
Intangible Assets
Included in other assets are various intangible assets, primarily goodwill
related to acquisitions. These amounts are generally being amortized over three
to five years using the straight-line method. Gross intangible assets were
$2,085,000 and $9,627,000 at December 31, 1997 and 1998, respectively, and the
related accumulated amortization was $285,000 and $2,503,000 at December 31,
1997 and 1998, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising expense is included
in sales and marketing expense and amounted to $7,245,000, $12,126,000 in 1997
and 1998, respectively, and was not significant in 1996.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are recognized for deductible
temporary differences, net operating loss carryforwards and credit carryforwards
if it is more likely than not that the tax benefits will be realized. To the
extent a deferred tax asset cannot be recognized under the preceding criteria,
allowances are established. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
The unaudited pro forma provision for income taxes reflects income tax
expense that would have been reported if On Target Inc. (an S corporation for
income-tax reporting purposes) had been a C corporation for each of the periods
presented.
Pro Forma Net Income Per Share
Basic pro forma net income per share is computed using the pro forma net
income and weighted average number of shares of common stock outstanding.
Diluted pro forma net income per share is computed using pro forma net income
and the weighted average number of shares of common stock and, when dilutive,
potential common shares from options to purchase common stock and warrants
outstanding using the treasury stock method. Diluted pro forma net income per
share also gives effect, when dilutive, to the conversion of the convertible
notes and subordinated debentures, using the if-converted method.
Employee Stock Option and Purchase Plans
The Company accounts for its stock-based compensation plans using the
intrinsic value method. As such, compensation expense is recorded on the date of
grant if the current market price of the underlying stock exceeds the exercise
price.
Foreign Currency Translation
The Company considers the functional currency of its foreign subsidiaries
to be the local currency, and accordingly, the financial statements of the
foreign subsidiaries are translated into U.S. dollars using exchange rates in
effect at period end for assets and liabilities and average exchange rates
during each reporting period for the
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
results of operations. Adjustments resulting from translation of foreign
subsidiary financial statements are reported within accumulated other
comprehensive income.
The Company generally utilizes foreign currency forward contracts to hedge
its exchange risk on foreign currency receivable and intercompany balances.
While these forward contracts are subject to fluctuations in value, which are
recorded in current results of operations, such fluctuations are generally
offset by the changes in value of the underlying exposures being hedged. The
Company does not hold or issue financial instruments for speculative or trading
purposes.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable, as the majority of the
Company's customers are large, well established companies. The Company maintains
reserves for potential credit losses, but historically has not experienced any
significant losses related to any particular industry or geographic area since
the Company's business is not concentrated on any one particular customer or
customer base. No single customer accounts for more than 10% of revenues; and
the Company's largest customer base, high technology, which accounted for
approximately 30% of revenues during the year ended December 31, 1998, is
sufficiently broad that the Company does not consider itself significantly
exposed to concentrations of credit risk.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate their
respective fair values. Changes in the fair value of the Company's derivative
financial instruments (foreign currency forward contracts) are generally offset
by changes in the value of the underlying exposures being hedged. The fair value
of the Company's derivative financial instruments at December 31, 1998 was a
gain of approximately $128,000.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable based on expected undiscounted cash flows
attributable to that asset. The amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset.
The Company does not have any long-lived assets it considers to be impaired.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts; and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated and accounted for as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. For a derivative not designated as a hedging instrument, changes in
the fair value of the derivative are recognized in earnings in the period of
change. This statement will be effective for all annual and interim periods
beginning after
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
June 15, 2000. Management does not believe the adoption of SFAS No. 133 will
have a material effect on the Company's consolidated financial position or
results of operations.
In December 1998, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP No. 98-9, "Software Revenue Recognition with Respect to
Certain Arrangements", which requires recognition of revenue using the "residual
method" in a multiple element arrangement when fair value does not exist for one
or more of the undelivered elements in the arrangement. Under the "residual
method", the total fair value of the undelivered elements is deferred and
subsequently recognized in accordance with SOP No. 97-2. Management does not
believe the adoption of SOP No. 98-9 will have a material effect on the
Company's consolidated financial position or results of operations. SOP 98-9
will be effective for the Company for all annual and interim periods beginning
on or after January 1, 2000.
(2) Financial Statement Details
Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of securities with remaining maturities of 90 days
or less at the date of purchase. Short-term investments as of December 31, 1997
consisted of $55,697,000 of municipal securities which matured in less than one
year, and $36,302,000 of municipal securities which matured in one to five
years. As of December 31, 1997, cost approximated market for short-term
investments; realized and unrealized gains and losses were not significant.
Short-term investments as of December 31, 1998 consisted of $46,187,000 of
securities which mature in less than one year, $94,980,000 of securities which
mature in one to five years and $10,721,000 of securities which mature in over
five years. Cash, cash equivalents and short-term investments consisted of the
following as of December 31, 1998 (in thousands):
Unrealized Unrealized
Cost loss gain Market
----------- ----------- ----------- ----------
Cash and cash equivalents:
Cash............................................... $ 39,047 $ -- $ -- $ 39,047
Certificates of deposit............................ 1,685 -- -- 1,685
Auction market preferreds.......................... 4,350 -- -- 4,350
Money market funds................................. 6,199 -- -- 6,199
Municipal securities............................... 29,460 -- -- 29,460
----------- ----------- ----------- ----------
$ 80,741 -- -- $ 80,741
=========== =========== =========== ==========
Short-term investments:
US treasury securities............................. $ 5,181 $ (15) $ -- $ 5,166
Municipal securities............................... 146,506 (60) 276 146,722
----------- ----------- ----------- ----------
$ 151,687 $ (75) $ 276 $ 151,888
=========== =========== =========== ==========
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
Accounts Receivable, Net
Accounts receivable, net, consisted of the following (in thousands):
December 31,
-------------------------
1997 1998
----------- -----------
Trade accounts receivable......................................................... $ 69,526 $ 136,411
Less: allowances for doubtful accounts and returns................................ 4,288 10,330
----------- -----------
$ 65,238 $ 126,081
=========== ===========
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
December 31,
----------------------
1997 1998
-------- ---------
Computer equipment.................................................................. $ 20,321 $ 38,965
Furniture and fixtures.............................................................. 6,500 10,513
Computer software................................................................... 8,446 8,735
Leasehold improvements.............................................................. 3,409 9,058
-------- ---------
38,676 67,271
Less: accumulated depreciation...................................................... 13,112 20,887
-------- ---------
$ 25,564 $ 46,384
======== =========
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31,
----------------------
1997 1998
-------- ---------
Bonuses............................................................................. $ 7,092 $ 23,091
Commissions......................................................................... 6,200 17,840
Sales tax........................................................................... 3,026 9,345
Vacation............................................................................ 2,312 3,967
Acquisition-related................................................................. 205 7,450
Other............................................................................... 10,282 26,492
-------- ---------
$ 29,117 $ 88,185
======== =========
Other Income, Net
Other income, net, consisted of the following (in thousands):
December 31,
-----------------------------------
1996 1997 1998
-------- --------- ---------
Interest income........................................................ $ 3,324 $ 6,055 $ 7,605
Interest expense....................................................... (32) (29) (68)
Other.................................................................. (158) (641) (1,279)
-------- --------- ---------
$ 3,134 $ 5,385 $ 6,258
======== ======== =========
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
(3) Convertible Subordinated Notes
The Company completed a private placement of $300,000,000 of convertible
subordinated notes in September 1999. The seven-year term notes bear interest at
a rate of 5.50% and are convertible into shares of the Company's common stock at
any time prior to maturity, at a conversion price of approximately $46.64 per
share, subject to adjustment under certain conditions. The notes may be
redeemed, in whole or in part, by the Company at any time on or after September
15, 2002. The redemption price will range from $309,420,000 to $302,370,000 if
the notes are redeemed between September 15, 2002 through September 14, 2006.
Any redemption made on or after September 15, 2006 will be redeemed at
$300,000,000. Accrued interest to the redemption date will be paid by the
Company in each redemption.
Other noncurrent liabilities includes $6,685,000 of convertible notes
issued in connection with the OnTarget acquisitions in January and February,
1999 (See Note 9). The notes bear interest at 5.5%, are convertible into
approximately 760,000 shares of the Company's common stock, and are due on
February 26, 2006.
(4) Commitments and Contingencies
Letters of Credit
In August 1996, the Company entered into a $1,325,000 secured letter of
credit with a bank. This letter of credit, which expires July, 2006,
collaterizes the Company's obligations to a third party for lease payments.
In March 1999, the Company entered into an $8,400,000 secured letter of
credit with a bank. This letter of credit, which expires November 2000,
collateralizes the Company's obligations to a third party for tenant improvement
costs.
In October 1999, the Company entered into two $8,400,000 secured letters of
credit with a bank. These letters of credit, which expire October 2000 and
January 2001, collateralize the Company's obligations to a third party for
tenant improvement costs. The Company also entered into a $3,000,000 secured
letter of credit with a bank. This letter of credit, which expires August 2000,
collateralizes the Company's obligation to a third party for lease payments.
The letters of credit are secured by cash, cash equivalents and short-term
investments.
Lease Obligations
As of December 31, 1998, the Company leased facilities under noncancelable
operating leases expiring between 1999 and 2008. Future minimum lease payments
are as follows (in thousands):
Year Ending
December 31,
------------
1999..................................................................... $ 15,415
2000..................................................................... 12,853
2001..................................................................... 11,892
2002..................................................................... 10,126
2003 and thereafter...................................................... 38,183
---------
$ 88,469
=========
Rent expense for the years ended December 31, 1996, 1997 and 1998, was
$3,065,000, $6,469,000 and $11,904,000, respectively.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
Employee Benefit Plan
The Company has 401(k) plans that allows eligible employees to contribute
up to 20% of their compensation, limited to $10,000 in 1998. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) plan, none have been made to
date. A subsidiary made discretionary contributions of $154,000 and $244,000 to
its 401(k) and profit-sharing plans in 1997 and 1998, respectively.
Legal Actions
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position or results of
operations, although there can be no assurance as to the outcome of such
litigation.
(5) Stockholders' Equity
Stock Split
On August 24, 1999 and October 20, 1999, respectively, the Company's Board
of Directors and stockholders approved a two-for-one stock split (to be effected
in the form of a stock dividend) to be paid on November 12, 1999. The
accompanying consolidated financial statements have been restated to give effect
to the stock split.
Pro Forma Net Income per Share (Unaudited)
The following is a reconciliation of the number of shares used in the basic
and diluted pro forma net income per share computation for the periods presented
(in thousands):
Nine-months ended
Year ended December 31, September 30
-----------------------------------------------------
1996 1997 1998 1998 1999
------------- ------- ------- -------- --------
(unaudited)
Shares used in basic pro forma net income per share computation 141,780 169,904 177,446 176,458 185,929
Effect of dilutive potential common shares.............. 16,924 21,434 24,758 25,380 34,372
Dilutive effect of convertible notes.................... - - - - 418
------------- ------- ------- -------- --------
Shares used in diluted pro forma net income
per share computation................................... 158,704 191,338 202,204 201,838 220,719
============= ======= ======= ======== ========
The Company excludes potentially dilutive securities from its diluted net
income per share computation when either the exercise price of the securities
exceeds the average fair value of the Company's common stock or the Company
reported net losses, because their effect would be anti-dilutive. During 1998,
the Company excluded 6,619,882 employee stock options with a weighted average
exercise price of $14.36 per share from the earnings per share computation as
their exercise prices exceeded the fair value of the Company's common stock and,
accordingly, their inclusion would have been anti-dilutive. For the nine months
ended September 30, 1999, the Company excluded 3,246,009 employee stock options
with a weighted average exercise price of $27.36 per share from the earnings per
share computation as their exercise prices exceeded the average fair value of
the Company's common stock during such period and, accordingly, their inclusion
would have been anti-dilutive. For the nine months ended September 30, 1998, the
Company excluded 5,281,082 employee stock options, respectively, with a weighted
average exercise price of $14.68 per share, respectively, from the earnings per
share computation. For the nine months ended September 30, 1999, the Company
excluded the convertible subordinated debentures (See Note 3) from the earnings
per share computation as the effect would be antidilutive.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
Employee Stock Option and Purchase Plans
The 1996 Equity Incentive Plan, which amended and restated the Company's
1994 Stock Option Plan and 1996 Supplemental Stock Option Plan and the 1998 Non-
Officer Equity Incentive Plan (collectively, the "Plan"), provides for the
issuance of up to an aggregate of 100,000,000 shares of common stock to
employees, directors and consultants. The Plan provides for the issuance of
incentive and nonstatutory stock options, restricted stock purchase awards,
stock bonuses and stock appreciation rights.
Under the Plan, the exercise price for incentive stock options is at least
100% of the fair market value on the date of the grant. Options generally expire
in 10 years; however, incentive stock options may expire in 5 years if the
optionee owns stock representing more than 10% of the voting power of all
classes of stock. Vesting periods are determined by the Board of Directors and
generally provide for shares to vest ratably over 5 years.
The Plan also allows for the exercise of certain unvested options. Shares
of common stock issued to employees upon exercise of unvested options are
subject to repurchase by the Company at the original exercise price. The
Company's ability to repurchase these shares expires at a rate equivalent to the
current vesting schedule of each option. During the period from October 1995
through April 1996, the Company granted options to purchase an aggregate of
32,610,000 shares of common stock at exercise prices ranging from $0.07 to $0.82
per share. Based in part on an independent appraisal obtained by the Company's
Board of Directors, and other factors, the Company recorded $748,000 of deferred
compensation expense in 1995 and an additional $893,000 of deferred compensation
expense in 1996 relating to these options. These amounts are being amortized
over the vesting period of the individual options, generally five years.
As of December 31, 1998, 7,013,200 shares of common stock had been issued
to employees upon the exercise of unvested options, which are subject to
repurchase, at a weighted average repurchase price of $0.12 per share. No
compensation expense has resulted from repurchases of restricted shares since
the amount of cash paid by the Company did not differ from the proceeds received
from the employee from the sale of the restricted shares. The Company has not
issued any other restricted stock purchase awards, stock bonuses or stock
appreciation rights.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
The Company has assumed certain options granted to former employees of
acquired companies (the "Acquired Options"). The Acquired Options were assumed
by the Company outside of the Plan, but all are administered as if issued under
the Plan. All of the Acquired Options have been adjusted to give effect to the
conversion under the terms of the Agreements and Plans of Reorganization between
the Company and the companies acquired. The Acquired Options generally become
exercisable over a four year period and generally expire either five or ten
years from the date of grant. No additional options will be granted under any of
the acquired companies' plans.
Combined plan activity is summarized as follows:
Weighted
Shares average
Available Number of exercise price
for grant shares per share
------------- ------------- --------------
Balances, December 31, 1995......................... 17,250,934 10,575,632 $ 0.43
Additional shares authorized................. 29,400,000 --
Options granted.............................. (39,857,888) 39,857,888 $ 1.92
Options exercised............................ -- (5,349,248) $ 0.23
Options canceled............................. 2,711,684 (2,711,684) $ 1.10
------------- ------------- --------------
Balances, December 31, 1996......................... 9,504,730 42,372,588 $ 1.81
Additional shares authorized................. 32,000,000 --
Options granted.............................. (26,660,548) 26,660,548 $ 8.28
Options exercised............................ -- (4,134,606) $ 1.13
Options canceled............................. 10,819,662 (10,819,662) $ 8.35
------------- ------------- --------------
Balances, December 31, 1997......................... 25,663,844 54,078,868 $ 3.74
Additional shares authorized................. 20,000,000 --
Options granted.............................. (37,462,444) 37,462,444 $ 11.25
Options exercised............................ -- (6,269,296) $ 2.93
Options canceled............................. 7,158,508 (7,158,508) $ 7.92
------------- ------------- --------------
Balances, December 31, 1998......................... 15,359,908 78,113,508 $ 7.04
============= ============= ==============
The following table summarized information about fixed stock options
outstanding as of December 31, 1998:
Options outstanding Options exercisable
------------------------------------------------- ----------------------------------
Weighted
average
remaining Weighted Weighted
Number of contractual average Number of average
Range of exercise prices shares life exercise price shares exercise price
- ------------------------ ----------- ------------- ------------------ ---------- -----------------
$ 0.00 1,456 0.2 $ 0.00 1,448 $ 0.00
$0.015 375,600 6.0 $ 0.02 375,600 $ 0.02
$ 0.03 336,000 6.3 $ 0.03 336,000 $ 0.03
$0.065 517,400 6.6 $ 0.07 517,400 $ 0.07
$ 0.22 1,945,300 7.1 $ 0.22 1,945,300 $ 0.22
$ 0.33- 0.375 5,446,832 7.2 $ 0.36 2,392,316 $ 0.37
$ 0.69- 0.915 9,882,014 7.3 $ 0.71 3,539,172 $ 0.70
$ 1.44- 2.125 3,587,116 7.3 $ 1.53 1,130,740 $ 1.53
$2.905- 4.22 2,227,506 7.0 $ 4.02 615,116 $ 3.91
$5.495- 8.11 14,561,864 7.8 $ 6.20 4,013,156 $ 6.24
$8.285- 12.39 30,773,748 9.4 $10.33 1,902,352 $10.52
$12.44- 18.51 8,425,912 9.4 $13.83 172,552 $15.09
$25.75 32,760 9.1 $25.75 11,600 $25.75
----------- ----- ------ ----------- ------
$ 0.00- 25.75 78,113,508 8.4 $ 7.04 16,952,752 $ 3.30
=========== ===== ====== =========== ======
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods
ended September 30, 1998 and 1999)
In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 2,800,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's initial
public offering. In January 1997, the Board of Directors of the Company adopted
an amendment to the Purchase Plan to increase the number of shares authorized
for issuance under the Purchase Plan to 6,800,000 shares. The Purchase Plan
permits eligible employees to purchase common stock, through payroll deductions
of up to 15% of the employee's compensation, at a price equal to 85% of the fair
market value of the common stock at either the beginning or the end of each
offering period, whichever is lower. As of December 31, 1998, 2,777,284 shares
had been purchased under the Purchase Plan.
In addition, Scopus had adopted the 1995 Employee Stock Purchase Plan (the
"Acquired Purchase Plan"). All shares purchased under the Acquired Purchase Plan
have been adjusted to give effect to the conversion under the terms of the
Agreement and Plan of Merger and Reorganization between the Company and Scopus.
Upon the closing of the Scopus merger, 330,932 shares had been purchased under
the Acquired Purchase Plan. No additional shares will be issued under the
Acquired Purchase Plan.
Common Stock
The Company has elected to continue to use the intrinsic value-based
method to account for all of its employee stock-based compensation plans. The
Company has recorded no compensation costs related to its stock option plans for
the years ended December 31, 1996, 1997 and 1998, except for the options granted
during the period from October 1995 through April 1996, because the exercise
price of each option equals or exceeds the fair value of the underlying common
stock as of the grant date for each stock option. The Company also recorded
compensation expense for the estimated fair value of common stock transferred
from the majority shareholder of On Target to two key employees in January 1998.
Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
effects on net income (loss) and net income (loss) per share data as if the
Company had elected to use the fair value approach to account for all its
employee stock-based compensation plans. Had compensation cost for the Company's
plans been determined consistent with the fair value approach enumerated in SFAS
No. 123, the Company's net income (loss) and net income (loss) per share for the
years ended December 31, 1996, 1997 and 1998 would have been as indicated below
(in thousands, except per share data).
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods
ended September 30, 1998 and 1999)
1996 1997 1998
--------- -------- --------
Pro forma net income (loss):
As reported.......................................... $ 13,313 $ 55 $ 43,460
Pro forma giving effect to SFAS No. 123.............. $ 10,065 $(12,697) $ 23,203
Diluted pro forma net income (loss) per share:
As reported.......................................... $ 0.08 $ 0.00 $ 0.21
Pro forma giving effect to SFAS No. 123.............. $ 0.06 $ (0.07) $ 0.11
Basic pro forma net income (loss) per share:
As reported.......................................... $ 0.09 $ 0.00 $ 0.24
Pro forma giving effect to SFAS No. 123.............. $ 0.07 $ (0.07) $ 0.13
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
1996 1997 1998
------ ------ ------
Risk-free interest rate.......................................... 6.0% 6.1% 4.85%
Expected life (in years)......................................... 3.5 3.5 3.4
Expected volatility.............................................. 69.2% 83.9% 70.5%
The fair value of employees' stock purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following weighted average
assumptions used for purchases:
1996 1997 1998
------ ------ ------
Risk-free interest rate.......................................... 5.5% 5.3% 5.3%
Expected life (in years)......................................... 0.5 0.7 0.6
Expected volatility.............................................. 68.5% 83.9% 70.5%
Under SFAS No. 123, the weighted average estimated fair value of employee
stock options granted at exercise prices equal to market price at grant date
during 1996, 1997 and 1998 was $1.03, $4.30 and $5.94 per share, respectively.
The Company determined the assumptions to be used in computing the fair
value of stock options or stock purchase rights. The risk-free rate is the U.S.
treasury bill rate for the relevant expected life. The expected useful lives
were estimated giving consideration to vesting and purchase periods, contractual
lives, expected employee turnover and underlying stock volatility.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods
ended September 30, 1998 and 1999)
(6) Income Taxes
Income before taxes includes income from foreign operations of
approximately $127,000, $680,000 and $3,600,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
Historical Information
The components of income tax expense for the years ended December 31, 1996,
1997 and 1998 are as follows (in thousands):
1996 1997 1998
--------- --------- ---------
Current:
Federal....................................................... $ 5,156 $ 7,694 $ 18,488
State ....................................................... 1,755 2,684 4,559
Foreign....................................................... 410 400 1,289
--------- --------- ---------
Total current............................................ 7,321 10,778 24,336
Deferred:
Federal....................................................... (1,709) (1,345) (6,432)
State ....................................................... (239) (219) (1,409)
--------- --------- ---------
Total deferred........................................... (1,948) (1,564) (7,841)
Charge in lieu of taxes attributable to employer's stock
option plans.................................................. 2,173 4,046 13,517
--------- --------- ---------
Total income taxes....................................... $ 7,546 $ 13,260 $ 30,012
========= ========= =========
The differences between the income tax expense computed at the federal
statutory rate of 35% and the Company's actual income tax expense for the years
ended December 31, 1996, 1997 and 1998 are as follows (in thousands):
1996 1997 1998
--------- --------- --------
Expected income tax expense....................................... $ 7,454 $ 4,866 $ 25,997
State income taxes, net of federal tax benefit.................... 1,172 1,876 3,234
In-process research and development............................... -- 7,959 --
Non deductible merger costs....................................... -- -- 3,369
Research and experimentation credit............................... (537) (543) (838)
Tax exempt interest............................................... (204) (995) (1,740)
Foreign sales corporation benefit................................. -- -- (634)
S corporation benefit ............................................ (437) (588) (805)
Other, net........................................................ 98 685 1,429
--------- --------- ---------
Total income taxes............................................ $ 7,546 $ 13,260 $ 30,012
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and 1998
are as follows (in thousands):
1997 1998
--------- --------
Deferred tax assets:
Deferred state taxes..................................................... $ 900 $ 549
Accruals and reserves, not currently taken for tax purposes.............. 3,276 12,486
Net operating loss carryforward.......................................... 648 235
--------- --------
Deferred assets..................................................... 4,824 13,270
Deferred tax liability--depreciation.......................................... (178) (783)
-------- --------
Net deferred assets................................................. $ 4,646 12,487
========= ========
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods
ended September 30, 1998 and 1999)
As of December 31, 1998, the Company had a net operating loss carryforward
for federal and state income tax purposes of approximately $370,000. The federal
net operating loss carryforward expires in 2012. The state net operating loss
carryforward expires in 2002.
As of December 31, 1998, Scopus Technology UK Ltd. ("Scopus UK"), a
subsidiary of the Company, had a net operating loss carryforward of
approximately $200,000, which can be carried forward indefinitely to offset
future Scopus UK income.
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize the deferred tax assets.
Unaudited Pro Forma Information
The pro forma provision for income taxes reflects the income tax expense
that would have been reported if OnTarget Inc. (an S corporation for income tax
reporting purposes) had been a C corporation for each of the years in the three-
year period ended December 31, 1998. The components of pro forma income tax
expense are as follows (in thousands):
1996 1997 1998
--------- --------- ---------
Current:
Federal....................................................... $ 5,541 $ 8,211 $ 19,192
State ....................................................... 1,807 2,755 4,660
Foreign....................................................... 410 400 1,289
--------- --------- ---------
Total current............................................ 7,758 11,366 25,141
Deferred:
Federal....................................................... (1,709) (1,345) (6,432)
State ....................................................... (239) (219) (1,409)
--------- --------- ---------
Total deferred........................................... (1,948) (1,564) (7,841)
Charge in lieu of taxes attributable to employer's stock
option plans.................................................. 2,173 4,046 13,517
--------- --------- ---------
Total income taxes....................................... $ 7,983 $ 13,848 $ 30,817
========= ========= =========
The differences between the pro forma income tax expense computed at the
federal statutory rate of 35% and the Company's actual pro forma income tax
expense for the years ended December 31, 1996, 1997 and 1998 are as follows (in
thousands):
1996 1997 1998
--------- --------- --------
Expected income tax expense....................................... $ 7,454 $ 4,866 $ 25,997
State income taxes, net of federal tax benefit.................... 1,172 1,876 3,234
In-process research and development............................... -- 7,959 --
Non-deductible merger costs....................................... -- -- 3,369
Research and experimentation credit............................... (537) (543) (838)
Tax exempt interest............................................... (204) (995) (1,740)
Foreign sales corporation benefit................................. -- -- (634)
Other, net........................................................ 98 685 1,429
--------- --------- ---------
Total income taxes............................................ $ 7,983 $ 13,848 $ 30,817
========= ========= =========
Deferred tax assets and liabilities on a pro forma basis do not differ
materially from the historical information presented above.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
(7) Related Party Transactions
Certain members of the Company's Board of Directors serve as officers of
customers of the Company. In 1997 aggregate license revenues associated with
shipments to these customers were $1,598,000. Royalties revenues were $445,200
and total accounts receivable from these customers was $875,000. In 1998,
aggregate revenues associated with shipments to these customers were $2,592,200
and accounts receivable from these customers was $1,488,000.
During the years ended December 31, 1998 and 1997, OnTarget received
royalties in the amount of $829,172 and $445,247, respectively, from a related
entity. At December 31, 1998 and 1997, $92,322 and $133,816, respectively, is
due from this related entity.
(8) Segment and Geographic Information
The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of Siebel Front Office Applications, its
family of proprietary software applications. Substantially all revenues result
from the licensing of the Company's software products and related consulting and
customer support (maintenance) services. The Company's chief operating decision
maker reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by geographic region for
purposes of making operating decisions and assessing financial performance.
Accordingly, the Company considers itself to be in a single industry segment,
specifically the license, implementation and support of its software
applications.
The Company evaluates the performance of its geographic regions based on
revenues and gross margin only. The Company does not assess the performance of
its geographic regions on other measures of income or expense, such as
depreciation and amortization, operating income or net income. In addition, as
the Company's assets are primarily located in its corporate office in the United
States and not allocated to any specific region, the Company does not produce
reports for, or measure the performance of, its geographic regions based on any
asset-based metrics. Therefore, geographic information is presented only for
revenues and gross margin.
While a majority of the Company's revenues are derived from the United
States, the Company's export sales have been growing. Export sales for the years
ended December 31, 1996, 1997 and 1998 were $7,700,000, $41,800,000 and
$88,200,000, respectively. This represented 10%, 27% and 30% of total license
revenues, respectively. The Company's export sales are principally in Europe and
Asia/Pacific.
The following geographic information is presented for the years ended
December 31, 1996, 1997 and 1998 (in thousands):
United Asia/
Year States Europe Pacific Other Totals
---- ----------- ----------- ----------- ----------- -----------
Revenues:
1996 $ 102,557 $ 4,538 $ 3,744 $ 1,141 $ 111,980
1997 171,491 35,052 10,115 5,413 222,071
1998 293,872 75,364 24,424 16,226 409,886
Gross margin:
1996 $ 85,386 $ 3,796 $ 3,513 $ 1,109 $ 93,804
1997 141,976 30,535 9,161 4,360 186,032
1998 241,529 62,699 20,824 13,847 $ 338,899
No single customer has accounted for 10% or more of total revenues in 1996,
1997 or 1998.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
(9) Acquisitions
OnTarget, Inc.
On December 1, 1999, the Company acquired OnTarget, Inc. In January and
February 1999, OnTarget acquired Target Marketing Systems Worldwide Limited,
Target Marketing Systems S.A., and The Sales Consultancy Inc. in exchange for
convertible notes and OnTarget stock. OnTarget recorded goodwill of $9,745,000
in connection with these acquisitions. The goodwill is being amortized over a
five-year period using the straight-line method. Pro forma information giving
effect to these mergers has not been presented since it would not differ
materially from the historical results of the Company.
OnTarget develops and implements advanced sales and marketing training and
consulting programs for sales organizations competing in complex, multilevel
sales campaigns. Primary customers include corporate clients and business owners
who wish to provide for the development and training of their sales and
marketing personnel.
Under the terms of the agreement, each outstanding share of OnTarget common
stock was exchanged for 0.3077516 newly issued shares of common stock of the
Company. This resulted in the issuance of approximately 3.7 million additional
shares of the Company's Common Stock. In addition, all outstanding stock options
of OnTarget were converted into the right to acquire the Company's Common Stock
at the same exchange ratio with a corresponding adjustment to the exercise
price.
The acquisition of OnTarget will be accounted for as a pooling of
interests. OnTarget had the same fiscal year-end as the Company, and its
financial position, results of operations and cashflows have been combined with
those of the Company's for the same dates and periods as if the entities had
been combined from the earliest date presented. There were no adjustments to
conform accounting methods or eliminate intercompany transactions. The Company
expects to incur approximately $750,000 of merger-related professional services
costs.
As a result of OnTarget's conversion from a Subchapter S Corporation to a
Subchapter C subsidiary of the Company on December 1, 1999, all of OnTarget's
retained earnings at that date will be reclassified to additional paid-in-
capital. In addition, the Company will record an income tax benefit in the
amount of OnTarget's net deferred tax assets at that date.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are summarized as follows (in thousands, unaudited):
Year Ended Nine Months Ended
December 31, September 30,
--------------------------------------------------
1996 1997 1998 1999
----------- ---------- ---------- -----------
(unaudited)
Total revenues:
Siebel........................................... $ 101,362 $ 207,628 $ 391,539 $ 493,783
OnTarget......................................... 10,618 14,443 18,347 29,152
----------- ---------- ---------- -----------
$ 111,980 $ 222,071 $ 409,886 $ 522,935
=========== ========== ========== ===========
Net income (loss):
Siebel........................................... $ 12,861 $ (1,187) $ 42,875 $ 77,195
OnTarget......................................... 889 1,830 1,390 (80)
----------- ---------- ---------- -----------
$ 13,750 $ 643 $ 44,265 $ 77,115
=========== ========== ========== ===========
Scopus Technology, Inc.
On May 18, 1998, the Company completed the acquisition of Scopus
Technology, Inc. ("Scopus") of Emeryville, California, a leading provider of
customer service, field service, and call center software solutions. Under the
terms of the agreement, each outstanding share of Scopus common stock was
exchanged for newly issued shares of common stock of the Company. This resulted
in the issuance of approximately 15.1 million additional shares of the Company's
common stock. In addition, all outstanding stock options of Scopus were
converted into the right to acquire the Company's common stock at the same
exchange ratio, with a corresponding adjustment to the exercise price. In
connection with the merger, the Company incurred direct merger-related expenses
of approximately $13,500,000, including fees for investment bankers, attorneys,
accountants and other professional fees of $9,100,000, integration charges
related to duplicate facilities and equipment of $3,100,000 and other
miscellaneous expenses of $1,300,000. The Company also incurred indirect merger-
related expenses of approximately $1,800,000 for joint sales training and
merger-related marketing costs, which are included within sales and marketing
expenses. At December 31, 1998, accrued liabilities included approximately
$1,450,000 of unpaid merger-related expenses.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
The transaction has been accounted for as a pooling of interests.
Accordingly, the financial statements of Siebel have been restated to include
the financial position and results of operations of Scopus for all periods
presented. Prior to the merger with Siebel, Scopus ended its fiscal year on
March 31. The restated financial statements as of December 31, 1997 and for
prior periods include Siebel's results of operations for the calendar periods
noted and Scopus' results of operations for the fiscal periods ending three
months later. Beginning January 1, 1998, the restated financial statements
combine the operating results of Siebel and Scopus for the calendar periods
noted. As a result of conforming the reporting periods of Siebel and Scopus, the
operating results of Scopus for the three month period ended March 31, 1998 are
included in the restated financial statements for both 1997 and 1998. Scopus
revenues and net income for the three-month period ended March 31, 1998 were
$27,100,000 and $1,500,000, respectively. Net income for this period of
approximately $1,500,000 is reflected as a reduction of opening retained
earnings in the restated 1998 financial statements.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow (in
thousands).
Year ended Quarter ended
December 31, March 31,
--------------------------------------
1996 1997 1998
----------- ----------- ------------
(unaudited)
Total revenues:
Siebel........................................... $ 39,152 $ 118,775 $ 47,100
Scopus........................................... 62,210 88,853 27,072
----------- ----------- -----------
$ 101,362 $ 207,628 $ 74,172
=========== =========== ===========
Net income (loss):
Siebel........................................... $ 5,025 $ (2,427) $ 8,284
Scopus........................................... 7,836 1,240 1,464
----------- ----------- -----------
$ 12,861 $ (1,187) $ 9,748
=========== =========== ===========
In combining the financial statements of Siebel and Scopus, certain
reclassifications, conforming changes and adjustments relating to revenue
recognition were made to the historical financial statements of Scopus. These
conforming changes and adjustments resulted in a reduction of previously
reported net income of approximately $580,000 in fiscal 1996 and $2,930,000 in
fiscal 1997. These adjustments will not reverse in future periods.
20*20 Group, Ltd.
On December 17, 1998, the Company acquired all of the outstanding
securities of the privately-held 20*20 Group, Ltd. ("20*20"), a provider of end-
user training for the enterprise relationship management software market. The
transaction was valued at approximately $6,000,000 and was accounted for by the
purchase method of accounting. Accordingly, the operating results of 20*20 have
been included in the accompanying consolidated financial statements of the
Company from the date of acquisition. The purchase price was allocated to
tangible net assets, including current assets, current liabilities and property,
plant and equipment. The excess of the purchase price over the fair value of the
tangible net assets acquired, $5,500,000, was allocated to goodwill. This amount
will be amortized over three years.
The results of operations of 20*20 prior to the acquisition date are not
considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
presented.
SIEBEL SYSTEMS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
InterActive WorkPlace, Inc
On October 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held InterActive WorkPlace, Inc.
("InterActive"), a developer of intranet-based business intelligence software
technology. The transaction was valued at approximately $15,000,000 and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of InterActive have been included in the accompanying consolidated
financial statements of the Company from the date of acquisition. Under the
terms of the agreement, InterActive's securityholders received or will receive
up to approximately 1,708,000 shares of the Company's common stock in exchange
for all outstanding shares in InterActive. Additionally, InterActive optionees
received options to purchase an aggregate of approximately 128,000 shares of the
Company's common stock in exchange for their options to purchase InterActive
common stock. The excess of the purchase price over the fair value of the net
assets acquired was allocated to purchased in-process research and development
and intangible assets of $14,017,000 and $104,000, respectively. The purchased
in-process research and development was charged to operations in the fourth
quarter of 1997. The amounts allocated to intangible assets will be amortized
over three years.
Purchased in-process research and development is related to the completion
of InterActive's data integration, filtering and formatting technology and its
integration into the Company's products. At the time of acquisition, a prototype
of InterActive's product existed and was in limited trials, however, the
prototype was not stable or sufficiently developed to be scalable on an
enterprise-wide basis. InterActive's technology was completed, at a cost of
approximately $400,000, and incorporated as a separate module into the Siebel 98
product suite which was released in June 1998. The Company estimated that the
technology was approximately 75% complete as of the acquisition date. At that
date, the only identifiable asset acquired was the technology under development.
Accordingly, essentially all of the excess purchase price over net assets
acquired, except for amounts assigned to net current assets, fixed assets and
workforce-in-place, was assigned to in-process research and development.
The results of operations of InterActive prior to the acquisition date are
not considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial information has not been presented.
Nomadic Systems, Inc
On November 1, 1997, the Company issued shares of common stock in exchange
for all outstanding securities of privately-held Nomadic Systems, Inc.
("Nomadic"), a provider of innovative business solutions to pharmaceutical sales
forces. The transaction was valued at approximately $11,000,000 and was
accounted for by the purchase method of accounting. Accordingly, the operating
results of Nomadic have been included in the accompanying consolidated financial
statements of the Company from the date of acquisition. Under the terms of the
agreement, Nomadic's securityholders received approximately 1,200,000 shares of
the Company's common stock in exchange for all outstanding shares of Nomadic.
The purchase price was allocated to net current assets, fixed assets, purchased
in-process research and development and intangible assets of $557,000, $186,000,
$8,723,000 and $1,553,000, respectively. The purchased in-process research and
development was charged to operations in the fourth quarter of 1997. The amounts
allocated to intangible assets will be amortized over three years.
The appraisal of the acquired research and development was based upon the
present value of forecasted operating cash flows from the technology acquired,
giving effect to the stage of completion at the acquisition date. These
forecasted cash flows were then discounted at a rate which gave consideration to
the risk involved in completing the acquired technology. The forecasted cash
flows assumed inclusion of the product developed from acquired technology into
the existing Siebel product suite.
SIEBEL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as of September 30, 1999 and for the nine-month periods ended
September 30, 1998 and 1999)
The purchased in-process research and development expense related to
completion of Nomadic's second generation pharmaceutical sales force automation
product. At the time of the acquisition, Nomadic had a first-generation product
at a limited number of customers, with a very small user base. There were a
considerable number of uncertainties as to increasing the product's scalability
for deployment on an enterprise-wide basis, improving the stability of the
application and identifying and fixing bugs. The Company allocated limited
excess purchase price over net assets acquired to net current assets, fixed
assets and workforce-in-place. The majority of the excess purchase price was
allocated to in-process research and development and other intangible assets
(goodwill) based upon the expected cash flows from Nomadic's existing product
and the product under development, giving consideration to the stage of
completion of the technology under development at the acquisition date. This
technology was completed, at a cost of approximately $1,300,000, for enterprise-
wide release in March 1998.
The results of operations of Nomadic prior to the acquisition date are not
considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
presented.
Clear With Computers, Inc.
The Company incurred merger costs of approximately $3,300,000 in the third
quarter of 1997 in connection with Scopus' planned merger with Clear With
Computers, Inc. The merger plan was terminated early in the fourth quarter of
1997.
(10) Selected Quarterly Financial Data (unaudited)
The following table presents selected consolidated quarterly information
for fiscal 1998 and 1999 (in thousands, except share data):
First Second Third Fourth
quarter quarter quarter quarter
------------ ------------ ------------ ------------
1998:
Net revenues...................................... $ 78,597 $ 93,868 $ 109,322 $ 128,099
Gross margin...................................... 65,978 75,422 90,449 107,050
Net income (loss)................................. 10,057 (511) 14,859 19,860
Pro forma net income (loss)....................... 9,881 (729) 14,539 19,769
Pro forma net income (loss) per diluted share..... 0.05 (0.00) 0.07 0.10
Pro forma net income (loss) per basic share....... 0.06 (0.00) 0.08 0.11
1999:
Net revenues...................................... $ 141,708 $ 174,882 $ 206,345
Gross margin...................................... 114,573 135,937 155,091
Net income (loss)................................. 22,000 25,853 29,262
Pro forma net income (loss)....................... 21,756 25,816 29,572
Pro forma net income (loss) per diluted share..... 0.10 0.12 0.13
Pro forma net income (loss) per basic share....... 0.12 0.14 0.16
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions Year
------------- ------------- --------------- -------------
(in thousands)
Allowance For Doubtful Accounts
Year ended December 31, 1998.................... $ 4,288 $ 6,230 $ 188 $ 10,330
Year ended December 31, 1997.................... $ 1,940 $ 4,920 $ 2,572 $ 4,288
Year ended December 31, 1996.................... $ 665 $ 2,636 $ 1,361 $ 1,940
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
Overview
Siebel Systems, Inc. ("Siebel" or the "Company") is the world's leading
supplier of Web-based front office software systems. Siebel provides an
integrated family of sales, marketing and customer service application software
for field sales, customer service, telesales, telemarketing, field service,
third-party resellers and Internet-based e-commerce and self service. Siebel
Systems' products are designed to meet the needs of small, medium and large
businesses.
In today's increasingly competitive global markets, businesses must
continuously improve their operations. Having spent considerable effort and
resources in previous years automating finance, manufacturing, distribution,
human resources management, and general office operations, many businesses are
now looking to apply the leverage of information technology to their sales,
marketing and customer service processes. Unlike previous automation efforts
which have focused on decreasing expenses, sales, marketing and customer service
information systems focus primarily on increasing revenues and customer
satisfaction.
The Siebel Front Office Applications are comprised of a broad range of
advanced Web-based application software products designed to allow corporations
to deploy comprehensive sales, marketing and customer service information
systems on a global basis. The Company's products provide support for a number
of frequently interdependent distribution channels, including direct field
sales, telesales, telemarketing, retail, customer service, call centers, field
service, resellers, business partners and Internet-based e-commerce, marketing
and customer service. The Company's products provide support for a broad range
of industries, business practices and multiple languages and currencies.
In December 1999, the Company acquired OnTarget, Inc. (formerly Target
Marketing Systems, Inc. "OnTarget"). OnTarget develops and implements advanced
sales and marketing training and consulting programs for sales organizations
competing in complex, multilevel sales campaigns. OnTarget's goal is to provide
its clients with a pragmatic, repeatable and implementable process that will
create lasting change within sales organizations, and which will enable Siebel's
clients to effectively respond to today's market challenges. Primary customers
include corporate clients and business owners who wish to provide for the
development and training of their sales and marketing personnel.
Under the terms of the agreement, each outstanding share of OnTarget common
stock was exchanged for 0.3077516 newly issued shares of common stock of the
Company. This resulted in the issuance of approximately 3.7 million additional
shares of the Company's Common Stock. In addition, all outstanding stock options
of OnTarget were converted into the right to acquire the Company's Common Stock
at the same exchange ratio with a corresponding adjustment to the exercise
price.
The acquisition of OnTarget has been accounted for as a pooling of
interests. Accordingly, the financial statements of the Company have been
restated to include the financial position and results of operations of OnTarget
for all periods presented.
Results of Operations
The following table sets forth statement of operations data for the three
years ended December 31, 1998 and the nine-month periods ended September 30,
1999, expressed as a percentage of total revenues:
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
------------ --------- --------- ---------- ---------
Revenues:
Software 71.8 70.7 71.0 71.2 63.0
Professional services, maintenance and other 28.2 29.3 29.0 28.8 37.0
------------ --------- --------- ---------- ---------
Total revenues 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software 1.9 1.9 1.4 1.5 1.0
Professional services, maintenance and other 14.3 14.3 15.9 16.2 21.5
------------ --------- --------- ---------- ---------
Total cost of revenues 16.2 16.2 17.3 17.7 22.5
Gross margin 83.8 83.8 82.7 82.3 77.5
Operating expenses:
Product development 13.2 12.0 10.7 12.4 11.2
Sales and marketing 41.6 46.6 43.7 44.9 37.3
General and administrative 12.8 9.6 8.4 6.6 6.6
Merger-related expenses - 11.7 3.3 4.8 -
Total operating expenses ------------ --------- --------- ---------- ---------
67.6 79.9 66.1 68.7 55.1
------------ --------- --------- ---------- ---------
Operating income 16.2 3.9 16.6 13.6 22.4
Other income, net 2.8 2.4 1.5 1.6 1.3
------------ --------- --------- ---------- ---------
Income before income taxes 19.0 6.3 18.1 15.2 23.7
Income taxes 6.7 5.9 7.3 6.5 9.0
------------ --------- --------- ---------- ---------
Net income 12.3 0.4 10.8 8.7 14.7
============ ========= ========= ========== =========
For Each of the Years Ended December 31, 1996, 1997 and 1998
Revenues
Software. License revenues increased from $80,413,000 and $156,971,000 for
the years ended December 1996 and 1997, respectively, to $290,890,000 for the
year ended December 31, 1998. License revenues as a percentage of total revenues
decreased and remained flat from 72% and 71% in the fiscal 1996 period and the
fiscal 1997 period, respectively, to 71% in the fiscal 1998 period. License
revenues increased in absolute dollar amount during these periods from the
respective prior year periods due to an increase in the number of licenses of
Siebel applications sold to new and existing customers and also due to licenses
of new modules, released with the latest version of Siebel applications, to
existing users of Siebel base applications. This increase in the number of
licenses was primarily due to continued demand by new and existing customers for
products in the Siebel applications family both in the United States and
internationally. During 1998, approximately $20,000,000 of license revenue was
attributable to products developed from technology acquired from Nomadic
Systems, Inc. ("Nomadic") and InterActive WorkPlace, Inc. ("InterActive"). The
Company expects that license revenues will continue to increase in absolute
dollars, but will remain the same or decrease as a percentage of total revenues
as the Company's maintenance revenues continue to grow as a result of increases
in the installed base of customers on maintenance.
Professional Services, Maintenance and Other. Professional services,
maintenance and other revenues increased from $31,567,000 and $65,100,000 for
the years ended December 31, 1996 and 1997, respectively, to $118,996,000 for
the year ended December 31, 1998, and as a percentage of total revenues
increased from 28% and 29% in the fiscal 1996 and 1997 periods, respectively, to
29% in the fiscal 1998 period. These increases in absolute dollar amount were
primarily due to growth in the Company's sales and marketing training
businesses, consulting business and in the installed base of customers on
maintenance. First-year maintenance is typically sold with the related software
license. Revenue related to such maintenance is deferred based on vendor-
specific objective evidence of fair value and amortized over the term of the
maintenance contract, typically twelve months. The Company expects that
professional services, maintenance and other revenues will remain the same or
increase as a percentage of total revenues due to increased maintenance revenues
derived from the Company's growing installed base and due to the
Company's expansion of its consulting and training organization to meet
anticipated customer demands in connection with product implementation and sales
training.
A relatively small number of customers account for a significant percentage
of the Company's license revenues. For 1996, 1997 and 1998, sales to the
Company's ten largest customers accounted for 25%, 22% and 21% of total
revenues, respectively. The Company expects that licenses of its products to a
limited number of customers will continue to account for a large percentage of
revenue for the foreseeable future.
The Company markets its products in the United States through its direct
sales force and internationally through its sales force and distributors
primarily in Japan, Latin America, South Africa and Asia. International revenues
accounted for 10%, 27% and 30% of license revenues in 1996, 1997 and 1998,
respectively. The Company is increasing its international sales force and is
seeking to establish distribution relationships with appropriate strategic
partners and expects international revenues will continue to account for a
substantial portion of total revenues in the future.
Cost of Revenues
Software. Cost of software license revenues includes third-party software
royalties, product packaging, documentation and production. Cost of license
revenues through December 31, 1998 has averaged less than 3% of software license
revenues. All costs incurred in the research and development of software
products and enhancements to existing products have been expensed as incurred,
and, as a result, cost of license revenues includes no amortization of
capitalized software development costs. These costs are expected to remain the
same or increase as a percentage of total revenues.
Professional Services, Maintenance and Other. Cost of professional
services, maintenance and other revenues consist primarily of personnel,
facilities, systems costs incurred in providing customer support and costs
incurred in the providing and administering of training programs. Cost of
professional services, maintenance and other revenues increased from $15,979,000
and $31,646,000 for the years ended December 31, 1996 and 1997, respectively, to
$65,387,000 for the year ended December 31, 1998, and as a percentage of
professional services, maintenance and other revenues were 51% and 49% for the
years ended 1996 and 1997, respectively, as compared to 55% in 1998. The
increases in the absolute dollar amount reflect the effect of fixed costs
resulting from the Company's expansion of its maintenance and support
organization and growth in the Company's consulting and sales training
businesses. The Company expects that professional services, maintenance and
other costs will continue to increase in absolute dollar amount as the Company
expands its customer support organization to support a growing installed base,
its consulting organization to meet anticipated customer demands in connection
with product implementation and the training organization to support the growing
needs of its customers. These costs are expected to remain the same or increase
as a percentage of total revenues.
Operating Expenses
Product Development. Product development expenses include expenses
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, benefits, consulting costs and the cost of software development tools.
Product development expenses increased from $14,775,000 and $26,650,000 for the
years ended December 31, 1996 and 1997, respectively, to $43,950,000 for the
year ended December 31, 1998, and decreased as a percentage of total revenues
from 13% and 12% in 1996 and 1997, respectively, to 11% in 1998. The increases
in the dollar amount of product development expenses were primarily attributable
to costs of additional personnel in the Company's product development
operations. The Company anticipates that it will continue to devote substantial
resources to product development. The Company expects product development
expenses to increase in absolute dollar amount but remain at a similar
percentage of total revenues as in 1998. The Company considers technological
feasibility of its software products to have been reached upon completion of a
working model that has met certain performance criteria. The period between
achievement of technological feasibility and general release of a software
product is typically very short, and development costs incurred during that
period have not been material. Accordingly, the Company has not capitalized any
software development costs to date.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses. Sales and
marketing expenses increased from $46,549,000 and $103,551,000 in the years
ended December 31, 1996 and 1997, respectively, to $178,957,000 for the year
ended December 31, 1998, and as a percentage of total revenues, sales and
marketing expenses decreased from 42% and 47% in 1996 and 1997, respectively, to
44% in 1998. The increases in the dollar amount of sales and marketing expenses
reflect primarily the hiring of additional sales and marketing personnel, costs
associated with expanded promotional activities, and indirect merger-related
costs, such as corporate sales training and marketing programs. The Company
expects that sales and marketing expenses will continue to increase in absolute
dollar amount as the Company continues to expand its sales and marketing
efforts, establishes additional sales offices in the United States and
internationally and increases promotional activities. These expenses are
expected to remain at a similar percentage of total revenues as in 1998.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. General and administrative expenses increased from
$14,318,000 and $21,275,000 for the years ended December 31, 1996 and 1997,
respectively, to $34,473,000 for the year ended December 31, 1998, and decreased
as a percentage of total revenues from 13% and 10% for 1996 and 1997,
respectively, to 8% in 1998. The increases in the absolute dollar amount of
general and administrative expenses were primarily due to increased staffing and
associated expenses necessary to manage and support the Company's increased
scale of operations. The Company believes that its general and administrative
expenses will continue to increase in absolute dollar amount as a result of the
continued expansion of the Company's administrative staff and facilities to
support growing operations. The Company anticipates that its general and
administrative expenses as a percentage of total revenues should remain at a
similar percentage as in 1998.
Merger-Related Expenses. In connection with the Company's merger with
Scopus Technology, Inc. ("Scopus"), the Company incurred direct merger-related
expenses of approximately $13,500,000, comprised primarily of investment
bankers, attorneys, accountants and other professional fees of $9,100,000,
duplicate facilities and equipment of $3,100,000 and other miscellaneous
expenses of $1,300,000. The Company also incurred indirect merger-related
expenses of approximately $1,800,000 for joint sales training and merger-related
marketing costs, which are included within sales and marketing expenses.
The Company incurred merger costs of approximately $3,300,000 in the third
quarter of 1997 in connection with Scopus' planned merger with Clear With
Computers, Inc. The merger plan was terminated early in the fourth quarter of
1997.
On October 1, 1997, the Company completed its purchase of InterActive, a
developer of intranet-based business intelligence software technology that has
been incorporated into the Siebel InterActive product. The acquisition was
accounted for by the purchase method of accounting. The Company recorded a
charge to income of $14,017,000, or $0.17 per diluted share, pursuant to an
allocation of the purchase price by an independent appraiser, as a write-off of
acquired research and development. Purchased in-process research and development
is related to the completion of InterActive's data integration, filtering and
formatting technology and its integration into the Company's products. At the
time of acquisition, a prototype of InterActive's product existed and was in
limited trials, however, the prototype was not stable or sufficiently developed
to be scalable on an enterprise-wide basis. InterActive's technology was
completed, at a cost of approximately $400,000, and incorporated as a separate
module into the Siebel 98 product suite, which was released in June 1998. The
Company estimated that technology was approximately 75% complete as of the
acquisition date. At that date, the only identifiable asset acquired was the
technology under development. Accordingly, essentially all of the excess
purchase price over net assets acquired, except for amounts assigned to net
current assets, fixed assets and workforce-in-place, was assigned to in-process
research and development.
The valuation of acquired research and development was prepared using the
income approach and contemplated that sales of products incorporating
InterActive's technology would be $11,500,000 in 1998, increasing to $35,000,000
in 2000, and declining significantly thereafter. Revenue increases were based
upon the historical growth rate of software sales for the customer relationship
management market and the Company. Operating costs as a percentage of revenue
ranged from 56% in 1998 to 47% in 2000 based upon the Company's normal operating
margin. Operating cash flows were reduced by an expected effective tax rate of
38% consistent with the Company's effective tax rate. Net cash flows were
discounted to their present value at the acquisition date
using an after-tax risk-adjusted discount rate of 30%. The Company believes this
discount rate is consistent with that required by venture capitalists for
investments in unproven but partially developed software products. Through the
end of 1998, total revenues from Siebel Interactive were approximately
$5,000,000; however, the Company is unable to quantify the effect of Siebel
Interactive as a competitive differentiator. The Company does not track selling,
general and administrative costs by product but believes the incremental costs
associated with selling and distributing Siebel Interactive were substantially
lower than those used in the valuation due to synergies associated with selling
the product as a separate module in the Siebel 98 product suite. If the Company
is unable to continuously upgrade the Siebel Interactive product or existing and
future customers do not elect to purchase this module, the Company's ability to
recover the value assigned to the acquired research and development will be
impaired and revenue and profitability will be adversely affected.
On November 1, 1997, the Company completed its purchase of Nomadic, a
provider of innovative business solutions to pharmaceutical sales forces. The
acquisition was accounted for by the purchase method of accounting. Technology
acquired from Nomadic has been incorporated into the Siebel Pharma product. The
Company recorded a charge to income of $8,723,000 or $0.10 per diluted share,
pursuant to an allocation of the purchase price by an independent appraiser, as
a write-off of acquired research and development. The appraisal of the acquired
research and development was based upon the present value of forecasted
operating cash flows from the technology acquired, giving effect to the stage of
completion at the acquisition date. These forecasted cash flows were then
discounted at a rate commensurate with the risk involved in completing the
acquired technology. The forecasted cash flows assumed inclusion of the product
developed from acquired technology into the existing Siebel product suite. The
purchased in-process research and development expense related to completion of
Nomadic's second generation pharmaceutical sales force automation product. This
product was completed and enterprise-wide deployment to end-user customers
commenced in March 1998. Much of the functionality was incorporated into the
Company's Pharma product, which was released in June 1998. At the time of the
acquisition, Nomadic had a first-generation product at a limited number of
customers, with a very small user base. There were a considerable number of
uncertainties as to increasing the product's scalability for deployment on an
enterprise-wide basis, improving the stability of the application and
identifying and fixing bugs. The Company allocated limited excess purchase price
over net assets acquired to net current assets, fixed assets and workforce-in-
place. The majority of the excess purchase price was allocated to in-process
research and development and other intangible assets (goodwill) based upon the
expected cash flows from Nomadic's existing product and the product under
development, giving consideration to the stage of completion of the technology
under development at the acquisition date. This technology was completed, at a
cost of approximately $1,300,000, for enterprise-wide release in March 1998.
The valuation of acquired research and development was prepared using the
income approach and contemplated that sales of products incorporating Nomadic's
technology would be $11,500,000 in 1998, increasing to $35,000,000 in 2000, and
declining significantly thereafter. Revenue increases were based upon the
historical growth rate of software sales for the customer resource management
market and the Company. Operating costs as a percentage of revenue were
estimated at 70%, based upon the Company's normal operating margin. Operating
cash flows were reduced by an expected effective tax rate of 39% consistent with
the Company's effective tax rate. Net cash flows were discounted to their
present value at the acquisition date using an after-tax risk-adjusted discount
rate of 25%. The Company believes this discount rate is consistent with that
required by venture capitalists for investments in unproven but partially
developed software products. Through the end of 1998, total revenues from
products incorporating the Nomadic technology under development at the
acquisition date were approximately $24,000,000. Although the Company does not
track selling, general and administrative costs by product, because these
products are sold as vertical customer resource management solutions for the
pharmaceutical industry, the Company believes the operating margin is similar to
the Company's consolidated operating margin. If the Company is unable to
continuously upgrade the Pharma product or superior products are released by
competitors, the Company's ability to recover the value assigned to the acquired
research and development will be impaired and revenue and profitability will be
adversely affected.
Operating Income and Operating Margin
Operating income increased from $18,162,000 and $8,518,000 for the years
ended December 31, 1996 and December 31, 1997, respectively, to $68,019,000 for
the year ended December 31, 1998. Operating margin was 16% and 4% in 1996 and
1997, respectively, compared with 17% in 1998. Excluding merger-related
expenses, operating income increased from $18,162,000 and $34,556,000 for the
years ended December 31, 1996 and December 31, 1997, respectively, to
$81,519,000 for the year ended December 31 1998, and operating margin increased
from 16% and 16% in 1996 and 1997, respectively, to 20% in 1998. These increases
in operating income and margin, excluding merger-related expenses, were due to
increases in license revenues without a proportional increase in cost,
particularly costs associated with the hiring of new personnel.
Other Income, Net
Other income, net, is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances.
Pro forma Provision for Income Taxes
Income taxes are comprised primarily of federal and state taxes. The pro
forma provision for income taxes reflects income tax expense that would have
been reported if OnTarget (an S Corporation for income tax reporting purposes)
had been a C Corporation for each of the periods presented. The pro forma
provision for income taxes was $7,983,000, $13,848,000 and $30,817,00 in 1996,
1997, and 1998, respectively . The pro forma provision for income taxes as a
percentage of pretax income was 37%, 100% and 41%, respectively. The pro forma
tax rate in 1997 was higher than the rates in 1998 and 1996 primarily due to
non- deductible items related to acquisitions. The Company expects its effective
tax rate in 1999 to be approximately 38%, excluding the effect of non-deductible
costs such as merger-related expenses.
Pro forma Net Income
The Company had pro forma net income of $13,313,000 and $55,000 in 1996 and
1997 respectively and pro forma net income of $43,460,000 for 1998. Pro forma
net income per share was $0.08 in 1996, and $0.00 in fiscal 1997, compared to
pro forma net income of $0.21 per diluted share in 1998.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments increased
from $162,335,000 as of December 31, 1997 to $232,629,000 as of December 31,
1998, representing approximately 60% and 52% of total assets, respectively. This
increase was primarily attributable to cash flows from operations and, to a
lesser extent, sale of common stock through the Company's stock option and stock
purchase plans. The increase was partially offset by increases in accounts
receivable, purchases of property and equipment and short-term investments. The
Company has generated positive cash flow from operating activities in 1996, 1997
and 1998.
Of the approximately $39,581,000 of purchases of property and equipment
during 1998, approximately $14,000,000 related to computer and networking
equipment to support the Company's introduction of SiebelNet. SiebelNet is a
family of application hosting, outsourcing and training services designed to
help customers quickly deploy and easily manage their sales, marketing and
customer service systems.
The Company recently entered into a lease agreement for a new headquarters
facility in San Mateo, California. The Company expects significant capital
expenditures in connection with tenant improvements and furniture and fixtures
for this facility. These expenditures are expected to be incurred through the
end of 2000. In addition, the Company expects to continue to incur capital
expenditures associated with tenant improvements, furniture and fixtures for
newly-leased offices.
Capital expenditures of the nature described above are expected to increase
during 1999 and 2000.
The Company believes that the anticipated cash flows from operations, cash,
cash equivalents and short-term investments, will be adequate to meet its cash
needs for working capital and capital expenditures for at least the next twelve
months.
For Each of the Nine-Month Periods Ended September 30, 1998 and 1999
Revenues
Software. License revenues increased from $200,567,000 for the nine months
ended September 30, 1998 to $329,388,000 for the nine months ended September 30,
1999 and decreased as a percentage of total revenues from 71% in 1998 to 63% in
1999. License revenues increased in absolute dollars during this period as
compared to the respective prior period due to an increase in the number of
licenses of Siebel applications sold to new and existing customers and also due
to licenses of new modules, released with the latest version of Siebel
applications, sold to existing users of Siebel base applications. The increase
in the number of licenses was primarily due to continued demand by new and
existing customers for products in the Siebel applications family both in the
United States and internationally. The Company expects that license revenues
will continue to grow in absolute dollars, but will remain the same or decrease
as a percentage of total revenues as the Company's maintenance revenues continue
to grow as a result of increases in the installed base of customers on receiving
maintenance and due to the Company's expansion of its consulting organization to
meet anticipated customer demands in connection with product implementation.
Professional Services, Maintenance and Other. Professional services,
maintenance and other revenues increased from $81,220,000 for the nine months
ended September 30, 1998 to $193,547,000 for the nine months ended September 30,
1999 and increased as a percentage of total revenues from 29% in 1998 to 37% in
1999. The increase in the absolute dollar amount were primarily due to growth in
OnTarget sales and marketing training revenues, growth in the Company's
consulting business and in the installed base of customers with a maintenance
contract. First-year maintenance is typically sold with the related software
license. Revenue related to such maintenance is deferred based on vendor-
specific objective evidence of fair value and amortized over the term of the
maintenance contract, typically 12 months. The Company expects that professional
services, maintenance and other revenues will remain the same or increase as a
percentage of total revenues due to increased maintenance revenues derived from
the Company's growing installed base and due to the Company's expansion of its
consulting organization to meet anticipated customer demands in connection with
product implementation and sales training.
The Company markets its products in the United States through its direct
sales force and internationally through its sales force and through distributors
which are primarily in Japan, Latin America, South Africa and Asia.
International revenues accounted for 29% and 31% of license revenues for the
nine months ended September 30, 1998 and 1999, respectively. The Company is
increasing its international sales force and is seeking to establish
distribution relationships with appropriate strategic partners and expects
international revenues will continue to account for a substantial portion of
total revenues in the future.
Cost of Revenues
Software. Cost of license revenues increased from $4,295,000 for the nine
months ended September 30, 1998 to $5,111,000 for the nine months ended
September 30, 1999 and as a percentage of total revenues was less than 3% for
each of the nine month periods ended September 30, 1998 and 1999. All costs
incurred in the research and development of software products and enhancements
to existing products have been expensed as incurred, and, as a result, cost of
license revenues includes no amortization of capitalized software development
costs. These costs are expected to remain the same or increase as a percentage
of total revenues.
Professional Services, Maintenance and Other. Cost of professional
services, maintenance and other revenues consists primarily of personnel,
facilities and systems costs incurred in providing consulting and customer
support. Cost of professional services, maintenance and other revenues increased
from $45,643,000 for the nine months ended September 30, 1998 to $112,223,000
for the nine months ended September 30, 1999 and increased as a percentage of
total revenues from 16% in 1998 to 21% in 1999. The increases in the absolute
dollar amount reflect the effect of fixed costs resulting from the Company's
expansion of its maintenance and support organization and growth in the
Company's consulting and sales training businesses. The Company expects that
professional services,
maintenance and other costs will continue to increase in absolute dollar amount
as the Company integrates OnTarget's training and consulting operations. The
Company also expects to expand both its customer support organization to support
a growing installed base and its consulting and training organizations to meet
anticipated customer demands in connection with product implementation and sales
training. These costs are expected to remain the same or increase as a
percentage of total revenues.
Operating Expenses
Product Development. Product development expenses include expenses
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, benefits, consulting costs and the cost of software development tools.
Product development expenses increased from $34,909,000 for the nine months
ended September 30, 1998 to $58,324,000 for the nine months ended September 30,
1999 and decreased as a percentage of total revenues from 12% in 1998 to 11% in
1999. The increase in the absolute dollar amount of product development expenses
was primarily attributable to costs of additional personnel in the Company's
product development operations. The Company anticipates that it will continue to
devote substantial resources to product development. The Company expects product
development expenses to increase in absolute dollar amount but remain at a
similar percentage of total revenues as in the first nine months of 1999. The
Company considers technological feasibility of its software products to have
been reached upon completion of a working model that has met certain performance
criteria. The period between achievement of technological feasibility and
general release of a software product is typically very short, and development
costs incurred during that period have not been material. Accordingly, the
Company has not capitalized any software development costs to date.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses. Sales and
marketing expenses increased from $126,482,000 for the nine months ended
September 30, 1998 to $194,874,000 for the nine months ended September 30, 1999
and decreased as a percentage of total revenues from 45% 1998 to 37% in 1999.
The increase in the dollar amount of sales and marketing expenses reflects
primarily the hiring of additional sales and marketing personnel and costs
associated with expanded promotional activities. The Company expects that sales
and marketing expenses will continue to increase in absolute dollars as the
Company continues to expand its sales and marketing efforts, establishes
additional sales offices in the United States and internationally and increases
its promotional activities. These expenses are expected to remain at a similar
percentage of total revenues as in the first nine months of 1999.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive and
finance personnel. General and administrative expenses increased from
$18,593,000 for the nine months ended September 30, 1998 to $34,674,000 for the
nine months ended September 30, 1999 and remained as a percentage of total
revenues at 7% in each of 1998 and 1999. The increase in the absolute dollar
amount of general and administrative expenses was primarily due to increased
staffing and associated expenses necessary to manage and support the Company's
increased scale of operations. The Company believes that its general and
administrative expenses will continue to increase in absolute dollars as a
result of the continued expansion of the Company's administrative staff and
facilities to support growing operations. The Company anticipates that its
general and administrative expenses as a percentage of total revenues should
remain at a similar percentage as in the first nine months of 1999.
Merger related expenses. In connection with the merger with Scopus, the
Company incurred direct merger-related expenses of approximately $13,500,000
consisting of direct transaction fees for investment bankers, attorneys,
accountants and other professional fees of $9,100,000, integration charges
related to duplicate facilities and equipment of $3,100,000 and other
miscellaneous expenses of $1,300,000. The Company also incurred indirect
merger-related expenses of approximately $1,800,000 for joint sales training
and merger-related marketing costs, which are included within sales and
marketing expenses.
There were no merger-related expenses in the nine months ended
September 30, 1999.
Operating Income and Operating Margin
For the nine months ended September 30, 1999 as compared with the nine
months ended September 30, 1998, operating income increased from $38,365,000 to
$117,729,000 and operating margin increased from 14% in 1998 to 23% in 1999.
These increases in operating income and margin were primarily due to $13,500,000
of merger-related expenses incurred in the three months ended September 30,
1998, not recurring in 1999. Excluding the merger related expenses, operating
income for the nine months ended September 30, 1999 increased from $51,865,000
for the nine months ended September 30, 1998 to $117,729,000 for the nine months
ended September 1999 and operating margin increased from 18% in 1998 to 23% in
1999. This increase in operating income and margin was due to increases in
license revenues without a proportional increase in cost, particularly costs
associated with the hiring of new personnel. The Company expects operating
margins, net of merger-related expenses, to decrease as compared to operating
margin for the first nine months of 1999 as it continues to invest heavily in
sales, marketing, development and support activities globally.
Other Income, Net
Other income, net is primarily comprised of interest income earned on the
Company's cash and cash equivalents and short-term investments and reflects
earnings on increasing cash and cash equivalents and short-term investment
balances.
Pro forma Provision for Income Taxes
Pro forma income taxes are comprised primarily of federal and state taxes.
The pro forma provision for income taxes reflects income tax expense that would
have been reported if OnTarget (an S Corporation for income tax reporting
purposes) had been a C Corporation for each of the periods presented. The pro
forma provision for income taxes was $19,140,000 and $47,282,000 and
approximately 45% and 38% of income before taxes, respectively, for the nine
months ended September 30, 1998 and 1999 respectively. The pro forma effective
tax rate in 1998 was affected by the non-deductibility of certain merger-related
expenses. The Company expects its effective tax rate for the remainder of 1999
to be approximately 38%.
Pro forma Net Income
The Company had pro forma net income of $23,691,000 for the nine months
ended September 30, 1998 compared to net income of $77,144,000 for the nine
months ended September 30, 1999. Pro forma net income increased as a percentage
of total revenues from 8% in the nine months ended September 30, 1998 to 15% in
the nine months ended September 30, 1999, due primarily to the effect of the
merger-related expenses in 1998.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments increased
to $624,791,000 as of September 30, 1999 from $232,629,000 as of December 31,
1998, representing approximately 62% and 52% of total assets, respectively. This
increase was primarily attributable to issuance of convertible subordinated
debentures, net income, sale of certain property and equipment, increases in
accounts payable, accrued expenses, income taxes payable and deferred revenue,
and issuance of common stock under the Company's stock option plans, partially
offset by an increase in accounts receivable and purchases of property and
equipment. The Company's days sales outstanding (DSO) in accounts receivable was
98 as of September 30, 1999, as compared with 88 as of December 31, 1998. The
Company expects DSO to fluctuate significantly in future quarters.
As of December 21, 1999, the fair market value of the Company's marketable
equity securities was $137,277,000.
The Company has used fully serviced office suites on a month-to-month
rental basis to establish its presence in new locations. As these locations
expand, the Company expects to transition more of the office suites to leased
space. This transition will involve build-out of tenant improvements,
acquisition of furniture and fixtures, and other capital costs, which were not
incurred in connection with the use of fully serviced office suites. The Company
has already built-out a number of leased facilities, both domestically and
internationally, and expects this trend to continue.
Capital expenditures of the nature described above are expected to increase
during the remainder of 1999 and 2000.
The Company believes that the anticipated cash flows from operations, cash,
cash equivalents and short-term investments will be adequate to meet its cash
needs for working capital and capital expenditures for at least the next twelve
months.
Audit Committee
The Company has established an Audit Committee of the Board of Directors,
the charter of which is to oversee the activities of management and the
Company's external auditors as they relate to the financial reporting process.
The Audit Committee is comprised of James C. Gaither, Charles R. Schwab and
George T. Shaheen. In particular, the Audit Committee's role includes ensuring
that management properly develops and adheres to a sound system of internal
controls, and that the Company's auditors, through their own review, assess the
effectiveness of those controls and management's adherence to them.
In fulfilling their responsibilities, the Audit Committee conducted
regular, quarterly meetings with the Company's outside auditors. In each of
these meetings, the Audit Committee met with the Company's outside auditors,
independent of management, to assure the Audit Committee an independent and
confidential view of the Company's management and internal controls as they
relate to the quality and reliability of the Company's financial statements.
The Company is committed to supporting this process and the Audit Committee
in fulfilling their role of ensuring the integrity of the Company's internal
controls and financial reporting.
Quantitative and Qualitative Disclosures About Market Risk
The tables below provide information about the Company's derivative
financial instruments and financial instruments that are subject to market risk.
These include foreign currency forward contracts used to hedge foreign currency
receivables and intercompany balances, which are subject to exchange rate risk,
and available-for-sale short-term investments, which are subject to interest
rate risk. The Company does not consider its cash equivalents to be subject to
interest rate risk due to their short maturities.
The Company generally manages its foreign currency exchange rate risk by
entering into contracts to sell foreign currency at the time a foreign currency
receivable is generated. When the foreign currency receivable is collected, the
contract is liquidated, thereby converting the foreign currency to US dollars
and mitigating the exchange rate risk.
The Company manages its interest rate risk by maintaining an investment
portfolio with debt instruments of high credit quality and relatively short
average maturities. The Company also manages interest rate risk by maintaining
sufficient cash and cash equivalent balances such that it is typically able to
hold its investments to maturity.
The Company is exposed to equity price risks on its marketable equity
securities. This investment is in a publicly-traded company in the high-
technology industry sector. The Company typically does not attempt to reduce or
eliminate its market exposure on these securities. A 10% adverse change in the
equity price would result in an approximate $4.7 million decrease in the fair
value of the Company's marketable equity securities as of September 30, 1999.
The following summarizes the Company's foreign currency forward contracts,
all of which mature in 1999, by currency, as of September 30, 1999. Contract
amounts are representative of the expected payments to be made under these
instruments (unaudited, in thousands):
Contract Fair Value
Amount at September
(Local Contract 30, 1999
Currency) Amount (US$) (US$)
-------------- ------------ --------------
German marks (contracts to pay DM/receive US$)........... DM 4,930 $ 2,664 $ (20)
British pounds (contracts to pay(pound)/receive US$)..... (pound) 4,741 $ 7,628 $ (179)
Japanese yen (contracts to pay(Yen)/receive US$)......... (Yen)1,543,100 $ 13,795 $ (714)
Euro (contracts to pay EUR/receive US$).................. EUR2,300 $ 2,475 $ 26
British pounds (contracts to pay(pound)/receive EUR)..... (pound) 83O EUR1,279 $ 5
The following summarizes the Company's short-term investments and the
weighted average yields, as of September 30, 1999 (unaudited, in thousands):
Expected maturity date
---------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
-------- -------- -------- -------- -------- -------------
US treasury
securities.... -- -- $ 1,986 $ 3,002 $1,984 $3,900
Wtd. Avg. Yld. 5.88% 5.71% 5.73% 6.84%
Municipal
securities.... $ 8,701 $ 55,234 $37,226 $36,708 $5,347 --
Wtd. Avg. Yld. 3.86% 3.85% 3.78% 4.29% 4.39%
Corporate bonds.... -- -- -- $ 4,505
Wtd. Avg. Yld. 5.93% -- --
On September 30, 1999, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$158,600,000. These securities, like all fixed income instruments, are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 100 basis
points from levels as of September 30, 1999, the fair value of the portfolio
would decline by approximately $2,400,000.
Year 2000 Preparedness
Many existing computer programs and systems use only two-digit fields to
identify the year, e.g. 85=1985, and they are unable to process date and time
information between the twentieth and twenty-first centuries. Accordingly,
computer programs and software may need to be modified prior to the year 2000
("Y2K") in order to remain functional. Failure to complete the necessary
modifications could cause a disruption or failure of such program and system.
The Company's Y2K initiative has been managed by a team of internal staff
and third-party consultants specializing in Y2K issues. The team's activities
are designed to identify potential Y2K problems and to ensure that there is no
adverse effect on our core business operations and that transactions with
clients, suppliers and financial institutions are fully supported. The Company's
efforts have focused on three areas: (i) the Company's products, (ii) internal
operating systems and (iii) interfaces with third-party systems.
Products. The Company has put in place a certification program to verify
the Y2K compliance of its products. Beginning with version 4.0 (Siebel 98), the
Company's programs have been designed to be Y2K compliant. The Company has
applied a number of test approaches and criteria to each of its products
beginning with Siebel 98 and believes that all such products are Y2K compliant.
While we believe that our currently developed and actively marketed products are
Y2K compliant for significantly all functionality, our software products could
contain errors or defects relating to Y2K. The Company has advised certain of
its customers that internal testing of Y2K compliance should be conducted to
ensure that the operations managed by Siebel products continue without
disruption. If such modifications and conversions are not made, or are not
completed in a timely manner, the Y2K issue could have a material adverse impact
on our operations. The costs incurred to test the Company's products for Y2K
compliance were incurred as normal product development expenses. Any additional
expenses are expected to be minimal.
Internal Operating Systems. The Company has implemented a plan to test all
internal operating systems, such as computer hardware and software,
telephone/PBX systems, fax machines, facilities systems such as building access
and other miscellaneous systems on a worldwide basis. The Company has approached
its Y2K internal readiness program in the following three phases: (i)
assessment, (ii) planning and (iii) implementation. These phases included such
individual steps as taking an inventory of the Company's operating systems
prioritized by risk,
identifying failure dates, defining a solution strategy, estimating repair
costs, identifying specific tasks necessary to ensure readiness, determining
resource requirements and allocations, and finally, testing and fixing the
operating systems as well as putting in place contingency plans for operating
systems that have a high impact on the Company's business. The plan has been
executed and the Company does not believe that the Y2K issue will pose
significant operational problems to our internal operating systems. Costs
incurred to complete this process have not been material.
Third-Party Systems. The Company has developed a Y2K process for dealing
with its key suppliers, distributors, vendors, system integrators and other
partners. The Company has been in contact with its key third-party relationships
regarding their Y2K compliance. The Company has received responses from its
critical third-party relationships, who have stated that they expect to address
all of their significant Y2K issues in a timely manner. The Company is working
to identify and analyze the most reasonably likely worst case scenarios for key
third party relationships affected by Y2K. These scenarios could include
possible infrastructure collapse, the failure of water and power supplies, major
transportation disruptions and failures of communications or financial systems -
any of which could have a material adverse effect on the Company's ability to
deliver its products and services to its customers. While the Company has
contingency plans in place to address most issues under its control, an
infrastructure problem outside of its control could result in a delay in product
shipments, depending on the nature and severity of the problems. The Company has
analyzed its key third-party systems and believes all of them to be largely Y2K
compliant. Costs incurred to complete this process have not been material.
Contingency plans. Our Y2K Program is designed to minimize the possibility
of serious Year 2000 interruptions. However, since their possibility cannot be
eliminated, we are developing contingency plans addressing Year 2000 concerns in
high impact areas. These plans will continue to be reviewed and updated through
out the end of the calendar year. Other contingency plans will be prepared,
tested, and updated as deemed practicable and appropriate.
The Company currently believes that the most reasonably likely worst-case
scenario is that there will be some Year 2000 disruptions at individual
locations that could affect individual business processes, facilities or third
parties for a short time. The Company does not expect such disruptions to be
long-term, or for the disruptions to affect the operations of the Company as a
whole. Because of the uncertainty as to the exact nature or location of
potential Year 2000-related problems that might arise, the business
continuity/contingency planning has focused on development of flexible plans to
minimize the scope, impact and duration of any Year 2000 problems that may
occur. The Company expects to have personnel and resources available to deal
with any Year 2000 problems that occur. Some of the currently planned
contingency actions include designating emergency response teams, increasing
staffing at critical times, in particular the Year 2000 weekend, and heightening
proactive monitoring at likely dates of impact.
Although the Company has spent a large amount of time and resource to
address potential Y2K problems, there is no assurance that the Company will be
successful in its efforts to identify and address all Y2K issues. Even though
the Company has acted in a timely manner to complete all of its assessments and
planned solutions, some problems may not have been identified or corrected in
time to prevent material adverse consequences to the Company. The discussion
above includes forward-looking statements regarding Y2K and is based on the
Company's best estimates given information that is currently available and is
subject to change. As the Company continues to progress with its Y2K
initiatives, it may discover that actual results will differ materially from
these estimates. See "Factors Affecting Operating Results -- Year 2000 Problems
may cause an Interruption in our Business."