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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 0-21985
SEEC, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 55-0686906
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
PARK WEST ONE, SUITE 200, CLIFF MINE ROAD, PITTSBURGH, PENNSYLVANIA 15275
(Address of Principal Executive Offices) (Zip Code)
(412) 893-0300
(Registrant's Telephone Number, Including Area Code)
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 2002, there were 6,082,144 outstanding shares of Common
Stock, par value $.01 per share, of SEEC, Inc.
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SEEC, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001... 2
Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002.............. 3
Condensed Consolidated Statements of Cash Flows for the three months
ended June 30, 2002 and 2001.............................................................. 4
Notes to Unaudited Consolidated Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 12
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 12
Item 2. Changes in Securities.................................................................. 12
Item 3. Defaults Upon Senior Securities........................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 12
Item 5. Other Information...................................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................................... 13
SIGNATURES...................................................................................... 15
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
----------------------------
2002 2001
----------- ------------
REVENUES:
Software license and maintenance fees $ 608,673 $ 342,357
Professional services 193,293 242,785
---------- ----------
Total revenues 801,966 585,142
---------- ----------
OPERATING EXPENSES:
Cost of revenues:
Software license and maintenance fees 87,606 111,384
Professional services 186,177 235,344
---------- ----------
Total cost of revenues 273,783 346,728
General and administrative 423,626 474,737
Sales and marketing 935,357 1,051,828
Research and development 389,016 452,226
Amortization of goodwill and other intangible assets 7,369 44,019
Restructuring costs 344,253 -
---------- ----------
Total operating expenses 2,373,404 2,369,538
---------- ----------
LOSS FROM OPERATIONS (1,571,438) (1,784,396)
NET INTEREST INCOME 78,881 223,218
---------- ----------
NET LOSS $ (1,492,557) $ (1,561,178)
============ ============
Basic and diluted net loss per common share $ (0.25) $ (0.26)
============ ============
Weighted average number of basic and
diluted common and common equivalent
shares outstanding 6,082,144 6,103,692
============ ============
The accompanying notes are an integral part of these financial statements.
2
SEEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
2002 2002
----------- ----------
(UNAUDITED) (AUDITED *)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,362,694 $10,473,967
Short-term investments 3,666,988 3,932,412
Accounts receivable - trade, net 686,996 448,404
Prepaid expenses and other current assets 329,302 433,358
----------- -----------
Total current assets 14,045,980 15,288,141
PROPERTY AND EQUIPMENT, NET 705,716 831,120
INTANGIBLE ASSETS, NET 64,260 60,291
----------- -----------
$14,815,956 $16,179,552
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 288,071 $ 280,481
Accrued compensation 477,700 410,801
Other current liabilities 286,082 244,573
Deferred maintenance revenues 281,908 288,526
Income taxes payable 42,547 40,794
----------- -----------
Total current liabilities 1,376,308 1,265,175
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock--no par value; 10,000,000 shares authorized;
none issued
Common stock--$.01 par value; 20,000,000 shares authorized;
6,309,187 shares issued 63,092 63,092
Additional paid-in capital 34,589,206 34,589,206
Accumulated deficit (20,402,750) (18,906,681)
Less treasury stock, at cost--227,043 shares (827,605) (827,605)
Accumulated other comprehensive income (loss) 17,705 (3,635)
----------- -----------
Total shareholders' equity 13,439,648 14,914,377
----------- -----------
$14,815,956 $16,179,552
=========== ===========
- ----------------
* Condensed from audited financial statements
The accompanying notes are an integral part of these financial statements.
3
SEEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
--------------------------------
2002 2001
--------------- ---------------
CASH FLOWS USED BY OPERATING ACTIVITIES $ (1,394,266) $ (1,674,290)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of disposals (5,668) (20,122)
Purchases of short-term investments - (767,057)
Sales of short-term investments 300,000 758,819
Other, net (11,339) (1,787)
--------------- ---------------
Net cash provided (used) by investing activities 282,993 (30,147)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,111,273) (1,704,437)
Cash and cash equivalents, beginning of period 10,473,967 16,049,397
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,362,694 $ 14,344,960
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
SEEC, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of SEEC, Inc., its wholly-owned subsidiaries, and its unincorporated
branch operations (collectively, the "Company" or "SEEC"). Management believes
that all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair statement of results have been included in the
consolidated financial statements for the interim periods presented. All
significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Operating results for interim periods are not necessarily indicative of results
that may be expected for an entire fiscal year. Accordingly, these interim
period consolidated financial statements should be read in conjunction with the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," and SOP 98-9, "Software Revenue Recognition, With Respect
to Certain Arrangements." SOP 97-2 specifies the criteria that must be met for
recognizing revenues from software sales, and SOP 98-9 requires recognition of
revenue using the "residual method" in a multiple-element arrangement when fair
value does not exist for one or more of the delivered elements in the
arrangement. Under the residual method, the total fair value of the undelivered
elements is deferred and subsequently recognized in accordance with SOP 97-2.
Revenues are derived from the license of software products, customer
support and maintenance contracts, and services contracts, including consulting
and training services. Revenues from product license fees are recognized when an
order or agreement is in hand, the fee is fixed and determinable, and delivery
of the product has occurred. Customer support and maintenance contract revenues
are recognized ratably over the term of the related agreement, generally twelve
months. The Company provides professional services under time-and-materials and
fixed-price contracts. Revenues from time-and-materials contracts are recognized
as the services are provided. Revenues from fixed-price contracts are recognized
principally by the percentage-of-completion method, whereby income is recognized
based on the estimated stage of completion of individual contracts. Provision
for estimated losses on uncompleted contracts is made in the period in which
such losses are determinable.
3. STOCK REPURCHASE PROGRAM
In July 1998, the Company announced its plan to begin a stock repurchase
program, utilizing up to $3 million to buy shares of the Company's Common Stock
from time to time on the open market, subject to market conditions and other
relevant factors. The Company may use repurchased shares to cover stock option
exercises, Employee Stock Purchase Plan transactions, and for other corporate
purposes. Through June 30, 2002, the Company had used $1.8 million to repurchase
441,875 shares, of which 214,832 shares were reissued to cover Employee Stock
Purchase Plan transactions, stock option exercises, and stock warrant exercises.
Repurchased shares are recorded as treasury shares.
4. NET LOSS PER SHARE
Net loss per share for all periods presented is computed in accordance with
the provisions of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." Options and warrants are excluded from the
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computation of net loss per share of common stock for the three months ended
June 30, 2002 and 2001, because their effect is not dilutive.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners.
The Company reports comprehensive income (loss) and its components in its annual
Consolidated Statement of Changes in Shareholders' Equity. The components of the
Company's comprehensive income (loss) were as follows:
THREE MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
--------------- -------------
Net loss ($1,492,557) $(1,561,178)
Unrealized gain (loss) on investments, net of
taxes 21,340 (40,702)
----------- -----------
Total comprehensive loss ($1,471,217) $(1,601,880)
=========== ===========
6. RESTRUCTURING COSTS
In June 2002, in response to the general slowdown in the economy, the
Company adopted a formal plan to reduce operating costs. A key component of the
plan was the decision to discontinue the Company's direct sales strategy for its
Axcess(TM) for Insurance solutions, allowing the Company to reduce operating
costs while focusing its direct sales efforts on the SEEC Mosaic(R) Studio
product line. The Company intends to enter into alliances with strategic
partners to continue to market its Axcess for Insurance solutions.
In connection with these actions, during the three months ended June 30,
2002, the Company recorded restructuring costs of $344,253 in accordance with
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring) and SEC Staff Accounting Bulletin No.
100, Restructuring and Impairment Charges. Included in the charge was $63,018
for the abandonment and write-off of excess property and equipment. An accrued
liability was recorded for the remaining $281,235 in charges. Of this amount,
$146,235 was recorded for workforce reduction, consisting of severance and
extended insurance benefits attributable to 10 employees, primarily in the
Company's sales and marketing functions. The remaining $135,000 represents an
accrual for non-cancelable lease payments, less management's estimates of
sublease income. These estimates will be evaluated by the Company quarterly and
are subject to change based on actual events.
All charges associated with the restructuring are included as restructuring
costs under operating expenses in the statement of operations. Below is a
summary of the restructuring costs:
CHARGED TO
OPERATIONS
THREE MONTHS RESTRUCTURING
ENDED TOTAL CASH LIABILITIES AT
JUNE 30, 2002 PAYMENTS JUNE 30, 2002
------------- -------- -------------
Cash Provisions:
Workforce reduction...................................... $146,235 $(20,010) $126,225
Non-cancelable leases..................................... 135,000 -- 135,000
-------- -------- --------
281,235 $(20,010) $261,225
======== ========
Non-cash:
Write-off of excess property and equipment................ 63,018
--------
$344,253
========
6
7. INCOME TAXES
In the three months ended June 30, 2002 and 2001, the Company calculated a
deferred tax asset, which was offset by a valuation allowance due to the
uncertainty of realization of the Company's net operating loss carryforwards,
resulting in no tax provision or benefit accrued in the periods. As of March 31,
2002, the Company had unused Federal and state net operating loss carryforwards
that may be applied to reduce future taxable income of approximately $13,647,000
and $10,297,000, respectively. The carryforwards expire at various times from
March 31, 2007 to March 31, 2022. Certain changes in ownership could result in
an annual limitation on the amount of carryforwards that may be utilized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Part I, Item 2 of this report should be read in conjunction with Part II,
Item 7 of SEEC's Annual Report on Form 10-K for the year ended March 31, 2002.
The information contained herein is not a comprehensive management overview and
analysis of the financial condition and results of operations of SEEC, but
rather an update of disclosures made in the aforementioned filing. Certain
information contained herein should be considered "forward-looking information,"
which is subject to a number of risks and uncertainties. The preparation of
forward-looking information requires the use of estimates of future revenues,
expenses, activity levels and economic and market conditions, many of which are
outside our control. Other factors and assumptions are involved in the
preparation of forward-looking information, and the failure of any such factors
and assumptions to be realized may cause actual results to differ materially
from those discussed. We assume no obligation to update such estimates to
reflect actual results, changes in assumptions or changes in other factors
affecting such estimates.
OVERVIEW
SEEC, Inc. ("SEEC" or the "Company") provides business-to-business ("B2B")
software solutions for insurance, financial services, telecommunications and
other industries. The Company's solutions are built upon SEEC Mosaic(R) Studio,
a platform for scalable B2B systems that extend and connect existing business
processes and systems with the Web. SEEC's solutions reuse the mission-critical
business rules locked within existing applications without disrupting current
operations or replacing back-end administrative systems. As a result, projects
can be implemented more rapidly and at lower cost, and with lower risk than with
traditional approaches.
The growth of the Web as a medium for business and the rapid development of
B2B technologies such as XML and Web services are driving large enterprises to
externalize their traditional business processes to improve efficiency, maintain
their competitiveness, and enable future growth. Our solutions focus on
preserving the competitive advantages inherent in current financial, customer
service and industrial systems while allowing companies to utilize the
underlying value of these systems in new Web-centric business processes. SEEC
Mosaic Studio supports these efforts by externalizing the business rules within
current systems and by providing means for quickly integrating those systems
with the Web.
The SEEC Mosaic Studio solutions are used in a wide range of industries,
and SEEC is now incorporating the SEEC Mosaic technologies in its Axcess(TM)
industry solutions for insurance and other sectors. The first of these
solutions, Axcess for Insurance, includes component templates that allow
insurance carriers to quickly automate and externalize their key sales processes
to agent and broker business partners. Axcess can reduce the carriers' costs and
improve their relations with the agents and brokers that account for the vast
majority of insurance sales. Axcess, along with SEEC Mosaic Studio, provides a
new alternative to "build vs. buy" for B2B initiatives that offers a faster
return on investment. As discussed in Note 6 to the Financial Statements, in
June 2002 we decided to shift to an indirect sales strategy for selling Axcess
for Insurance solutions. Rather than continue to incur the high costs associated
with direct marketing, we believe we can reduce expenses and still effectively
market our Axcess solutions through alliances with strategic partners.
SEEC was founded in 1988 to develop tools and solutions for reengineering
of legacy COBOL applications. Through 1999, organizations used SEEC's solutions
extensively for year 2000 remediation and testing, legacy system maintenance,
and legacy system reengineering. In fiscal 2001, we introduced SEEC Mosaic
Studio. Our
7
customer base consists primarily of large and medium-sized organizations
including corporations, third-party information technology ("IT") service
providers, higher education institutions, non-profit entities and governmental
agencies. We derive our revenues from software license and maintenance fees and
professional services fees. Professional services are typically provided to
customers in conjunction with the license of software products. Our enterprise
solutions and software products and services are marketed through a broad range
of distribution channels, including direct sales to end users, and to end users
in conjunction with our partners.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America, which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities. We periodically evaluate these estimates, including those related
to our revenue recognition, allowance for doubtful accounts, and intangible
assets. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable based on the specific
circumstances, the results of which form the basis for making judgments about
the carrying value of certain assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.
We believe the following critical accounting policies impact the most
significant judgments and estimates used in the preparation of our consolidated
financial statements. Information regarding our other accounting policies is
included in our Annual Report on Form 10-K for the year ended March 31, 2002.
Revenue Recognition. Our revenue recognition policy is significant because
our revenue is a key component of our results of operations. We follow detailed
guidelines discussed in Note 1 of the Notes to our Consolidated Financial
Statements for the year ended March 31, 2002. We recognize revenue in accordance
with generally accepted accounting principles that have been prescribed for the
software industry. The accounting rules related to revenue recognition are
complex and are affected by interpretations of the rules and an understanding of
industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
judgments.
Revenues are derived from the license of software products, customer
support and maintenance contracts, and services contracts, including consulting
and training services. Revenues from product license fees are recognized when an
order or agreement is in hand, the fee is fixed and determinable, and delivery
of the product has occurred. Customer support and maintenance contract revenues
are recognized ratably over the term of the related agreement, generally twelve
months. The Company provides professional services under time-and-materials and
fixed-price contracts. Revenues from time-and-materials contracts are recognized
as the services are provided. Revenues from fixed-price contracts are recognized
principally by the percentage-of-completion method, whereby income is recognized
based on the estimated stage of completion of individual contracts. Provision
for estimated losses on uncompleted contracts is made in the period in which
such losses are determinable. Fixed-price contracts and related estimates have
not been significant in recent years.
Impairment of Goodwill and Intangible Assets. We record intangible assets
when we acquire other companies. The cost of the acquisition is allocated to the
assets and liabilities acquired, including intangible assets, with the remaining
amount being classified as goodwill. We periodically review the carrying amounts
of goodwill and intangible assets for indications of impairment. If impairment
is indicated, we assess the value of the intangible assets. The value of
goodwill and intangible assets has been amortized to operating expense over
time, with in-process research and development recorded as a one-time charge on
the acquisition date. Under current accounting guidelines that became effective
on July 1, 2001, goodwill arising from transactions occurring after June 30,
2001 and any existing goodwill as of April 1, 2002 are no longer amortized to
expense but rather are periodically assessed for impairment. As a result of
write-downs of goodwill resulting from impairment evaluations performed in
fiscal 2001 and 2002, no goodwill exists as of April 1, 2002. We periodically
review the estimated remaining useful lives of our remaining intangible assets.
A reduction in our estimate of remaining useful lives, if any, could result in
increased amortization expense in future periods. See Notes 2 and 3 to the
Consolidated Financial Statements for the year ended March 31, 2002.
8
Allowance for Doubtful Accounts. We record allowances for estimated losses
resulting from the inability of our customers to make required payments. We
assess the credit worthiness of our customers based on past collection history
and specific risks identified in our outstanding accounts receivable. If the
financial condition of a customer deteriorates such that its ability to make
payments might be impaired, or if payments from a customer are significantly
delayed, additional allowances might be required, resulting in future bad debt
expense not provided in the allowance for doubtful accounts at June 30, 2002.
Restructuring Costs. In June 2002, SEEC's management formally adopted a
plan to reduce operating costs, including the discontinuation of our direct
sales strategy related to Axcess for Insurance solutions. We have accounted for
the related restructuring costs in accordance with Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and SEC Staff Accounting Bulletin No. 100, Restructuring and
Impairment Charges. A significant portion of the restructuring costs related to
excess facilities, primarily from non-cancelable leases and other costs for the
abandonment or disposal of property and equipment. Estimates related to
non-cancelable lease costs and sublease income are based on certain assumptions,
including those regarding the period during which we will be successful in
contracting with a sub-lessee or sub-lessees, and sublease rates which can be
achieved. We review these estimates each reporting period, and to the extent
that these assumptions change due to changes in the market, the ultimate
restructuring expenses for these excess facilities could vary.
COMPARISON OF THREE-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
The following section includes information related to changes in SEEC's
Consolidated Statements of Operations. References to the first quarter of fiscal
2003 and to the first quarter of fiscal 2002 refer to the three-month periods
ended June 30, 2002 and June 30, 2001, respectively.
REVENUES. Total revenues for the first quarter of fiscal 2003 were $802,000
compared to $585,000 for the first quarter of fiscal 2002, an increase of
$217,000 or 37%. Software license and maintenance fees were $609,000 for the
first quarter of fiscal 2003 compared to $342,000 for the first quarter of
fiscal 2002, an increase of $267,000 or 78%. Professional services revenues were
$193,000 for the first quarter of fiscal 2003 compared to $243,000 for the first
quarter of fiscal 2002, a decrease of $50,000 or 21%.
The increase in revenues is attributable to an increase in sales of our
SEEC Mosaic Studio solution, particularly a large sale to a customer in the
insurance sector. That was partially offset by the decline in professional
services revenues, as many companies continued to defer or reduce the rate of
spending on IT projects.
COST OF REVENUES. Total cost of revenues was $274,000 for the first quarter
of fiscal 2003 compared to $347,000 for the first quarter of fiscal 2002, a
decrease of $73,000 or 21%. The decrease in total cost of revenues is primarily
due to a decline in personnel costs, as discussed below.
Cost of software license and maintenance fees includes the costs of
providing customer support services, the cost of third-party software sold, and,
to a lesser degree, the costs of media, manuals, duplication and shipping
related to sales of certain of our software products. Customer support is
primarily delivered via telephone or online (Internet) to customers who have
purchased maintenance in conjunction with software license purchases. Cost of
software license and maintenance fees was $88,000 for the first quarter of
fiscal 2003 compared to $111,000 for the first quarter of fiscal 2002, a
decrease of $23,000 or 21%. Expenses in the fiscal 2002 period included higher
costs for customer support personnel and third-party software sold.
Professional services costs consist primarily of compensation and related
benefits, and travel and equipment for Company personnel responsible for
providing consulting and training services to customers. Professional services
costs were $186,000 for the first quarter of fiscal 2003 compared to $235,000
for the first quarter of fiscal 2002, a decrease of $49,000 or 21%. The decrease
in professional services costs was attributable primarily to a reduction in
employment-related expenses.
GROSS MARGINS. Total gross margin (total revenues less total cost of
revenues) as a percentage of revenues
9
was 66% for the three months ended June 30, 2002 compared to 41% for the three
months ended June 30, 2001. Gross margin percentages were 86% and 67% for
software license and maintenance fees, and 4% and 3% for professional services
for the first quarters of fiscal 2003 and 2002, respectively. The gross margin
percentages for software license and maintenance fees are impacted by the
proportion of customer support services costs to the amount of software license
and maintenance fees generated in a given period. These percentages also
fluctuate depending on the mix of software products and the varying royalty
expenses, if any, associated with those products. The gross margin percentages
for professional services vary depending on the utilization rates for billable
consultants, the timing and amount of costs incurred for recruiting and training
services consultants, and the type of services provided. The gross margin
percentage for professional services in the first quarter of fiscal 2003 was
higher than the gross margin percentage in the fiscal 2002 period, due primarily
to a reduction in payroll-related costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
costs of general management, finance, legal, accounting, investor relations,
office facilities and other administrative functions. General and administrative
expenses were $424,000 for the first quarter of fiscal 2003 compared to $475,000
for the first quarter of fiscal 2002, a decrease of $51,000 or 11%. This
decrease was primarily a result of a reduction in employment-related costs.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, incentive compensation and related taxes and benefits of our sales,
sales support, and marketing personnel, plus the costs of travel, advertising,
trade shows, and other promotional activities. Sales and marketing expenses were
$935,000 for the first quarter of fiscal 2003 compared to $1,052,000 for the
first quarter of fiscal 2002, a decrease of $117,000 or 11%. Expenses in the
first quarter of fiscal 2002 included higher levels of spending on recruitment
expenses and on advertising and promotion, particularly tradeshows.
RESEARCH AND DEVELOPMENT. Total expenditures for research and development
were $389,000 for the first quarter of fiscal 2003 compared to $452,000 for the
first quarter of fiscal 2002, a decrease of $63,000 or 14%. This decrease was
the result of reductions in employment-related expenses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other
intangible assets are amortized over their estimated useful lives of five to
seven years. In the first quarter of fiscal 2003, amortization of goodwill and
other intangible assets amounted to $7,000 compared to $44,000 in the first
quarter of fiscal 2002, a decrease of $37,000 or 84%. The reduction was due to
the write-down of goodwill recorded in the fourth quarter of fiscal 2002, which
reduced the value of assets subject to amortization in subsequent quarters.
RESTRUCTURING AND IMPAIRMENT CHARGES. In June 2002, we adopted a formal
plan to reduce operating costs, including the shift in our direct sales strategy
related to Axcess for Insurance solutions. Our strategy in implementing the
restructuring is to reduce operating costs while focusing our direct sales
efforts on the SEEC Mosaic Studio product line. We intend to continue to market
the Axcess for Insurance solution through alliances with strategic partners,
who, we believe, can offer a broader solution for the insurance market and can
leverage their greater sales and marketing resources and existing customer
relationships. In connection with this plan, during the three months ended June
30, 2002, we recorded restructuring costs of $344,253. Included in the charge
was $63,018 for the abandonment and write-off of excess property and equipment.
An additional $146,235 was recorded for workforce reduction, consisting of
severance and extended insurance benefits attributable to 10 employees,
primarily from our sales and marketing functions. The remaining $135,000
represents an accrual for non-cancelable lease payments, taking into account
management's estimates of sublease income.
There can be no assurance that our restructuring activities will be
sufficient to allow us to generate improved operating results in future periods.
It is possible that additional changes in our business or in our industry may
necessitate additional restructuring activities in the future, which may result
in expenses that adversely affect reported results of operations in the period
the restructuring plan is adopted and require incremental cash payments.
NET INTEREST INCOME. Net interest income consists principally of interest
income on cash equivalents and short-term investments, which are comprised
primarily of money market funds and high-grade bonds with average maturities of
less than two years. Net interest income was $79,000 for the first quarter of
fiscal 2003
10
compared to $223,000 for the first quarter of fiscal 2002, a decrease of
$144,000 or 65%. This decrease resulted from lower short-term interest rates
combined with the effect of lower cash and short-term investments balances in
the current year period as compared to the prior year period.
INCOME TAXES. In fiscal 2003 and 2002, we calculated a net deferred tax
asset, which was fully offset by a valuation allowance due to the uncertainty of
realization of our net operating loss carryforwards. As a result, no provision
for income taxes was recorded. At March 31, 2002, SEEC had unused Federal and
state net operating loss carryforwards that may be applied to reduce future
taxable income of approximately $13,647,000 and $10,297,000, respectively. The
carryforwards expire at various times from March 31, 2007 to March 31, 2022.
Certain changes in SEEC's ownership could result in an annual limitation on the
amount of carryforwards that may be utilized.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash, cash equivalents, and short-term investments
of $13,030,000 and working capital of $12,670,000. Excess cash has been
invested, and we expect that it will continue to be invested, in
interest-bearing investment grade securities and money market funds. We used
$1,394,000 for operating activities in the three months ended June 30, 2002,
compared to $1,674,000 used for operating activities in the three months ended
June 30, 2001. Our primary investing activities in the three months ended June
30, 2002 consisted of net sales of short-term investments of $300,000, compared
to net purchases of short-term investments of $8,000 in the three months ended
June 30, 2001.
Our cash balances may be used to develop or expand domestic and
international sales and marketing efforts, to establish additional facilities,
to hire additional personnel, to increase research and development, for capital
expenditures, and for working capital and other general corporate purposes. We
may also utilize cash to develop or acquire other businesses, products or
technologies complementary to our current business. The amounts actually
expended for each such purpose may vary significantly and are subject to change
at our discretion, depending upon certain factors, including economic or
industry conditions, changes in the competitive environment and strategic
opportunities that may arise. We believe that cash flows from operations and the
current cash balances will be sufficient to meet our liquidity needs for the
foreseeable future. In the longer term, we may require additional sources of
capital to continue operations at the current rate or to fund future growth.
Such sources of capital may include additional equity offerings or debt
financings.
SEASONALITY
We do not believe that our operations are affected by seasonal factors. Our
cash flows may at times fluctuate due to the timing of cash receipts from large
individual sales.
FOREIGN CURRENCY
The overall effects of foreign currency exchange rates on our business
during the periods discussed have not been material. Movements in foreign
currency exchange rates create a degree of risk to our operations if those
movements affect the dollar value of costs incurred in foreign currencies. The
majority of our billings to date have been denominated in U.S. dollars. Changing
currency exchange rates may affect our competitive position if such changes
impact the profitability and business and/or pricing strategies of non-U.S.
based competitors.
The functional currency of our foreign subsidiaries is the U.S. dollar.
Monetary assets and liabilities of these subsidiaries and branches are
remeasured at the current exchange rate at the balance sheet date, and
non-monetary items are translated at historical rates. Revenues and expenses are
translated using the average exchange rate during the period.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
11
Assets." SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. Our previous business combinations
were accounted for using the purchase method. SFAS No. 141 also requires that
acquired intangible assets be recognized apart from goodwill if the acquired
intangible assets meet certain criteria. In accordance with the guidelines in
SFAS No. 142, goodwill and other intangible assets with indefinite useful lives
will be tested for impairment annually, or more frequently if impairment
indicators arise. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. SFAS No.
142 must be applied to all goodwill and other intangible assets recognized at
December 15, 2001, regardless of when those assets were initially recognized. In
accordance with the provisions of the statement, we adopted SFAS 142 on April 1,
2002. Under the new standard, we reassessed the useful lives of other intangible
assets during the first quarter of fiscal 2003. SFAS No. 142 requires that a
transitional goodwill impairment test be completed six months from the date of
adoption. The adoption of the new standards did not have a material affect on
our financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 also supercedes certain provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 addresses financial accounting and
reporting for the impairment and disposal of long-lived assets and significantly
changes the criteria required to classify an asset as held-for-sale. We adopted
the standard effective April 1, 2002. The adoption of SFAS No. 144 did not have
a material affect on our financial position, results of operations, or cash
flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relates to our cash equivalent instruments and short-term
investments. We invest our excess cash in short-term, floating-rate instruments.
Short-term investments consist of fixed-income securities of government agencies
and high quality corporate issuers. The average duration of the short-term
investment portfolio of debt securities is approximately two years. These
securities are generally classified as available-for-sale and, consequently, are
recorded on the balance sheet at fair value with unrealized gains or losses, net
of tax, reported as a separate component of accumulated other comprehensive
income (loss). A sharp rise in interest rates could have a material adverse
impact on the fair value of our fixed-income investments. Conversely, declines
in interest rates could have a material impact on interest earnings. We do not
currently use derivative financial instruments to hedge these interest rate
exposures.
Foreign Currency Risk. We are exposed to foreign currency exchange rate
fluctuations as the financial results of our foreign subsidiaries in India and
the United Kingdom are translated into U.S. dollars. As part of our risk
management strategy, we maintain only nominal foreign currency cash balances,
consisting of working funds necessary to facilitate the short-term operations of
our subsidiaries. We did not hold any material foreign-denominated financial
instruments or contracts, and we have not entered into foreign currency hedge
transactions. The effect of an immediate 10% change in exchange rates would not
have a material impact on our operating results or cash flows.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NOT APPLICABLE
ITEM 5. OTHER INFORMATION--NOT APPLICABLE
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The Exhibits listed below are filed or incorporated by reference as part of
this Form 10-Q.
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------
2.1 (5) Agreement and Plan of Merger dated July 16, 1999 between the
Registrant and Mozart Systems Corporation.
3.1 (1) The Registrant's Amended and Restated Articles of
Incorporation.
3.2 (1) The Registrant's Amended and Restated Bylaws.
10.1 (1) SEEC, Inc. 1994 Stock Option Plan.
10.2 (1) Registration Rights Agreement dated as of August 15, 1996
among the Registrant and certain of its shareholders.
10.3 (1) Agreement dated July 16, 1996 between the Registrant and Raj
Reddy.
10.4 (2) SEEC, Inc. 1997 Stock Option Plan.
10.5 (4) Asset Purchase Agreement dated August 7, 1998, between the
Registrant and ERA.
10.6 (3) SEEC, Inc. 1998 Employee Stock Purchase Plan.
10.7 (5) Employment Agreement dated August 3, 1999 between Mozart
Systems Corporation and Alan P. Parnass.
10.8 (5) Non-Competition Agreement dated August 3, 1999 between Mozart
Systems Corporation and Alan P. and Kim I. Parnass.
10.9 (6) Agreement and Release dated March 7, 2000 between the
Registrant and Allen Gart.
10.10 (6) Employment Agreement dated March 10, 2000 between the
Registrant and Ravindra Koka.
10.11 (6) Employment Agreement dated March 10, 2000 between the
Registrant and John D. Godfrey.
10.12 (6) Employment Agreement dated March 10, 2000 between the
Registrant and Richard J. Goldbach.
10.13 (7) Agreement dated September 22, 2000 between the Registrant
and Alan Parnass.
10.14 (8) Employment Agreement dated February 2, 2001 between the
Registrant and Alan Parnass.
10.15 (9) Employment Agreement dated November 15, 1993 between the
Registrant and Shankar Krish.
10.16 (10) Employment Agreement dated June 13, 2001 between the
Registrant and Bruce W. Cameron.
10.17 (11) SEEC, Inc. 2000 Non-Employee Directors Stock Option Plan.
10.18 Separation and Release Agreement dated July 19, 2002 between the
Registrant and Bruce W. Cameron.
21.1 (6) Subsidiaries of the Company.
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
- ----------
(1) Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1, File No. 333-14027.
(2) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997, File No. 0-21985.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 333-62149.
13
(4) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1999, File No. 0-21985.
(5) Incorporated by reference to the Company's Report on Form 8-K dated August
4, 1999, File No. 0-21985.
(6) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2000, File No. 0-21985.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 333-54366.
(8) Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended December 31, 2000, File No. 0-21985.
(9) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001, File No. 0-21985.
(10) Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2001, File No. 0-21985.
(11) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002, File No. 0-21985.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 2002.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEEC, Inc.
-----------------------------------
(Registrant)
Date: August 14, 2002
By: /s/ RAVINDRA KOKA
-----------------------------------
Ravindra Koka
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ RICHARD J. GOLDBACH
-----------------------------------
Richard J. Goldbach
Treasurer and Chief Financial Officer
(Principal Financial Officer)
15