Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-27794
--------------------------
SEGUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4188982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 SPRING STREET,
LEXINGTON, MASSACHUSETTS 02421
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 402-1000
--------------------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
--------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $44,260,003 as of March 12, 2001, based upon the
closing sale price of Common Stock reported for that date on the Nasdaq National
Market. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of Registrant's Common Stock outstanding as of
March 12, 2001 was 9,532,532.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant
to Regulation 14A for Registrant's 2001 Annual Meeting of Stockholders to be
held on June 8, 2001, are incorporated by reference into Part III of this Annual
Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEGUE SOFTWARE, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 4
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 30
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Management and Certain Beneficial
Owners...................................................... 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
2
This Form 10-K contains statements that are "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. We may also make
written or oral forward-looking statements in other documents we file with the
SEC, in our annual reports to stockholders, in press releases and other written
materials, and in oral statements made by our officers, directors or employees.
You can identify forward-looking statements by the use of the words "believe,"
"expect," "anticipate," "intend," "estimate," "assume," "outlook," "will,"
"should," and other expressions which predict or indicate future events and
trends and which do not relate to historical matters. You should not rely on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Company. These risks, uncertainties and other factors may cause the actual
results, performance or achievements of the Company to be materially different
from the anticipated future results, performance or achievements expressed or
implied by the forward-looking statements.
Some of the factors that might cause these differences are discussed under
the heading "Factors That May Affect Future Results" beginning on page 24. You
should carefully review all of these factors, and you should be aware that there
may be other factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this
report, and we do not promise to update any forward-looking statements to
reflect changes in underlying assumptions or factors, new information, future
events or other changes.
3
PART I
ITEM 1. BUSINESS
GENERAL
Segue Software, Inc. and its subsidiaries ("Segue," "the Company," or "we")
develop, market and support software products, and provide related professional
services for the management and testing of electronic business ("eBusiness")
applications. Segue was incorporated in California in 1988 and reincorporated in
Delaware in March 1996. Segue has its corporate headquarters at 201 Spring
Street, Lexington, Massachusetts. Our products are used by webmasters, quality
assurance professionals and software developers to improve software quality,
reduce development costs, manage the vast and growing number of application
components and shorten the time required to develop and deploy these
mission-critical applications. Our products and services provide a solution
designed to deliver automated functional load testing and monitoring for
applications deployed on the World Wide Web. These solutions enable our
customers to deploy and operate reliable business-to-business (B2B) and
business-to-consumer (B2C) web sites. Reliability solutions, such as ours, are
critical components of the eBusiness infrastructure that is developing rapidly
on a global basis.
eBUSINESS FOCUS HISTORY
During 1997, Segue introduced technology to provide automated software
testing for web-enabled software applications, extending our testing
capabilities beyond distributed client/server applications with GUI front ends.
This new technology was added to the Company's sole product at that time, QA
Partner. The version of QA Partner with this web testing technology included was
later renamed "SilkTest." We also began to focus on load testing through an
OEM/reseller arrangement with a third party software vendor. On December 30,
1997, we acquired both the third party software vendor and the developer of the
product, SQLBench International, Inc. and ARC--Dr. Ambichl & Dr. Reindl
Communication GmbH (formerly named ARC Dr. Ambichl & Dr. Reindl OEG), hereafter
referred to collectively as "SQLBench" (see Note 2 of the Consolidated Financial
Statements). The acquired load testing product, SilkPerformer, provides web
developers and testers the ability to determine the scalability of their web
applications. SilkPerformer revenue has grown rapidly from its introduction in
the fourth quarter of 1997 and represented approximately 54% of license revenue
for the year ending December 31, 2000.
In the second quarter of 1998, Segue introduced "LiveQuality," an eBusiness
scenario testing solution, and continued our strategic transition from general
software testing to the more specialized world of eBusiness testing. In
May 1999, we decided to brand all of our eBusiness products under the Silk brand
and renamed the LiveQuality product to be "SilkRealizer."
During the first quarter of 1999, Segue began to execute a restructuring
plan to consolidate our marketing, product development and administrative
operations in order to achieve cost efficiencies through the elimination of
redundant functions. We realigned our marketing and product development
operations to redirect our focus to our strongest product lines and better
integrate the efforts of our product development teams. We recognized a one-time
pre-tax charge of approximately $1.0 million during the first quarter of 1999
related to this restructuring plan. The restructuring charge included
approximately $830,000 for severance and other employee-related costs of the
terminated staff and approximately $190,000 for facility-related costs,
including the accrual of estimated lease obligations associated with the closure
of excess office facilities.
During the second quarter of 1999, we restructured our product development
operations and delayed the introduction of the Eventus product, SilkControl, a
product we had acquired in connection with our 1998 acquisition of Eventus
Software, Inc. ("Eventus"). Segue has no present plans to integrate SilkControl
into our product line. These product development restructuring activities were
aimed at reducing our costs associated with the development of SilkControl and
enhancing our sales
4
force ability to focus on other products. The restructuring resulted in the
consolidation of four development labs into three and included the termination
of fifteen employees associated with the development of the Eventus product.
Additionally, during the second quarter of 1999, Segue shifted its sales
strategy away from creating and managing a large network of resellers towards
building deeper relationships with a few large system integrators. This revised
strategy resulted in the termination of seven of our employees who focused sales
efforts on these channel resellers. Segue also terminated the employment of two
senior vice presidents during the second quarter of 1999, each of whom has been
replaced. Associated with these events, we recorded during the second quarter of
1999 non-recurring and other charges of approximately $1.5 million, of which
$1.0 million related exclusively to severance and other employee-related costs
associated with the restructuring, and $481,000 (including a noncash
compensation charge of approximately $118,000) which related to severance of the
two senior vice presidents.
In addition, in the second quarter of 1999, Segue introduced the first
versions of SilkPilot, SilkMeter and SilkObserver. These tools came from our
acquisition in December 1998 of Black & White Software, Inc. ("Black & White"),
providing our business with tools that specifically assist engineers in the
testing of complex logic associated with eBusiness servers. These tools help
engineers detect software bugs, monitor and diagnose performance, and meter
transactions in servers that deploy complex distributed Common Object Request
Broker Architecture (CORBA) object technology. License sales from these tools in
1999 and 2000 were approximately $400,000 and $419,000, respectively. In 2000,
we released an important new version of SilkPilot, enabling this product to
support Enterprise JavaBeans and providing us with a competitive advantage in
the middleware testing area. We also continued to integrate the SilkMeter
product with our other products, enabling new models for licensing products to
customers and partners. The first fully metered product, SilkPerformer, can now
be licensed on a "pay for usage" basis. We have a pending patent application for
this metered product. We have made this licensing model available only to our
strategic alliances at this time but will expand availability as our experience
merits. We decided to stop development at this time of our SilkObserver product
in order to concentrate our efforts on our SilkPilot and SilkMeter products, and
on enabling deeper Java support for our SilkTest product.
In the third quarter of 1999, we introduced the eConfidence Solutions
packages called eConfidence Functionality, eConfidence Performance and
eConfidence Production, that bundle our quality assurance tools with our
consulting services. In 2000, we expanded the eConfidence Solutions packages
with a hosted scalability service called eCScale. In order to deliver this
solution, we signed an agreement in the third quarter of 2000 with service
provider NaviSite for networking and server infrastructure. In effect, our
customers are able to rent our SilkPerformer product and use our consultants
cost effectively through the eCScale package in a hosted environment. We intend
to expand delivery of this service offering through alliances with other service
providers. Our sales force has incentives to sell eCScale hosted testing
engagements that will enable customers to receive a full-scale stress test
report concerning their web sites.
We believe that consultants represent an important source of indirect
channel revenue for the future and that product education is a critical element
for our success. We are focused on building up our eBusiness expertise through
our consulting services and training the information technology consulting
industry to deliver such services based on Segue products. As part of this
program, in October 1999, Segue published a book for consultants "GAIN
eCONFIDENCE--THE eBUSINESS RELIABILITY SURVIVAL GUIDE." In addition, in
November 1999 we created eConfidence University, a certification school for
industry consultants that uses our book as its text. We trained approximately
100 consultants in the fourth quarter of 1999 from partnerships we formed with
several consulting firms including marchFIRST (formerly USWeb/CKS), Accenture
(formerly Arthur Andersen LLP), IBM Global Services and PricewaterhouseCoopers
LLP. In 2000, we trained more than 500 IT consultants, including more than 200
from IBM Global Services.
5
In the third quarter of 2000, we released SilkPerformer 4.0 a significantly
enhanced version of SilkPerformer with load testing support of wireless
protocols and devices. We anticipate that this enhancement will enable us to
continue to produce strong sales of SilkPerfomer.
In October 2000, we published our second book "LOAD TESTING FOR
eCONFIDENCE," a guide to web application and load testing. The book is a
comprehensive and detailed guide to load testing--a crucial stage of application
design and deployment that helps ensure peak application performance during use
by thousands of simultaneous users. The Segue book offers valuable information
on the objectives and requirements of scalability testing, how companies can
apply performance testing to their requirements, and a real-life example of a
load-testing engagement and its results.
In the fourth quarter of 2000, Segue introduced its first two products in
the product monitoring area--Server Analysis Module (SAM), and KM for Patrol.
The production monitoring area is closely related to our eBusiness testing
focus, as companies want to monitor the performance of their web sites and use
this information to guide their testing and deployment plans. SAM monitors the
performance of the servers that are used to run the internet application behind
the firewall. SAM replaces SilkMonitor, an earlier standalone version of the
technology, and is sold as an add-on package to SilkPerformer.
KM for Patrol integrates Segue's SilkPerformer with one of the leading
system management products, Patrol from BMC Software Inc. With this integration
in place, Patrol users can use their valuable networking and computer data
collected by Patrol to help build testing suites and diagnose performance
problems with their internet applications. Segue also entered into an agreement
with BMC in the fourth quarter of 2000 that enables BMC's Professional Services
organization to resell SilkPerformer with KM for Patrol.
Also in the fourth quarter of 2000, Segue and IBM entered into a marketing
agreement in which IBM manufactures and ships a demonstration version of
SilkPerformer, called SilkPreview, to its WebSphere customers. WebSphere is
IBM's eBusiness software platform and SilkPerformer will provide
performance-testing technology to Websphere-based internet applications. Segue
anticipates that SilkPreview will be a strong marketing tool to generate
SilkPerformer sales leads from IBM's WebSphere client base. When sales leads are
converted, IBM receives a referral fee.
Segue is active in four business segments: eBusiness product licenses;
client/sever testing product licenses; training and consulting; and
maintenance/support services. Please see Note 11 to the Company's Consolidated
Financial Statements for more detailed financial information about our segments.
INDUSTRY BACKGROUND
Companies worldwide are rapidly implementing eBusiness applications that
customers can access twenty-four hours a day, seven days a week. As businesses
expand the use of technology to manage information and processes, and as
software becomes a more important component in the delivery of products and
services, consistent and effective operation of software applications has become
more critical to these businesses' success. While real-time communication,
prompted by eBusiness, has created constant access to a company's services and
products, it also brings with it constant exposure. This exposure is forcing
companies to re-think the stability of their systems, as the cost of an
unexpected shutdown could cripple even the strongest of organizations.
Unlike mainframe environments, where applications, operating systems and
hardware are designed by a single vendor as an integrated solution; or
traditional client/server systems, where application development follows a
process of specify, design, develop, test and release; web-based systems are
developed across many different functional areas in an organization, are
designed in component fashion and are continuously being assembled, validated
and deployed based on market conditions. In addition, web-based systems consist
of component layers of applications, middleware, operating systems,
6
databases, browsers, servers, processors and network technology designed
separately by multiple vendors. For example, in a web-based configuration, a
browser might access a Netscape web server that then sends requests to an
application server installed on a Microsoft Windows NT server that distributes
the requests to an Oracle database located on a Sun Solaris server. There is a
higher probability for application instability or failure when the component
layers of web-based applications are developed separately by multiple vendors
and integrated to form a business system.
Web applications present enormous challenges to webmasters, quality
assurance professionals and software developers. These challenges include
integrating the efforts of many diverse contributors, managing a large and
growing number of varied application components and keeping applications
up-to-date with changing content, while simultaneously maintaining system
reliability and accuracy.
Traditional automated functional and regression testing tools, which are
designed for a specific component on a particular platform, do not adequately
address the complexities of distributed computing. First, they are not designed
to validate distributed application logic and data. Second, tests created by
these tools become obsolete when a component is replaced or upgraded. Third,
traditional automated functional and regression testing tools are unable to
recover when a bug is encountered in the component being tested, meaning that
truly unattended testing in a distributed environment is impossible using such
tools. Finally, they do not deliver the capability to design, create, manage and
re-use tests across multiple platforms and system configurations, thereby
resulting in additional costs and time spent on the software development and
quality assurance processes.
As businesses move mission-critical applications to the Internet to give
customers greater access to such applications, they will need to test and
measure the true capacity and scalability of web applications in order to avoid
shutdowns, delays and other problems, while providing quality service. Such
tests should help businesses determine whether (i) web applications scale with
anticipated Internet volume, (ii) such applications can operate with little or
no downtime, and (iii) new content can be deployed quickly and reliably. By
building load testing into the application testing process early in the
development cycle, the performance of the application in a "real world"
environment can be tested before the application is deployed and exposed to real
customers.
PRODUCTS
Segue provides a full suite of products and services, known as our Silk
Product Line, designed to help companies create, monitor and deploy more
reliable B2B and B2C web applications. In addition, we continue to support our
legacy client/server automated testing tools.
Revenue from our Silk product line, which makes up our eBusiness management
system product line, represented approximately 62%, 61% and 39% of total
revenues in 2000, 1999 and 1998, respectively.
Revenue from QA partners, our client/sever testing product, represented
approximately 0.5%, 2% and 25% of total revenues in 2000, 1999 and 1998,
respectively.
eBUSINESS MANAGEMENT SYSTEM PRODUCTS
SILKRADAR is a defect-tracking product used to track and manage errors in
software projects that provides the ability to associate test scenarios and
known defects with each component.
SILKTEST is an automated functional and regression testing tool for
end-to-end testing of enterprise web applications. SilkTest includes a recovery
system that supports unattended testing seven days a week, twenty-four hours a
day. SilkTest contains a test planning and management tool that creates
customized test plans for particular applications and manages the testing
process from a central point of control. SilkTest also directly accesses a
database using SQL calls to verify accurate database content and to write
results of the tests. By providing test scripts with direct ODBC standard access
to over 35 databases, SilkTest helps ensure that eBusiness applications function
with the associated
7
database reliably before they are deployed. SilkTest also has a distributed
testing capability that enables users to thoroughly test eBusiness systems.
SilkTest can run across multiple platforms, technologies, browsers and
environments.
SILKPERFORMER uses load testing technology to simulate real-world conditions
to help users predict capacity, scalability and performance problems during
their development process. SilkPerformer captures and simulates web and
application server protocols including HTTP, HTTPS, FTP, POP3, LDAP, SMTP, IIOP
and WAP at varying connection speeds from 14.4 kbs through ISDN, T1 and other
high-speed connections. The SilkPerformer Server Analysis Module adds enhanced
monitoring capabilities.
SERVER ANALYSIS MODULE is an add-on module to SilkPerformer that assists
test and production managers in gathering statistics about how their servers and
networks are performing under heavy user and application loads. These statistics
can then be used to help determine the optimum infrastructure configuration for
best performance.
SILKPERFORMER KM FOR PATROL enables BMC's Patrol customers to easily
determine application specifications required for reliable performance.
SilkPerformer tests can be launched from Patrol to provide end-user diagnostics
such as the number of simulated users running at any given time, transaction
response time, and the number of failed and successful transactions.
SILKPILOT provides object-level transaction validation for debugging and
testing of objects in a CORBA-based distributed environment and an Enterprise
JavaBeans environment.
SILKREALIZER models the effects on business processes under real-world
conditions such as unpredictable user loads, rapid content change or
event-triggered volume.
SILKMETER manages the deployment and authorized usage of distributed objects
or applications for the purpose of monitoring and billing.
CLIENT/SERVER TESTING PRODUCTS
QA PARTNER is an automated functional and regression testing tool for
end-to-end testing of cross-enterprise client/server applications. QA Partner
includes a recovery system that supports unattended testing seven days a week,
twenty-four hours a day. QA Partner runs across multiple platforms, technologies
and environments.
SERVICES
We supplement our product offerings with training, consulting, customer
service and technical support services. Segue's services are designed to promote
a clear and consistent approach to our solutions and facilitate the penetration
of our products into a broader market. As of February 28, 2001, we have
approximately 86 employees that provide these services.
Training and Consulting. We offer training courses and consulting services,
performed by Segue employees and third party consultants, in support of our
products. Our training courses are held regionally in selected U.S. and European
cities or at the customer site. Worldwide consulting is offered both as an
onsite service, as well as remote MSP (Management Service Provider) hosted
testing service. Consulting services are purchased either on a daily service,
rate basis, or as pre-packaged solutions that address scalability, monitoring
and transaction verification of eBusiness applications. Project management is
provided on all engagements. Segue consulting comprises experts in the use of
the Silk product line, which provides a vehicle for the delivery of end-to-end
testing solutions which include front-end functional testing, middleware testing
and server load and stress testing. We have two principal objectives for our
fee-based training courses and consulting services: (i) to produce the
agreed-upon deliverables for the projects, and (ii) to enhance our customers'
understanding of our methodologies and techniques.
8
Support Services. We offer fee based annual maintenance contracts to
customers who have entered into license agreements for the use of Segue software
products. We provide customer service and support through our internal technical
support organization. Support services include the maintenance of our software
products in accordance with specifications contained in each product's user
guide and access to technical support personnel. This support includes technical
support through our internal customer support group via phone, fax and e-mail
communications. Our distributors and some of our channel partners provide
initial telephone support to end-users. We currently provide these services
through our global technical support center in Belfast, Northern Ireland. Segue
made a significant investment in technical support in 2000. We have increased
the number of support staff by over 30% in the last 12 months.
SALES AND MARKETING
In 2000, Segue invested significant resources into its sales and marketing
organizations. As of February 28, 2001, our sales and marketing force consisted
of approximately 150 employees. Segue sells its products and services both
directly and indirectly. The primary markets we focus upon are in North America,
Europe and Asia. No customer accounted for 10% or more of total revenue in 2000,
1999 or 1998.
Direct Sales. The direct sales organization is deployed in teams which
consist of Enterprise Field Sales Representatives, Inside Product Sales
Representatives, Technical Sales Engineers, Inside Sales Management and Regional
Field Sales Management. It is the primary responsibility of the Enterprise Field
Sales Representative to focus on Fortune 2000 clients with solution needs in
excess of $60,000. Conversely, the Inside Product Sales Representatives are
responsible for sales of hosted services and products that are generally less
than $60,000, and sold over the telephone with little face-to-face intervention.
Technical Sales Engineers carry the responsibility of supporting the sales
process by providing engineering expertise that allows customers to understand
technically, how Segue's eBusiness solutions will improve their organizations.
Indirect Sales. Segue has dedicated resources focused on a small number of
strategic alliances and a larger number of resellers. The goal with strategic
alliances is to focus on a small number of key partners that have the potential,
by way of their technology or channels, to significantly enhance the sales
revenue and value of Segue as a company. The focus on resellers is primarily
designed to leverage either relationships, economies of scale, unique expertise,
or a combination thereof, in order to increase sales and to provide Segue Silk
users with solutions that meet their eBusiness needs.
Geographic Sales. We have eight sales offices in North America, one sales
office in the United Kingdom and three sales offices in Germany. Our
international sales force as of February 28, 2001 is approximately 25 employees.
Segue derived approximately 16%, 12% and 16%, of its total software revenue from
international customers in 2000, 1999 and 1998, respectively. We have expanded
our sales force significantly in Europe and in the U.S. during the first half of
2000. As of February 28, 2001, our direct sales force consisted of approximately
100 employees.
Product Marketing. Our marketing staff has designated resources that
support our sales staff, alliances and resellers in the development of materials
that support each of our products.
BACKLOG
The time between order and delivery of Segue's products is generally short.
The number of orders, as well as the size of individual orders, can vary
substantially from month to month. Because of the short period between order
receipt and shipment of products, we typically do not have a backlog of unfilled
orders.
9
RAW MATERIALS
Segue's products utilize the Company's engineering designs, with industry
standard and semi-custom components and subsystems. The components and
subsystems are available from a number of suppliers.
RESEARCH AND DEVELOPMENT
Segue has made substantial investments in research and product development.
Our research and development is conducted by project teams consisting of
development and quality assurance engineers, technical writers and product
managers. We use most of our own products and methodologies in our development
process. Segue organizes development and quality assurance schedules to optimize
usage of automated tests by starting script development very early in the
development life cycle. Our research and development staff originates, produces
and tests many of our prototype products. The research and development
department consults with our sales and marketing staff and utilizes the feedback
from customer support and training to ensure the satisfaction of our current
customers. We also license technology from vendors to be embedded in our product
for resale or to be resold as Segue products.
Segue's primary research and development group is located at our corporate
headquarters in Lexington, Massachusetts. We also have development operations in
Austria and Northern California. The majority of the Northern California
employees joined Segue as part of the December 1998 acquisition of Black &
White. As of February 28, 2001, we had approximately 91 employees in research
and development.
In April 2000, we were awarded our third United States patent, for one of
our web application testing technologies. The patent, "Application Testing with
Virtual Object Recognition", will cover some of Segue's most advanced technical
innovations in automated software testing. In June 2000, we restructured our
product development operations and discontinued new sales of the SilkObserver
product. We consolidated our Java related product development activities in our
Northern California office. In September 2000, we completed the replacement of
the SilkMonitor product by the Server Analysis Module for SilkPerformer. We also
have a pending patent application, "Method And System for Tracking Software
Licenses And Usage," which relates to our innovative metered license system.
This usage-based system allows users to pay only for the time actually using our
software products.
We intend to continue making significant investments in research and
development to develop new products, expand the capabilities of our web
application testing products and "internationalize" Segue products.
COMPETITION
The market for software quality management tools is new, intensely
competitive, rapidly evolving and subject to rapid technological change. Segue's
competitors offer a variety of products and services to address this market. We
currently encounter direct competition from a number of public and private
companies such as Mercury Interactive Corporation, Rational Software Corporation
and Compuware Corporation. In addition, the possible entrance of new competitors
may intensify competition in the software quality management market. Many of our
current and potential future competitors have significantly greater financial,
technical, marketing and other resources than we have, and many have well
established relationships with our current and potential customers. It is also
possible that alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations or increased web usage. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect our business,
operating results and financial condition. There can be no assurance that Segue
will be able to compete effectively against current and future competitors.
10
Segue believes that the principal competitive factors affecting its market
include product features and functionalities such as flexibility, scalability,
ease-of-integration, ease-of-implementation, ease-of-use, quality, performance,
price and total cost of ownership, customer service and support, company
reputation, financial viability and effectiveness of sales and marketing
efforts. Although we believe that Segue currently competes effectively with
respect to such factors, there can be no assurance that we will be able to
maintain our competitive position against current and potential competitors.
PROPRIETARY TECHNOLOGY
Segue primarily relies upon a combination of patent, trademark, copyright
and trade secret laws and employee and third-party non-disclosure agreements to
protect its proprietary rights in its products. We have three United States
patents and currently have submitted one more patent application that is under
evaluation by the United States Patent and Trademark Office. However, there can
be no assurance that these patents would be upheld if challenged. There can be
no assurance that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. There can also
be no assurance that the measures taken to protect our proprietary rights will
be adequate to prevent misappropriation of the technology or independent
development by others of similar technology. In addition, the laws of various
countries in which our products may be sold may not protect our products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against Segue or that any such claims
will not require us to enter into royalty arrangements or result in costly
litigation. We are not aware of any patent infringement charge claimed by any
third party relating to Segue's products or Segue's use of third party products.
However, the computer software market is characterized by frequent and
substantial intellectual property litigation. Intellectual property litigation
is complex and expensive, and the outcome of such litigation is difficult to
predict. We believe that due to the rapid pace of technological innovation for
software quality management products, our ability to establish a position of
technology leadership in the industry is dependent more upon the skills of our
development personnel than upon the legal protections afforded our existing
technology.
EMPLOYEES
As of February 28, 2001, Segue had approximately 375 full-time employees
with 91 in research and development, 150 in sales and marketing, 86 in services,
and 48 in operations, finance and administration. Our employees are not
represented by any collective bargaining organizations and Segue has never
experienced any work stoppages. We consider our relations with our employees to
be good.
ITEM 2. PROPERTIES
Segue's corporate headquarters are located in Lexington, Massachusetts,
under a lease that expires in October 2007. On July 1, 1999, we fulfilled our
commitment to lease an additional 15,000 square feet at this corporate location.
In July 2000, we leased an additional 5,800 square feet at this Lexington
location. With this 73,300 total square feet of space, we believe that we now
have adequate expansion space for growth in operations at the headquarters
location for the foreseeable future.
In November of 1999, Segue entered into a five-year lease for 15,600 square
feet of office space in Los Gatos, California. This site was established as our
Western Headquarters. The new space allowed us to consolidate two California
locations which housed the Campbell, California product development lab and the
Los Gatos based Western Regional Sales operation. The consolidation of these two
offices was implemented in February 2000. As a result of this action, the
Campbell, California lease terminated upon expiration in January 2000. The prior
Los Gatos sales office is being subleased through the remainder of the term
(through March 31, 2003); the sublease agreement was executed on March 24, 2000.
11
In February 2000, the Company entered into a five-year lease for a branch
sales office consisting of approximately 3,200 square feet in San Francisco,
California. This office replaced another larger office in San Francisco that we
had acquired as part of the Eventus acquisition in December 1998. The lease for
the office that we replaced terminated in April 2000.
In addition to the office locations outlined above, we have field sales and
support operations in six other locations throughout the United States and in
six locations in Europe. Remote product development facilities are located in
Los Gatos, California and Linz, Austria. With the expansion of our headquarters
in Lexington, Massachusetts and our Western headquarters in Los Gatos,
California, we believe that our current facilities are sufficient for current
operations and for operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On or about April 27, 1999, a putative class action complaint was filed in
the United States District Court for the District of Massachusetts against
Segue, its Chief Executive Officer and a former Chief Financial Officer of
Segue, captioned NATHAN RICE V. SEGUE SOFTWARE, INC., ET AL., Civil
No. 99-CV-10891-RGS. The class action complaint alleged the defendants violated
the federal securities laws by making material misrepresentations and omissions
in certain public disclosures during the period beginning on October 13, 1998
through April 9, 1999, inclusive. The public disclosures relate to, among other
things, Segue's past and future financial performance and results. On or about
May 3, 1999, another similar putative class action complaint was filed against
Segue, its Chief Executive Officer and a former Chief Financial Officer of Segue
in the United States District Court for the District of Massachusetts, captioned
ANTHONY MOUMOURIS V. SEGUE SOFTWARE, INC., ET AL., Civil No. 99-CV-10933-RGS.
These cases were consolidated under the caption IN RE SEGUE SOFTWARE, INC.
SECURITIES LITIGATION, Civil No. 99-CV-10891-RGS and the plaintiffs filed a
consolidated amended complaint on September 27, 1999 alleging a putative class
period of July 14, 1998 through April 9, 1999, inclusive. The complaints sought
an unspecified amount of damages. On November 8, 1999 each of the defendants
filed a motion to dismiss the amended complaint for failure to state a cause of
action, and on July 26, 2000, the United States District Court for the District
of Massachusetts granted Segue's Motion to Dismiss the putative securities class
action litigation brought against the above three defendants. The dismissal was
entered "with prejudice." The plaintiffs appealed the decision to the First
Circuit, and, in December 2000 while the appeal was still pending, the parties
and Segue's insurers reached an agreement in principle to settle the matter for
an agreed upon settlement amount. Segue's Directors' and Officers' insurance
will contribute a substantial portion of such settlement amount, and, upon such
contribution, the settlement will not have a material adverse affect upon
Segue's financial position or results of operation. The settlement is not yet
finalized.
Various other claims, charges and litigation have been asserted or commenced
against Segue arising from or related to contractual or employee relations.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of Segue.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE FOR COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
closing prices of our Common Stock as reported on the Nasdaq National Market
System. Our Common Stock is traded under the Nasdaq symbol: SEGU. These prices
do not include retail markups, markdowns, or commissions.
YEAR ENDED DECEMBER 31, 2000: HIGH LOW
- ----------------------------- -------- --------
First Quarter.............................................. $21.125 $8.313
Second Quarter............................................. $12.000 $7.063
Third Quarter.............................................. $10.125 $7.250
Fourth Quarter............................................. $10.063 $3.375
YEAR ENDED DECEMBER 31, 1999: HIGH LOW
- ----------------------------- -------- --------
First Quarter.............................................. $23.313 $8.813
Second Quarter............................................. $ 9.625 $4.438
Third Quarter.............................................. $12.563 $7.000
Fourth Quarter............................................. $25.875 $9.875
On March 12, 2001, the closing price reported on the Nasdaq National Market
System for the Common Stock was $5.625. The market price of our Common Stock has
fluctuated significantly and is subject to significant fluctuations in the
future.
HOLDERS OF RECORD
As of March 12, 2001, there were approximately 102 holders of record of the
Common Stock and 9,532,532 shares of Common Stock outstanding.
DIVIDEND POLICY
We have never paid cash dividends on our Common Stock and do not anticipate
paying such dividends in the foreseeable future. The current policy of our Board
of Directors is to retain future earnings for use in Segue's business. The
payment of any future dividends will be determined by the Board of Directors in
light of conditions then existing, including our financial condition and
requirements, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board of Directors.
USE OF PROCEEDS FROM REGISTERED SECURITIES
We completed our initial public offering ("IPO") of Segue Common Stock in
April 1996. The IPO was made pursuant to a Registration Statement on Form S-1,
filed with the Securities and Exchange Commission pursuant to Rule 462(b) under
the Securities Act of 1933 (Commission File No. 333-1488), which was declared
effective as of March 28, 1996. The IPO commenced on April 2, 1996 and
terminated shortly thereafter after the sale into the public market of all of
the registered shares of Common Stock.
After deducting the expenses of $3.9 million, we received approximately
$39.5 million in net proceeds of the IPO.
13
Through the period ended December 31, 2000, we used approximately
$9.7 million for the purchase of property and equipment, approximately
$5.6 million for repayment of indebtedness including interest ($4.2 million and
$645,000, for principal and interest, respectively, on the SQLBench notes and
approximately $395,000 and $334,000 on Eventus and Black & White debt,
respectively), $950,000 for guaranteed royalties, $480,000 for a non-recurring
engineering and initial license fee, approximately $1.6 million for employee
severance payments, and approximately $14.1 million for working capital. The
remaining approximately $7.0 million is invested in temporary investments,
mainly consisting of government agency paper and commercial paper.
No payments from the net offering proceeds of the IPO were made to
directors, officers, or persons owning 10 percent or more of the Common Stock of
the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
All financial data below has been restated to give retroactive effect to the
Company's December 1998 acquisitions of Eventus and Black & White, using the
pooling-of-interests method of accounting.
14
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Software........................................ $36,606 $ 29,448 $26,249 $19,662 $16,551
Services........................................ 21,550 16,973 14,599 7,977 5,411
------- -------- ------- ------- -------
Total revenue................................. 58,156 46,421 40,848 27,639 21,962
Cost of revenue:
Cost of software................................ 2,394 2,762 4,291(4) 3,673 2,807
Cost of services................................ 8,706 8,942 6,119 2,641 1,721
------- -------- ------- ------- -------
Total cost of revenue......................... 11,100 11,704 10,410 6,314 4,528
Gross margin...................................... 47,056 34,717 30,438 21,325 17,434
Operating expenses:
Sales and marketing............................. 35,452 29,461 20,764 14,071 10,073
Research and development........................ 9,683 10,224 8,571 7,084 5,043
General and administrative...................... 9,820(5) 7,757 4,500 3,933 2,950
Amortization of goodwill........................ 1,505 1,506 1,506 -- --
Non-recurring and other charges................. -- 2,499(1) 1,531(2) 835(3) --
------- -------- ------- ------- -------
Total operating expenses...................... 56,460 51,447 36,872 25,923 18,066
Loss from operations.............................. (9,404) (16,730) (6,434) (4,598) (632)
Litigation settlement............................. -- -- -- -- (744)
Other income, net................................. 1,061 956 1,521 2,155 1,540
------- -------- ------- ------- -------
Income (loss) before provision for income taxes... (8,343) (15,774) (4,913) (2,443) 164
Provision for income taxes........................ 221 174 140 56 20
------- -------- ------- ------- -------
Net income (loss)................................. $(8,564) $(15,948) $(5,053) $(2,499) $ 144
------- -------- ------- ------- -------
Net income (loss) per share--basic................ $ (0.91) $ (1.76) $ (0.59) $ (0.32) $ 0.03
Net income (loss) per share--diluted.............. $ (0.91) $ (1.76) $ (0.59) $ (0.32) $ 0.02
Weighted average shares outstanding--basic........ 9,393 9,041 8,626 7,761 5,639
Weighted average shares outstanding--diluted...... 9,393 9,041 8,626 7,761 7,980
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 9,379 $ 7,429 $16,096 $23,393 $ 7,541
Working capital................................... 12,253 17,668 30,904 33,693 40,308
Total assets...................................... 39,901 45,566 56,279 57,167 49,983
Long-term obligations............................. -- -- 883 3,777 245
Total stockholders' equity........................ 21,050 29,184 42,541 43,452 42,353
- --------------------------
(1) Non-recurring and other charges in 1999 represent $2.3 million of severance
and other employee-related costs and $190,000 of facility-related costs
associated with the first and second quarter restructuring actions and the
costs related to the termination of two senior vice presidents of Segue.
(2) Non-recurring and other charges in 1998 represent $1.5 million of
transaction costs associated with the acquisitions of Eventus
Software, Inc. and Black & White Software, Inc.
(3) Non-recurring and other charges in 1997 include a charge of $117,000 for
purchased research and development in process and $718,000 for severance
charges.
(4) Cost of software in 1998 includes $667,000 associated with the write-off of
a non-recurring fee and prepaid royalties
(5) General and administrative expenses for 2000 includes $750,000 for
settlement of litigation.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Segue develops, markets and supports software products and provides related
professional services, for the management and testing of eBusiness applications.
Our products are used by webmasters, quality assurance professionals and
software developers to improve software quality, reduce development costs,
manage the vast and growing number of application components and shorten the
time required to develop and deploy these mission-critical applications. Our
products provide a solution designed to assemble, model, deploy, monitor and
analyze electronic commerce ("e-commerce") systems as well as to provide
automated functional testing, load testing and monitoring of applications
deployed on the World Wide Web and on client/server systems.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain items reflected in Segue's consolidated
statements of operations:
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
Software.................................................. 62.9 % 63.4 % 64.3 %
Services.................................................. 37.1 36.6 35.7
----- ----- -----
Total revenue........................................... 100.0 100.0 100.0
Cost of revenue:
Cost of software.......................................... 4.1 5.9 10.5
Cost of services.......................................... 15.0 19.3 15.0
----- ----- -----
Total cost of revenue................................... 19.1 25.2 25.5
Gross margin................................................ 80.9 74.8 74.5
Operating expenses:
Sales and marketing....................................... 61.0 63.5 50.8
Research and development.................................. 16.6 22.0 21.0
General and administrative................................ 16.9 16.7 11.0
Amortization of goodwill.................................. 2.6 3.2 3.7
Non-recurring and other charges........................... -- 5.4 3.8
----- ----- -----
Total operating expenses................................ 97.1 110.8 90.3
----- ----- -----
Loss from operations........................................ (16.2) (36.0) (15.8)
Interest income............................................. 2.0 2.7 4.8
Interest expense............................................ (0.1) (0.7) (1.1)
----- ----- -----
Loss before provision for income taxes...................... (14.3) (34.0) (12.1)
Provision for income taxes.................................. 0.4 0.4 0.3
----- ----- -----
Net loss.................................................... (14.7)% (34.4)% (12.4)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
SOFTWARE REVENUE
Software revenue consists of revenue from the granting of perpetual and time
based licenses for the use of Segue products. We license our software through
our direct sales force, telesales, international distributors, business
partners, and resellers. Software revenue increased 24% to
16
$36.6 million in 2000 from $29.4 million in 1999. The increase is primarily the
result of the expansion of our sales and marketing force during the first two
quarters of 2000. In addition, we are shifting our sales focus away from sales
to dot-com companies towards sales to large enterprise opportunities with
multinational companies. International product sales accounted for 16% and 12%
of Segue's total product sales in 2000 and 1999, respectively. The increased
international sales were primarily attributed to the expansion of the European
sales force and increased demand for testing products.
Total eBusiness software revenue represented 99% and 96% of total software
revenue in 2000 and 1999, respectively. Segue client/server products represented
1% and 4% of the total software revenue for the years ended December 31, 2000
and 1999, respectively. It became apparent in 2000 that our continuing focus on
the eBusiness testing market and the enhanced Silk family of products has almost
completely replaced our original core product line.
The rate of continued software revenue growth depends upon our ability to
successfully generate and fulfill current software license orders, generate
incremental revenue from our business partnerships and strategic alliances,
attract and retain skilled personnel and deliver timely new products and
enhancements and continued market growth. Performance could also be affected by
the market acceptance of our Silk family product enhancements and new product
areas.
SERVICES REVENUE
Services revenue consists of revenue from maintenance, training and
consulting. Services revenue increased 27% to $21.6 million in 2000 from
$17.0 million in 1999. The increase in services revenue is a result of the
growth in our installed customer base and the increased training and consulting
services performed for those customers. Maintenance revenue increased 47% to
$13.1 million in 2000 compared to $8.9 million in 1999. Training and consulting
revenue increased 5% to $8.5 million in 2000 compared to $8.1 million in 1999.
The moderate increase in training and consulting revenue was primarily due
to the increase in product revenue, which drove up the demand for consulting
services and training. The increase in recognized maintenance revenue was driven
largely by incremental additional software licenses sold over the past
12 months. Recognized maintenance revenue is being amortized over the contract
period, which is predominately a 12 month period. In addition, as the installed
base of license holders has increased, revenue from the renewal of maintenance
contracts has also increased.
COST OF SOFTWARE
Cost of software includes documentation, product packaging, product media,
employment costs for processing and distribution, amortization of capitalized
technology and royalties due to third parties. These costs decreased 14% to
$2.4 million, or 7% of software revenue, in 2000 compared to $2.8 million, or 9%
of software revenue, in 1999. The amortization of the completed technology
included in cost of software for 2000 and 1999 was $989,000 and $987,000,
respectively.
The decrease in cost of software is mainly the result of our continuing cost
control effort through scrutinization of expenditures, and a reduction in
royalty expenses.
In December 1998, we entered into a five-year agreement with a software
vendor, which provides future royalty payments to the vendor of 10% of net
revenues achieved on sales of Segue products to the vendor's customer base.
Under the terms of the agreement, we paid a guaranteed, non-refundable minimum
royalty of $650,000 in December 1998. As of December 31, 1999, other current
assets included approximately $220,000 and other long-term assets included
approximately $210,000 related to the guaranteed royalties. During 2000, we
expensed approximately $220,000 of this prepaid royalty. In December 2000, we
determined that future sales from this vendor were uncertain and wrote off the
remaining prepaid balance of approximately $210,000.
17
COST OF SERVICES
Cost of services consists principally of salaries and benefits for our
customer technical support staff, which provides services under maintenance
contracts, and for our training and consulting staff, as well as third party
consulting fees and the cost of materials and facilities used in training
customers. Cost of services decreased 3% to $8.7 million, or 40% of services
revenue, in 2000 compared to $8.9 million, or 53% of services revenue, in 1999.
The decrease in cost of services is primarily due to the expansion of our
consulting division by hiring more in house consultants rather than using third
party consultants to assist in testing solution implementations. The cost of
third party consultants is generally higher than the cost of internal resources;
thus, we spent less in 2000 as compared to 1999. Additionally, our investment in
Northern Ireland technical support center has proven to be successful. We
currently provide all technical support services through our global technical
support center in Belfast, Northern Ireland. The number of the support staff in
Belfast has grown from 12 to 29 over the past year. While the overall cost of
technical support increased in 2000 due to increased staff and operating costs
in Belfast, the cost would have been higher if the same level of hiring had
occurred in the U.S.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and benefits,
commissions, travel costs and promotional marketing programs. Marketing programs
include advertising, direct mail programs, seminars and trade shows. Sales and
marketing expenses increased 20% to $35.5 million, or 61% of total revenue, in
2000 compared to $29.5 million, or 63% of total revenue, in 1999. The increase
in expenses in 2000 as compared to 1999 was primarily due to an increase in
personnel related costs of $2.8 million, reflecting growth in sales and
marketing headcount from 113 to 155, an increase in spending on marketing
programs of $1.2 million and increase in facilities and related costs for sales
and marketing of $800,000. Segue expects sales and marketing expenses to
increase in absolute dollars as total revenue increases, but such expenses may
vary as a percentage of revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and benefits
and facility costs. To date, all of Segue's internal costs for research and
development have been charged to operations as incurred since amounts of
software development costs qualifying for capitalization have been
insignificant. Research and development expenses decreased 5% to $9.7 million,
or 17% of total revenue, in 2000 compared to $10.2 million, or 22% of total
revenue, in 1999. During 2000, as part of the management cost saving strategy,
we shifted part of the research workforce from our Californian lab to our
Austrian lab. Although the net headcount increased by 10, we managed to decrease
the overall operating expenses because of the lower wage rates and overhead in
Austria.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
benefits for executive, finance, information technology, human resource and
administrative personnel, professional fees, system support costs and other
general corporate expenses. General and administrative expenses increased 27% to
$9.8 million, or 17% of total revenue, in 2000 compared to $7.8 million, or 17%
of total revenue, in 1999. Included in the 2000 general and administrative
expenses is $750,000 related to Segue's portion of the settlement of certain
lawsuits. These settlements were approximately $150,000 for the shareholder
lawsuits, $550,000 for the complaint brought by Charles White, Julia Miller and
the Charles White and Julia Miller 1995 Trust, and $50,000 for other matters.
Segue's insurance carriers will pay the balance of the lawsuits settlements. The
balance of the increase in absolute dollars in
18
general and administrative expenses is partly attributable to increased
headcount and related compensation, increased consulting, legal and accounting
expenses.
AMORTIZATION OF GOODWILL
Goodwill resulted from Segue's acquisition of SQLBench in December 1997 and
is being amortized on a straight-line basis over five years. In 2000,
amortization expenses remained the same as in 1999 at $1.5 million, which
represented 2.6% of total revenue in 2000, as compared to 3.2% in 1999.
NON-RECURRING AND OTHER CHARGES
In 2000, there were no non-recurring and other charges.
During the second quarter of 1999, we restructured our product development
operations and delayed the introduction of the Eventus product, SilkControl.
These activities were aimed at reducing our costs associated with the
development of that product and enhancing our sales force's ability to focus on
other products. The restructuring resulted in the consolidation of four
development labs into three and included the termination of fifteen employees
associated with the development of the Eventus product. Additionally, during the
second quarter of 1999 we shifted our sales strategy away from creating and
managing a large network of resellers towards building deeper relationships with
a few large system integrators. This revised strategy resulted in the
termination of seven employees who had focused sales efforts on these channel
resellers. We also terminated the employment of two senior vice presidents
during the second quarter of 1999, each of whom has been replaced. Associated
with all the events noted above, Segue recorded during the second quarter of
1999 non-recurring and other charges of approximately $1.5 million, of which
$1.0 million related exclusively to severance and other employee-related costs
associated with restructuring, and $481,000 (including a noncash compensation
charge of approximately $118,000), which related to severance of the two senior
vice presidents. As of December 31, 1999, we had made payments of approximately
$882,000 related to the restructuring costs. During the first half of 2000, we
paid the remaining restructuring balance of approximately $131,000.
During the first quarter of 1999, we executed a restructuring plan to
consolidate our marketing, product development and administrative operations in
order to achieve cost efficiencies through the elimination of redundant
functions. We realigned our marketing and product development operations to
redirect our focus on our strongest product lines and better integrate the
efforts of our product development teams. As a result, Segue recognized a
non-recurring charge of approximately $1.0 million during the first quarter of
1999. This restructuring charge included approximately $830,000 for severance
and other employee-related costs for the termination of ten employees and
approximately $190,000 for facility-related costs, including the accrual of
estimated lease obligations associated with the closure of excess office
facilities. As of December 31, 1999, we had made payments of approximately
$700,000 related to these costs, and the related restructuring accrual balance
was approximately $300,000. We paid off the $300,000 restructuring cost balance
during the first half of 2000. At the time of the restructuring action, we
expected to realize a reduction in recurring costs of approximately
$1.5 million annually as a result of the restructuring action. However, there
can be no assurance that such benefits will be realized.
OTHER INCOME (EXPENSE)
Interest income from cash, cash equivalents and short-term investments
amounted to $1.1 million and $1.2 million for the years ended December 31, 2000
and 1999, respectively. The decrease in interest income is related to the
decrease in the average amount of invested funds.
19
Interest expense amounted to $86,000 and $289,000 for the years ended
December 31, 2000 and 1999, respectively. Interest expense decreased because of
a lower balance outstanding on notes payable in 2000 as compared to 1999.
PROVISION FOR INCOME TAXES
Segue recorded a provision for foreign and state income taxes of $221,000
and $174,000 for the years ended December 31, 2000 and 1999, respectively. There
was no tax benefit for losses generated in the U.S. during 2000 and 1999 due to
the uncertainty of realizing such benefits.
Management has evaluated the positive and negative evidence impacting the
realizability of its deferred tax assets. Based on the weight of the available
evidence, it is more likely than not that all of the deferred tax assets will
not be realized and, accordingly, the deferred tax assets have been fully
reserved. Management re-evaluates the positive and negative evidence on a
quarterly basis.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
SOFTWARE REVENUE
Software revenue increased 12% to $29.4 million in 1999 from $26.2 million
in 1998. The increase is primarily the result of increased sales force
productivity, resulting in increased unit shipments and greater market
penetration into the eBusiness marketplace. These increased unit shipments were
due to continued demand for Segue products from existing customers and due to
first-time buyers; the introduction of new and upgraded products; and increased
market acceptance of the families of products including web application testing
and load testing products. International product sales accounted for 12% and 16%
of total Segue's product sales in 1999 and 1998, respectively. The slightly
decreased international sales were primarily due to the shifting of sales
strategy from distributor to direct sales.
Total eBusiness software revenue represented 96% and 61% of total software
revenue in 1999 and 1998, respectively. Segue client/server products, our
historical core product line, represented 4% and 39% of the total software
revenue for the years ended December 31, 1999 and 1998, respectively. The
increase in eBusiness software revenue from year to year was due to our
increased focus on the e-commerce testing market and the introduction of our new
and enhanced Silk family products such as SilkMonitor, SilkObserver and
SilkPilot.
The rate of continued software revenue growth depends upon our ability to
successfully generate and fill current software license orders, attract and
retain skilled personnel and deliver timely new products and enhancements.
Performance could also be affected by the market acceptance of our new products:
SilkPilot, SilkMeter and SilkObserver.
SERVICES REVENUE
Services revenue increased 16% to $17 million in 1999 from $14.6 million in
1998. The increase in service revenue is a result of the growth in our installed
customer base and the increased training and consulting services performed for
those customers. Maintenance revenue increased 24% to $8.9 million in 1999
compared to $7.2 million in 1998. Training and consulting revenue increased 9%
to $8.1 million in 1999 compared to $7.4 million in 1998.
The moderate increase in training and consulting revenue is primarily due to
fact that we completed more year 2000 related projects during 1999 as compared
to 1998. The increase in recognized maintenance revenue was driven largely by
incremental additional software licenses sold over the past 12 months.
20
COST OF SOFTWARE
Cost of Software decreased 36% to $2.8 million, or 9% of software revenue,
in 1999 compared to $4.3 million, or 16% of software revenue, in 1998. The
amortization of the completed technology included in cost of software for 1999
and 1998 was $987,000 and $988,000, respectively.
The decrease in cost of software is partly due to the 1998 non-recurring
charge of $667,000 to write-off of an NRE (non-recurring engineering) fee and
prepaid royalties. There were no similar charges in 1999. In addition, cost of
software is lower in 1999 as a result of Segue's continuing effort to increase
sales of non-royalty-bearing products and eliminate sales of royalty bearing
products.
In December 1998, we entered into a five-year agreement with a vendor which
provides for future royalty payments to the vendor of 10% of net revenues
achieved on sales of Segue products to the vendor's customer base. Under the
terms of the agreement, we paid a guaranteed, non-refundable minimum royalty of
$650,000 in December 1998. As of December 31, 1999, other current assets
included approximately $220,000 and other long-term assets included
approximately $210,000 related to the guaranteed royalties. Future royalty
expense will be recognized as cost of software based upon qualified sales of the
Segue's products. To the extent that revenue from related products does not
support the guaranteed royalties described above, we could be required to
accelerate amortization of these prepaid royalties. The amortization of the
prepaid royalties may cause the cost of software to increase as a percentage of
revenue in the future.
COST OF SERVICES
Cost of services increased 46% to $8.9 million, or 53% of services revenue,
in 1999 compared to $6.1 million, or 42% of services revenue, in 1998.
The increase in cost of services is primarily due to our utilization of
third party consultants to assist in testing solution implementations. The cost
of third party consultants is generally higher than the cost of internal
resources. The increases in amount and as a percentage of service revenue are
also the result of start up costs incurred in the first six months of 1999
associated with the staffing and training for our Northern Ireland technical
support center, which began operations in July 1999, as well as the operating
expenses of this support center during 1999. Headcount in the training and
consulting and technical support groups increased 45% from December 31, 1998 to
December 31, 1999. We expect to continue to hire employees in the services group
in order to generate and support worldwide services revenue and to provide
ongoing quality customer support to our increasing installed base of customers.
SALES AND MARKETING
Sales and marketing expenses increased 42% to $29.5 million, or 63% of total
revenue, in 1999 compared to $20.8 million, or 51% of total revenue, in 1998.
The principal reasons for the absolute dollar increase in sales and marketing
expenses were increased headcount, increases in commissions as a result of
higher revenue levels, higher commission rates used in commission plans and
increases in related travel costs.
Segue expects to continue the growth of its worldwide sales and marketing
organization during 2000. The continued growth depends upon our ability to
attract and retain highly skilled technical, managerial and sales personnel.
There can be no assurance that related increased expenditures would result in
increased revenue or improvement in the effectiveness of our sales organization.
21
RESEARCH AND DEVELOPMENT
Research and development expenses increased 19% to $10.2 million, or 22% of
total revenue, in 1999 compared to $8.6 million, or 21% of total revenue, in
1998. The increase in absolute dollars in research and development expenses is
mainly attributable to the increased headcount.
Segue intends to continue to make significant investments in research and
development to develop new products and to expand the capabilities of its web
application testing products.
During 1999, Segue introduced several new products, including SilkMonitor,
which provides monitoring and reporting of web, application and database
servers; SilkPilot, a CORBA-based distributed object testing product; and
SilkObserver which provides object monitoring and diagnostic capabilities for
eBusiness applications.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 72% to $7.8 million, or 17% of
total revenue, in 1999 compared to $4.5 million, or 11% of total revenue, in
1998. The increase in absolute dollars in general and administrative expenses is
partly attributable to increased headcount and related bonuses, increased
facility costs for our new office location in Lexington, Massachusetts from
August 1998 and increased consulting, legal and accounting expenses. We
anticipate that general and administrative expenses will increase in 2000 to
support our expanding business.
AMORTIZATION OF GOODWILL
Goodwill resulted from Segue's acquisition of SQLBench in December 1997 and
is being amortized on a straight-line basis over five years. In 1999,
amortization expenses remained the same as in 1998 at $1.5 million, which
represents 3.2% of total revenue in 1999, as compared to 3.7% in 1998.
NON-RECURRING AND OTHER CHARGES
During the second quarter of 1999, we restructured our product development
operations and delayed the introduction of the Eventus product, SilkControl.
These activities were aimed at reducing our costs associated with the
development of that product and enhancing our sales force's ability to focus on
other products. The restructuring resulted in the consolidation of four
development labs into three and included the termination of fifteen employees
associated with the development of the Eventus product. Additionally, during the
second quarter of 1999 we shifted our sales strategy away from creating and
managing a large network of resellers towards building deeper relationships with
a few large system integrators. This revised strategy resulted in the
termination of seven employees who focused sales efforts on these channel
resellers. We also terminated the employment of two senior vice presidents
during the second quarter of 1999, each of whom has subsequently been replaced.
Associated with all the events noted above, Segue recorded during the second
quarter of 1999 non-recurring and other charges of approximately $1.5 million,
of which $1.0 million relates exclusively to severance and other
employee-related costs associated with a restructuring, and $481,000 (including
a noncash compensation charge of approximately $118,000), which relates to
severance of two senior vice presidents. As of December 31, 1999, we had made
payments of approximately $882,000 related to the restructuring costs, and the
related restructuring accrual balance was approximately $131,000.
During the first quarter of 1999, we executed a restructuring plan to
consolidate our marketing, product development and administrative operations in
order to achieve cost efficiencies through the elimination of redundant
functions. We realigned our marketing and product development operations to
redirect our focus to our strongest product lines and better integrate the
efforts of our product development teams. As a result, Segue recognized a
non-recurring charge of approximately $1.0 million during the first quarter of
1999. This restructuring charge included approximately $830,000 for
22
severance and other employee-related costs for the termination of ten employees
and approximately $190,000 for facility-related costs, including the accrual of
estimated lease obligations associated with the closure of excess office
facilities. As of December 31, 1999, we had made payments of approximately
$700,000 related to these costs, and the related restructuring accrual balance
was approximately $300,000.
At the time of the restructuring action, we expected to realize a reduction
in recurring costs of approximately $1.5 million annually as a result of the
restructuring action. However, there can be no assurance that these benefits
will be realized.
In the fourth quarter of 1998, the Company recorded a charge of
$1.5 million related to the Eventus and Black & White acquisitions (see Note 10
to the Consolidated Financial Statements). This charge consisted primarily of
investment banking, legal, accounting and other professional fees and related
costs.
OTHER INCOME (EXPENSE)
Interest income from cash, cash equivalents and short-term investments
amounted to $1.2 million and $2.0 million for the years ended December 31, 1999
and 1998, respectively. The decrease in interest income is related to the
decrease in the average amount of invested funds.
Interest expense amounted to $289,000 and $449,000 for the years ended
December 31, 1999 and 1998, respectively. Interest expense decreased because of
a lower balance outstanding on notes payable in 1999 compared to 1998.
PROVISION FOR INCOME TAXES
Segue recorded a provision for foreign and state income taxes of $174,000
and $140,000 for the years ended December 31, 1999 and 1998, respectively. There
was no tax benefit for losses generated in the U.S. during 1999 and 1998 due to
the uncertainty of realizing such benefits.
Management has evaluated the positive and negative evidence impacting the
realizability of its deferred tax assets. Based on the weight of the available
evidence, it is more likely than not that all of the deferred tax assets will
not be realized, and accordingly the deferred tax assets have been fully
reserved. Management re-evaluates the positive and negative evidence on a
quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, our principal sources of liquidity included cash,
cash equivalents and short-term investments totaling $17.2 million.
Our operating activities utilized cash of $1.1 million in 2000, compared to
$8.0 million in 1999. Cash utilized in 2000 primarily reflects net loss adjusted
for depreciation of fixed assets and amortization of goodwill and purchased
research and development in connection with the SQLBench acquisition, as well as
the change in accounts receivable as a result of our revenue growth and change
in accounts payable, offset by increased accrued expenses and deferred revenue.
Our investing activities generated cash of $2.4 million in 2000 as compared
to cash utilized of $3.0 million in 1999. We purchased $2.5 million of property
and equipment in 2000 compared to $4.3 million in 1999. The $1.8 million, or
42%, decrease in fixed assets expenditures as compared to 1999 was the result of
the completion of a new management information system (ERP) implemented in 1999,
as well as the infrastructure costs related to the opening of a technical
support center in Northern Ireland during 1999. Additionally, in 2000 we paid
$883,000 on acquisition related notes payable. The cash used in investing
activities was largely offset by net maturities of short-term investments.
23
Our financing activities provided cash of $660,000 and $2.3 million in 2000
and 1999, respectively, primarily due to the issuance of common stock upon the
exercise of stock options and the issuance of stock under the employee stock
purchase plan. During December 2000, Segue repurchased approximately 145,000
shares of its stock for approximately $600,000.
Our corporate headquarters in Lexington, Massachusetts is currently under a
lease, which expires in October 2007. The annual rental rate is approximately
$2.3 million. On July 1, 2000, we entered into an amendment to our sublease
agreement to rent an additional 5,800 square feet within the headquarters
location, with this additional space, we occupy a total of 73,300 square feet of
office space at the headquarter location. We have the right to terminate the
lease on September 30, 2004 for a fee of approximately $2.3 million.
During 2000, we paid approximately $291,000 and $131,000 related to the 1999
first and second quarter restructuring charges, respectively. We paid
approximately $300,000 of the remaining balance related to the 1999
implementation of a new management information system.
In December 2000, we paid approximately $900,000 for the final payment of
the SQLBench notes issued in connection with the December 1997 acquisition of
SQLBench.
In December 2000, we settled, subject to final approvals, certain lawsuits,
including the suit related to Black & White, and the securities litigation
matter that is referenced in Item 1 of Part II of this Form 10-K and accrued
Segue's portion of the settlement, approximately $750,000. No amounts were paid
on these lawsuits in 2000. As of February 2001, we paid approximately $500,000
of these accruals (see Note 9 to the Company's Consolidated Financial Statements
included in this Form 10-K).
We expanded our Northern Ireland technical support center during 2000 by
adding seventeen technical support engineers. In addition to the increased
headcount, we also renovated the third floor of our Belfast Technical Support
center to accommodate the additional personnel. The estimated total facility
expansion costs were approximately $175,000. As of December 31, 2000, we had
paid approximately $87,000 for leasehold improvement and approximately $70,000
for additional computer equipment located in Northern Ireland.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the development of new software products and enhancements of
existing products, the enhanced presentation of our web site, the possible
opening of additional international offices, and the possible acquisition of
software products or technologies complementary to Segue's business.
Assuming there is no significant change in our business, we believe that
cash, cash equivalents and short-term investments as well as cash flows from
operations will be sufficient to meet our working capital and debt requirements
for at least the next twelve months. In the event Segue requires additional
financing, we believe we would be able to obtain such financing; however, there
can be no assurance that we would be successful in doing so, or that we could do
so on terms favorable to Segue.
To date, inflation has not had a material impact on our financial results.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to many uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995. The Company's
future results may differ materially from its current results and actual results
could differ materially from those projected in the forward-looking statements
as a result of certain risk factors, including but not limited to those set
forth below, other one-time events and other important factors disclosed
previously and from time to time in Segue's other filings with the SEC.
24
OUR QUARTERLY RESULTS MAY FLUCTUATE. Segue's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. If our quarterly revenue or operating results fall below the
expectations of investors or public market analysts, the price of its common
stock could fall substantially. Our quarterly revenue may fluctuate
significantly for several reasons, including: the timing and success of
introductions of our new products or product enhancements or those of our
competitors; uncertainty created by changes in the market, including in
particular the dot-com eBusiness market which may affect the ability of
customers to order our products or to pay for them; difficulty in predicting the
size and timing of individual orders; software bugs or other product quality
problems; competition and pricing; customer order deferrals in anticipation of
new products or product enhancements; increases in operating expenses; ability
to increase sales from enterprise companies; and general economic conditions. A
substantial portion of Segue's operating expenses are related to personnel,
facilities and marketing and sales programs. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on our
expectations of future revenues. If actual revenue levels are below management's
expectations for a certain quarter, results of operations are likely to be
adversely affected. Furthermore, Segue has often recognized a substantial
portion of its product revenues in the last month of a quarter, with these
revenues frequently concentrated in the last weeks or days of a quarter. As a
result, product revenues in any quarter are substantially dependent on orders
booked and shipped in the latter part of that quarter and revenues from any
future quarter are not predictable with any significant degree of accuracy.
Segue typically does not experience order backlog. For these reasons, Segue
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
WE MAY NOT BE PROFITABLE IN THE FUTURE. Since Segue began operations, it
has generally experienced losses. Losses have resulted in an accumulated deficit
of approximately $35.7 million as of December 31, 2000. Segue had net income of
$144,000 in 1996; a net loss of $2.5 million in 1997, which includes a charge of
$117,000 for purchased research and development in process and $718,000 for
severance charges; a net loss of $5.1 million in 1998, which includes a charge
of $1.5 million related to our acquisitions of Eventus and Black & White, and a
charge of $667,000 related to write-offs of an NRE fee and guaranteed royalties;
a net loss of $15.9 million in 1999, which includes $2.0 million for
restructuring costs, $481,000 for severance of senior executives; and a net loss
of $8.6 million for the year ended December 31, 2000. In the fourth quarter of
2000, we incurred $750,000 for various litigation settlement costs, which we
charged to general and administrative expenses. Except for the third quarter of
2000, the Company has achieved sequential revenue growth in the past two years,
but continued growth at the same rate may not be sustained, and is not
necessarily indicative of future operating results. Failure to achieve
profitability may adversely affect the market price of Segue's common stock.
SEGUE MAY NOT BE SUCCESSFUL IN GENERATING SUBSTANTIAL REVENUE FROM
ENTERPRISE SALES TO LARGER MORE ESTABLISHED COMPANIES. Historically, we have
derived the overwhelming percentage of our product revenue from the sale of our
products to dot-com companies. In the fourth quarter of 2000 those sales were
negligible. We reorganized our sales force in 2000 to target larger enterprise
transactions with the more established companies. Three area Vice-Presidents
report directly to the Chief Executive Officer and outside sales representatives
now focus on these enterprise transactions. In addition, a full-time experienced
General Counsel was added to the senior staff to stream line the licensing
process and close these bigger opportunities. While we have experienced success
in selling to this market, there is no assurance that Segue can continue to
close these transactions at a rate sufficient to generate substantial increases
in revenue. These larger transactions entail a greater closing risk since these
are often complex and highly competitive, requiring more resources per
transaction than with historically smaller clients. The sales force must also
adapt successfully to this type of selling. If Segue is unsuccessful in closing
these larger deals, our financial performance could be adversely affected.
25
SEGUE'S NEW STRATEGIC ALLIANCE AND PARTNER PROGRAMS MAY NOT BE SUCCESSFUL IN
INCREASING PRODUCT REVENUES. In an effort to augment the product revenue
derived from the efforts of the direct sales force, we organized a strategic
alliance group to develop successful business relationships with companies that
have the ability to generate for us significant product revenue from the sale
and use of our software products or the ability to deliver services in a hosted
service environment. Traditionally, Segue's revenue from strategic alliances has
been modest and there is no assurance that these current efforts will be
successful. In parallel, with this focus on strategic alliances, we have adopted
a new approach to our partner program and in particular a new partner revenue
sharing model, which is designed both to increase product revenue as well as
service revenue. The strategic alliance and partner markets are highly
competitive and uncertain. Should Segue fail to generate substantial revenue
from its strategic alliance and partner programs, the financial results and
stock price could be adversely affected.
SELLING PRODUCTS AND SERVICES THROUGH ALLIANCES AND PARTNERSHIPS MAY LIMIT
OUR CONTROL AND INTERACTION WITH END USERS OF OUR PRODUCTS. As a result, our
ability to forecast sales accurately, evaluate customer satisfaction and
recognize emerging customer requirements may be limited. Our ability to develop
and maintain customer goodwill could also be affected. Finally, we will have to
resolve potential conflicts among our sales force and business partners in order
to make the partner program successful.
WE MAY HAVE DIFFICULTY MANAGING ORGANIZATIONAL CHANGES. During the past
year Segue has reorganized its sales force, appointed new leaders in its support
services, consulting, and product development areas, created a new strategic
alliance group, appointed a new head of its channel partner program, and added a
General Counsel. The success of these organizational changes is uncertain and
further change could disrupt the operations.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH OUR PAST ACQUISITIONS AND FUTURE
ACQUISITIONS. Our product offerings and customer base has increased due in part
to prior acquisitions. We may do future acquisitions to enhance further our
product lines. Our prior acquisitions or any future acquisition may not produce
the revenue, earnings or business synergies that we had anticipated, and an
acquired product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired companies
into our existing business may also result in unforeseen difficulties.
Acquisitions may require significant financial resources that we might otherwise
allocate to other activities, including the ongoing development or expansion of
our existing operations. If Segue pursues a future acquisition, our management
could spend a significant amount of time and effort in identifying and
completing the acquisition. To pay for a future acquisition, we might use
capital stock or cash. Alternatively, we might borrow money from a bank or other
lender. If we use capital stock as we did with our past acquisitions, our
stockholders would experience dilution of their ownership interests. If we use
cash or debt financing, our financial liquidity will be reduced.
SEGUE FACES SIGNIFICANT COMPETITION FROM OTHER SOFTWARE COMPANIES. The
market for web-based software quality management and testing tools is new and
evolving, intensely competitive and subject to rapid technological change. We
expect competition to intensify in the future. Segue currently encounters
competition from a number of public and private companies, including Mercury
Interactive Corporation, Rational Software Corporation and Compuware
Corporation. Many of our current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, and
significantly greater financial, technical and marketing resources than we do
and, therefore, may be able to respond more quickly to new or changing
opportunities, technologies, standards or customer requirements or may be able
to devote greater resources to the promotion and sale of their products than we
can. An increase in competition could result in price reductions and loss of
market share. Such competition and any resulting reduction in profitability
could have a material adverse effect on our business, operating results and
financial condition.
26
SEGUE'S BUSINESS COULD BE ADVERSELY AFFECTED IF ITS PRODUCTS CONTAIN
ERRORS. Software products as complex as ours may contain undetected errors or
"bugs" which result in product failures. The occurrence of errors could result
in loss of or delay in revenue, loss of market share, failure to achieve market
acceptance, diversion of development resources, significant repair and
replacement costs, injury to our reputation, or damage to our efforts to build
brand awareness, any of which could have a material adverse effect on our
business, operating results and financial condition.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO RESPOND RAPIDLY AND
EFFECTIVELY TO TECHNOLOGICAL AND OTHER MARKET CHANGES. The nature of the
web-based automated software testing and eBusiness testing markets in which we
compete is characterized by rapidly changing technology, rapidly evolving
customer needs and desires, changes in industry standards and practices and
frequent releases of new product or enhancements by competitors. To be
competitive, Segue must develop and introduce product enhancements and new
products that address the increasingly sophisticated and varied needs of our
existing and potential customers. Failure to develop and introduce new products
and enhancements successfully and on a timely basis, could have a material
adverse effect on our business, operating results and financial condition. Over
ninety percent (90%) of Segue's product revenue in 2000 was generated from its
SilkPerformer and SilkTest products. We must continue to grow sales of these
products, and must also introduce new products and solutions, thereby reducing
the risk of any undue reliance on current products for future revenues. The
development of technologies that result in new products or enhancements requires
significant expenditures and utilization of resources. We may not be successful
in developing such technologies or may not be able to keep pace with
technological developments. If any of our newly developed products or product
enhancements fail to be accepted by our existing and potential customers, our
business may be materially adversely affected.
CERTAIN LAWSUITS HAVE BEEN FILED AGAINST SEGUE. On or about April 27, 1999,
a putative class action complaint was filed in the United States District Court
for the District of Massachusetts against Segue, its Chief Executive Officer and
a former Chief Financial Officer of Segue, captioned NATHAN RICE V. SEGUE
SOFTWARE, INC., ET AL., CIVIL NO. 99-CV-10891-RGS. The class action complaint
alleged the defendants violated the federal securities laws by making material
misrepresentations and omissions in certain public disclosures during the period
beginning on October 13, 1998 through April 9, 1999, inclusive. The public
disclosures relate to, among other things, Segue's past and future financial
performance and results. On or about May 3, 1999, another similar putative class
action complaint was filed against Segue, its Chief Executive Officer and a
former Chief Financial Officer of Segue in the United States District Court for
the District of Massachusetts, captioned ANTHONY MOUMOURIS V. SEGUE
SOFTWARE, INC., ET AL., CIVIL NO. 99-CV-10933RGS. These cases were consolidated
under the caption IN RE SEGUE SOFTWARE, INC. SECURITIES LITIGATION, CIVIL
NO. 99-CV-10891-RGS and the plaintiffs filed a consolidated amended complaint on
September 27, 1999 alleging a putative class period of July 14, 1998 through
April 9, 1999, inclusive. After the court granted Segue's motion to dismiss and
pending appeal of this order, Segue and the plaintiffs agreed to settle this
matter. The settlement must be approved by the trial court. After the
contribution by insurance carrier, the settlement, if approved by the court,
will not have a materially adverse effect on Segue's financial results. If the
settlement is not approved by the trial court, there is a risk the plaintiffs
will proceed with their appeal and succeed in obtaining a reversal of the
district court's dismissal of this matter, which could expose Segue to a claim
for damages in an amount which the plaintiffs have not yet specified but which
could, if successful, have a material adverse effect on Segue's financial
results (see Note 9 to the Company's Consolidated Financial Statements included
in this Form 10-K).
Various other claims, charges and litigation have been asserted or commenced
against Segue arising from or related to contractual or employee relations.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of Segue.
27
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR
MARKET. Qualified personnel are in great demand throughout the software
industry. Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled employees, particularly sales and marketing
personnel, software engineers and other senior personnel. The failure to attract
and retain the highly skilled personnel that are integral to our direct sales,
product development, service and support teams may limit the rate at which we
can generate sales and develop new products or product enhancements. This could
have a material adverse effect on our business, operating results and financial
condition.
WE FACE MANY RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES. We
derived approximately 16% of total product software sales from international
customers in 2000. The international market for software products is highly
competitive and we expect to face substantial competition in this market from
established and emerging companies. We intend to expand our sales in Asia and we
may not be successful. Segue faces many risks associated with international
business activities including currency fluctuations, imposition of government
controls, export license requirements, restrictions on the export of critical
technology, political and economic instability, tailoring of products to local
requirements, trade restrictions, changes in tariffs and taxes, difficulties in
staffing and managing international operations, longer accounts receivable
payment cycles and the burdens of complying with a wide variety of foreign laws
and regulations. To the extent we are unable to continue to expand international
sales in a timely and cost-effective manner, our business could be materially
adversely affected.
SEGUE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. In selling its
products, Segue relies primarily on "shrink wrap" licenses that contain, among
other things, provisions protecting against the unauthorized use, copying and
transfer of our software and limiting Segue's exposure to potential product
liability claims. However, these licenses are not signed by the licensees and
the provisions of these licenses, including the provisions limiting Segue's
exposure to liability claims, may therefore be unenforceable under the laws of
certain jurisdictions. Although we maintain general liability insurance,
including coverage for errors and omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims.
SEGUE'S SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR SOFTWARE AND OTHER
PROPRIETARY TECHNOLOGY. The unauthorized reproduction or other misappropriation
of our proprietary technology could enable third parties to benefit from Segue's
technology without paying us for it. This could have a material adverse effect
on our business, operating results and financial condition. Although we have
taken steps to protect our proprietary technology, these efforts may be
inadequate. We currently rely on a combination of patent, trademark, copyright
and trade secret laws and contractual provisions to protect our proprietary
rights in our products. Currently, we have three issued patents and a fourth
pending. There can be no assurance that these patents would be upheld if
challenged. Moreover, the laws of other countries in which we market our
products may afford little or no effective protection of our intellectual
property. If we resort to legal proceedings to enforce our intellectual property
rights or protect our trade secrets, the proceedings could be burdensome and
expensive and could involve a high degree of risk. If we were to discover that
any of Segue products violated third party proprietary rights, there can be no
assurance that we would be able to obtain licenses on commercially reasonable
terms to continue licensing our software without substantial reengineering or
that any effort to undertake such reengineering would be successful. Any claim
of infringement could cause Segue to incur substantial costs defending against
the claim, even if the claim is invalid, and could distract management resources
from our business. Furthermore, a party making such a claim could secure a
judgment that requires us to pay substantial damages or result in an injunction.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
discussed in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK. Segue is exposed to market risk from changes in
interest rates primarily through its investing and borrowing activities. In
addition, our ability to finance future acquisition transactions may be impacted
if we are unable to obtain appropriate financing at acceptable rates. Our
investing strategy to manage interest rate exposure is to invest in short-term,
highly secure and liquid investments. We maintain a portfolio of highly liquid
cash equivalents and short-term investments (primarily in high-grade corporate
commercial paper). As of December 31, 2000, the fair value of our short-term
investments approximated market value.
FOREIGN CURRENCY RISK. Segue faces exposure to movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse effect on our business,
financial condition and results of operations. We do not use derivative
financial instruments or other financial instruments to hedge economic exposures
or for trading. Historically, our primary exposures have been related to the
operations of our foreign subsidiaries. As of December 31, 2000, the total
impact of foreign currency changes was $391,000. The introduction of the Euro as
a common currency for most members of the European monetary union took place in
our fiscal year of 1999. As of December 31, 2000, the impact of Euro has not
been significant to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required pursuant to this Item 8 are presented
beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item 9 was previously reported in a
current report on Form 8-K filed with the SEC on February 8, 2000. Such filing
is incorporated herein by reference.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will furnish to the SEC a definitive Proxy Statement (the "Proxy
Statement") not later than 120 days after the close of the fiscal year ended
December 31, 2000. The information required by this Item 10 concerning Segue's
directors and officers is incorporated by reference to the information under the
heading, "Election of Directors--Information Regarding the Nominees and
Executive Officers" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the
Proxy Statement under the heading, "Compensation of Directors and Executive
Officers."
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The information required by this Item 12 is incorporated by reference to the
Proxy Statement under the heading, "Security Ownership of Management and Certain
Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
Proxy Statement under the heading "Directors and Executive Officers."
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following financial statements of Segue
Software, Inc. are filed as a part of this report:
PAGE
--------
Table of Contents........................................... F-1
Reports of Independent Certified Public Accountants......... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
2. Financial Statement Schedules. All schedules have been omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits. Documents listed below, except for documents identified by
footnotes, are not being filed as exhibits herewith. Documents identified by
footnotes are being filed herewith and, pursuant to Rule 12b-32 of the
General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Act") reference is made to such
documents as previously filed as exhibits with the Commission. The Company's
file number under the Act is 0-27794.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- ------------------------------------------------------------
3.1 (1) Restated Certificate of Incorporation (Exhibit 3.2 of
Registration Statement on Form S-1 (File No. 333-1488))
3.2 (1) By-Laws (Exhibit 3.3 of Registration Statement on Form S-1
(File No. 333-1488))
4.1 (1) Specimen Certificate representing the Common Stock
(Exhibit 4.2 of Registration Statement on Form S-1 (File
No. 333-1488))
10.1 (1) Segue Software, Inc. 1996 Amended and Restated Incentive and
Non-Qualified Stock Option Plan
10.2 (1) Segue Software, Inc. 1996 Employee Stock Purchase Plan
10.3 (1) Form of Shareholder Rights Agreement, dated as of
February 8, 1996, entered into between the Registrant and
certain of its stockholders (Exhibit 10.9 of Registration
Statement on Form S-1 (File No. 333-1488))
10.4 (1) Form of Indemnification Agreement between the Registrant and
its directors and officers (Exhibit 10.10 of Registration
Statement on Form S-1 (File No.333-1488))
10.5 (2) Amendment to Segue Software, Inc. 1996 Amended and Restated
Incentive and Non-Qualified Stock Option and Grant Plan
10.6 (3) Agreement and Plan of Merger by and among the Registrant,
SGE Merger Corp. and SQL Bench International, Inc. and the
Stockholders of SQLBench International Inc, dated as of
December 30, 1997
10.7 (3) Asset Purchase Agreement by and among the Registrant,
ARC-Dr. Ambichl & Dr. Reindl Communication GmbH and the
Stockholders of ARC-Dr. Ambichl & Dr. Reindl Communication
GmbH dated as of December 30, 1997
10.8 (3) Segue Software, Inc. Special Termination and Vesting Plan
adopted February 5, 1997
10.9 (4) Sublease Agreement dated March 31, 1998 by and between
MediaOne of Delaware, Inc. and the Registrant
31
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- ------------------------------------------------------------
10.10 (5) Second Amendment to Segue Software, Inc. 1996 Amended and
Restated Incentive and Non-Qualified Stock Option Plan.
10.11 (5) Amendment to Segue Software, Inc. 1996 Employee Stock
Purchase Plan
10.12 (6) 1998 Employee Stock Option Plan
10.13 (7) Agreement and Plan of Merger by and among the Registrant,
SSI Merger Corp. and Eventus Software, Inc. and the
Stockholders of Eventus Software, Inc. dated as of
December 3, 1998
10.14 (8) Agreement and Plan of Merger by and among the Registrant,
SBW Merger Corp. and Black & White Software, Inc. and the
Stockholders of Black & White dated as of December 31, 1998
10.15 (9) Amendment to Segue Software 1998 Employee Stock Option Plan,
as of December 17, 1999
10.16 (9) Lease Agreement dated November 5, 1999 by and between
Albright Properties and the Registrant
10.17 (10) Third Amendment to Segue Software, Inc. 1996 Amended and
Restated Incentive and Non-Qualified Stock Option Plan
10.18 (10) Second Amendment to Segue Software, Inc. 1996 Employee Stock
Purchase Plan
*10.19 Second Amendment to Sublease Agreement dated June 27, 2000
between Sublandlord, Media One of Delaware, Inc. and the
Registrant
*10.20 Third Amendment to Sublease Agreement dated February 28,
2001 between Sublandlord, Media One of Delaware, Inc. and
the Registrant
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Grant Thornton LLP
*23.2 Consent of PricewaterhouseCoopers LLP
- --------------------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, as amended (File No. 333- 1488), which
was declared effective on March 28, 1996.
(2) Incorporated by reference to exhibit 4.3 filed with the Registrant's
Registration Statement on Form S-8 dated August 5, 1997 (File
No. 333-32903).
(3) Incorporated by reference to the exhibits filed with the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1997.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q dated August 14, 1998.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 dated November 23, 1998 (File
No. 333-67739).
(6) Incorporated by reference to exhibit 4.3 filed with the Registrant's
Registration Statement on Form S-8 dated December 17, 1998 (File
No. 333-69105).
(7) Incorporated by reference to the exhibits filed with the Registrant's Report
on Form 8-K dated December 17, 1998.
(8) Incorporated by reference to the exhibits filed with the Registrant's Report
on Form 8-K dated January 14, 1999.
(9) Incorporated by reference to the exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999 (File
No. 000-27794).
(10) Incorporated by reference to the exhibits filed with the Registrant's
Report on Form S-8 dated August 7, 2000.
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the quarter ended
December 31, 2000.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 on this 27th day of
March 2001.
SEGUE SOFTWARE, INC.
By: /s/ STEPHEN B. BUTLER
-----------------------------------------
Stephen B. Butler,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLES DATE
--------- ------ ----
/s/ STEPHEN B. BUTLER President, Chief Executive Officer March 27, 2001
------------------------------------ and Director (Principal Executive
Stephen B. Butler Officer)
/s/ DOUGLAS ZACCARO Chief Financial Officer (Principal March 27, 2001
------------------------------------ Financial Officer and Principal
Douglas Zaccaro Accounting Officer)
/s/ JAMES H. SIMONS Chairman of the Board March 27, 2001
------------------------------------
James H. Simons
/s/ LEONARD E. BAUM Director March 27, 2001
------------------------------------
Leonard E. Baum
/s/ JYOTI PRAKASH Director March 27, 2001
------------------------------------
Jyoti Prakash
/s/ JOHN R. LEVINE Director March 27, 2001
------------------------------------
John R. Levine
/s/ HOWARD L. MORGAN Director March 27, 2001
------------------------------------
Howard L. Morgan
/s/ EDMUND F. KELLY Director March 27, 2001
------------------------------------
Edmund F. Kelly
/s/ ROBERT W. POWERS, JR Director March 27, 2001
------------------------------------
Robert W. Powers, Jr
33
SEGUE SOFTWARE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
--------
Reports of Independent Certified Public Accountants......... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Segue Software, Inc.
We have audited the accompanying consolidated balance sheets of Segue
Software, Inc., as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Segue Software, Inc., as of December 31, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 7, 2001
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Segue Software, Inc.:
In our opinion, the consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1998 (appearing on pages
F-5 through F-7 of this Form 10-K) present fairly, in all material respects, the
results of operations and cash flows of Segue Software, Inc. for the year ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Segue Software, Inc. for any period
subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
April 15, 1999, except as to Note 2
which is as of February 7, 2000
F-3
SEGUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,379 $ 7,429
Short-term investments.................................... 7,839 13,287
Accounts receivable, net of allowances of $665 and $600... 12,176 12,014
Other current assets...................................... 1,710 1,320
-------- --------
Total current assets.................................... 31,104 34,050
Property and equipment, net................................. 5,774 5,734
Completed technology, net................................... -- 989
Goodwill, net............................................... 3,011 4,516
Other assets................................................ 12 277
-------- --------
Total assets............................................ $ 39,901 $ 45,566
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 883
Accounts payable.......................................... 1,525 1,896
Accrued compensation and benefits......................... 2,834 2,881
Accrued royalties......................................... 100 147
Accrued expenses.......................................... 2,912 2,168
Deferred revenue.......................................... 11,480 8,407
-------- --------
Total current liabilities............................... 18,851 16,382
Commitment and contingencies (Note 9)....................... -- --
Stockholders' equity:
Preferred stock, par value $.01 per share; 9,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, par value $.01 per share; 30,000 shares
authorized; 9,472 and 9,290 shares issued and
outstanding............................................. 95 93
Additional paid-in capital................................ 57,684 56,426
Cumulative translation adjustment......................... (391) (161)
Accumulated deficit....................................... (35,738) (27,174)
-------- --------
21,650 29,184
Less treasury stock, at cost, 145 and 0 shares,
respectively.............................................. (600) --
-------- --------
Total stockholders' equity.............................. 21,050 29,184
-------- --------
Total liabilities and stockholders' equity.............. $ 39,901 $ 45,566
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
Software.................................................. $36,606 $ 29,448 $26,249
Services.................................................. 21,550 16,973 14,599
------- -------- -------
Total revenue........................................... 58,156 46,421 40,848
Cost of revenue:
Cost of software.......................................... 2,394 2,762 4,291
Cost of services.......................................... 8,706 8,942 6,119
------- -------- -------
Total cost of revenue................................... 11,100 11,704 10,410
Gross margin................................................ 47,056 34,717 30,438
Operating expenses:
Sales and marketing....................................... 35,452 29,461 20,764
Research and development.................................. 9,683 10,224 8,571
General and administrative................................ 9,820 7,757 4,500
Amortization of goodwill.................................. 1,505 1,506 1,506
Non-recurring and other charges........................... -- 2,499 1,531
------- -------- -------
Total operating expenses................................ 56,460 51,447 36,872
------- -------- -------
Loss from operations........................................ (9,404) (16,730) (6,434)
Interest expense............................................ (86) (289) (449)
Interest income............................................. 1,147 1,245 1,970
------- -------- -------
Loss before provision for income taxes...................... (8,343) (15,774) (4,913)
Provision for income taxes.................................. 221 174 140
------- -------- -------
Net loss.................................................... $(8,564) $(15,948) $(5,053)
======= ======== =======
Net loss per share--basic and diluted....................... $ (0.91) $ (1.76) $ (0.59)
Weighted average shares outstanding--basic and diluted...... 9,393 9,041 8,626
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
COMMON STOCK
-------------------- ADDITIONAL TREASURY UNEARNED ACCUMULATED
SHARES PAR VALUE PAID-IN-CAPITAL STOCK COMPENSATION DEFICIT
-------- --------- --------------- -------- ------------- ------------
Balance at December 31, 1997....... 8,109 $81 $49,649 $ -- $(105) $ (6,173)
Return of capital--B&W........... (15)
Issuance of common stock under
stock plans.................... 753 8 3,088
Issuance of common stock, net of
issuance costs................. 50 -- 989
Stock options cancelled and
amortization of unearned
compensation................... (57) 85
Compensation cost related to
stock options and warrants..... 44
Net loss......................... (5,053)
Foreign currency translation
adjustment...................
Comprehensive loss............... --
----- --- ------- ----- ----- --------
Balance at December 31, 1998....... 8,912 89 53,698 -- (20) (11,226)
Issuance of common stock under
stock plans.................... 378 4 2,623
Compensation cost related to
stock options and warrants..... 118
Stock options cancelled and
amortization of unearned
compensation................... (13) 20
Net loss......................... (15,948)
Foreign currency translation
adjustment...................
Comprehensive loss............... --
----- --- ------- ----- ----- --------
Balance at December 31,1999........ 9,290 93 56,426 -- -- (27,174)
Issuance of common stock under
stock plans.................... 327 2 1,258
Purchase of treasury stock....... (145) (600)
Net loss......................... (8,564)
Foreign currency translation
adjustment...................
Comprehensive loss...............
----- --- ------- ----- ----- --------
Balance at December 31, 2000....... 9,472 $95 $57,684 $(600) $ -- $(35,738)
===== === ======= ===== ===== ========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
LOSS EQUITY
-------------- -------------
Balance at December 31, 1997....... $ -- $ 43,452
Return of capital--B&W........... (15)
Issuance of common stock under
stock plans.................... 3,096
Issuance of common stock, net of
issuance costs................. 989
Stock options cancelled and
amortization of unearned
compensation................... 28
Compensation cost related to
stock options and warrants..... 44
Net loss......................... (5,053)
Foreign currency translation
adjustment................... --
--------
Comprehensive loss............... (5,053)
----- --------
Balance at December 31, 1998....... -- 42,541
Issuance of common stock under
stock plans.................... 2,627
Compensation cost related to
stock options and warrants..... 118
Stock options cancelled and
amortization of unearned
compensation................... 7
Net loss......................... (15,948)
Foreign currency translation
adjustment................... (161) (161)
--------
Comprehensive loss............... (16,109)
----- --------
Balance at December 31,1999........ (161) 29,184
Issuance of common stock under
stock plans.................... 1,260
Purchase of treasury stock....... (600)
Net loss......................... (8,564)
Foreign currency translation
adjustment................... (230) (230)
--------
Comprehensive loss............... (8,794)
----- --------
Balance at December 31, 2000....... $(391) $ 21,050
===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
SEGUE SOFTWARE, INC
CONSOLIDATED STATEMNTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $ (8,564) $(15,948) $ (5,053)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization........................... 4,918 4,667 4,480
Loss on disposal of property and equipment.............. -- -- 4
Noncash compensation charges............................ -- 118 10
Write off of other assets............................... -- -- 378
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................... (235) (3,251) (3,589)
Other current assets.................................. (390) 185 (886)
Other assets.......................................... -- 701 (433)
Accounts payable...................................... (376) (575) 687
Accrued expenses, royalties, compensation and
benefits............................................. 534 2,020 (215)
Deferred revenue...................................... 3,053 4,101 879
-------- -------- --------
Net cash used in operating activities....................... (1,060) (7,982) (3,738)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment....................... (2,520) (4,352) (2,678)
Additions to other assets................................. 318 (16) (735)
Payments of notes payable for acquisition................. (883) (2,649) (883)
Maturities of short-term investments...................... 48,185 35,229 16,200
Purchases of short-term investments....................... (42,737) (31,181) (19,150)
-------- -------- --------
Net cash provided by (used in) investing activities......... 2,363 (2,969) (7,246)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............... 2 7 989
Proceeds from insurance of notes payable.................. -- -- 110
Payments of notes payable................................. -- (334) (493)
Proceeds from exercise of stock options and stock purchase
plan.................................................... 1,258 2,627 3,096
Purchases of treasury stock............................... (600) -- --
Return of capital to shareholders......................... -- -- (15)
-------- -------- --------
Net cash provided by financing activities................... 660 2,300 3,687
-------- -------- --------
Effect of exchange rate changes on cash..................... (13) (16) --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,950 (8,667) (7,297)
Cash and cash equivalents, beginning of period.............. 7,429 16,096 23,393
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 9,379 $ 7,429 $ 16,096
======== ======== ========
Supplemental disclosure of noncash investing and financing
transactions:
Cash paid during the year for interest.................... $ 86 $ 286 $ 419
The accompanying notes are an integral part of the consolidated financial
statement
F-7
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Segue Software, Inc. and its subsidiaries (hereafter, collectively, "Segue"
or the "Company") develop, market and support software products, and provide
related professional services, for the management and testing of eBusiness
applications. The Company's products are used by webmasters, quality assurance
professionals and software developers to improve software quality, reduce
development costs, manage the growing number of application components, and
shorten the time required to develop and deploy these mission critical
applications. The Company's products provide a solution designed to assemble,
model, deploy, monitor and analyze electronic commerce ("eBusiness") systems as
well as to provide automated functional and load testing of applications
deployed on the World Wide Web and on client/server systems.
OPERATING MATTERS
The Company has generally incurred losses since it began operations, which
has resulted in an accumulated deficit of approximately $35.7 million at
December 31, 2000. As a result, the Company has used, and expects to continue to
use, significant amounts of cash, cash equivalents and short-term investments to
fund its operations.
Additional long-term cash requirements, other than normal operating
expenses, are anticipated for the development of new software products and
enhancements of existing products, the potential opening of additional
international offices, and the possible acquisition of software products or
technologies complementary to the Company's business. There are no assurances,
however, that the actions taken or to be taken by the Company will achieve the
above intended objectives.
Management believes that the existing cash, cash equivalents and short-term
investments as well as cash flow from operations will be sufficient to meet
working capital requirements for at least the next twelve months.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
As described in Note 2, in December 1998, the Company acquired Eventus
Software, Inc. ("Eventus") and Black & White Software, Inc. ("B&W"). Both
acquisitions were accounted for using the pooling-of-interests method of
accounting and, accordingly, the historical consolidated financial statements of
the Company prior to the acquisitions presented herein have been restated to
include the financial position, results of operations and cash flows of Eventus
and B&W.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany transactions and balances have
been eliminated in consolidation.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2 requires that revenue allocated to software products,
specified upgrades and enhancements is generally recognized upon delivery of the
related products, upgrades or enhancements. Revenue allocated to post contract
customer support (maintenance) is generally recognized ratably over the term of
the support, and revenue allocated to service elements (training and consulting)
is generally recognized as the services are performed.
F-8
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recognizes revenue from software licenses upon product shipment
and receipt of a signed purchase order or contract, provided that collection is
probable and the other revenue recognition criteria of SOP 97-2 are met. The
Company's products do not require significant modification or customization of
software.
Post contract customer support (maintenance) and service revenue (training
and consulting) which is not yet earned is included in deferred revenue.
Effective March 15, 1999, the Company adopted Statement of Position 98-9
(SOP 98-9), which amends paragraphs 11 and 12 of Statement of Position 97-2.
Under SOP 98-9, the residual method of revenue recognition is used for
multi-element arrangements when the vendor-specific objective evidence (VSOE) of
the fair value does not exist for one of the delivered elements. Under the
residual method, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements.
The Company typically does not grant to its customers a contractual right to
return software products. When approved by management, however, the Company has
accepted returns of certain software products and has provided an allowance for
those specified products. The Company also provides reserves for customer
receivable balances that are considered potentially uncollectible. Included in
accounts receivable allowances are a sales allowance provided for expected
returns and credits and an allowance for bad debts.
The following table sets forth the activity in the Company's allowance for
bad debts and sales returns:
CHARGES TO
BALANCE AT THE GENERAL & OFFSETS TO BALANCE AT
BEGINNING OF ADMINISTRATIVE PRODUCT WRITE-OFFS, THE END OF
YEAR ENDED: THE YEAR EXPENSE REVENUE NET THE YEAR
- ----------- -------------- -------------- ---------- ----------- ----------
December 31, 1998................... $454,000 $203,787 $666,644 $(716,431) $608,000
December 31, 1999................... $608,000 $225,000 $284,000 $(517,000) $600,000
December 31, 2000................... $600,000 $572,874 $(63,442) $(444,432) $665,000
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to operations as incurred.
Software development costs subsequent to the establishment of technological
feasibility are capitalized and amortized to cost of software. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method,
pursuant to which deferred income taxes are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse. Valuation allowances are provided
if, based upon the
F-9
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The Company does not provide for U.S. income taxes on the undistributed
earnings of foreign subsidiaries, which the Company considers to be permanent
investments.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's German subsidiary is the local
currency. Accordingly, all assets and liabilities of this subsidiary are
translated at the current exchange rate at the end of the period and revenues
and costs at average rates in effect during the period. The gains and losses
from translation of the subsidiary's financial statements are recorded directly
into a separate component of stockholder's equity.
The functional currency of all other subsidiaries is the U.S. dollar. Assets
and liabilities for these subsidiaries are translated at year-end exchange rates
and revenue and costs at average rates in effect during the period. The gains
and losses from translation of these subsidiaries' financial statements, which
have not been significant to date, are included in the consolidated statement of
operations.
Except as described below, transaction gains and losses, which have not been
material to date, are included in the consolidated statement of operations. The
Company considers its inter-company investment in its subsidiaries in Ireland
and Austria to be of a long-term nature and therefore accounts for the effect of
transaction gains and losses on these balances in a manner similar to a
translation adjustment by recording the effect directly into a separate
component of stockholders' equity.
NET INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") is based upon the weighted average number
of common shares outstanding during the period. Diluted EPS is based upon the
weighted average number of common and common equivalent shares outstanding
during the period. Common stock equivalent shares are included in the diluted
EPS calculation where the effect of their inclusion would be dilutive. Common
equivalent shares result from the assumed exercise of outstanding stock options
and warrants, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents. Investments with
maturities greater than three months are considered to be short-term
investments. Cash equivalents and short-term investments consist primarily of
commercial paper (approximately $17.2 million at December 31, 2000). The Company
has classified its securities as "available for sale" and reports them at fair
value, with unrealized gains and losses excluded from earnings and reported as
an adjustment to stockholders' equity. As of December 31, 2000 and 1999,
unrealized gains and losses on securities were not material.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives, generally three to five years.
Leasehold improvements are amortized over the shorter of the assets' useful
lives or the term of the related leases. Expenditures for major
F-10
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
improvements that substantially increase the useful lives of assets are
capitalized. Repair and maintenance costs are expensed as incurred.
Upon retirement or sale, the cost of the assets disposed and the related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the determination of net income or loss.
COMPLETED TECHNOLOGY AND GOODWILL
Completed technology is carried at cost less accumulated amortization, which
is being provided on a straight-line basis over a period of three years, its
estimated useful life (see Note 2). Goodwill represents the excess of cost over
the fair value of the net assets of businesses acquired. Goodwill is amortized
using the straight-line method over five years.
LONG LIVED ASSETS
Long-lived assets to be held and used are recorded at cost. Management
reviews long-lived assets, including intangible assets, for impairment whenever
events or changes in circumstances indicate the carrying amount of such assets
is less than the undiscounted expected future cash flows from such assets.
Recoverability of these assets is assessed using a number of factors including
operating results, business plans, budgets, and economic projections and
undiscounted cash flows. In addition, the Company's evaluation considers
non-financial data such as market trends, product development cycles and changes
in management's market emphasis.
CONCENTRATION OF CREDIT RISK
The Company places its excess cash in cash equivalents and short-term
investments, primarily consisting of commercial paper. There are no significant
concentrations in any one issuer of debt securities. The Company places its
cash, cash equivalents and investments with financial institutions with high
credit standing. The Company has not experienced any significant losses on its
cash, cash equivalents and short-term investments to date. The Company believes
credit risk with respect to investments of commercial paper is minimal due to
the duration of such investments, which are generally less than twelve months.
The Company sells its products principally through a worldwide direct sales
force and through distributors outside of the United States to customers in a
broad range of industries. The Company provides credit, in the normal course of
business, to various types and sizes of companies located throughout North
America and Europe and does not require collateral or other security. The
Company maintains reserves for potential credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reported periods. The most significant estimates included in
these financial statements are the valuation of accounts receivable and
long-term assets, including intangibles and deferred tax assets. Actual results
could differ from these estimates.
F-11
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
COMPREHENSIVE LOSS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. To date
the Company's comprehensive income items have consisted exclusively of foreign
translation adjustments. Comprehensive income has been included in the
consolidated statement of Stockholder's Equity for all periods.
SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"), which changes the manner in which public companies report
information about their operating segments. SFAS 131, which is based on the
management approach to segment reporting, requires disclosures about products
and services, major customers, and geographic areas. Information related to
segment reporting is included in Note 11.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
was effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must
be adopted prospectively and retroactive application is not permitted. SFAS
No. 133 requires the Company to record all derivatives on the balance sheet at
fair value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or for forecasted transactions, deferred and
recorded as a component of accumulated other comprehensive income (loss) in
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will immediately be recognized in earnings. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133", which delayed the effective
date. SFAS No. 133 is now effective for fiscal years beginning after June 15,
2000. The Company expects to adopt SFAS No. 133 on January 1, 2001 and does not
believe the effect of adopting SFAS No. 133 will have any material effect on its
consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. This adoption
of SAB 101 did not have a material effect on our results of operations,
financial position or cash flows.
F-12
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS
On December 31, 1998, the Company acquired all of the outstanding capital
stock of B&W in exchange for 224,809 shares of the Company's common stock and
the conversion of all B&W outstanding common stock options into options to
purchase 41,870 shares of the Company's common stock. This acquisition was
accounted for using the pooling-of-interests method of accounting and,
accordingly, the historical consolidated financial statements of the Company
prior to the acquisition presented herein have been restated to reflect the
financial position, results of operations and cash flows of B&W. Founded in 1992
as a California S Corporation, B&W supplied a wide range of products for
application development and productivity enhancement, including tools for
creating object-oriented client/server applications and building applications
with dynamic graphics and visual animation for graphical user interface. During
1998, B&W began to focus its efforts on products that diagnose and monitor
communications between distributed application objects. B&W had approximately 40
employees at the time of the acquisition.
On December 3, 1998, the Company acquired all of the outstanding capital
stock of Eventus in exchange for 312,990 shares of the Company's common stock
and the conversion of all Eventus outstanding common stock options and warrants
into options and warrants to purchase 31,951 shares of the Company's common
stock. This acquisition was accounted for using the pooling-of-interests method
of accounting and, accordingly, the historical consolidated financial statements
of the Company prior to the acquisition presented herein have been restated to
reflect the financial position, results of operations and cash flows of Eventus.
Founded in September 1996 and based in California, Eventus' principal product
manages the assembly and deployment of web applications. Eventus had
approximately 20 employees at the time of the acquisition.
The following information presents certain statement of operations data (in
thousands) of Segue, Eventus and B&W for the period prior to the acquisitions.
YEAR ENDED
DECEMBER 31,
1998
-------------
Revenue:
Segue..................................................... $36,167
Eventus................................................... 789
B&W....................................................... 3,892
-------
Total revenue........................................... $40,848
=======
Net loss:
Segue..................................................... $(3,267)
Eventus................................................... (2,358)
B&W....................................................... 572
-------
Net loss................................................ $(5,053)
=======
Acquisition costs of $1.5 million, consisting primarily of investment
banking, legal, accounting and other professional fees, were charged to
operations in the fourth quarter of 1998. Prior to the mergers, there were no
intercompany transactions between Segue, Eventus, and B&W.
On December 30, 1997, the Company acquired both SQLBench
International, Inc. and ARC--Dr. Ambichl & Dr. Reindl Communication GmbH
(formerly named ARC Dr. Ambichl & Dr. Reindl OEG), privately-held developers of
Web-based load testing technology (hereafter referred to as
F-13
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"SQLBench"). Since the acquisition of each company was contingent upon both
companies being acquired, the transaction was accounted for as a single business
combination using the purchase method of accounting. Accordingly, the operating
results of SQLBench are included in the Company's consolidated financial
statements from the date of acquisition. The combined purchase had an aggregate
consideration of approximately $10.6 million, including transaction costs, and
consisted of approximately $4.4 million in cash paid from the Company's existing
cash balances, $4.4 million in notes payable and the issuance of 144,000
restricted shares of the Company's common stock with a fair value of
$1.5 million. The purchase price was allocated $3.0 million to completed
technology, which was amortized over three years; $117,000 to purchased research
and development in process; and $7.5 million to goodwill, which is being
amortized over five years. The purchased research and development in process had
not reached technological feasibility, had no alternative future use and was
valued using expected future cash flows, discounted for risks and uncertainties
related to the target markets and the completion of the products and reflecting
each project's stage of completion at the acquisition date. Consequently, at the
date of acquisition, the $117,000 allocated to purchased research and
development in process was recorded as a non-recurring charge. As of
December 31, 2000 and 1999, accumulated amortization related to completed
technology was $2,964,000 and $1,975,000 respectively, and accumulated
amortization related to goodwill was $4,517,000 and $3,012,000, respectively.
3. OTHER ASSETS
In March 1998, the Company entered into an agreement with a vendor whereby
the vendor licensed specific software to the Company for purposes of marketing
and distribution. Under the initial terms of the agreement, the Company paid
$780,000 in 1998, which represented a non-refundable, non-recurring engineering
and initial license fee ("NRE") of $480,000 and guaranteed royalties of
$300,000. Under this agreement, an additional $200,000 for guaranteed royalties
was to be paid by September 30, 1998. In October 1998, the parties amended this
agreement to, among other things, remove the Company's obligation to make the
remaining payment for guaranteed royalties (see Note 9). The NRE fee was being
amortized into cost of software revenue on a straight-line basis over its
estimated life of two years, and the royalty expense was being recognized as
cost of software revenue based upon sales of the related products. For the year
ended December 31, 1998, amortization expense and royalty expense related to
this agreement was approximately $180,000 and $10,000, respectively.
Based on minimal sales of the licensed products and management's decision in
the first quarter of 1999 to cease selling the licensed products related to the
above agreement in order to focus efforts on the eBusiness management system
products, the Company wrote off the remaining balances of the NRE ($300,000) and
prepaid royalties ($290,000) as cost of software as of December 31, 1998.
Additionally in the fourth quarter of 1998, the Company wrote off $77,000 of
other prepaid royalties, based on an analysis of their recoverability.
In December 1998, the Company entered into a five-year agreement with a
vendor that provides for future royalty payments to the vendor of 10% of net
revenues achieved on sales of the Company's products to the vendor's customer
base. Under the terms of the agreement, the Company paid a guaranteed,
non-refundable minimum royalty of $650,000 in December 1998. In December 2000,
the Company wrote off the remaining balance of approximately $210,000 on the
prepaid royalty, due to uncertainty of future sales by the vendor. As of
December 31, 2000 and 1999, other current assets included approximately $0 and
$220,000, respectively, and other long-term assets included approximately $0 and
$210,000, respectively, related to the guaranteed royalties. Royalty expense is
F-14
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized as cost of software revenue based upon qualified sales of the
Company's products and amounted to $430,000, $220,000 and $0 for the years ended
December 31, 2000, 1999 and 1998, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31 (in
thousands):
2000 1999
-------- --------
Computer equipment........................................ $10,736 $ 8,764
Office equipment.......................................... 429 403
Furniture and fixtures.................................... 1,456 1,131
Leasehold improvements.................................... 813 660
------- -------
13,434 10,598
Accumulated depreciation and amortization................. (7,660) (5,224)
------- -------
Total................................................... $ 5,774 $ 5,734
======= =======
Depreciation and amortization of property and equipment totaled $2,436000,
$1,964,000, and $1,514,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
5. NOTES PAYABLE
In conjunction with the SQLBench acquisition on December 30, 1997, the
Company issued $4.4 million of notes payable that bore interest at the
designated prime rate. These notes would have become subordinated debt upon the
issuance of qualified Senior Debt, as defined by the note agreements.
Subject to certain acceleration terms set forth below, the notes were to
mature on December 30, 2002. Interest was payable in arrears semi-annually
beginning on June 30, 1998 and on each December 31 and June 30 thereafter. If
the holders of the notes terminated employment with the Company prior to
December 30, 2000, no interest was to be accrued with respect to any period
following such termination. In the event that the note holders were either
(i) employed by the Company as at certain defined dates or (ii) terminated by
the Company without cause or by reason of death or permanent disability,
remaining payments under the notes were to be made on December 30, 2000.
On December 29, 2000, the Company paid the remaining balance of the notes
payable in full.
In February 1997, B&W obtained a $350,000 revolving line of credit
(increased to $500,000 in November 1997) and an $85,000 term note with a bank,
both of which bore interest at the bank's prime rate plus 1.50%. At
December 31, 1998, $334,000 was outstanding under these notes. The notes were
paid in full in January 1999.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company's Certificate of Incorporation authorizes 30 million shares of
$.01 par value common stock and 9 million shares of $.01 par value preferred
stock; 4 million shares of such 9 million shares of preferred stock are
designated as Series A preferred stock.
F-15
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each series of Preferred Stock will have the rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Company's Board of Directors.
STOCK COMPENSATION PLANS
STOCK OPTION PLANS
In June 1998, the Company's 1996 Amended and Restated Incentive and
Non-Qualified Stock Option Plan (the "Option Plan") was amended to increase the
maximum number of shares of common stock available for issuance to 3,250,000
shares. In June 2000, the Option Plan was amended to increase the maximum number
of shares available for issuance under the 1996 Option Plan to 3,700,000, with
provision for an additional increase in shares available for issuance on
January 1, 2001 and on January 2, 2002 of five percent (5%) of the number of
shares of Common Stock of the Company outstanding on each such date. Under the
Option Plan, incentive stock options may be granted to any officer or employee
of the Company, and nonqualified stock options may be granted to any officer,
employee, consultant, director or other agent of the Company.
In November 1998, the Company established the 1998 Employee Stock Option
Plan (the "1998 Option Plan"). On December 17, 1999, the Board of Directors
approved an amendment to increase by 250,000 the number of shares authorized for
issuance under the 1998 Option Plan. The 1998 Option Plan, as amended, provides
for grants of nonqualified options to purchase up to 1,250,000 shares of the
Company's common stock to employees and consultants of the Company.
All options issued under the Option Plan and the 1998 Option Plan are
granted at the fair market value of the stock on the date of grant, become
exercisable at varying rates, generally over three or four years, as determined
by the Board of Directors, and generally expire 10 years from the date of grant.
With the acquisition of Eventus on December 3, 1998, the Company assumed 836
outstanding stock warrants and 31,115 outstanding stock options (adjusted for
the merger exchange ratio of 0.021378 common Eventus shares for each share of
the Company's common stock) representing all of Eventus' obligations under its
existing stock option plan. The assumed stock options and warrants were granted
to employees, directors, and consultants of Eventus at the fair market value of
the Eventus common stock at the date of grant, as established by the Eventus
Board of Directors, and expire 10 years from the date of grant. Vesting was
established by the Eventus Board of Directors and generally occurs over a three
to five year period. As of December 31, 1998, 98,060 shares (adjusted for the
merger exchange ratio) were authorized under the Eventus stock option plan, with
57,348 shares available for future grants. No additional stock options or
warrants will be granted under the Eventus plan.
With the acquisition of B&W on December 31, 1998, the Company assumed 41,870
outstanding stock options (adjusted for the merger exchange ratio of 0.112405
common B&W shares for each share of the Company's common stock) representing all
of B&W's obligations under its existing stock option plan. The assumed stock
options were granted to employees of B&W at the fair market value of the B&W
common stock at the date of grant, as established by the B&W Board of Directors,
and expire 10 years from the date of grant. Vesting was established by the B&W
Board of Directors and generally occurs over a four year period, with 50%
vesting on the second anniversary of the grant date, and 25% vesting on each of
the third and fourth anniversary of the grant dates. As of December 31, 1998,
56,202 shares (adjusted for the merger exchange ratio) were authorized under the
B&W stock option plan,
F-16
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with 14,332 shares available for future grants. No additional stock options will
be granted under the B&W plan.
The following table summarizes activity of the Company's option plans since
December 31, 1997. Information with respect to Eventus and B&W stock options has
been retroactively restated to reflect their merger exchange ratios noted above.
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------------- --------
(IN THOUSANDS)
Outstanding at December 31, 1997...................... 2,472 $ 8.24
Granted........................................... 1,107 $17.40
Exercised......................................... (711) $ 3.88
Cancelled......................................... (468) $12.81
------
Outstanding at December 31, 1998...................... 2,400 $12.87
Granted........................................... 1,601 $ 9.31
Exercised......................................... (320) $ 2.08
Cancelled......................................... (1,193) $14.34
------
Outstanding at December 31, 1999...................... 2,488 $10.68
Granted........................................... 1,718 $ 9.54
Exercised......................................... (80) $11.80
Cancelled......................................... (1,045) $10.61
------
Outstanding at December 31, 2000...................... 3,081 $10.18
------
As of December 31, 2000, 1999, and 1998, options to purchase 1,097,475,
645,800 and 552,000 shares, respectively, were exercisable with weighted average
exercise prices of $10.84, $10.19 and $7.67 per share, respectively. As of
December 31, 2000, approximately 227,000 shares were available for future grants
under the Option Plan and the 1998 Option Plan.
For various price ranges, weighted average information for options
outstanding at December 31, 2000 was as follows:
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING LIFE AVERAGE AVERAGE
EXERCISE PRICES SHARES (IN YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.75 - 6.31 166 7.75 $ 3.86 56 $ 2.93
$ 6.38 - 6.38 182 8.29 $ 6.38 74 $ 6.38
$ 6.50 - 8.90 1,049 9.48 $ 8.05 127 $ 8.13
$ 9.00 - 9.00 365 6.66 $ 9.00 275 $ 9.00
$ 9.25 - 11.75 323 7.59 $10.59 201 $10.34
$11.88 - 13.38 572 8.83 $12.46 152 $12.53
$13.69 - 16.13 216 8.01 $14.57 102 $14.72
$16.69 - 22.25 208 7.72 $19.53 110 $19.61
----- -----
$.075 - $22.25 3,081 8.43 $10.18 1,097 $10.84
===== =====
F-17
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In February 1996, the Company established the Segue Software, Inc. 1996
Employee Stock Purchase Plan (the "ESPP"), that made available 100,000 shares of
the Company's common stock for purchase by eligible employees through payroll
deduction. The shares can be purchased for 85% of the lower of the beginning or
ending fair market value of each six-month segment within the offering period.
Purchases are limited to 10% of an employee's annual compensation. In
June 1998, the ESPP was amended in order to increase the maximum number of
shares of common stock available for issuance from 100,000 to 200,000 shares. In
June 2000, the ESPP was amended in order to increase the maximum number of
shares of common stock available for issuance from 200,000 to 300,000 shares. As
of December 31, 2000, approximately 239,000 shares have been issued under the
ESPP.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123") was issued. SFAS 123
required the Company to elect either expense recognition under SFAS 123 or its
disclosure-only alternative for stock-based employee compensation. The expense
recognition provision encouraged by SFAS 123 requires fair-value based financial
accounting to recognize compensation expense for employee stock compensation
plans. The Company adopted SFAS 123 in 1997 and elected the disclosure-only
alternative. Had compensation costs for the Company's stock and stock option
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the methodology of SFAS 123, the Company's net
loss and net loss per share would have been adjusted to the pro forma amounts
indicated below for the years ended December 31, (in thousands, except per share
data):
2000 1999 1998
-------- -------- --------
Net loss
As reported................................... $ (8,564) $(15,948) $(5,053)
Pro forma..................................... $(13,354) $(19,182) $(7,644)
Net loss per common share--basic and diluted
As reported................................... $ (.91) $ (1.76) $ (0.59)
Pro forma..................................... $ (1.42) $ (2.12) $ (0.89)
For the years ended December 31, 2000, 1999 and 1998, total compensation
cost recognized in pro forma net loss for stock-based employee compensation
awards was $4,790,000, $3,234,000 and $2,591,000, respectively. Since the
SFAS 123 method of accounting has not been applied to options granted prior to
January 1, 1995, the resulting compensation cost may not be representative of
that to be expected in future years.
The weighted average fair value of the stock options granted during 2000,
1999 and 1998 was $7.43, $5.15, and $9.65 per share, respectively. For the
computation in accordance with SFAS 123, the fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 2000,
1999 and 1998, respectively: risk-free interest rate of 6.3%, 5.3%, and 5.0%;
dividend yield of 0%; expected life of five years; and expected volatility of
100%, 60%, and 59%. For the computation in accordance with SFAS 123, the fair
value of the employees' purchase rights under the ESPP is estimated using the
Black-Scholes model with the following assumptions for 2000, 1999, and 1998:
risk-free interest rate of 5.0%, 4.6%, and 5.5%, respectively; dividend yield of
0%; expected life of six months; and expected average volatility of 100%, 108%
and 60%, respectively.
F-18
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options to purchase approximately 3,081,000, 2,488,000 and 2,400,000 shares
of common stock were outstanding for the years ended December 31, 2000, 1999 and
1998, respectively, but were not included in the calculation of diluted net loss
per common share because their inclusion would have been anti-dilutive.
7. EMPLOYEE SAVINGS PLAN
The Company maintains a 401(k) plan under which all U.S. employees may make
contributions to their respective participant accounts. The Company may, at its
discretion, make matching contributions on behalf of its employees. Employees
must have completed two years of service to be eligible for the Company's
contributions. No matching contributions were made during the years ended
December 31, 2000, 1999 or 1998.
8. INCOME TAXES
Loss before income taxes and the components of the income tax provision
(benefit) are as follows for the years ended December 31, (in thousands):
2000 1999 1998
-------- -------- --------
Loss before income taxes:
United States.................................. $(9,213) $(16,359) $(5,107)
Foreign........................................ 871 585 194
------- -------- -------
Total loss before income taxes............. $(8,342) $(15,774) $(4,913)
======= ======== =======
Provision for (benefit from) income taxes:
Current:
Foreign...................................... $ 151 $ 114 $ 71
State........................................ 70 60 69
------- -------- -------
Total current.............................. $ 221 $ 174 $ 140
------- -------- -------
Deferred:
Federal...................................... $(3,333) $ (5,372) $(1,167)
Foreign...................................... 8 (22) (26)
State........................................ (708) (1,244) (192)
Change in valuation allowance................ 4,033 6,638 1,385
------- -------- -------
Total deferred tax provision............... -- -- --
------- -------- -------
Total tax provision........................ $ 221 $ 174 $ 140
======= ======== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-19
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purposes. As of December 31, the components of the net deferred tax asset are as
follows (in thousands):
2000 1999
-------- --------
Gross deferred tax assets:
Net operating losses.................................... $13,778 $10,832
Intangible assets....................................... 2,127 1,468
Accounts receivable..................................... 214 250
Accrued expenses & deferred compensation................ 240 206
Fixed assets............................................ 45 102
Research and experimentation credits.................... 2,235 1,558
------- -------
Total assets.......................................... 18,639 14,416
Valuation allowance....................................... (18,639) (14,416)
------- -------
Net deferred tax asset (liability)........................ $ 0 $ 0
======= =======
Of the changes in the valuation allowance described above approximately
$190,000 relates to tax return deductions attributable to the exercise of
non-qualifying stock options and disqualifying dispositions of incentive stock
options, and are not benefited through income.
As of December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $36.5 million, of which $11.0 million relates to
deductions attributable to the exercise of nonqualified stock options and
disqualifying dispositions of incentive stock options; state net operating loss
carryforwards of approximately $26.3 million, of which at least $4.6 million is
subject to annual limitations on utilization; and $1,680,000 of federal and
$842,000 of state tax credit carryforwards available for income tax purposes.
These carryforwards generally expire in the years 2001 through 2020 and may be
subject to additional annual limitations as a result of changes in the Company's
ownership. The benefits of stock option deductions included in net operating
loss carryforwards will be credited to additional paid-in capital when realized.
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets. Based on the weight of
the available evidence, it is more likely than not that all of the deferred tax
assets will not be realized, and accordingly the deferred tax assets have been
fully reserved. Management re-evaluates the positive and negative evidence on a
quarterly basis.
F-20
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following schedule reconciles the difference between the federal income
tax rate and the effective income tax rate for the years ended December 31 (in
thousands):
2000 1999 1998
-------- -------- --------
U.S. federal statutory tax........................ $(2,912) $(5,423) $(1,670)
S Corporation (income) loss taxed at shareholders'
level (Black & White)........................... -- -- (194)
State tax provision, net.......................... (421) (781) (81)
Foreign rate differential......................... 6 6 4
Federal and state tax credits..................... (678) (622) --
Nondeductible acquisition costs................... -- -- 520
Change in valuation allowance..................... 4,033 6,638 1,385
Amortization of nondeductible goodwill............ 218 218 218
Other............................................. (25) 138 (42)
------- ------- -------
Effective tax..................................... $ 221 $ 174 $ 140
======= ======= =======
9. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On or about April 27, 1999, a putative class action complaint was filed in
the United States District Court for the District of Massachusetts against
Segue, its Chief Executive Officer and a former Chief Financial Officer of
Segue, captioned NATHAN RICE V. SEGUE SOFTWARE, INC., ET AL., Civil
No. 99-CV-10891-RGS. The class action complaint alleged the defendants violated
the federal securities laws by making material misrepresentations and omissions
in certain public disclosures during the period beginning on October 13, 1998
through April 9, 1999, inclusive. The public disclosures relate to, among other
things, Segue's past and future financial performance and results. On or about
May 3, 1999, another similar putative class action complaint was filed against
Segue, its Chief Executive Officer and a former Chief Financial Officer of Segue
in the United States District Court for the District of Massachusetts, captioned
ANTHONY MOUMOURIS V. SEGUE SOFTWARE, INC., ET AL., Civil No. 99-CV-10933RGS.
These cases were consolidated under the caption IN RE SEGUE SOFTWARE, INC.
SECURITIES LITIGATION, Civil No. 99-CV-10891-RGS and the plaintiffs filed a
consolidated amended complaint on September 27, 1999 alleging a putative class
period of July 14, 1998 through April 9, 1999, inclusive. The complaints sought
an unspecified amount of damages. On November 8, 1999 each of the defendants
filed a motion to dismiss the amended complaint for failure to state a cause of
action, and on July 26, 2000, the United States District Court for the District
of Massachusetts granted Segue's Motion to Dismiss the putative securities class
action litigation brought against the above three defendants. The dismissal was
entered "with prejudice." The plaintiffs appealed the decision to the First
Circuit, and in December 2000 while the appeal was still pending, the parties
and Segue's insurers reached an agreement in principle to settle the matter for
an agreed upon amount. This settlement is subject to final approvals. At
December 31, 2000, Segue accrued, as a general and administrative expense,
$150,000 for its share of this lawsuit amount. The balance of the agreed upon
settlement amount is to be paid by Segue's Directors' and Officers' insurance
carriers.
Additionally, on April 7, 2000, a complaint for fraud in the inducement and
breach of contract in connection with the December 31, 1998 acquisition by Segue
of Black & White Software, Inc. was filed in the Delaware Chancery Court against
Segue, its Chief Executive Officer and a former Chief Financial Officer by
Charles White, Julia Miller and the Charles White and Julia Miller 1995 Trust,
the former shareholders of Black & White Software, Inc. The plaintiffs and Segue
settled this matter.
F-21
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segue's insurance carriers have agreed to contribute to this settlement. At
December 31, 2000, Segue accrued, as a general and administrative expense,
$550,000 for its portion of the settlement of this complaint.
In addition to the lawsuits and settlements noted above, Segue accrued
$50,000 at December 31, 2000 for various other matters that were settled.
Various other claims, charges and litigation have been asserted or commenced
against Segue arising from or related to contractual or employee relations.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of Segue.
LEASE COMMITMENTS
In August 1998, the Company moved its corporate headquarters to Lexington,
Massachusetts under a non-cancelable operating lease that expires in 2007. The
Company has an obligation to provide a security deposit of up to approximately
$2.2 million if the Company's current assets become less than $20.0 million. The
Company has the right to terminate the lease on September 30, 2004 for a fee of
approximately $2.2 million. The Company also leases certain U.S. and foreign
sales offices and certain equipment under various operating leases with lease
terms ranging from month-to-month up to five years. Certain of these leases
contain renewal options. The agreements generally require the payment of
utilities, real estate taxes, insurance and repairs. Future minimum payments
under the facilities and equipment leases with non-cancelable terms are as
follows as of December 31, 2000 (in thousands):
AMOUNT
--------
2001........................................................ $ 3,250
2002........................................................ 3,017
2003........................................................ 2,986
2004........................................................ 2,979
2005........................................................ 2,351
Thereafter.................................................. 4,227
-------
Total..................................................... $18,810
=======
Rent expense for the years ended December 31, 2000, 1999 and 1998 totaled
$3.5 million, $2.6 million and $1.9 million, respectively.
ROYALTY COMMITMENTS
The Company has participated in royalty arrangements with third parties and
as revenues from the related products are recognized, the Company records the
related royalty expense. Current remaining royalty arrangements are not
significant.
10. NON-RECURRING AND OTHER CHARGES
During the second quarter of 1999, the Company restructured its product
development operations and delayed indefinitely the introduction of the Eventus
product, SilkControl. These activities were aimed at reducing costs associated
with the development of that product and enhancing the sales force's ability to
focus on other products. The restructuring resulted in the consolidation of four
development labs into three and included the termination of 15 employees
associated with the development of the Eventus product. Additionally, during the
second quarter of 1999 the Company shifted its sales strategy away from creating
and managing a large network of resellers towards building deeper relationships
with a few large system integrators. This revised strategy resulted in the
F-22
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
termination of seven employees who focused sales efforts on these channel
resellers. The Company also terminated the employment of two senior vice
presidents during the second quarter of 1999, each of whom has subsequently been
replaced. Associated with all the events noted above, the Company recorded
during the second quarter of 1999 non-recurring and other charges of
approximately $1.5 million, of which $1.0 million relates exclusively to
severance and other employee-related costs associated with a restructuring, and
$481,000 (including a noncash compensation charge of approximately $118,000),
which relates to severance of two senior vice presidents. As of December 31,
2000, the Company made payments of approximately $1,000,000 related to the
restructuring costs, and the related restructuring accrual balance was $0.
Additionally, as of December 31, 2000, the Company's accrued balance related to
severance of two senior vice presidents was also $0.
During the first quarter of 1999, the Company executed a restructuring plan
to consolidate its marketing, product development and administrative operations
in order to achieve cost efficiencies through the elimination of redundant
functions. The Company realigned its marketing and product development
operations to redirect focus to its strongest product lines and better integrate
the efforts of certain product development teams. As a result, the Company
recognized a non-recurring charge of approximately $1.0 million during the first
quarter of 1999. The restructuring charge included approximately $830,000 for
severance and other employee-related costs for the termination of 10 employees
and approximately $190,000 for facility-related costs, including the accrual of
estimated lease obligations associated with the closure of excess office
facilities. As of December 31, 2000, the Company had made payments of
approximately $1,000,000 related to these costs. The related restructuring
accrual balance was approximately $0.
In the fourth quarter of 1998, the Company recorded a charge of
$1.5 million, of which substantially all was paid in fiscal 1998, consisting
primarily of investment banking, legal, accounting, and other professional fees,
related to the Eventus and B&W acquisitions.
11. SEGMENT REPORTING
The Company considers that it has the following four reportable operating
segments based on differences in products and services. Operating segments are
defined as components of the enterprise about which separate financial
information is available that is reviewed regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing their performance.
2000 1999 1998
------------------- ------------------- -------------------
GROSS GROSS GROSS
REVENUE MARGIN REVENUE MARGIN REVENUE MARGIN
-------- -------- -------- -------- -------- --------
Operating Segments:
eBusiness product licenses.......... $36,306 $28,434 $16,125
Client/server testing product
licenses.......................... 300 1,014 10,124
------- ------- ------- ------- ------- -------
Total software.................... $36,606 $34,212 $29,448 $26,686 $26,249 $21,958
------- ------- ------- ------- ------- -------
Training and consulting............. $ 8,484 $ 2,686 $ 8,088 $ 1,222 $ 7,373 $ 2,712
Maintenance/Support services........ 13,066 10,158 8,885 6,809 7,226 5,768
------- ------- ------- ------- ------- -------
Total services.................... $21,550 $12,844 $16,973 $ 8,031 $14,599 $ 8,480
------- ------- ------- ------- ------- -------
Total............................. $58,156 $47,056 $46,421 $34,717 $40,848 $30,438
======= ======= ======= ======= ======= =======
F-23
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents revenue and long-lived asset information by
geographic area as of and for the years ended December 31 (in thousands):
TOTAL REVENUE LONG LIVED ASSETS
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
United States............................ $51,273 $42,518 $35,792 $4,730 $5,161 $4,995
Foreign.................................. 6,883 3,903 5,056 1,056 850 197
------- ------- ------- ------ ------ ------
$58,156 $46,421 $40,848 $5,786 $6,011 $5,192
======= ======= ======= ====== ====== ======
Foreign revenue is based on the country in which the sale originates.
Revenue from no single foreign country was material to the consolidated revenues
of the Company. No customer accounted for 10% or more of total revenue in 2000,
1999 or 1998.
12. QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)--UNAUDITED
2000 Q1 2000 Q2 2000 Q3 2000 Q4 2000 TOTAL
- ---- -------- -------- -------- -------- --------
Net revenue............................. $14,143 $15,022 $14,136 $14,855 $ 58,156
Gross margin............................ 11,057 12,284 11,331 12,384 47,056
Net loss................................ (2,218) (2,318) (1,449) (2,579)(1) (8,564)
Net loss per share (basic and
diluted).............................. (0.24) (0.25) (0.15) (0.27) (0.91)
1999 Q1 1999 Q2 1999 Q3 1999 Q4 1999 TOTAL
- ---- -------- -------- -------- -------- --------
Net revenue............................. $ 8,971 $11,711 $12,770 $12,969 $ 46,421
Gross margin............................ 6,009 8,407 10,045 10,256 34,717
Net loss................................ (6,953)(2) (5,620)(3) (1,280) (2,095) (15,948)
Net loss per share (basic and
diluted).............................. (0.78) (0.62) (0.14) (0.22) (1.76)
- ------------------------
(1) Included $750,000 for settlements of certain litigation.
(2) Included $1.0 million non-recurring and other charges for first quarter
restructuring cost.
(3) Included $1.5 million non-recurring and other charges for second quarter
restructuring cost and termination of two senior vice presidents.
F-24