UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 2, 1998
Commission File Number 0-23169
SEAGATE SOFTWARE, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 77-0397623
915 Disc Drive, Scotts Valley, California 95066
Telephone: (408) 438-6550
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
____ ____
On February 11, 1998, 907,948 shares of the registrant's common stock were
issued and outstanding.
INDEX
SEAGATE SOFTWARE, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- ----------------------------------------------------------------------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets--January 2,
1998 (unaudited) and June 27, 1997 3
Condensed Consolidated Statements of
Operations--Three and six months ended January 2,
1998 and December 27, 1996 (unaudited) 4
Condensed Consolidated Statements of Cash
Flows--Six months ended January 2, 1998 and
December 27, 1996 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION PAGE NO.
- ----------------------------------------------------------------------
Item 1. Legal Proceedings 20
Item 2. Recent Sales of Unregistered Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
(UNAUDITED) (1)
ASSETS
Cash $ 11,465 $ 12,085
Accounts receivable, net 39,456 28,172
Inventories 2,357 3,206
Deferred income taxes 25 --
Other current assets 3,971 4,040
--------- ---------
Total Current Assets 57,274 47,503
Property, equipment and leasehold
improvements, net 17,940 20,785
Goodwill and other intangibles, net 59,146 75,306
--------- ---------
Total Assets $ 134,360 $ 143,594
========= =========
LIABILITIES
Loan payable to Seagate Technology $ 15,020 $ 28,971
Accounts payable 10,464 9,116
Accrued employee compensation 13,308 10,267
Accrued expenses 19,709 18,734
Deferred revenue 10,516 8,354
--------- ---------
Total Current Liabilities 69,017 75,442
Deferred income taxes 3,437 6,233
Other liabilities 270 301
--------- ---------
Total Liabilities 72,724 81,976
STOCKHOLDERS' EQUITY
Convertible preferred stock 55 55
Common stock -- --
Additional paid-in capital 342,929 342,091
Accumulated deficit (281,247) (280,685)
Foreign currency translation adjustment (101) 157
--------- ---------
Total Stockholders' Equity 61,636 61,618
--------- ---------
Total Liabilities and
Stockholders' Equity $ 134,360 $ 143,594
========= =========
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 27, 1997.
See notes to condensed consolidated financial statements
3
SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JANUARY 2, DECEMBER 27, JANUARY 2, DECEMBER 27,
---------- ------------ ---------- ------------
1998 1996 1998 1996
---- ---- ---- ----
Revenues:
License $ 60,183 $ 47,395 $111,980 $ 91,560
License from Seagate Technology, Inc. 1,433 1,486 2,433 3,703
Maintenance, support and other 10,728 6,255 20,953 11,336
----------- -------- -------- --------
Total revenues 72,344 55,136 135,366 106,599
Cost of revenues:
License 3,704 4,980 8,673 10,442
License from Seagate Technology, Inc 86 482 371 1,079
Maintenance, support and other 4,675 1,546 9,275 2,692
Amortization of developed technologies 3,037 4,800 6,979 9,221
----------- -------- -------- --------
Total cost of revenues 11,502 11,808 25,298 23,434
----------- -------- -------- --------
Gross profit 60,842 43,328 110,068 83,165
Operating expenses:
Sales and marketing 31,761 27,430 60,458 51,691
Research and development 11,778 10,443 23,171 20,931
General and administrative 10,414 7,872 19,493 16,129
Amortization of goodwill and other intangibles 5,546 6,770 9,002 11,209
----------- -------- -------- --------
Total operating expenses 59,499 52,515 112,124 99,960
----------- -------- -------- --------
Income (loss) from operations 1,343 (9,187) (2,056) (16,795)
Interest expense (358) (227) (658) (328)
Other, net 301 46 466 (152)
----------- -------- -------- --------
Interest and other, net (57) (181) (192) (480)
----------- -------- -------- --------
Income (loss) before income taxes 1,286 (9,368) (2,248) (17,275)
Benefits from income taxes 1,067 699 1,686 742
----------- -------- -------- --------
Net income (loss) $ 2,353 $ (8,669) $ (562) $(16,533)
=========== ======== ======== ========
Net income (loss) per share:
Basic $ 15.30 $(138.70) $ (4.38) $(264.53)
Diluted $ .04 $(138.70) $ (4.38) $(264.53)
Number of shares used in per share computations:
Basic 153,777 62,500 128,326 62,500
Diluted 56,933,790 62,500 128,326 62,500
See notes to condensed consolidated financial statements
4
SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------
JANUARY 2, DECEMBER 27,
---------- ------------
1998 1996
---- ----
OPERATING ACTIVITIES
Net loss $ (562) $(16,533)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,298 20,289
Deferred income taxes (2,821) (3,408)
Write-off of goodwill and intangibles 1,900 4,357
Changes in operating assets and liabilities:
Accounts receivable (11,284) (5,755)
Inventories 849 (748)
Other current assets 69 (853)
Accounts payable 1,348 1,901
Accrued employee compensation 3,041 1,385
Accrued expenses 4,420 (292)
Accrued income taxes (2,953) 1,405
Deferred revenue 2,162 1,669
Other assets and liabilities (31) (190)
-------- --------
Net cash provided by operating activities 16,436 3,227
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold
improvements, net (3,193) (6,380)
-------- --------
Net cash (used in) investing activities (3,193) (6,380)
FINANCING ACTIVITIES
Sale of common stock 346 --
Borrowings from Seagate Technology, net (13,951) 4,376
-------- --------
Net cash provided by (used in) financing (13,605) 4,376
activities
Effect of exchange rate changes on cash (258) 266
-------- --------
Increase (decrease) in cash (620) 1,489
Cash at the beginning of the period 12,085 7,595
-------- --------
Cash at the end of the period $ 11,465 $ 9,084
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 36 $ 154
Cash paid for income taxes 3,975 1,828
See notes to condensed consolidated financial statements
5
SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated condensed financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes the
disclosures included in the unaudited condensed consolidated financial
statements, when read in conjunction with the consolidated financial statements
of the Company as of June 27, 1997 and notes thereto, are adequate to make the
information presented not misleading.
The condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to summarize fairly the consolidated
financial position, results of operations and cash flows for such periods.
The results of operations for the three and six months ended January 2, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending July 3, 1998.
The Company operates and reports financial results on a fiscal year of 52 or
53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1997 was
52 weeks and ended on June 27, 1997 and fiscal 1998 will be 53 weeks and will
end on July 3, 1998.
RECENT ACCOUNTING PRONOUNCEMENT ON SOFTWARE REVENUE RECOGNITION. The
Financial Accounting Standards Board recently approved the new American
Institute of Certified Public Accountants Statement of Position 97-2 ("SOP 97-
2") on software revenue recognition. SOP 97-2 will be effective for the Company
beginning in fiscal year 1999. The Company is currently assessing the impact of
the new SOP on its revenue recognition policies.
6
SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NET INCOME (LOSS) PER SHARE. Basic net income (loss) per common share is
computed using the weighted average number of shares of common stock outstanding
during the period. For periods in which the Company had losses, common
equivalent shares from common stock options and convertible preferred stock are
excluded from the computation of dilutive net loss per share as their effect is
antidilutive. Below is a reconciliation of the numerator and denominator used
to calculate basic earnings per share and diluted earnings per share (in
thousands except share and per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- --------------------------
JANUARY 2, DECEMBER 27, JANUARY 2, DECEMBER 27,
---------- ------------ ---------- ------------
1998 1996 1998 1996
---- ---- ---- ----
Basic EPS computation:
Numerator:
Net income $ 2,353 $ (8,669) $ (562) $(16,533)
----------- -------- -------- --------
Denominator:
Weighted average number of common
shares outstanding during
the period 153,777 62,500 128,326 62,500
----------- -------- -------- --------
Net income (loss) per
share - Basic $ 15.30 $(138.70) $ (4.38) $(264.53)
=========== ======== ======== ========
Diluted EPS Computation:
Numerator:
Net income $ 2,353 $ (8,669) $ (562) $(16,533)
----------- -------- -------- --------
Denominator:
Weighted average number of common
Shares outstanding during
the period 153,777 62,500 128,326 62,500
Convertible preferred stock 54,633,333
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
Purchase treasury stock) 2,146,680 - - -
----------- -------- -------- --------
56,933,790 62,500 128,326 62,500
Net income (loss) per
share - Diluted $ .04 $(138.70) $ (4.38) $(264.53)
=========== ======== ======== ========
7
SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTS RECEIVABLE.
Accounts receivable are summarized below, in thousands:
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
Accounts receivable $40,710 $29,442
Allowance for
non-collection (1,254) (1,270)
------- -------
$39,456 $28,172
======= =======
INVENTORIES.
Inventories are summarized below, in thousands:
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
Raw materials $ 694 $ 1,699
Finished goods 1,663 1,507
------ -------
$2,357 $ 3,206
====== =======
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.
Property, equipment and leasehold improvements consisted of the following, in
thousands:
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
Property, equipment and leasehold
improvements $ 38,321 $ 36,437
Allowance for depreciation and
amortization (20,381) (15,652)
-------- --------
$ 17,940 $ 20,785
======== ========
GOODWILL AND OTHER INTANGIBLES.
Goodwill and other intangibles consisted of the following, in thousands:
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
Goodwill $ 44,120 $ 46,200
Developed technology 43,279 46,136
Trademarks 9,972 9,972
Assembled workforce 4,256 6,666
Distribution network 2,925 2,925
Other intangibles 12,313 12,853
-------- --------
116,865 124,752
Accumulated amortization (57,719) (49,446)
-------- --------
Goodwill and other
intangibles, net $ 59,146 $ 75,306
======== ========
8
SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company expects its annual effective tax rate on anticipated operating
income for the 1998 fiscal year to approximate 75%. The projected effective tax
rate exceeds the U.S. statutory rate primarily due to the amortization of
goodwill which is not deductible for tax purposes. This expected annual
effective tax rate has been used to record the benefit of 75% for income taxes
for the six months ended January 2, 1998 compared with a 4% effective tax rate
used to record the benefit for income taxes for the comparable year-ago period.
The effective tax rate used to record the benefit for income taxes for the six
months ended December 27, 1996 was less than the U.S. statutory rate primarily
from increases in the valuation allowance for deferred tax assets and the
amortization of nondeductible goodwill. The Company's expected annual effective
tax rate for fiscal 1998 may vary from 75% if, for example, the Company incurs
charges in connection with future acquisitions.
STOCKHOLDERS' EQUITY
Shares authorized and outstanding are as follows:
SHARES OUTSTANDING
------------------
JANUARY 2, JUNE 27,
---------- --------
1998 1997
---- ----
Preferred stock, par value $.001
per share, 73,000,000 shares
authorized 54,633,333 54,633,333
Common stock, par value $.001
per share, 95,600,000 shares
authorized 165,313 83,355
RESTRUCTURING COSTS
During fiscal year 1996, the Company recorded restructuring charges totaling
$9,502,000 as a result of the acquisition of Arcada, a majority-owned subsidiary
of Seagate Technology which was acquired in connection with Seagate Technology's
merger with Conner Peripherals, Inc. The restructuring charges were incurred for
the reduction of personnel, write-off or write down of equipment, intangibles
and other assets, closure of duplicate and excess facilities, attorneys and
accountants fees, contract cancellations and other expenses. In connection with
the restructuring, the Company expected a total workforce reduction of
approximately 121 employees. Of that number, approximately 71 have been
terminated as of January 2, 1998, and a certain number of employees have left
the Company due to normal attrition.
During fiscal year 1997, the Company recorded restructuring charges of
approximately $2,524,000, which consisted of $3,481,000 resulting from the
Network and Storage Management Group's (NSMG's) consolidation efforts, offset by
an adjustment to reduce the 1996 restructuring by $957,000. The restructuring
charges were incurred for the reduction of personnel, write-off or write down of
equipment, intangibles and other assets, closure of duplicate and excess
facilities and other expenses. In connection with such restructuring, the
Company expected a total workforce reduction of approximately 109 employees. Of
that number, approximately 102 have been terminated as of January 2, 1998, and a
certain number of employees have left the Company due to normal attrition.
9
SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's restructuring activity for the
six months ended January 2, 1998 (in thousands):
EQUIPMENT,
----------
SEVERANCE INTANGIBLES
--------- -----------
AND EXCESS AND
--- ------ ---
BENEFITS FACILITIES OTHER ASSETS TOTAL
-------- ---------- ------------ -----
Reserve balances, June 27, 1997 $ 480 $1,235 $1,414 $3,129
Cash charges (192) (377) (8) (577)
Non-cash charges -- -- (662) (662)
----- ------ ------ ------
Reserve balances, January 2, 1998 $ 288 $ 858 $ 744 $1,889
===== ====== ====== ======
NEW ACCOUNTING PRONOUNCEMENTS
The Company intends to adopt SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Both standards will require additional disclosure, but will not
have a material effect on the Company's financial position or results of
operations. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and is expected to first be reflected in the Company's
first quarter of 1999 interim financial statements. Components of comprehensive
income included items such as net income and changes in value of available-for-
sale securities. SFAS No. 131 changes the way companies report segment
information and requires segments to be determined based on how management
measures performance and makes decisions about allocating resources. SFAS No.
131 will first be reflected in the Company's 1998 Form 10-K.
LITIGATION
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") are forward-looking statements
based on current expectations, and entail various risks and uncertainties that
could cause actual results to differ from those projected in such forward-
looking statements. Certain of these risks and uncertainties are set forth below
in the sections entitled "Results of Operations," "Liquidity and Capital
Resources" and "Factors Affecting Future Operating Results." Certain sections in
this Quarterly Report on Form 10-Q have been identified as containing forward-
looking statements. The reader is cautioned that other sections and other
sentences not so identified may also contain forward-looking information.
OVERVIEW
The Company develops, markets and supports software products and provides
related services through two business units. The Information Management Group
("IMG") business unit offers business intelligence products that support the
access, analysis, reporting and delivery of enterprise data, and the Network and
Storage Management Group ("NSMG") business unit offers systems infrastructure
management products that support the management of information technology
systems. The Company's revenues have been derived from the sale of software
product licenses and related maintenance, support, training and consulting
through its two business units. Historically the Company's revenues have been
generated primarily from distributors, direct sales to end users, large
corporations and original equipment manufacturers ("OEMs"), including Seagate
Technology, Inc. (the "Parent Company"). The Company's revenue related to
Parent Company transactions consists of shipments to the Parent Company's OEM
tape drive divisions located in Costa Mesa, California and Scotland. The
Company has also developed strategic relationships with a number of computer
hardware manufacturers and packaged application software developers.
The Company is a majority-owned and consolidated subsidiary of Seagate
Technology, Inc., a data technology company that provides products for storing,
managing and accessing digital information on computer systems. As of January
2, 1998, the Parent Company and one of its subsidiaries held 99.8% of the
Company's outstanding capital stock. On a fully diluted basis, the outstanding
minority interests of the Company amounted to approximately 13% and consisted of
the Company's Common Stock and options to purchase its Common Stock held by
certain employees an directors of the Company and the Parent Company issued
pursant to the Company's 1996 Stock Option Plan.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1997
was 52 weeks and ended on June 27, 1997 and fiscal 1998 will be 53 weeks and
will end on July 3, 1998.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased 31% and 27% over the comparable year-ago
quarter and the comparable year-ago six month period, respectively. The
increases in licensing revenues over both the comparable year-ago quarter and
the comparable year-ago six month period were primarily due to increases in the
number of NSMG and IMG product licenses sold. Such growth over both comparable
year-ago periods was due in part to increased unit sales of NSMG's Backup Exec,
a storage management product that supports Microsoft's Windows NT operating
system, and IMG's Crystal Reports, a business intelligence report writing
product. Additionally, the Company continued to expand both its indirect and
11
direct sales channels. Revenues from indirect sales increased 33% and 29% over
the comparable year-ago quarter and six month period, respectively. Revenues
from direct sales increased 28% and 22% over the comparable year-ago quarter and
six month period, respectively. The increase in maintenance, support and other
revenues over the comparable year-ago quarter and six month period was primarily
due to increases in training and consulting revenues resulting from a larger
installed customer base.
COST OF REVENUES. The cost of revenues consists of amortization of acquired
developed technology, royalties, product packaging, documentation, duplication,
production and the cost of maintenance, consulting support and other services.
Acquired developed technology is amortized based on the greater of the straight-
line method over its estimated useful life (30 to 60 months) or the ratio of
current revenues to the total current and anticipated future revenues. The
total cost of revenues decreased 3% and increased 8% over the comparable year-
ago quarter and the comparable year-ago six month period, respectively.
Decreases in the cost of license revenues over the comparable year-ago quarter
and six month period were primarily due to reductions in product packaging and
documentation costs resulting from increases in volume licensing agreements with
the Company's OEM and corporate customers. The increases in the cost of
maintenance, support and other revenues over the comparable year-ago quarter and
six month period were primarily due to expansion of the Company's professional
services work force necessary to support the growth in training and consulting
revenues. The decreases in the amortization of developed technology over the
comparable year-ago quarter and six month period were primarily due to write-
downs of certain developed technologies amounting to approximately $1,288,000
and $2,088,000 during the comparable year-ago quarter and six month period,
respectively, as a result of asset values that had become impaired based on
reductions in estimated future cash flows.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel related expenses, advertising, sales and marketing promotions and
customer technical support costs. Total sales and marketing expenses increased
16% and 17% over the comparable year-ago quarter and the comparable year-ago six
month period, respectively. The increases in sales and marketing expenses over
both the comparable year-ago quarter and the comparable year-ago six month
period were primarily due to expansion of the Company's sales force and
increases in advertising, promotion and technical support costs necessary to
support revenue growth. Such increases were partially offset by reductions in
work force within the NSMG organization due to facility consolidations.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel related expenses, depreciation of development equipment
and facilities and occupancy costs. In accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," software development costs are expensed
as incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release to
customers. To date, the establishment of technological feasibility of the
Company's products and general release of such software has substantially
coincided. As a result, software development costs qualifying for
capitalization have been insignificant.
Total research and development expenses increased 13% and 11% over the
comparable year-ago quarter and the comparable year-ago six month period,
respectively. The increases in research and development expenses over both the
comparable year-ago quarter and the comparable year-ago six month period were
primarily due to increases in personnel and related expenses necessary to
support new product development and localization costs. Such increases were
partially offset by reductions in work force within the NSMG organization due to
facility consolidations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel related expenses for finance, legal, information
technology, human resources and general management, fixed asset provisions and
outside services. Total general and administrative expenses increased 32% and
21% over the comparable year-ago quarter and the comparable year-ago six month
period, respectively.
12
The increases in general and administrative expenses over both the comparable
year-ago quarter and the comparable year-ago six month period were primarily due
to increases in personnel and related expenses necessary to support the
Company's growth, and increased legal expenses (see Legal Proceedings section in
Other Information Part II, Item 1).
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents the
excess of the purchase price of acquired companies over the estimated fair
values of the tangible and intangible net assets acquired. Goodwill is amortized
on a straight-line basis over six to seven years. Other intangible assets
consist of acquired trademarks, assembled workforces, distribution networks,
developed technology, customer bases, and covenants not to compete. Amortization
of other intangibles, other than acquired developed technology, which is
included in the cost of revenues, is provided based on the straight-line method
over the respective useful lives of the assets ranging from one to five years.
Total amortization of goodwill and other intangibles decreased 18% and 20% over
the comparable year-ago quarter and the comparable year-ago six month period,
respectively. The decreases in the amortization of goodwill and other
intangibles over the comparable year-ago quarter and six month period were
primarily due to decreases in amortization expense based on lower levels of
intangible assets and write-downs and write-offs of the carrying value of
goodwill and other intangible assets of approximately $1,900,000 during the
quarter ended January 2, 1998 and $2,269,000 during the comparable year-ago
quarter, based on asset values that had become impaired resulting from
reductions in estimated future cash flows.
INTEREST EXPENSE. Interest expense increased 58% and 101% over the
comparable year-ago quarter and the comparable year-ago six month period,
respectively. The increases in interest expense over the comparable year-ago
quarter and six month period were primarily due to higher interest expense on
outstanding borrowings.
INCOME TAXES. The Company expects its annual effective tax rate on
anticipated operating income for the 1998 fiscal year to approximate 75%. The
projected effective tax rate exceeds the U.S. statutory rate primarily due to
the amortization of goodwill which is not deductible for tax purposes. This
expected annual effective tax rate of 75% has been used to record the benefit
for income taxes for the six months ended January 2, 1998 compared with a 4%
effective tax rate used to record the benefit for income taxes for the
comparable year-ago period. The effective tax rate used to record the benefit
for income taxes for the six months ended December 27, 1996 was less than the
U.S. statutory rate primarily from increases in the valuation allowance for
deferred tax assets and the amortization of nondeductible goodwill. The
Company's expected annual effective tax rate for fiscal 1998 may vary from 75%
if, for example, the Company incurs charges in connection with future
acquisitions.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash was $11,465,000 and $12,085,000 as of January 2, 1998
and June 27, 1997, respectively. The decrease in cash was primarily due to
acquisitions of property and equipment and a reduction in the Company's loan
payable balance to the Parent Company, partially offset by cash provided by
operating activities. The Company's cash is maintained in highly liquid
operating accounts and primarily consists of bank deposits.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
13
The Company's operations have been financed by cash flows from operating
activities and borrowings from the Parent Company. Such borrowings are available
to the Company under an intercompany Revolving Loan Agreement dated as of June
28, 1996, whereby the Parent Company finances certain of the Company's working
capital requirements. The Loan Agreement provides for maximum borrowings of up
to $60,000,000 and matures within two years and is extendable by mutual consent.
Interest is paid to the Parent Company at the rate of 6% per annum. The loan
balance was $15,020,000 as of January 2, 1998.
During the three months ended October 3, 1997, the Company made investments in
property and equipment totaling approximately $2,329,000 for new office
facilities, leasehold improvements, computers, furniture and office equipment.
The Company presently anticipates it will make investments in 1998 of
approximately $12,000,000 in property and equipment and will fund such
investments from existing cash balances and cash flows from operations.*
The Company believes its current cash balances, its available borrowings from
the Parent Company and cash flows generated from the Company's operations will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.* Although operating activities may
provide cash in certain periods, to the extent that the Company experiences
growth in the future, the Company anticipates that operating and investing
activities may use cash.* Consequently, any such growth will require the Company
to obtain additional debt financing from the Parent Company or alternative
sources.* The Company believes that additional financing will be available from
the Parent Company at a reasonable cost.*
FACTORS AFFECTING FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN ANNUAL AND/OR QUARTERLY OPERATING RESULTS. The
Company's future results of operations may be subject to substantial future
fluctuations. The Company operates with no backlog because its software products
are generally shipped shortly after orders are received. Annual and/or quarterly
sales and operating results therefore depend on the volume and timing of and the
ability to fill orders received within a given quarter, and such factors are
difficult to forecast. The Company recognizes a substantial portion of its
revenue in the last month of each quarter and, therefore, may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. If revenue levels in a given year or quarter are below expectations,
the Company's operating results may be materially adversely affected.
The Company expects to experience significant fluctuations in annual and/or
quarterly operating results based upon a number of factors including, but not
limited to, (i) market acceptance of new products and product enhancements, (ii)
the Company's ability to develop, introduce and market new products and product
enhancements in a timely fashion, (iii) the timing of large orders, (iv)
increased competition, (v) changes in pricing policies by the Company and/or its
competitors, (vi) the Company's ability to control costs, (vii) the amount of
one time charges incurred in future acquisitions, (viii) the Company's ability
to integrate future acquisitions into its operations, (ix) technological changes
in the Company's markets, (x) personnel changes and (xi) general economic
factors.* Because of these considerations, the Company believes that a period to
period comparison of its operations is not necessarily meaningful and should not
be relied upon as any indication of future performance.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
14
REVENUE CONCENTRATION. The Company derives a substantial majority of its
revenues from a limited number of software products and anticipates that revenue
from these products will continue to account for a majority of the Company's
revenue in the foreseeable future. Broad market acceptance of such products is
therefore critical to the Company's future success. New versions of these
products have been introduced recently into the market, and failure to achieve
broad market acceptance of these products as a result of competition,
technological change or other factors would have a material adverse effect on
the business, operating results and financial condition of the Company.* The
life cycle of these products is difficult to estimate, and the Company's future
financial performance may depend in part on the successful development,
introduction and market acceptance of new products, applications and product
enhancements.* There can be no assurance that the Company will continue to be
successful in marketing its key products or any new products, applications or
product enhancements.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. The Company's future
success will therefore depend on its ability to design, develop, test and
support new software products and enhancements on a timely and cost effective
basis.* There can be no assurance that the Company will be successful in
developing and marketing new products that respond to technological changes or
that the Company's new products will achieve market acceptance. If the Company
is unable for technological or other reasons to develop and introduce new
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition may be materially adversely affected. If potential new products are
delayed or fail to achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected.
RELIANCE ON SALES STAFF AND CHANNEL PARTNERS. The Company sells and supports
its products through its sales staff and third party distributors and OEMs. The
Company has made significant expenditures in recent years into the expansion of
its sales and marketing force and plans to continue to expand its sales and
marketing force. The Company's future success will depend in part upon the
productivity of its sales and marketing force and the ability of the Company to
continue to attract, integrate, train, motivate and retain new sales and
marketing personnel.* Competition for sales and marketing personnel in the
software industry is intense. There can be no assurance that the Company will be
successful in hiring and retaining such personnel in accordance with its plans.
There can be no assurance that the Company's recent and other planned expenses
in sales and marketing will ultimately prove to be successful or that the
incremental revenue generated will exceed the significant incremental costs
associated with these efforts. In addition, there can be no assurance that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and better funded sales and marketing
operations of many of the Company's current and potential competitors. If the
Company is unable to develop and manage its sales and marketing force expansion
effectively, the Company's business, operating results and financial condition
would be materially adversely affected.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
15
The Company derives a substantial portion of its revenue from the marketing
and distribution of its products by its distributors and OEMs. The Company's
agreements with distributors and OEMs typically allow such resellers to carry
product lines that are competitive with those of the Company and in many cases
may be terminated by either party without cause. There can be no assurance that
such distributors and OEMs will place high priority on the marketing of the
Company's products or that they will continue to carry the Company's products.
Loss of the Company's current distributors and OEMs or the inability to attract
new distributors and OEMs could materially adversely affect the Company's
business, operating results and financial condition.
COMPETITION. The markets for the Company's products are highly competitive
and characterized by rapidly changing technology and evolving standards.
Increased competition can be expected to cause price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Current and potential competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources for the development, promotion, sale and support of their products
than the Company. It is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, network operating system vendors could introduce new or upgrade
existing operating systems or environments that could render the Company's
products obsolete and unmarketable. There can be no assurance that the Company
will successfully compete against current or future competitors, or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends to a
significant degree upon the continued service of its key members of management
as well as marketing, sales and product development personnel. The loss of one
or more of the Company's key personnel would have a material adverse effect on
the Company's business, operating results and financial condition. The Vice
President of Sales and Marketing for the Company's Information Management Group
has recently left the Company and those duties have been transferred within the
organization. There can be no assurance that this transition will be
successful. The Company believes its future success will also depend in large
part upon its ability to attract and retain highly skilled management,
marketing, sales and product development personnel.* Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to retain its key employees or that it will be successful in attracting,
assimilating and retaining them in the future.
MANAGEMENT OF INTEGRATION AND GROWTH. The Company has recently expended
substantial management resources in integrating its operations after a period
characterized by a substantial number of acquisitions. In addition, the Company
is in the process of expanding the geographic scope of its customer base and
operations. This integration and expansion have resulted and will continue to
result in substantial demands on the Company's management resources.* The
Company's future operating results will depend on the ability of its officers
and other key employees to continue to implement and improve its operations and
customer support and financial control systems and to effectively expand, train
and manage its employee base.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
16
RISK OF ACQUISITIONS. The Company has acquired numerous businesses and
intends to enter into future business combinations and acquisitions of
complementary companies, products and technologies, although there can be no
assurance that suitable companies, divisions or products will be available for
acquisition.* Such acquisitions are inherently subject to certain risks,
including the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of the Company's ongoing business,
the potential inability to retain key technical and managerial personnel,
additional expenses associated with the amortization of acquired intangible
assets, and the potential impairment of relationships with employees and
customers as a result of any integration of new personnel. There can be no
assurance that the Company will be successful in overcoming these risks or that
such transactions will not have a material adverse effect upon the Company's
business, financial condition or results of operations.
RISKS OF INFRINGEMENT. The Company's success depends on its proprietary
technology. The Company relies on a combination of patent, copyright, trademark
and trade secret rights, confidentiality procedures, employee and third party
nondisclosure agreements and licensing arrangements to protect its proprietary
rights. As part of its confidentiality procedures, the Company enters into
license agreements with respect to its software, documentation and other
proprietary information. In licensing its products, the Company relies in part
on shrink wrap licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. Despite the
precautions undertaken by the Company, it may be possible for a third party to
copy or otherwise obtain and use the Company's products and technology without
authorization. Policing unauthorized use of the Company's products is difficult
and, although the Company is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a persistent
problem.
PROTECTION OF INTELLECTUAL PROPERTY. No assurance can be given that
competitors will not successfully challenge the validity or scope of the
Company's patents, copyrights and trademarks and that such patents, copyrights
and trademarks will provide a competitive advantage to the Company. As part of
its confidentiality procedures, the Company generally enters into non disclosure
agreements with its employees, distributors and corporate partners, and license
agreements with respect to its software documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently. Effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the Company's protection of
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around any patents issued to the Company or other intellectual
property rights of the Company.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
17
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company believes that software product developers will be
subject increasingly to claims of infringement as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation that could absorb significant
management time, which could have a material adverse effect on the Company's
business, operating results and financial condition.* Such claims might require
the Company to enter into royalty or license agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the Company
or at all, and the Company's inability to enter such agreements could have a
material adverse effect on the Company's business, operating results and
financial condition.
PRODUCT LIABILITY. The Company markets its products to customers for
information technology system management and resource optimization and to
access, analyze, report and deliver enterprise data. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in the Company's
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
The sale and support of its products by the Company may entail the risk of such
claims, which could be substantial in light of the use of such products in
system management, resource optimization and business intelligence applications.
A successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
POTENTIAL LITIGATION/LIABILITY RELATED TO YEAR 2000 READINESS. The Company's
products are used in numerous operating environments. It is likely that,
commencing in the Year 2000, the functionality of certain operating environments
will be adversely affected when one or more component products of the
environment is unable to process four-digit characters representing years. The
Company considers a product Year 2000 ready if the product's performance and
functionality are unaffected by processing dates prior to, during, and after the
Year 2000, but only if all products (for example hardware, firmware, and
software) used with the product properly exchange accurate date data with it.
The Company has determined that certain of its software products are not and
will not be Year 2000 ready and is taking measures to inform its customers of
that fact. The inability of one or more of the Company's products to properly
manage and manipulate data related to the Year 2000 could result in a material
adverse affect on the Company's business, financial condition and results of
operations, including increased warranty costs, customer satisfaction issues and
potential lawsuits.*
Even if the Company successfully brings certain of its products into Year 2000
readiness and publicizes the non-readiness of its other products, the Company
anticipates that substantial litigation may be brought against vendors of all
component products of noncompliant operating environments, including the
Company.* The Company's agreements with its customers typically contain
provisions designed to limit the Company's liability for such claims. It is
possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions. The Company believes that any
such claims, with or without merit, could result in costly litigation (and
possible adverse judgment) that could absorb significant management and product
development time and potentially result in significant liability to the Company,
which could have a material adverse effect on the Company's business, operating
results and financial condition.*
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
18
The Company is identifying Year 2000 dependencies in the Company's systems in
order to determine whether it has Year 2000 issues and implementing changes to
its internal information systems to make them Year 2000 compliant. While the
Company currently expects that the Year 2000 will not pose significant
operational problems, delays in the implementation of new information systems,
or a failure fully to identify all Year 2000 dependencies in the Company's
systems could result in material adverse consequences, including delays in the
delivery or sale of products.*
SOFTWARE PRODUCT ERRORS OR DEFECTS. Software products as complex as those
offered by the Company frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Despite
product testing, the Company's recently introduced products or any products may
contain defects or software errors and, as a result, the Company may experience
delayed or lost revenues during the period required to correct any defects or
errors.* Any such defects or errors could result in adverse customer reactions,
negative publicity regarding the Company and its products, harm to the Company's
reputation or loss of or delay in market acceptance, or could require extensive
product changes, any of which could have a material adverse effect upon the
Company's business, operating results or financial condition.
RISK OF INTERNATIONAL SALES. The Company's international business involves a
number of risks, including lack of acceptance of localized products, cultural
differences in the conduct of business, longer accounts receivable payment
cycles, greater difficulty in accounts receivable collection, seasonality due to
the slow down in European business activity during the summer months, unexpected
changes in regulatory requirements, royalties and withholding taxes that
restrict repatriation of earnings, tariffs and other trade barriers, difficulty
in hiring qualified personnel, economic and political conditions in each
country, management of an enterprise spread over various countries and the
burden of complying with a wide variety of foreign laws. A majority of the
Company's international sales are currently denominated in U.S. dollars, and an
increase in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and potentially less competitive in
foreign markets. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and
therefore the overall operating results and financial condition of the Company.
The Company anticipates that the recent turmoil in Asian financial markets and
the recent deterioration of the underlying economic conditions in certain Asian
countries may have an impact on its sales to customers or OEMs located in those
countries due to the impact of currency fluctuations on the relative price of
the Company's products and/or restrictions on government spending imposed by the
International Monetary Fund (the "IMF") on those countries receiving the IMF's
assistance.* In addition, customers in those countries may face reduced access
to working capital to fund component purchases, such as the Company's products,
due to higher interest rates, reduced bank lending due to contractions in the
money supply or the deterioration in the customer's or its bank's financial
condition or the inability to access local equity financing. During fiscal 1997
and the six months ended January 2, 1998, sales to OEMs or end-user customers
located in or to OEMs whose end customers were located in the countries of
Japan, Korea, Malaysia, Thailand, Taiwan and Hong Kong were not material to the
Company's business, operating results or financial condition.
______
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are strongly encouraged to review
the section entitled "Factors Affecting Future Operating Results" commencing
on page 14, for a discussion of factors that could affect future performance.
Readers are cautioned that other sections and other sentences not so identified
may also contain forward-looking information.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 10, 1997, Vedatech Corporation ("Vedatech") commenced an action
against the Company's United Kingdom subsidiary, Seagate Software Information
Management Group, Ltd. ("SS IMG LTD") in the High Court of Justice in the
United Kingdom. The Writ alleges that SS IMG LTD breached an existing oral
agreement and also alleges joint ownership of the United Kingdom copyright for
the Japanese translation of a Company software product (the "Complaint"). The
Company filed a response to Vedatech's writ on January 13, 1998. The Company has
collected documentation and conducted various interviews and believes the
Complaint has no merit and intends vigorously to defend the action. However, if
an unfavorable outcome were to arise, there can be no assurance that such
outcome would not have a material adverse effect on the Company's liquidity,
financial position, or results of operations.
In addition to the foregoing, the Company is engaged in legal actions arising
in the ordinary course of its business and believes that the ultimate outcome of
these actions will not have a material adverse effect on the Company's financial
position, liquidity, or results of operations.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
From October 3, 1997 to December 23, 1997, the Company sold 720,896 shares
of its Common Stock to an aggregate of 47 persons through the exercise of
previously granted stock options under the Company's 1996 Stock Option Plan.
Each such person is a current or former employee of the Company. The 720,896
shares sold had exercise prices ranging from $4.00 to $6.00 per share. The
transactions described in this paragraph were exempt from the registration
requirements of the Securities Act of 1933, as amended. On December 23, 1997,
the Company filed a Registration Statement on Form S-8 with respect to
11,788,009 shares of its Common Stock for granted and ungranted shares reserved
pursuant to its 1996 Incentive Stock Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
27 Financial Data Schedule
(a) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended January 2, 1998.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGATE SOFTWARE, INC.
----------------------
(Registrant)
DATE: February 11, 1998 BY: /s/ Terence R. Cunningham
--------------------------------------
TERENCE R. CUNNINGHAM
President and Chief Operating Officer
DATE: February 11, 1998 BY: /s/ Ellen E. Chamberlain
---------------------------------------
ELLEN E. CHAMBERLAIN
Senior Vice President, Treasurer and
Chief Financial Officer
21
SEAGATE SOFTWARE, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
_______
27 Financial Data Schedule
22